Business Context and Reporting Period
This filing is a Form 10-Q for Landec Corporation, not a standalone filing for Lifecore Biomedical, Inc. It covers the fiscal quarter and six months ended November 30, 2014, compared with November 24, 2013. Landec operates through Apio’s Food Products Technology and Food Export businesses and Lifecore’s HA-based Biomaterials business.
The filing states that the first quarter of fiscal 2015 contained 14 weeks, creating a year-to-year calendar difference. Results are also affected by seasonality in Apio’s food business and order timing for Lifecore customers.
Key Financial Metrics
| Metric | Three months ended Nov. 30, 2014 | Prior comparable period | Six months ended Nov. 30, 2014 | Prior comparable period |
|---|---|---|---|---|
| Product sales | $132.7 million | $120.0 million | $266.3 million | $229.5 million |
| Gross profit | $15.7 million | $13.7 million | $29.9 million | $26.3 million |
| Gross margin | 11.8% | 11.4% | 11.2% | 11.4% |
| Operating income | $3.9 million | $3.2 million | $7.4 million | $5.2 million |
| Operating margin | 2.9% | 2.6% | 2.8% | 2.2% |
| Net income applicable to common stockholders | $3.2 million | $3.5 million | $5.6 million | $8.2 million |
| Diluted earnings per share | $0.12 | $0.13 | $0.20 | $0.30 |
Six-month cash flow from operations was $3.4 million, compared with $4.3 million in the prior period. Investing cash flow was negative $25.1 million, principally due to $18.0 million of additional Windset investments and $7.1 million of capital expenditures. Financing cash flow was positive $12.5 million, including $11.2 million of long-term borrowings and $5.0 million of net borrowings under Apio’s revolving line of credit.
Cash and cash equivalents declined to $5.0 million at November 30, 2014 from $14.2 million at May 25, 2014. Total debt, including current and long-term debt and the $5.0 million Apio line-of-credit balance, was approximately $47.2 million. Available borrowing capacity was reported at $31.1 million under Apio’s revolving line and $7.8 million under Lifecore’s revolving facility. Management stated that existing cash, operating cash flow and available resources should fund operational and capital requirements for at least the next twelve months.
Material Changes Versus Prior Comparable Period
- Total revenue increased 11% in the quarter and 16% for the six-month period.
- Food Products Technology revenue increased 16% in the quarter and 21% year to date, driven by higher unit volumes, new products and favorable product mix. Gross profit increased 36% and 35%, respectively.
- Food Export revenue declined 4% in the quarter but increased 10% year to date. Gross margin declined to 7.0% from 7.9% in the quarter and to 5.6% from 6.8% year to date because of higher sourcing costs.
- HA-based Biomaterials revenue declined 5% in the quarter and 13% year to date. Lifecore’s six-month results were affected by lower ophthalmic fermentation shipments to a major customer, which indicated that fiscal 2015 orders would be approximately 50% below fiscal 2014 levels, and by delayed development activities.
- Consolidated gross profit increased 14% in both comparison periods, but six-month gross margin declined modestly because of weaker Lifecore product mix and lower Food Export margins.
- Net income applicable to common stockholders declined 7% in the quarter and 32% year to date. The comparison was affected by lower fair-value gains on the Windset investment: other income was $1.2 million versus $2.3 million in the quarter and $1.4 million versus $7.7 million year to date.
- Selling, general and administrative expense increased 15% in the quarter and 9% year to date, primarily because Apio increased sales and marketing spending to promote new salad and stir-fry products.
- At August 31, 2014, management determined that the three-year operating-income target under the long-term incentive plan was unlikely to be achieved. The resulting reversal reduced year-to-date SG&A expense by $677,000.
Guidance, Outlook, Risks and Unusual Items
No formal revenue or earnings guidance is provided in the filing. Management highlighted strong adoption of Apio’s Sweet Kale Salad, with weekly sales exceeding $1 million as of November 2014, and continued investment in Apio’s value-added products and Lifecore’s aseptic filling and fermentation capabilities.
The $59.0 million Windset investment is a Level 3 fair-value asset based on projected cash flows, growth rates and discount rates. The valuation is subject to significant estimation risk; a 10% increase in projected revenue growth would increase estimated value by $4.9 million, while a 10% increase in expense growth would reduce it by $4.1 million.
- Customer concentration remains material: the top five customers represented 44% of six-month revenue; Costco and Wal-Mart represented 20% and 11%, respectively.
- Lifecore faces reduced orders from a major ophthalmic customer and timing uncertainty for development activities.
- Apio’s businesses are exposed to produce availability, weather, sourcing costs, product mix, seasonality and international market conditions.
- Liquidity is supported by revolving facilities, but cash declined substantially while debt and inventory increased. Debt agreements contain collateral requirements, financial covenants and restrictions on additional borrowing, investments, dividends, asset sales and other corporate actions.
- Apio’s GE Capital facility was expanded from $25 million to $40 million, with a lower spread and maturity extended to July 2019. New equipment borrowings of $7.1 million and $4.1 million were made during the period.
- All reported financial covenants were satisfied at November 30, 2014. The company reported no legal proceedings, no defaults and no significant changes to previously disclosed risk factors.
Investor Verification Priorities
- Confirm that the intended issuer is Landec Corporation rather than Lifecore Biomedical, Inc.
- Assess the sustainability of Apio’s volume growth and new-product sales after the 14-week first quarter effect.
- Monitor Lifecore’s major-customer order reductions, business-development timing and recovery in higher-margin fermentation revenue.
- Reconcile cash generation with capital expenditures, Windset investment funding and increased borrowings.
- Review the assumptions and sensitivity of the $59.0 million Level 3 Windset valuation and the related put/call features.
- Evaluate customer concentration, produce sourcing risks, debt covenant headroom and availability under the revolving facilities.