The one-off, non-cash $7.9 million charge reflects the difference between carrying the cost of production equipment on the company's books and the amount that it will receive from Schreiber when the sale is completed, said the company.
Last month Galaxy announced the planned sale of its manufacturing and distribution assets for $8.7 million, and an agreement to outsource its operations in these areas to Schreiber Foods for at least the next five years.
Although the charge accounts for the main part of operating loss (profits were $18,220 in Q1 2005 compared to a loss of $8.8 million this year) high casein costs continued to plague the company, leading to a decrease in gross profit margin to 23 percent of sales, compared to 26 percent last year.
And sales of Galaxy's nutritious plant-based dairy products took a tumble in the quarter ended June 20, from $11.2 to $9.9 million. This, the company seeks to explain through a temporary hiccough in its supply of products to Walmart stores, which had previously been channeled through a private label customer.
Galaxy is no longer doing business with this customer, having been saddled with $1.8 million in bad debt and inventory write-off last year. It now plans to supply the retail giant directly.
The combined effects of the one-off charge and the change in WalMart supply arrangements led CEO Michael Broll to call the Q1 results "quite unusual".
He expects the transition to Schreiber carrying out production to be completed in the next four months, and for the benefits of the new arrangement to start becoming apparent on the balance sheet for Q4 2006.
The Florida firm is anticipating lower production costs afforded by outsourcing to Schreiber. Its production facility had a larger capacity than was required and was underutilized, meaning that the cost of production was considerably higher.
As a larger company, Schreiber also has greater purchasing power with raw materials suppliers - an area with which Galaxy has struggled recently, mainly due to the high cost of casein, one of the main ingredients in its products. It also has well-established distribution in place, expense when Schreiber takes over this function later in the year.
Galaxy plans to use some of the proceeds from the sale of its facility to pay off around $7.4 million of its outstanding debt. This should lead to a reduction in interest expense of more than $4 million per year. In Q1 2006, interest expense was $357,195.
Broll has previously said that the cost savings brought about by selling the production facility to Schreiber and outsourcing arrangements could be to the tune of several million dollars.
The asset sell-off is seen by the company as the final step in its repositioning, coming on the back of two years of rationalizing product lines and battling high casein prices.
In fiscal 2005 the price of casein increased an average of 32 percent.
"I can say with confidence that the future looks bright, for both the company and its shareholders," said Broll. The future he envisages will revolve around brand building in the burgeoning health foods category, including upping the spend on advertising and promotions and increasing retail shelf space and market share.
It will also be trialling new products and flavors, in a bid to increase its customer base and awareness, increasing its customer base and generating consumer awareness.
"I believe that Galaxy Nutritional Foods is well-positioned to realize the potential of its strong brands in the healthy foods category and to improve its financial performance significantly in coming years," said Broll.