Lifeway Foods Announces Results for Third Quarter Fiscal 2011

Third Quarter 2011 Net Sales Increase a Record 21% to $17.7 Million

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Nov 14, 2011, 04:15 ET

MORTON GROVE, Ill., Nov. 14, 2011 /PRNewswire/ -- Lifeway Foods, Inc., (Nasdaq: LWAY), a leading supplier of cultured dairy products known as kefir and organic kefir, today announced results for three and nine months ended September 30, 2011.

Third Quarter Results

Third quarter of 2011 gross sales increased 22% to $19.4 million compared to $15.9 million for the third quarter of 2010. This increase is primarily attributable to increased sales and growing awareness of the benefits of Lifeway's flagship line, Kefir, as well as ProBugs® Organic Kefir for kids, and the successful introduction of new product lines such as Bio Kefir™. In addition, Lifeway Frozen Kefir contributed approximately $0.3 million in sales during the third quarter of 2011. The frozen kefir line was launched in April 2011.

Third quarter total consolidated net sales increased $3.1 million, or approximately 21%, to $17.7 million from $14.6 million in the third quarter of 2010. Net sales are recorded as gross sales less promotional activities such as slotting fees paid, couponing, spoilage and promotional allowances as well as early payment terms given to customers.

Gross profit for the third quarter of 2011 increased 19% to $6.2 million, compared to $5.3 million in the third quarter of the prior year. The Company's gross profit margin decreased to 35% in the third quarter versus 36% in the third quarter of 2010. Gross profit was impacted primarily by increased transportation and other petroleum based production supply costs, as well as the increased price of conventional milk, the Company's largest raw material. The cost of milk was approximately 35 to 45% higher in the third quarter of 2011 compared to the same period in 2010.

Operating expenses as a percentage of net sales were approximately 26% during the third quarter of 2011 compared to approximately 23% during the same period in 2010. This increase was primarily attributable to increased selling expenses as compared to the same period in 2010. Selling related expenses increased by $0.9 million (approximately 49%) to $2.7 million during the third quarter of 2011, from $1.8 million during the same period in 2010. This increase is directly attributable to increases in marketing and advertising of the Company's flagship line, Kefir, as well as ProBugs® Organic Kefir for kids, BioKefir™ and Lifeway's Frozen Kefir.

Operating income decreased to $1.6 million in the third quarter of 2011 compared to $1.9 million in the same period last year. The decrease in operating income is due to increased operating expenses in the third quarter of 2010 as compared to the third quarter of 2011.

The Company reported net income of $1.0 million or earnings of $0.06 per diluted share compared to net income of $0.9 million or earnings of $0.05 per diluted share in the third quarter of 2010.

Julie Smolyansky, CEO of Lifeway Foods, Inc. commented, "We are very pleased with our ability to continue to grow our sales and profits despite facing record high input costs. In the quarter, we further increased our retail distribution and we believe we have the right Kefir product assortment to further expand our customer reach and increase market share long-term."

Smolyansky continued, "We will continue to intently manage the controllable aspects of our business as we realize increased production efficiencies and economies of sales to achieve record annual sales and profits in 2011. Going forward, we intend to take advantage of the opportunity to expand distribution in the U.S. and internationally with Lifeway's market leading position."

Nine Month Results

Total consolidated gross sales increased by $11.0 million, or approximately 23%, to $58.4 million during the nine-month period ended September 30, 2011 from $47.4 million during the same nine-month period in 2010. This increase is primarily attributable to increased sales and awareness of Lifeway's flagship line, Kefir, as well as ProBugs® Organic Kefir for kids and BioKefir™. In addition, Lifeway's Frozen Kefir line, which was launched in April 2011, contributed approximately $0.6 million to revenue during the first nine months of 2011.

Total consolidated net sales increased by $9.4 million, or approximately 22%, to $53.2 million during the nine-month period ended September 30, 2011 from $43.8 million during the same nine-month period in 2010.

