Lifeway Foods, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited consolidated results include Lifeway and its wholly owned subsidiaries. The company produces and distributes dairy products, led by Kefir, as well as related products.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Gross sales | $22.62 million | $19.42 million | $66.88 million | $58.38 million |
| Net sales | $20.62 million | $17.70 million | $60.57 million | $53.20 million |
| Gross profit | $7.47 million | $6.35 million | $22.27 million | $19.16 million |
| Operating income | $2.08 million | $1.57 million | $7.08 million | $5.53 million |
| Net income | $1.40 million | $1.03 million | $4.55 million | $3.22 million |
| Diluted EPS | $0.09 | $0.06 | $0.28 | $0.20 |
- Q3 gross sales rose about 16% and net sales about 16%; nine-month gross sales rose about 15% and net sales about 14% year over year.
- Gross profit increased about 18% in Q3 and 16% for the nine-month period. Operating expenses rose 13% and 12%, respectively, while operating income grew 33% and 28%.
- Management reported gross margins of approximately 33% for Q3 and 36% for the nine months. The filing does not clearly reconcile those stated percentages with gross profit divided by net sales, which yields approximately 36% and 37%, respectively.
- Cash provided by operations was $6.09 million for the first nine months, versus $2.59 million in 2011. Investing activities used $1.22 million; financing activities used $3.61 million. Cash increased $1.26 million from year-end 2011 to $2.38 million.
Financial position and liquidity
- At September 30, 2012, cash was $2.38 million, investments $2.03 million, certificates of deposit $0.45 million, and current assets $20.88 million. Current liabilities were $7.94 million; the resulting current ratio was approximately 2.6.
- Total notes payable were $5.68 million, including $0.58 million current and $5.10 million long-term. Notes payable declined from $7.81 million at September 30, 2011. The principal bank note bears a variable rate, then 2.7963%, and includes a $5.07 million balloon due February 6, 2014. The company reported compliance with its bank covenants.
- Total assets were $54.51 million and stockholders’ equity $38.37 million. The company paid $1.15 million in dividends during the nine months and repurchased 13,200 shares during Q3 under its 2012 repurchase program.
Changes, outlook, and risks
- Management attributed sales growth primarily to greater sales and awareness of Kefir, ProBugs Organic Kefir for kids, and BioKefir. Frozen Kefir contributed approximately $0.7 million of Q3 sales and $1.9 million for the nine months.
- Management cited a 20% decrease in conventional milk costs, partly offset by a 10% increase in organic milk costs. Advertising expense declined to $1.98 million from $2.70 million for the nine-month periods; general and administrative expense increased.
- Management expects to fund foreseeable liquidity requirements internally. The filing provides no specific revenue or earnings guidance.
- Two major customers together represented approximately 31% of nine-month gross sales in 2012, versus 29% in 2011; they represented approximately 30% of accounts receivable at September 30, 2012. This customer concentration creates exposure to changes in customer demand or creditworthiness.
- The company reported no material pending legal proceedings and no material changes in internal control over financial reporting. It identified no additional risk factors in this filing. Investment securities had $14,962 of unrealized losses; management did not consider any material investment other-than-temporarily impaired.
Important facts for investors to verify
- Reconcile management’s stated gross-margin percentages with the financial statements and clarify the margin calculation basis.
- Assess customer concentration, receivables collectability, and the impact of any changes in the major customer relationships.
- Review the refinancing or repayment plan for the $5.07 million balloon payment due in February 2014, along with variable-rate exposure and covenant requirements.
- Monitor conventional and organic milk costs, promotional discounts and allowances, and whether product-led sales growth continues.
- Confirm the availability and maturity terms of investments and certificates of deposit when assessing liquidity; the filing’s cash-flow statement reports cash and cash equivalents separately.