Much as I love the company, there's one thing that's always bugged me about Lifeway Foods (NASDAQ:LWAY): minimal cash profits. Sure, I know the little kefir maker is pouring its operating cash flow into growing the business, and I'm fine with that. That's how the company has maintained a sales growth rate that has compounded at 26% over the past five years.

It's just that, for a simple Fool like me, seeing plentiful free cash flow is a security blanket -- I get a warm and fuzzy feeling seeing a company rolling in cash.

So, for better or worse, yesterday was a feel-good moment for me; Lifeway announced Q1 earnings -- and positive free cash flow. Whereas one year ago, the company was in cash-burn mode, things turned around last quarter, with Lifeway producing nearly $560,000 in cash profits. Even more impressive, it didn't need to skimp on investing in itself to accomplish this. To the contrary, Lifeway nearly tripled its capital expenditures relative to last year.

Between the lines
If there's one criticism I'd level at management today, it's that they forced investors to read between the lines to discern this good news. Lifeway continues to withhold cash flow statements from its earnings releases, forcing investors to trudge over to the SEC's website to find this crucial document.

Way outside the lines
Walking through the highlights of the financials:

  • Sales rose 23% for the quarter -- nice, but we already knew that.
  • Higher dairy costs squeezed gross margins -- again, not a new story. We saw something similar at Dean Foods (NYSE:DF) a couple weeks back and to be honest, we've heard this story  over and over again at companies like Kraft (NYSE:KFT), General Mills (NYSE:GIS), and Starbucks (NASDAQ:SBUX).
  • CFO Edward Smolyansky updated us on "decreasing milk cost, which began in March ... continued in April, and even more so in May, and we hope that this trend continues throughout the year." Good news for gross margins there.
  • Operating costs are well under control, rising slower than sales, and most of the increase came from Lifeway's ramped-up marketing spending (the company's dipping its toe into television advertising, and sponsoring events ranging from a probiotics study at Georgetown University, to, um, Lollapalooza).

All the news that wasn't fit to print
Honestly, I had planned to end this column with the paragraph above -- but events forced me to take a different turn. No sooner had Lifeway enjoyed its well-deserved, post-earnings price bump, than the stock began giving back those gains in the aftermarket. Why? News broke on Lifeway literally as I was putting the column to bed -- and at first glance, it looked like bad news.

Apparently, at the same time as earnings were coming out, the FDA was issuing some Lifeway news of its own: "The U.S. Food and Drug Administration today announced the shut down of cream cheese ... operations at Lifeway Foods ... until they are found compliant with food-safety laws ... The FDA's enforcement action follows the defendants' extensive history of violations of the Federal Food, Drug, and Cosmetic Act dating back to at least 2004."

Now before you panic and sell the stock, let me be clear: The FDA's allegations look to me like a tempest in a kefir cup. Basically, they boil down to some easily fixed labeling errors, and documentary issues with a small company that Lifeway bought back in 2004. What's more, after the news broke, I contacted Lifeway's CEO and CFO to clarify the situation. They confirmed that the issues raised by the FDA affected products amounting to less than 1% of annual sales -- and in any case, were corrected months ago.

Foolish takeaway
Operationally, things are going great guns at Lifeway. The FDA Consent Decree, while a bit of a shock, appears to be a non-issue. Now if we could just get those cash flow statements, please?

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