Gross profit for the first nine months of 2011 increased 9% to $18.8 million, compared to $17.2 million in the third quarter of the prior year. The Company's gross profit margin decreased to 35% in the first nine months versus 39% in the same period last year. Gross profit was negatively impacted primarily by increased transportation and other petroleum based production supply costs, as well as the increased price of conventional milk, the Company's largest raw material. The cost of milk was approximately 20 to 25% higher compared to the first nine months of 2010.

Operating expenses as a percentage of net sales were approximately 25% during the nine-month period ended September 30, 2011 compared to approximately 24% during the same period in 2010. Selling related expenses increased by $2.2 million, or approximately 39%, to $7.8 million during the nine-month period ended June 30, 2011, from $5.6 million during the same period in 2010. This increase is directly attributable to the Company recording an approximate $0.7 million expense related to its 25th Anniversary Cross Country Mobile tour, which occurred in the second quarter of 2011 and was expensed during the second quarter of 2011. The Company views this as a non-recurring advertising expense. The Company also accrued for $0.1 million in bonuses the first six months of 2011 to be paid in the fourth quarter of 2011. In 2011 the Company records expenses throughout the year for bonuses so the full impact is not taken in fourth quarter alone and rather spread out across each of the four quarters equally. The Company accrued for all expenses in the fourth quarter last year.

Total net income was $3.2 million or $0.20 per share for the nine-month period ended September 30, 2011 compared to $3.9 million or $0.23 per share in the same period in 2010.

Balance Sheet/Cash Flow Highlights

Net cash provided by operating activities was $2.6 million during the nine-months ended September 30, 2011 which is a decrease of $1.4 million when compared to the same period in 2010. This decrease is primarily attributable to the decrease in net income of $0.6 million.

Net cash used in investing activities was $2.1 million during the nine-months ended September 30, 2011 which is an increase of $1.7 million compared to the same period in 2010. This increase is primarily due to a decrease in proceeds from sale of investments of $1.9 million compared to 2010.

The Company had cash and cash equivalents of $0.9 million as of September 30, 2011 compared to cash and cash equivalents of $0.8 million as of September 30, 2010.

Total stockholder's equity was $35.8 million as of September 30, 2011, which is an increase of $2.2 million when compared to December 31, 2010. This is primarily due the increase in retained earnings of $3.2 million when compared to December 31, 2010. Total stockholder's equity increased by $1.3 million when compared to September 30, 2010. This is primarily due the increase in retained earnings of approximately $3.0 million as of September 30, 2011, when compared to September 30, 2010.

Conference Call

The Company will host a conference call to discuss these results with additional comments and details.

The conference call is scheduled to begin at 5:00 p.m. ET on Monday, November 14, 2011. The call will be broadcast live over the Internet hosted at the Investor Relations section of Lifeway Foods' website at www.lifeway.net, and will be archived online through November 28, 2011. In addition, listeners may dial 877-407-3982 in North America, and international listeners may dial 201-493-6780. Participants from the Company will be Julie Smolyansky, President and Chief Executive Officer, and Edward Smolyansky, Chief Financial Officer.

For more information about Lifeway Kefir, please visit http://www.lifewaykefir.com.

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About Lifeway Foods

Lifeway Foods, Inc. (NASDAQ:LWAY), recently named one of Fortune Small Business' Fastest Growing Companies for the fifth consecutive year, is America's leading supplier of the cultured dairy products known as kefir and organic kefir. Lifeway Kefir is a dairy beverage that contains 10 exclusive live and active probiotic cultures plus ProBoost™. While most regular yogurt contains only two or three of these "friendly" cultures, Lifeway Kefir products offer greater nutritional benefits and support a healthier life. Lifeway produces various different flavors of its drinkable Kefir and Organic Kefir beverage, and recently introduced a series of innovative new products such as a children's line of Organic Kefir called ProBugs™ with a no-spill pouch and kid-friendly flavors like Goo Berry Pie and Strawnana Split. In addition to its line of Kefir products, the company produces a variety of probiotic cheese products. Lifeway also sells frozen kefir, kefir smoothies and kefir parfaits through its Starfruit™ retail stores.

