Landec Corporation Form 10-Q Summary
Filing identity: The submitted filing is for Landec Corporation, not Lifecore Biomedical, Inc. It covers the fiscal quarter ended August 28, 2011, with comparable results for the quarter ended August 29, 2010. Lifecore Biomedical is a wholly owned subsidiary and reportable business segment of Landec.
Business Context and Reporting Period
Landec develops and sells polymer-based products through four segments: Food Products Technology, Food Export, Hyaluronan-based Biomaterials operated by Lifecore, and Technology Licensing. The company’s products include specialty packaged produce, produce exports, hyaluronan-based medical biomaterials, seed coatings, and licensed polymer technologies.
The interim financial statements are unaudited and should be read with Landec’s fiscal 2011 Form 10-K. Management notes that quarterly results are affected by seasonality in the food business and fluctuations in Lifecore customer ordering patterns.
Financial Performance and Position
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Total revenue | $73.3 million | $65.0 million | Up 13% |
| Gross profit | $11.3 million | $11.8 million | Down 5% |
| Operating income | $2.9 million | $3.9 million | Down 27% |
| Net income attributable to common stockholders | $1.8 million | $2.3 million | Down 21% |
| Diluted EPS | $0.07 | $0.09 | Down $0.02 |
| Cash flow from operations | $4.4 million | $4.4 million | Essentially unchanged |
- Gross margin declined to approximately 15.4% from 18.2%; operating margin declined to approximately 3.9% from 6.1%; net margin attributable to common stockholders declined to approximately 2.5% from 3.5%.
- Apio value-added revenue increased 8% on a 10% increase in unit volume, but lower-margin bag products replaced higher-margin tray products.
- Apio Export revenue increased 30%, while gross margin fell to 4.7% from 5.7% because of product mix.
- Lifecore revenue increased 12%, driven by a 34% increase in aseptic filling revenue, partly offset by an 8% decline in fermentation revenue. Lifecore gross margin fell to 38% from 47% due to the mix shift toward lower-margin aseptic filling.
- Technology Licensing revenue declined 4%, primarily reflecting normal variation in licensing activity.
- Research and development expense increased 5% to $2.3 million, and selling, general and administrative expense increased 7% to $6.0 million. SG&A growth included accrued bonuses at Apio and Corporate.
- Dividend income of $281,000 was recorded from the Windset preferred stock investment. The investment also generated a $52,000 fair-value gain.
- Income tax expense was $1.1 million, with an effective tax rate of 38%, compared with 37% in the prior-year quarter.
Cash Flow, Liquidity, Debt, and Capital Resources
- Cash and cash equivalents were $7.2 million at August 28, 2011, compared with $8.1 million at May 29, 2011.
- Marketable securities were $32.1 million, bringing cash and marketable securities to approximately $39.4 million.
- Operating cash flow was $4.4 million. Investing cash flow used $5.5 million, including $1.6 million of capital expenditures and net purchases of $4.0 million of marketable securities.
- Financing activities provided $298,000, including a $1.3 million tax benefit from stock-based compensation, partially offset by $1.0 million of debt repayment.
- Total debt was $18.8 million, consisting of $15.0 million under the Wells Fargo credit agreement and $3.8 million of industrial revenue bonds. The current portion was $4.3 million.
- The Wells Fargo facility is secured by Lifecore assets and guaranteed by Landec. Financial covenants include minimum net income, quick-ratio and fixed-coverage requirements, and a maximum capital-expenditure limitation.
- An interest-rate swap effectively fixed the rate on $20 million of borrowings at 4.24% through April 2015. The accumulated after-tax unrealized loss on the swap was $301,000.
- Management stated that existing cash, marketable securities, and internally generated operating cash flow should be sufficient to fund operational and capital requirements for at least the next twelve months.
Material Changes, Outlook, Risks, and Unusual Items
- Revenue growth did not translate into profit growth because of unfavorable product mix in Apio value-added products, Apio Export, and Lifecore aseptic filling.
- The Lifecore acquisition includes potential earn-out payments of up to $10.0 million based on 2011 and 2012 revenue targets. The recorded fair value of the earn-out liability was $9.88 million at August 28, 2011, and management projected paying the full $10 million during fiscal 2012.
- Monsanto notified Landec on September 9, 2011 that it intends to allow the Intellicoat license agreement to expire on December 1, 2011 rather than exercise its purchase option. Landec expects to receive a $4.0 million termination fee, and the technology rights will revert to Landec.
- Chiquita’s license agreement was scheduled to terminate in December 2011, subject to a five-year renewal option. The filing does not state whether Chiquita exercised the option.
- Windset’s first-year minimum license payment was deferred from June 2011 to April 2012 because of delays in obtaining required packaging materials.
- Sales concentration remained significant: the five largest customers accounted for 43% of revenue, and the largest customer represented 16%.
- International sales totaled $30.1 million, including $9.4 million to Taiwan, $7.5 million to Indonesia, and $5.0 million to Canada.
- Produce supply, pricing, weather, customer concentration, seasonality, product mix, regulatory requirements, intellectual-property matters, technology commercialization, debt covenants, and the availability of additional financing were identified as material risks.
- The company reported no material changes to previously disclosed risk factors, no legal proceedings, and no material changes in market risk or internal control over financial reporting.
- As a subsequent event, Landec repurchased 633,768 shares for $3.5 million from September 22 through October 4, 2011. No shares were repurchased during the reported quarter.
Investor Verification Priorities
- Confirm that the intended issuer is Landec Corporation rather than Lifecore Biomedical, Inc.
- Verify the sustainability of revenue growth given the decline in gross and operating margins.
- Assess whether the full $10 million Lifecore earn-out was ultimately paid and its effect on liquidity and debt repayment.
- Evaluate the financial impact of Monsanto’s December 2011 license expiration, including receipt of the $4 million termination fee and the economics of redeploying Intellicoat rights.
- Review Chiquita’s renewal decision and the status of Windset’s deferred minimum payment.
- Monitor compliance with Wells Fargo and industrial revenue bond covenants.
- Assess customer concentration, international exposure, produce supply volatility, and Lifecore’s dependence on a limited number of medical customers.
- Reconcile subsequent share repurchases with the company’s liquidity position and capital-allocation priorities.