Lifeway Foods, Inc. — Q1 2013 Form 10-Q
Business and period: The company produces kefir and other dairy products, along with related food products. This filing covers the three months ended March 31, 2013; comparisons are to Q1 2012 unless noted.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Gross sales | $27.59 million | $21.55 million | +28% |
| Net sales | $24.39 million | $19.40 million | +26% |
| Gross profit | $8.59 million | $6.09 million | +41% |
| Income from operations | $3.73 million | $1.87 million | +99% |
| Net income | $2.37 million | $1.09 million | +116% |
| Diluted EPS | $0.14 | $0.07 | Up $0.07 |
| Operating cash flow | $0.81 million | $1.55 million | Down $0.73 million |
Gross margin was approximately 35.2%, up from 31.4%; operating margin was approximately 15.3%, up from 9.7%; net margin was approximately 9.7%, up from 5.6%. The effective tax rate was 37.4%, versus 41.0%.
At March 31, 2013, cash was $2.74 million, investments were $2.06 million, certificates of deposit were $0.25 million, and current assets were $24.53 million. Current liabilities were $8.67 million, implying a current ratio of approximately 2.8. Total notes payable were $5.36 million, including $0.54 million current. Total assets were $58.09 million and stockholders’ equity was $41.69 million.
Material changes and cash flows
- Management attributed sales growth primarily to increased sales and awareness of flagship Kefir and the ProBugs Organic Kefir and BioKefir lines.
- Cost of goods sold excluding depreciation fell to approximately 63% of net sales from 67%. Management cited conventional milk costs approximately 5% lower year over year.
- Promotional discounts and allowances increased to $3.20 million, or 12% of gross sales, from $2.15 million, or 10%.
- Operating cash flow declined as accounts receivable and inventory increased; cash from operations was also supported by higher accounts payable. Capital spending was $0.32 million. Cash and cash equivalents increased $0.45 million from year-end to $2.74 million.
- Receivables rose to $11.92 million from $8.48 million a year earlier; inventories rose to $7.08 million from $5.21 million. Accounts payable reached $6.47 million, up from $4.60 million.
- The 2012 comparative income statement was restated to reclassify production costs from general and administrative expenses to cost of goods sold. The restatement reduced reported gross profit and operating expenses by $0.67 million each, with no effect on operating income, net income, balance sheets, or cash flows.
Outlook, risks, and unusual items
- No specific financial guidance was provided. Management said it expected to fund foreseeable liquidity requirements internally and continued to explore acquisition opportunities.
- After quarter-end, the company amended its bank facilities: the revolving commitment increased to $5.0 million and matures May 31, 2014; the term loan maturity was extended to May 31, 2018. The facilities are secured by substantially all company assets and include minimum fixed-charge coverage and tangible-net-worth requirements. The filing does not state covenant headroom.
- On May 15, 2013, the company agreed to acquire a dairy plant in Waukesha, Wisconsin, for approximately $7.4 million, with closing expected June 10, 2013. The plant is expected to add approximately 170,000 square feet of production capacity.
- Management concluded disclosure controls and internal control over financial reporting were not effective as of March 31, 2013 because of a material weakness in classification of direct manufacturing costs. Management described remediation steps, including improved general-ledger monitoring and expense coding, and said it performed additional post-closing procedures.
- Two major customers together accounted for approximately 31% of gross sales; they represented approximately 36% of accounts receivable at quarter-end. The company reported ordinary-course litigation but did not expect it to have a material adverse effect.
Important facts for investors to verify
- Whether sales growth and improved margins persist, particularly if milk costs or promotional spending increase.
- Receivables collection, inventory levels, and working-capital trends given weaker operating cash flow and customer concentration.
- Liquidity and covenant capacity under the amended secured credit facilities, including funding for the announced plant acquisition.
- Progress and effectiveness of remediation for the disclosed material weakness in financial reporting controls.
- Acquisition closing, final transaction terms, and expected costs and benefits of the additional production capacity.
- The filing contains minor inconsistencies in some reported amounts; figures above are rounded, and the source text does not provide a single fully consistent value for every line item.