Forward Looking Statements

This news release contains forward-looking statements. Investors are cautioned that actual results may differ materially from such forward-looking statements. Forward-looking statements involve risks and uncertainties including, but not limited to, competitive pressures and other important factors detailed in the Company's reports filed with the Securities and Exchange Commission.

LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statements of Income and Comprehensive Income For the Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)
	(Unaudited) Three Months Ended				(Unaudited) Nine Months Ended
	September, 30				September, 30
	2011		2010		2011		2010

Sales	$ 19,423,533		15,908,784		58,383,802		$ 47,419,499
Less: discounts and allowances	( 1,721,929)		( 1,315,767)		( 5,180,377)		( 3,651,976)
Net Sales	17,701,604	17,701,604	14,593,017	14,593,017	53,203,425	53,203,425	43,767,523	43,767,523

Cost of goods sold		11,066,579		8,981,922		33,253,219		25,512,628
Depreciation expense		396,732		349,017		1,163,939		1,033,612

Total cost of goods sold		11,463,311		9,330,939		34,417,158		26,546,240

Gross profit		6,238,293		5,262,078		18,786,267		17,221,283

Selling expenses		2,748,389		1,848,222		7,760,704		5,584,954
General and administrative		1,726,241		1,329,803		4,904,148		4,298,024
Amortization expense		195,958		175,760		587,874		527,280

Total Operating Expenses		4,670,588		3,353,785		13,252,726		10,410,258

Income from operations		1,567,705		1,908,293		5,533,541		6,811,025

Other income (expense):
Interest and dividend income		14,465		97,697		49,152		205,381
Rental income		4,546		4,050		5,196		8,085
Interest expense		( 61,074)		( 86,167)		( 195,502)		( 262,274)
Gain (loss) on sale of investments, net		( 33,477)		( 1,687)		( 35,533)		53,097
Loss on Disposition of Assets		( 20,135)		---		( 20,135)		---
Total other income (expense)		( 95,675)		13,893		( 196,822)		4,289

Income before provision for
income taxes		1,472,030		1,922,186		5,336,719		6,815,314

Provision for income taxes		441,989		1,017,349		2,115,365		2,957,285

Net income		$ 1,030,041		$ 904,837		$ 3,221,354		$ 3,858,029

Basic and diluted earnings
per common share		0.06		0.05		0.20		0.23

Weighted average number of
shares outstanding		16,428,005		16,625,414		16,450,973		16,695,782

COMPREHENSIVE INCOME

Net income		$ 1,030,041		$ 904,837		$ 3,221,354		$ 3,858,029

Other comprehensive income
(loss), net of tax:
Unrealized gains on
investments (net of tax)		( 83,118)		101,334		( 57,263)		91,995
Less reclassification adjustment
for (gains) losses included in
net income (net of taxes)		18,914		990		20,076		( 31,168)

Comprehensive income		$ 965,837		$ 1,007,161		$ 3,184,167		$ 3,918,856

LIFEWAY FOODS, INC. AND SUBSIDIARIES Statement of Cash Flow For the Nine Months Ended September 30, 2011 and 2010 (Unaudited)
	(Unaudited) September 30,
	2011	2010

