Lifeway Foods, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparative period is Q1 2022. Lifeway produces cultured dairy products, primarily drinkable kefir. Unless noted otherwise, financial amounts below are in thousands of dollars.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $37,904 | $34,099 |
| Gross profit / margin | $8,226 / 21.7% | $5,580 / 16.4% |
| Operating income (loss) | $1,437 | $(1,049) |
| Net income (loss) | $830 | $(895) |
| Diluted earnings (loss) per share | $0.06 | $(0.06) |
| Operating cash flow | $3,027 | $(648) |
| Capital expenditures | $1,762 | $348 |
Sales rose 11.2%, mainly from higher branded drinkable kefir volume and price increases implemented in Q4 2022. Gross margin improved 5.3 percentage points; management attributed the gain primarily to pricing and branded-product volume, with additional benefit from milk pricing and transportation costs. Selling expense increased to $3,519, including higher advertising and compensation; G&A decreased to $3,135. Interest expense rose to $104 from $42. The effective tax rate was 37.9%, versus 18.1%; the filing attributes the difference in part to the method used to calculate interim tax expense.
At March 31, cash was $5,209 and current assets were $27,554, compared with current liabilities of $13,790. Working capital was approximately $13,764. The balance sheet reported a $2,777 revolving-credit balance and note payable of $3,228 net of financing costs ($3,250 principal). The company had $2,223 available on its $5 million revolver. Total liabilities were $21,912 and equity was $48,743. Cash increased $765 during the quarter. Operating cash flow improved year over year; investing outflows rose with planned higher capital spending, while financing outflows included $500 of term-loan repayments.
Changes, outlook, and risks
- Management said inflation and higher costs for milk, ingredients, packaging, and transportation continued to pressure profitability and operating cash flows. It expected inflationary pressures to persist through 2023, at lower levels than in 2022, and expected prior price increases to help offset costs.
- The company reported full production and no significant supply-chain or labor disruptions, and did not anticipate near-term manufacturing or staffing disruptions.
- No numeric revenue or earnings guidance was provided. Management said cash generation, cash balances, and borrowing facilities were expected to provide sufficient liquidity for operations, capital needs, and growth initiatives.
- The company was in compliance with its credit-agreement covenants at quarter-end, including a minimum working-capital covenant of $11.25 million and a fixed-charge coverage ratio of 1.25:1. Debt is secured by substantially all company assets; the revolving facility matures June 30, 2025, and the term loan August 18, 2026.
- Principal risks cited include commodity-price changes, customer and competitor actions and price competition, execution of business strategy, regulation, COVID-19 effects, and supply-chain, manufacturing, distribution, or cybersecurity disruptions. Two major customers represented approximately 24% of Q1 2023 net sales, highlighting customer concentration.
- Ordinary-course legal matters were described as not material individually or in aggregate based on management’s assessment, though an adverse outcome could be material. After quarter-end, Lifeway sued current director Ludmila Smolyansky and former director and executive officer Edward Smolyansky, alleging breaches of agreements and seeking at least $400 and $100, respectively.
- Related-party context: an endorsement agreement with Ludmila Smolyansky was terminated in September 2022; the termination agreement provided for a $400 lump-sum payment. No royalties were recorded in Q1 2023, compared with $150 in Q1 2022.
Important facts for investors to verify
- Track whether pricing and sales volume continue to offset input-cost inflation and support gross margin.
- Monitor cash conversion, planned capital spending, and availability under the revolving facility, alongside covenant compliance and debt repayments.
- Assess customer concentration and the outcome and potential financial effects of the post-quarter litigation.
- Reconcile the filing’s stated borrowing rates: Note 7 reports 6.71% for the term loan at March 31, while MD&A reports 4.94% for the note payable; the filing text does not provide a clear reconciliation.
- Consider the interim results’ limitations: management notes that quarterly results are not necessarily indicative of annual results.