Lifeway Foods, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; includes fourth-quarter comparisons with Q4 2012. Lifeway manufactures and distributes probiotic cultured dairy and non-dairy products, led by kefir. In July 2013, it acquired Golden Guernsey Dairy’s manufacturing, bottling and distribution plant and related assets for approximately $7.4 million.
Financial results and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Gross sales | $108.97 million | $89.75 million |
| Net sales | $97.52 million | $81.35 million |
| Gross profit | $27.62 million; 28.3% margin | $26.62 million; 32.7% margin |
| Operating income | $8.03 million; 8.2% margin | $8.84 million; 10.9% margin |
| Net income / diluted EPS | $4.99 million / $0.31 | $5.62 million / $0.34 |
| Cash provided by operations | $5.84 million | $6.63 million |
- Q4: Gross sales grew 26% to $28.94 million and net sales grew 26% to $26.27 million. Lifeway recorded an operating loss of $388,832 and net loss of $469,208, or $0.02 per diluted share, versus operating income of $1.77 million and net income of $1.07 million, or $0.07 per diluted share, in Q4 2012.
- Margins and costs: Annual cost of goods sold, excluding depreciation, rose to approximately 70% of net sales from 65%. Management attributed the increase to milk, the largest raw material; milk costs were approximately 25% higher for the year and 30% higher in Q4 year over year. Annual operating expenses fell to approximately 20% of net sales from 22%.
- Cash and investment: Cash and cash equivalents were $3.31 million at year-end, up from $2.29 million. Investing activities used $7.86 million, including $8.48 million in property and equipment purchases; financing activities provided $3.04 million, including $4.98 million in debt proceeds.
- Balance sheet: Total assets were $63.67 million; current assets $24.75 million and current liabilities $8.88 million. Total notes payable were $9.87 million, including $875,002 due within one year. Stockholders’ equity was $42.95 million. Debt is secured by substantially all company assets; loan agreements include minimum fixed-charge-ratio and tangible-net-worth requirements.
- Dividends: The company declared $0.08 per share in 2013, compared with $0.07 in 2012. Future distributions are at the board’s discretion.
Material changes, outlook and risks
- Annual net sales increased approximately 20%, primarily on stronger sales and awareness of Lifeway Kefir, ProBugs Organic Kefir and BioKefir. Net income declined approximately 11%, while operating income declined approximately 9%.
- Q4 results included an approximately $305,000 loss on disposition of assets associated with closing a non-performing Starfruit store; management described it as a one-time, non-cash expense.
- The Golden Guernsey asset purchase expanded the company’s production footprint. The filing states that the acquired assets had not been placed in service by year-end.
- Management said it expected to fund foreseeable liquidity requirements internally and continued to explore acquisition opportunities. The filing provides no quantified financial guidance.
- Key business risks include volatility in milk and other commodity costs, competition from larger dairy and yogurt producers, customer and consumer demand, regulation, product-launch and acceptance risks, and customer concentration. Two customers represented approximately 35% of 2013 gross sales in the financial statement note; MD&A separately says two customers represented approximately 27% of sales, so the filing’s figures are not consistent.
- The independent auditor issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. Management and the auditor identified pervasive material weaknesses, including inventory valuation, financial statement preparation and review, segregation of duties, and entity-level controls. Management said it was beginning to seek outside help to develop remediation plans.
- The 2012 income statement was revised to reclassify $802,727 of production wages from selling expenses to cost of goods sold; management reported no effect on net income, balance sheets or cash flows. Lifeway also disclosed no material pending legal proceedings and no off-balance-sheet financing arrangements.
Investor verification priorities
- Reconcile the customer-concentration disclosure: approximately 27% in MD&A versus approximately 35% of gross sales in the financial statement note.
- Assess the severity and remediation progress of the material weaknesses, particularly inventory valuation and financial statement controls.
- Verify Golden Guernsey’s integration, the timing and cost of placing its assets in service, and the effect on capacity and cash needs.
- Monitor milk-cost trends and whether pricing, product mix or operating efficiencies can restore margins.
- Review debt covenants, the May 2014 maturity of the $5 million revolving credit facility, and the company’s funding needs following elevated capital spending.