Lifeway Foods, Inc. — Q2 2012 Form 10-Q
Business and period: Lifeway produces dairy products, including Kefir, and distributes primarily through U.S. retailers and distributors, with some sales in Canada and Eastern Europe. This unaudited filing covers the three and six months ended June 30, 2012; comparisons are to the corresponding 2011 periods.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $20.55 million | $18.20 million | $39.95 million | $35.50 million |
| Gross profit | $8.04 million | $5.50 million | $14.80 million | $13.02 million |
| Operating income | $3.13 million | $0.70 million | $5.00 million | $3.97 million |
| Net income | $2.05 million | $0.27 million | $3.14 million | $2.19 million |
| Diluted EPS | $0.13 | $0.02 | $0.19 | $0.13 |
- Q2 net sales rose 13%; gross margin was approximately 39% versus 30% a year earlier. Management attributed the improvement chiefly to a 20% decline in conventional milk costs, partly offset by a 5% increase in organic milk costs.
- Six-month net sales rose 13% and gross margin was approximately 37%, broadly unchanged from 2011. Operating margin improved to approximately 12.5% from 11.2%.
- Management cited stronger sales and awareness of Kefir, ProBugs Organic Kefir and BioKefir. Frozen Kefir contributed about $0.8 million of Q2 sales and about $1.5 million for the first half.
- Operating cash flow was $4.13 million for the first half, versus $0.85 million in 2011. Investing used $0.56 million; financing used $2.68 million, including $1.15 million of dividends, $0.34 million of treasury-stock purchases and debt repayments.
Financial position and liquidity
- At June 30, cash and cash equivalents were $2.00 million; investments were $1.87 million and certificates of deposit were $0.30 million. Current assets totaled $19.79 million against current liabilities of $8.25 million (current ratio approximately 2.4).
- Total assets were $53.76 million and stockholders’ equity was $37.04 million. Total notes payable were $5.77 million, including $0.54 million current; the balance-sheet long-term portion was $5.23 million. Checks written in excess of bank balances were $0.71 million.
- The principal bank note carries a variable rate reported at 2.7963%, with a $5.07 million balloon due February 6, 2014. The $2.0 million bank line, maturing May 2013, had no balance outstanding. The company reported compliance with its bank covenants.
Changes, outlook and risks
- Compared with Q2 2011, operating income and net income increased substantially; management cited sales growth and lower conventional milk costs. First-half net income rose about 43%.
- The company paid a $0.07-per-share dividend during the quarter and repurchased 18,200 shares in Q2 under a new program authorized for up to 200,000 shares. The filing says earlier repurchase plans had expired.
- Management expected to fund foreseeable liquidity requirements internally; no quantified earnings or revenue guidance was provided.
- Customer concentration is notable: the filing reports that a major customer represented approximately 31% of first-half gross sales and 30% of receivables at June 30. The company also identifies milk as its largest raw-material cost. These are relevant exposure areas, not quantified forecasts.
- No material pending legal proceedings were reported, and management stated disclosure controls were effective. The filing reports no material market-risk disclosure and no additional risk factors in this report.
Investor verification points
- Verify customer concentration, customer retention and receivable collectability, given the disclosed sales and receivables exposure.
- Assess the sustainability of the Q2 margin improvement against future conventional and organic milk prices and promotional spending.
- Review liquidity and refinancing plans for the $5.07 million balloon due in February 2014, along with covenant requirements.
- Reconcile share-count disclosures: the balance sheet reports 16,372,217 shares outstanding at June 30, while the cover reports 16,371,217 as of August 10, 2012.
- Check the first-half gross-sales figure: the income statement reports $44,259,854, while MD&A states $44,259,859.