Lifeway Foods, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial amounts below are in thousands of dollars, except per-share data and percentages. The filing was signed June 26, 2020.
Business context and financial performance
Lifeway manufactures cultured dairy products, led by drinkable kefir, and reports one operating segment. Net sales increased 3.1% year over year to $25.388 million, primarily on higher branded drinkable kefir volume; lower cream revenue, associated with reduced butterfat market prices, partly offset growth.
- Profitability: Gross profit was $5.997 million, down 4.9%; gross margin fell to 23.6% from 25.6%. The company attributed the decline mainly to increased strategic promotions, partly offset by lower variable costs, and noted higher manufacturing depreciation.
- Operating expenses declined 14.1% to $5.759 million, with lower selling and administrative expenses. Operating income improved to $238,000 from an operating loss of $401,000.
- Net income was $146,000, or $0.01 per diluted share, versus a net loss of $388,000, or $0.02 per share. The 2020 tax provision was $55,000; the quarter included a $245,000 tax benefit related to CARES Act net operating loss carrybacks.
- Cash flow: Operating activities used $1.055 million, versus providing $1.182 million a year earlier. Investing activities used $398,000, including $403,000 in capital expenditures. Financing activities used $405,000, primarily for share repurchases. Cash declined by $1.858 million to $1.978 million.
- Liquidity and debt: Current assets were $19.597 million and current liabilities $8.861 million at quarter-end. The revolving facility had $2.751 million outstanding and approximately $6.223 million available under the borrowing base. The interest rate was 3.66%; the facility matures May 7, 2021. Lifeway reported compliance with applicable debt covenants.
Changes, outlook, risks, and unusual items
- March brought increased retail orders in North America and Europe as consumers stocked up. Management reported full production capacity and no significant facility impacts at the time, and said it did not anticipate near-term staffing shortages or disruption to production, transportation, or sales.
- Management emphasized that COVID-19 remained fluid and that its future effect could not be predicted. Risks include workforce illness or quarantine, facility or supply-chain disruptions, reduced customer purchases, and inability to meet orders. The company described employee-safety measures and supply and transportation contingency planning.
- No quantified financial guidance was provided. Management expected to meet foreseeable liquidity and capital needs through operating cash flows, the revolving facility, and cash, while continuing to assess pandemic-related liquidity needs and manage discretionary spending.
- The company repurchased 178,406 shares for $405,000 during the quarter at an average $2.27 per share; no capacity remained under the amended repurchase authorization at March 31.
- Ordinary-course legal matters were disclosed; management said recorded accruals were not material and it could not estimate a possible loss or range. Related-party payments to the board chair included $250,000 in quarterly consulting fees and $150,000 in quarterly royalties.
Important facts for investors to verify
- Whether sales growth and March’s elevated orders continued after quarter-end, and the extent of any COVID-19 effects on demand, production, suppliers, and distribution.
- Whether gross-margin pressure from promotions and product costs persisted, and whether lower advertising and compensation expenses are sustainable.
- Cash conversion and working-capital needs, particularly receivables and inventory, given negative operating cash flow and the decline in cash.
- Availability and terms of the revolving facility, covenant compliance, and refinancing or repayment plans ahead of its May 2021 maturity.
- The customer-concentration disclosure: it states that two major customers accounted for approximately 21% of 2020 net sales and 22% in 2019, but does not clearly specify whether those percentages are combined or per customer.