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Non-Tech : LIFEWAY FOODS (LWAY) -- Ignore unavailable to you. Want to Upgrade?

To: mark cox who wrote (215)	4/2/1998 2:27:00 PM
From: mark cox	Respond to of 352

Hello everyone, I have completed my analysis of the 10K for the most part and will post what I have found. It is possible that I may have made a mistake in a calculation so do your own analysis and don't making any investment decisions based on the following: REVENUE GROWTH for the year was +12.6% NET INCOME GROWTH for the year was +13.4% REVENUE GROWTH for just the 4th quarter was +19.8% which shows that with the new facility and no capacity restraints, they have begun to sell more product again. NET INCOME GROWTH for just the 4th quarter was -27% which was probably caused by the overhead expenses of the new facility, cost of goods sold increased at a higher rate than revenues and the sales made from the new facility weren't recorded as earnings in the 4th quarter because of LWAY's 50 day Accounts Receivables time frame. So the earnings that were made were recorded as Accounts Receivable. Also Interest Expense was higher this year. OTHER INCOME for the year accounted for $0.034 in EPS. This Other Income was earned on rental income from leasing the new facility before LWAY moved into it. This income occurred during the 1st and 2nd quarters of the year. This will be important to remember when comparing this year's 1st and 2nd quarter numbers with last year's. INTEREST EXPENSE was up +100% or $62,050 to $124,218. This was caused by the mortgage on the new facility. This cut into earnings a lot, $0.016 just from the increase alone. TAX RATE for the year was 40.5% SHARES OUTSTANDING decreased by 1,283 to 3,776,102 GROSS MARGINS decreased -1.2% to 42.4% for the year and was caused by an increase in Cost of Goods Sold. NET PROFIT MARGINS for the year rose slightly to 11.75% from 11.66% CURRENT RATIO is 1.5 which is down from 3.7 a year ago. This is caused by two things, 1) LWAY expended over $1.2 million of their cash on new equipment this year, and 2) about $578,000 of long term liabilities from two mortgages were moved to current liabilities because of balloon payments due in 1998. They say they plan to refinance these mortgages. So with the use of the cash and the large chunk moved from long to current liabilities the current ratio was affected downward. Rule of thumb says a company should maintain a current ratio of at least 2. When these mortgages are refinanced their current ratio will move back up some. DEBT/EQUITY RATIO, I compute this ratio as Total Liabilities divided by Total Stockholder's Equity. Does everyone agree with that formula? Using it I came up with a Debt/Equity Ratio of .61 at present compared to .68 a year ago. Yahoo, MarketGuide and WSRN all show it around .37. Can anyone tell me why my numbers have come out differently? FINANCIAL LEVERAGE GAIN was 6% for 1997, this means that for every dollar LWAY has in debt, they generated 6 cents in net profit with it. Last year they earned 9.3 cents so we have a -35% drop versus a year ago. This is due to the added debt of the new facility and the large increase in Total Assets of the company which negatively impacted ROA, which is used to compute Financial Leverage Gain. RETURN ON EQUITY was 18.2% versus 19.7% a year ago. This is a decrease of -1.5% and is caused by an increase in Total Shareholder's Equity of +23%. Alot of these ratios show how a good increase in one of the fundamentals can negatively impact another ratio. BOOK VALUE rose to $1.02 per share up from $0.83 a year ago. This is due to the increase of Total Stockholder's Equity again and a very slight decrease in Shares Outstanding. RETURN ON ASSETS fell to 11.2% down from 17.8% a year ago. This is due to the large increase in the Company's Total Assets, which for the most part is the new facility and equipment, and they didn't bring in any earnings for the year because it went online at the end of the year so a large increase in Assets with no Income generated from them knocked this ratio down alot. INVENTORIES rose +48.6% over a year ago. Normally with a large increase in Inventories and a low increase in Revenue growth would appear to be some possible trouble but we all know that with the new facility coming online that it had to be stocked with Inventory to prepare it for production. So I don't see any trouble here. INVENTORY HOLDING PERIOD decreased to 5.6 weeks down from 7.2 weeks a year ago. This shows that their inventories are being used at a faster rate than a year ago so even though Inventories are up +48.6%, they are not sitting there tying up capital. ACCOUNTS RECEIVABLE WEEKS rose to 7.1 weeks up from 6.1 weeks a year ago. This means it takes an average of 50 days for LWAY to get paid by its customers versus 43 a year ago. The shorter the time the better. Also Accounts Receivable rose by 31.9% versus its Revenue growth rate of only 12.6%. These two rates should stay around the same. This is a large variance. LWAY has done this in the past and then brought it under control. I will be asking the Company about this the next time I call them. I will also be looking at this again for the 1st quarter. This is probably being caused LWAY's distribution expanding into new stores and areas. ACCOUNTS PAYABLE CREDIT rose to 6 weeks up from 4.2 weeks a year ago. This means that LWAY waits 6 weeks before paying its bills. The longer the time frame the better because this frees up capital for the company. CASH FLOWS FROM OPERATIONS were very strong in 1997 with $942,631 in cash being generated by the Company's business. The 4th quarter alone produced $337,153. This is one of the most important fundamentals of a company to me. How well a company can generate cash from its main business says alot about how that company and its management are performing. CASH FLOWS FROM INVESTING, LWAY spent $1,286,711 in cash on new equipment during 1997. In the future we shouldn't see any more large expenditures here. The CEO explained that to increase the present production capacity with more equipment will take only a small amount of money because of the way he designed the new facility. WORKING CAPITAL fell to $787,679 from $1,696,175 a year ago. This is explained by all of the cash purchases for new equipment. RESEARCH AND DEVELOPMENT expenditures for R&D were up +60% over a year ago to $16,000. As I stated in previous posts, LWAY has a lot of new products in development. They launched three new products in 1997, "Elita", "Kwashenka" and "Basics Plus". ADVERTISMENTS, LWAY spent $158,000 on advertising and product promotion in 1997. In last year's 10K they stated that they expected to spend $100,000 so I am hoping that they stepped up their advertising campaign in the last part of the year. They participated in 12 Tradeshows during 1997. EMPLOYEES, LWAY has 43 full time employees now compared with 35 a year ago. EXPORTS, LWAY exports to Canada, Russia and the Ukraine. DISTRIBUTION, a year ago LWAY had 4 Company-owned trucks that distributed their products directly to over 750 stores in Illinois. Today LWAY has 6 Company-owned trucks which directly distribute to over 1,100 stores in Illinois. Of course they also distribute their products nationwide through many distributors. I of course didn't go over everything in the 10K, just the basics. I hope others on the forum will do some analyzing as well and put out more information. Many of the above ratios show how much impact the new facility has had without producing any earnings yet. In about 5 more weeks we'll have a 10Q to look at. If anyone sees any errors that I have made, please bring it to the forum's attention. I am not a professional and I have much to learn still. Anyone have any thoughts about anything? My hands are tired. Mark