Business Context and Reporting Period
Landec Corporation filed this Form 10-Q for the fiscal quarter ended February 24, 2013, covering the three and nine months ended February 24, 2013, compared with February 26, 2012. The filing identifies Landec Corporation as the registrant, although the request metadata references Lifecore Biomedical. Landec operates through Apio’s Food Products Technology and Food Export businesses, Lifecore’s hyaluronan-based biomaterials business, and corporate licensing activities.
Financial Performance and Key Metrics
| Metric | Three Months Ended February 24, 2013 | Prior Comparable Period | Nine Months Ended February 24, 2013 | Prior Comparable Period |
|---|---|---|---|---|
| Total revenue | $117.9 million | $80.1 million | $334.6 million | $234.9 million |
| Gross profit | $17.5 million | $13.2 million | $49.7 million | $37.4 million |
| Gross margin | 14.9% | 16.5% | 14.9% | 15.9% |
| Operating income | $6.7 million | $4.0 million | $20.8 million | $11.1 million |
| Operating margin | 5.6% | 5.0% | 6.2% | 4.7% |
| Net income attributable to common stockholders | $4.8 million | $4.8 million | $18.1 million | $9.9 million |
| Diluted earnings per share | $0.18 | $0.18 | $0.68 | $0.38 |
- Third-quarter revenue increased 47%, primarily from the GreenLine acquisition, higher Apio value-added volume, and Lifecore shipments that shifted from the prior year’s second quarter. Nine-month revenue increased 42%.
- Apio value-added revenue increased 54% in the quarter and 60% year to date; Apio Export revenue increased 8% and 15%, respectively. Lifecore revenue increased 57% in the quarter and 20% year to date.
- Third-quarter gross profit rose 33%, but gross margin declined because of unfavorable California produce sourcing costs and seasonally higher green bean costs. Nine-month gross profit also increased 33%.
- Operating expenses were $10.8 million in the quarter and $29.0 million year to date. Selling, general and administrative expense increased 28% in the quarter and 16% year to date, partly because of GreenLine-related expenses and amortization.
- Other income included $1.0 million of fair-value appreciation in the Windset investment during the quarter and $6.3 million year to date, plus Windset dividend income of $281,000 in the quarter and $844,000 year to date.
- The effective tax rate was 36% for the quarter and 31% year to date, compared with 38% for the prior-year nine-month period.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $9.9 million at February 24, 2013, down from $22.2 million at May 27, 2012. Marketable securities totaled $3.8 million, resulting in cash and marketable securities of approximately $13.7 million.
- Operating cash flow was $13.5 million for the nine months, compared with $8.5 million in the prior-year period.
- Investing activities used $8.3 million, including $4.5 million of capital expenditures and net purchases of marketable securities.
- Financing activities used $17.4 million, including the $9.7 million cash portion of the Lifecore earn-out payment, $12.1 million of debt and line-of-credit repayments, and $4.5 million of capital expenditures funded through operations and financing resources.
- Reported long-term debt totaled $42.8 million, including the current portion of $7.0 million. An additional $4.0 million was outstanding under Apio’s revolving line of credit. The filing states that Apio and Lifecore were in compliance with all financial covenants.
- Current assets were $82.0 million and current liabilities were $48.3 million. Management stated that operating cash flow, cash, cash equivalents and marketable securities should be sufficient to fund operational and capital requirements for at least the next twelve months.
Material Changes Versus the Prior Comparable Period
- The April 2012 GreenLine acquisition materially expanded Apio revenue and gross profit but also increased SG&A, debt and amortization.
- Landec reversed a previously recorded $3.9 million GreenLine contingent earn-out liability after determining that revenue targets would not be achieved, increasing year-to-date operating income and net income without generating cash.
- The company paid the $10.0 million Lifecore earn-out in May 2012; $9.7 million was classified as a financing cash outflow because it had previously been recorded as a contingent liability.
- Corporate licensing revenue declined year to date because the Monsanto agreement terminated in December 2011; this was partly offset by the Nitta research and development agreement, which contributed $275,000 of third-quarter revenue and an expected additional $275,000 in the fourth quarter.
- Chiquita elected not to maintain its exclusive BreatheWay license for calendar 2013. The arrangement became non-exclusive, eliminating the related minimum gross-profit obligation but allowing Landec to license the technology to other parties.
- Apio’s value-added business experienced approximately $3.0 million of unfavorable produce sourcing and related costs during the quarter due to California weather and seasonal green bean costs.
- Landec reported a material weakness in internal control over financial reporting related to the application of fair-value accounting for its private-company investment. Management stated that remediation measures had been implemented after the reporting period and were expected to be evaluated in the fourth quarter.
Outlook, Risks and Unusual Items
- No formal revenue or earnings guidance is provided. Management expects existing liquidity and operating cash flow to fund requirements for at least twelve months.
- Results may fluctuate because of seasonality in Apio’s Food Export business and customer order patterns at Lifecore.
- Produce sourcing costs, weather conditions, product mix and commodity pricing can materially affect Apio margins. Food Export generally operates at a 5% to 8% gross margin.
- The five largest customers represented 39% of nine-month revenue, and the largest Food Products Technology customer represented 14%, creating customer-concentration risk.
- The $27.8 million Windset investment is a Level 3 fair-value asset based on unobservable discounted cash flow assumptions. Its reported value is sensitive to projected growth, expenses, taxes and discount rates.
- The company’s debt agreements contain collateral, guarantee, borrowing, asset-sale, dividend and repurchase restrictions, as well as minimum fixed-charge, quick-ratio and tangible-net-worth covenants.
- The filing references a prior fiscal first-quarter restatement and states that previously filed first-quarter financial statements should not be relied upon. Continued control deficiencies could affect reporting reliability, investor confidence and access to capital.
- Unrecognized tax benefits were approximately $1.0 million, including approximately $785,000 that could affect the effective tax rate if recognized.
Important Facts for Investors to Verify
- Confirm that the filing being analyzed is Landec Corporation’s Form 10-Q, not a standalone Lifecore Biomedical filing.
- Assess the sustainability of revenue and earnings growth after separating GreenLine acquisition effects, the non-cash earn-out reversal and Windset fair-value gains.
- Review the impact of weather-related sourcing costs and seasonal green bean costs on future Apio gross margins.
- Verify remediation and auditor testing of the material weakness involving the Windset fair-value calculation.
- Monitor cash conversion, receivables, inventory, debt repayments and compliance with Apio and Lifecore financial covenants.
- Evaluate customer concentration and the commercial consequences of Chiquita’s move from an exclusive to a non-exclusive license.