Lifeway Foods, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The unaudited consolidated results cover Lifeway Foods and its subsidiaries. The company manufactures cultured dairy products, principally kefir and farmer cheese.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $29.82 million | $29.57 million | $59.44 million | $58.70 million |
| Gross profit | $7.02 million | $7.50 million | $15.40 million | $14.17 million |
| Operating income | $49,054 | $1.52 million | $1.46 million | $2.15 million |
| Net income | $98,913 | $669,416 | $752,631 | $966,595 |
| Diluted EPS | $0.01 | $0.04 | $0.05 | $0.06 |
- Q2 net sales grew 0.9%; gross sales rose 11.3%, but discounts and promotional allowances more than doubled to $6.47 million, equal to 17.8% of gross sales versus 9.3% a year earlier. Management attributed gross-sales growth to higher drinkable-kefir volumes.
- Q2 gross margin declined to approximately 23.5% from 25.4%, while operating margin fell to approximately 0.2% from 5.2%. Higher G&A expense, including salaries, professional fees and Wisconsin facility costs, outweighed lower selling expenses.
- For the first half, net sales increased 1.3%; gross margin improved to approximately 25.9% from 24.1%, which management attributed largely to lower raw-material costs, primarily milk. Operating income and net income nevertheless declined as G&A expense increased 51.6% to $6.80 million.
- Cash from operations was $4.70 million for the first half, versus $2.10 million in 2014. The company attributed the increase primarily to payment timing and lower income-tax payments. Capital spending was $1.38 million; cash and cash equivalents rose to $5.87 million from $3.26 million at year-end.
- At June 30, current assets were $27.13 million and current liabilities $11.28 million. Notes payable totaled $8.38 million, including $840,000 current maturities. The $5 million revolving credit facility was undrawn and extended to July 31, 2016; the company reported compliance with its financial covenants.
Material changes, outlook and risks
- G&A increased by $2.06 million in Q2. The filing cites higher salaries following personnel role changes, legal and accounting fees associated with delayed SEC filings, and higher utilities at the Wisconsin facility. First-half advertising expense increased 50.3%, including the company’s first national television commercial.
- The company recorded approximately $180,000 of other-than-temporary impairment losses on three structured notes during the first quarter. It also reported a $207,083 Q2 gain on sale of property and equipment.
- Management said it expected to fund foreseeable liquidity needs internally and continued to explore acquisitions. The filing provides no quantified earnings or revenue guidance.
- Two customers represented approximately 27% of Q2 gross sales. Variable-rate term debt exposes the company to interest-rate risk; management estimated a 1 percentage-point rate increase would add about $85,000 to annualized interest expense.
- Disclosure controls and procedures were deemed ineffective at quarter-end due to previously identified material weaknesses. Management described remediation work and said additional procedures supported its view that the financial statements fairly present the reported results.
- The company filed this Q2 report on September 30, 2015, after Nasdaq notices concerning late periodic filings and noncompliance with listing requirements. The bank had granted filing extensions. The company also disclosed revisions to previously reported 2014 interim statements; the adjustments reduced reported Q2 2014 net income by approximately $425,000.
- After quarter-end, the board authorized repurchases of up to $3.5 million, capped at 250,000 shares. Management said ordinary-course litigation was not expected to have a material adverse effect; no material change to the 2014 Form 10-K risk factors was reported.
Investor facts to verify
- Status of remediation of the material weaknesses and the effectiveness of financial reporting controls.
- Nasdaq listing compliance and timeliness of subsequent SEC filings.
- Whether elevated promotional allowances persist and how they affect net sales and margins.
- Drivers and recurrence of higher G&A costs, including delayed-filing professional fees and Wisconsin facility costs.
- Customer concentration, structured-note investment exposure, and compliance with debt covenants and repayment obligations.