Lifeway Foods, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Lifeway makes cultured dairy products, led by drinkable kefir, and reports one operating segment.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $29.162 (+16.6%) | $25.014 | $58.538 (+16.1%) | $50.402 |
| Gross profit / margin | $7.677 / 26.3% | $6.928 / 27.7% | $15.726 / 26.9% | $12.925 / 25.6% |
| Operating income / margin | $2.494 / 8.6% | $1.438 / 5.7% | $4.430 / 7.6% | $1.676 / 3.3% |
| Net income / margin | $1.618 / 5.5% | $0.980 / 3.9% | $2.924 / 5.0% | $1.126 / 2.2% |
| Diluted EPS | $0.10 | $0.06 | $0.19 | $0.07 |
Sales growth was driven mainly by higher volumes of branded drinkable kefir. The USDA Farmers to Families Food Box program, which ended in May 2021, accounted for approximately 50% of the Q2 sales increase and 42% of the first-half increase. Drinkable kefir other than ProBugs represented 82% of first-half sales.
Cash, liquidity and debt
- Cash was $10.412 million at June 30, up from $7.926 million at year-end 2020. Current assets were $28.122 million and current liabilities $8.978 million, implying working capital of $19.144 million.
- First-half operating cash flow was $3.647 million, compared with $1.911 million a year earlier. Investing cash outflow was $1.161 million, principally capital spending; financing cash flow was zero. Net cash increased $2.486 million.
- Revolver borrowings were $2.777 million, with $2.223 million available under the $5 million revolving line. The stated interest rate was 2.15%; the facility matures June 30, 2025, unless earlier terminated. The company reported compliance with its financial covenants.
- Total liabilities were $13.638 million. The filing reports no material change in risk factors from the 2020 Form 10-K.
Changes, outlook and risks
- Q2 gross margin declined year over year, which management attributed mainly to unfavorable milk pricing and, to a lesser extent, higher prices for other inputs; lower depreciation partly offset the effect. First-half gross margin improved, primarily due to operating leverage.
- First-half selling expense rose $0.493 million, mainly from first-quarter television and digital advertising, partly offset by lower compensation. General and administrative expense fell $0.368 million, reflecting lower compensation, professional fees and office lease costs.
- No numerical earnings or revenue guidance is provided. Management expects foreseeable liquidity needs to be met through operating cash flows, cash on hand and the revolving facility; it reported full production capacity and no significant operating disruption to date.
- COVID-19-related demand may ease as at-home consumption patterns change. Management also cited possible supply constraints or higher ingredient, packaging and raw-material costs, as well as uncertainty around consumer demand and future pandemic effects; the financial impact could not be reasonably estimated.
- On August 3, 2021, after quarter-end, Lifeway agreed to acquire certain Glenoaks Farms assets for $5.8 million, subject to adjustments. The deal covers assets and rights related to probiotic drinkable yogurt, and Lifeway is not assuming the seller’s liabilities.
- Two major customers accounted for approximately 23% of Q2 sales and 22% of first-half sales. Related-party payments to the board chair included $0.250 million in first-half service fees, $0.188 million in estimated performance fees, and $0.300 million in product royalties.
- Ordinary-course legal matters are disclosed; management said recorded accruals were not material and it could not estimate a possible loss or range for contingencies. Disclosure controls were assessed as effective at June 30, 2021.
Investor verification priorities
- Assess how much sales growth and future demand depended on the temporary USDA food-box program and pandemic-era at-home consumption.
- Track milk and other input costs, pricing actions, and whether gross-margin pressure seen in Q2 persists.
- Verify the Glenoaks acquisition’s closing, final consideration, funding source, and subsequent contribution to sales and cash flow.
- Review customer concentration and the terms, approval and ongoing amounts of the board chair’s consulting, incentive and royalty arrangements.
- Monitor cash conversion, capital spending, revolver availability, and continued covenant compliance.