Lifeway Foods, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Dollar amounts are in thousands, except per-share data. Lifeway manufactures and sells cultured dairy products, principally drinkable kefir, and reports one operating segment.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $29,553 | $26,039 | $88,091 | $76,441 |
| Gross profit | $6,993 | $7,577 | $22,719 | $20,502 |
| Gross margin | 23.7% | 29.1% | 25.8% | 26.8% |
| Operating income | $1,044 | $2,617 | $5,474 | $4,293 |
| Net income | $480 | $1,826 | $3,404 | $2,952 |
| Diluted EPS | $0.03 | $0.12 | $0.22 | $0.19 |
- Q3 sales increased 13.5% year over year, primarily from higher branded drinkable kefir volumes and, to a lesser extent, the Glen Oaks acquisition. Q3 net income fell 73.7% as gross profit declined and operating expenses rose.
- For the first nine months, sales increased 15.2% and net income increased 15.3%. Management attributed sales growth primarily to branded kefir volumes; approximately 29% of the sales increase related to the USDA Farmers to Families Food Box program and approximately 7% to Glen Oaks.
- Q3 gross margin declined 5.4 percentage points, mainly due to milk pricing and higher freight and other input costs, partly offset by lower depreciation. Nine-month margin declined 1.0 percentage point for similar cost pressures.
- Q3 selling expense rose to $2,722 from $2,116, reflecting increased advertising and marketing. Nine-month advertising expense was $2,892 versus $1,700. Nine-month operating income improved despite lower gross margin, with operating expenses declining as a percentage of sales.
- Effective tax rate was 52.3% in Q3 and 35.2% for the nine-month period, versus 29.5% for the comparable 2020 periods. Lifeway cited nondeductible executive compensation, including Section 162(m), and the prior-year CARES Act tax benefit.
Cash, liquidity and debt
- Cash and cash equivalents were $10,018 at September 30, 2021, including $580 of restricted acquisition escrow cash. Current assets were $29,148 and current liabilities were $12,839.
- Nine-month operating cash flow was $6,435, compared with $5,348 in 2020. Investing used $7,485, including $5,800 for the Glen Oaks acquisition and $1,685 of capital expenditures. Financing provided $3,142, including proceeds from a new term loan.
- Debt at September 30 included $2,777 outstanding on the revolving facility and $4,726 on the term loan, net of financing costs. The revolver had $2,223 available. The loans carried a 2.15% rate at period-end; the term loan matures August 18, 2026.
- The company reported compliance with its financial covenants. The credit agreement requires a fixed-charge coverage ratio of at least 1.25 to 1.00 and secures borrowings with substantially all company assets.
- The company repurchased 250,000 shares for $1,583 during Q3, completing the authorized repurchase plan.
Developments, outlook and risks
- On August 18, Lifeway acquired certain Glen Oaks Farms assets for $5,800 in cash, funded by a $5,000 term loan and existing cash. The acquired drinkable-yogurt business contributed $739 in sales and approximately $112 in pretax income after acquisition through September 30. Purchase-price allocation was preliminary; $4,400 was allocated to customer relationships and brand name, and $1,400 to goodwill.
- Management provided no specific financial guidance. It said production capacity was available and it expected near-term operations to continue without staffing or production interruptions. It expects foreseeable liquidity needs to be met through operating cash flows, the revolver and cash.
- Management noted that pandemic-related at-home demand may ease, while supply constraints and higher ingredient, packaging and freight costs could pressure operations. The duration and financial effect of COVID-19-related impacts could not be reasonably estimated.
- Two major customers represented approximately 23% of nine-month sales. Ordinary-course litigation was not considered material by management, though outcomes and potential losses could not be predicted with certainty.
- Related-party arrangements include consulting services from the board chairperson (service fees of $375 for nine months, plus $282 recorded for estimated 2021 performance fees) and product royalties of $450 for nine months.
Most important facts for investors to verify
- Whether sales growth persists after the USDA food-box program ended in May and as pandemic-driven demand changes.
- Whether milk, freight and other input-cost inflation continues to compress gross margin, and whether price or mix offsets it.
- Final Glen Oaks purchase-price allocation, integration performance and contribution to growth and profitability.
- Cash conversion and working-capital needs, covenant headroom, and debt costs under the variable-rate credit agreement.
- Customer concentration, related-party compensation and royalties, and any material developments in litigation or supply-chain risks.