Landec Corporation Form 10-Q Summary
Reporting period: Three months ended August 27, 2017, the first quarter of fiscal 2018. The filing identifies the registrant as Landec Corporation, not Lifecore Biomedical, Inc. Results include Apio, Lifecore Biomedical, and O Olive, acquired March 1, 2017.
Business Context
Landec operates three primary segments: Packaged Fresh Vegetables, Food Export, and Biomaterials. Apio sells branded and private-label fresh produce and exports whole commodities, Lifecore provides hyaluronan-based biomaterials and aseptic manufacturing services, and O Olive sells specialty olive oils and vinegars. The company’s businesses are seasonal, and Lifecore customer order patterns can cause quarterly fluctuations.
Key Financial Metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $123.4 million | $132.4 million | (7%) |
| Gross profit | $19.3 million | $21.1 million | (9%) |
| Gross margin | 15.6% | 16.0% | Down approximately 40 bps |
| Operating income | $2.5 million | $5.5 million | (54%) |
| Net income attributable to common stockholders | $2.1 million | $3.3 million | (35%) |
| Diluted EPS | $0.08 | $0.12 | Down $0.04 |
| Net cash from operating activities | $(0.1) million | $6.5 million | Down $6.6 million |
- Segment revenue: Packaged Fresh Vegetables $102.6 million, up 7%; Food Export $7.6 million, down 68%; Biomaterials $12.2 million, down 1%; Other $1.0 million, up 35%.
- Segment gross profit: Packaged Fresh Vegetables $15.0 million, Food Export $0.5 million, Biomaterials $3.5 million, and Other $0.3 million.
- Cash and liquidity: Cash and equivalents were $8.2 million at August 27, 2017, compared with $5.4 million at May 28, 2017.
- Debt: Current portion of long-term debt was $4.9 million, long-term debt was $41.1 million, and $10.5 million was outstanding under the revolving credit facility. The company reported compliance with all debt covenants.
- Capital spending and investing: Capital expenditures were $2.1 million; investing cash outflows also included a $1.2 million note receivable.
- Balance sheet: Total assets were $367.0 million and total liabilities were $135.8 million at August 27, 2017. The Windset investment was carried at fair value of $64.5 million.
Material Changes Versus Prior Comparable Period
- Packaged Fresh Vegetables revenue increased primarily from an 8% increase in unit volume, higher demand from existing and new customers, and growth in salad kits.
- Food Export revenue declined because management discontinued lower-margin export fruit business. Unit volume fell 80%, although gross margin improved to 6.4% from 4.4% due to product mix.
- Biomaterials revenue was broadly flat, but gross profit fell 31% because a prior-year accelerated fermentation shipment shifted the comparison and the current period had a greater mix of lower-margin aseptic filling revenue.
- Gross profit declined $1.9 million, while research and development expense increased 40% to $2.7 million and SG&A increased 2% to $14.0 million.
- Operating income declined $2.9 million. Other income included a $0.9 million increase in the fair value of the Windset investment, which partially offset lower operating performance.
- Operating cash flow turned negative, primarily because of increased inventories, lower accrued compensation after bonus payments, and higher receivables.
- O Olive contributed approximately $1.0 million of revenue and $0.3 million of gross profit in the quarter.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that existing cash, operating cash flow, and available resources are expected to fund operational and capital requirements for at least the next twelve months. No specific revenue or earnings guidance was provided.
- The company expects continued seasonal effects in Apio and fluctuations from Lifecore customer ordering patterns.
- Customer concentration is significant: the top five customers represented 47% of revenue, while Costco and Walmart each represented 18% of quarterly revenue.
- Apio is subject to labor-related litigation settlements totaling $6.0 million. The company paid the first $2.4 million installment in July 2017 and may pay the full $1.8 million installment due in November 2017. Pacific Harvest is responsible for half of the settlement, with reimbursement secured by a security interest in Pacific Harvest assets.
- The company carried a $5.9 million contingent consideration liability related to the O Olive acquisition, with potential earn-out payments of up to $7.5 million through fiscal 2020.
- The $64.5 million Windset valuation is a Level 3 fair value estimate based on unobservable assumptions. A 10% increase in the discount rate would reduce estimated value by approximately $4.5 million, according to the filing’s sensitivity analysis.
- Landec is evaluating the impact of the forthcoming revenue recognition standard, including possible changes to gross-versus-net reporting for Food Export and timing of Biomaterials revenue. The impact could not yet be reasonably estimated.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm that the intended filing is for Landec Corporation and that the reference to Lifecore Biomedical, Inc. in the request metadata is not a separate-company mismatch.
- Assess whether the decline in operating income and cash from operations is temporary, particularly given product mix, inventory buildup, and Lifecore shipment timing.
- Monitor Food Export volume reductions and whether the higher reported margin is sustainable after discontinuation of lower-margin business.
- Review liquidity under the $100 million revolver, scheduled $1.25 million quarterly term-loan payments, and potential labor-settlement cash requirements.
- Evaluate the sensitivity and reliability of the $64.5 million Windset fair value and related $0.9 million quarterly gain.
- Track customer concentration, O Olive earn-out obligations, Pacific Harvest reimbursement collections, and the eventual effect of new revenue and lease accounting standards.