Shares of Morton Grove, Ill.-based Lifeway Foods (NASDAQ:LWAY) were on the decline in midday Friday trading, despite reporting earnings that soundly trumped analyst expectations.

Consolidated net sales at Lifeway grew 15%, to reach $23.8 million in Q3 2013, ahead of the $23.2 million that analysts were expecting. Profits per diluted share were up 11% year over year, at $0.10, $0.02 more than Wall Street had predicted.

CEO Julie Smolyansky called the quarter "strong," and said her company is making "steady progress in growing Lifeway into a leading health food brand," showing "increased sales and awareness of the Company's flagship line, Kefir, as well as ProBugs Organic Kefir for kids and BioKefir."

Management noted, however, that a 35% increase in the company's primary raw material -- milk -- cut four percentage points off of its gross margin, which declined to 29%. Reductions in operating expense, a lower effective tax rate, and profits from an assets sale were then needed to keep profits growing.

Additionally, the company reported the disappointing news that net cash from operations has declined significantly year to date, falling to $3.6 million. Subtracting the cost of $7.9 million worth of investments that the company has made in production, this now leaves Lifeway with negative free cash flow for the year -- which may explain why investors are now shunning the stock.