Cash flows from operating activities:
Net income	$ 3,221,354	$ 3,858,029
Adjustments to reconcile net income to net
cash flows from operating activities, net of acquisition:
Depreciation and amortization	1,751,813	1,560,893
Loss (Gain) on sale of investments, net	35,533	( 53,097)
Loss on sale of equipment	20,135
Deferred income taxes	( 186,677)	( 392,966)
Treasury stock issued for compensation	---	62,318
Increase in allowance for doubtful accounts	80,000	---
(Increase) decrease in operating assets:
Accounts receivable	( 2,649,396)	( 1,795,921)
Other receivables	89,847	( 12,532)
Inventories	( 1,794,552)	( 1,212,177)
Refundable income taxes	906,748	1,308,978
Prepaid expenses and other current assets	71,913	3,577
Increase (decrease) in operating liabilities:
Accounts payable	346,276	( 55,466)
Accrued expenses	348,403	125,638
Income taxes payable	351,107	567,926
Net cash provided by operating activities	2,592,504	3,965,200

Cash flows from investing activities:
Purchases of investments	( 1,806,564)	( 1,809,171)
Proceeds from sale of investments	990,397	2,868,975
Investments in certificates of deposits	( 50,000)	-
Proceeds from redemption of certificates of deposit	---	202,545
Purchases of property and equipment	( 1,241,388)	( 1,681,740)
Acquisition of the assets of First Juice	---	---
Net cash provided by (used in) investing activities	( 2,107,555)	( 419,391)

Cash flows from financing activities:
Proceeds of note payable	1,000,000	250,000
Checks written in excess of bank balances	( 470,223)	659,125
Purchases of treasury stock	( 1,022,429)	( 2,059,911)
Repayment of notes payable	( 2,361,553)	( 2,175,773)
Net cash used in financing activities	( 2,854,205)	( 3,326,559)

Net (decrease) increase in cash and cash equivalents	( 2,369,256)	219,250

Cash and cash equivalents at the beginning of the period	3,229,939	630,407

Cash and cash equivalents at the end of the period	$ 860,683	$ 849,657

LIFEWAY FOODS, INC. AND SUBSIDIARIES Consolidated Statement of Balance Sheets For the Nine Months Ended September 30, 2011 and 2010 (Unaudited)
	(Unaudited) September 30,
	2011	2010
ASSETS

Current assets
Cash and cash equivalents	$ 860,683	$ 849,657
Investments	1,814,344	3,488,502
Certificates of deposits in financial institutions	300,000	450,000
Inventories	5,779,926	4,509,153
Accounts receivable, net of allowance for doubtful accounts and discounts	9,362,672	7,795,659
Prepaid expenses and other current assets	86,402	37,120
Other receivables	14,833	62,290
Deferred income taxes	458,001	277,393
Refundable income taxes	---	---
Total current assets	18,676,861	17,469,774

Property and equipment, net	15,380,717	14,930,309

Intangible assets
Goodwill and other non amortizable brand assets	14,068,091	13,806,091
Other intangible assets, net of accumulated amortization of $2,891,982 and $2,125,489 at September 30, 2011 and 2010	5,414,019	5,732,149
Total intangible assets	19,482,110	19,538,240

Other assets	---	500,000

Total assets	$ 53,539,688	$ 52,438,323

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Checks written in excess of bank balances	$ 870,987	$ 1,002,101
Current maturities of notes payable	1,923,436	3,608,978
Accounts payable	4,529,757	2,708,534
Accrued expenses	857,862	739,982
Accrued income taxes	351,107	567,926
Total current liabilities	8,533,149	8,627,521

Notes payable	5,882,691	6,197,778

Deferred income taxes	3,313,092	3,120,432
Total liabilities	17,728,932	17,945,731

Stockholders' equity
Common stock, no par value; 20,000,000 shares authorized; 17,273,776 shares issued; 16,425,809 shares outstanding at September 30, 2011; 17,273,776 shares issued; 16,597,749 shares outstanding at September 30, 2010	6,509,267	6,509,267
Paid-in-capital	2,032,516	2,018,727
Treasury stock, at cost	( 7,447,975)	( 5,897,308)
Retained earnings	34,797,229	31,811,438
Accumulated other comprehensive income (loss), net of taxes	( 80,281)	50,468
Total stockholders' equity	35,810,756	34,492,592

Total liabilities and stockholders' equity	$ 53,539,688	$ 52,438,323