SEC Filing Summary
Filing: Landec Corporation Form 10-K for the fiscal year ended May 31, 2015, filed July 30, 2015. The provided filing is for Landec Corporation, not Lifecore Biomedical, Inc.; Lifecore is a subsidiary and operating segment. The filing reports fiscal 2015, fiscal 2014, and fiscal 2013 results. Fiscal 2015 included an additional week versus fiscal 2014.
Business Context
Landec operates three reportable segments: Food Products Technology, Food Export, and HA-based Biomaterials. Apio sells branded and private-label fresh-cut and whole produce using BreatheWay packaging, while Cal-Ex exports produce primarily to Asia. Lifecore manufactures pharmaceutical-grade sodium hyaluronate and provides aseptic filling and contract development services for ophthalmic, orthopedic, veterinary, and other medical applications.
Key Financial Metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $539.3 million | $476.8 million | +13% |
| Gross profit | $65.4 million | $62.6 million | +5% |
| Gross margin | 12.1% | 13.1% | Down approximately 100 bps |
| Operating income | $18.5 million | $20.2 million | -9% |
| Net income attributable to common stockholders | $13.5 million | $19.1 million | -29% |
| Diluted EPS | $0.50 | $0.71 | Down $0.21 |
| Operating cash flow | $26.2 million | $21.0 million | +24% |
| Capital expenditures | $17.5 million | $14.9 million | +18% |
| Cash and equivalents at year-end | $14.1 million | $14.2 million | Approximately flat |
| Total debt | $42.5 million | $34.4 million | +$8.1 million |
Segment Performance
- Food Products Technology: Revenue increased 19% to $430.4 million and gross profit increased 27% to $46.0 million. Growth was driven by a 12% unit-volume increase, new salad kits, favorable product mix, and the extra fiscal week.
- Food Export: Revenue declined 3% to $67.8 million and gross profit declined 20% to $4.3 million. Unit volume fell 9%, primarily because of a West Coast longshore labor dispute. Gross margin declined to 6.3% from 7.6%.
- HA-based Biomaterials: Revenue declined 12% to $40.4 million and gross profit declined 29% to $14.6 million. Ophthalmic fermentation revenue fell 29% because a major customer reduced inventory, while business-development revenue also declined; higher aseptic-filling revenue provided a partial offset.
Fourth-Quarter Information
The filing’s unaudited fiscal 2015 fourth-quarter results were revenue of $134.4 million, gross profit of $18.7 million, net income of $4.2 million, basic EPS of $0.16, and diluted EPS of $0.15. Fiscal 2014 fourth-quarter revenue was $120.9 million, gross profit was $16.1 million, and net income was $4.5 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was concentrated in Apio’s Food Products Technology business, particularly higher-margin salad kits.
- Overall profitability declined despite higher revenue. Operating income fell because selling, general and administrative expense increased 14%, including a 20% increase in Apio sales and marketing expense.
- Lifecore’s lower-margin aseptic-filling mix and reduced ophthalmic fermentation shipments materially pressured consolidated gross profit.
- Other income declined to $3.1 million from $10.0 million, primarily because the increase in the fair value of the Windset investment was lower than in the prior year.
- Fiscal 2015 included a $793,000 write-off of the Aesthetic Sciences investment.
- Windset investment fair value increased to $61.5 million from $39.6 million, producing $3.9 million of non-cash other income. The valuation uses Level 3 discounted-cash-flow assumptions.
- Landec increased its Windset investment by $18.0 million during fiscal 2015 and increased its preferred investment to $22.0 million, which generated $1.4 million of dividend income.
- Research and development expense declined 3% to $7.0 million, while capital expenditures increased to $17.5 million to support Apio and Lifecore expansion.
Liquidity, Debt, and Capital Resources
- Operating cash flow of $26.2 million exceeded capital expenditures of $17.5 million, but cash was substantially deployed for the $18.0 million Windset investment.
- Net cash used in investing activities was $34.4 million. Financing activities provided $8.2 million, including $15.0 million of long-term debt proceeds and $6.9 million of debt repayments.
- Debt principal payments due in fiscal 2016 totaled $8.4 million. Total contractual obligations, including debt, interest, operating leases, and purchase commitments, were $73.5 million, including $28.0 million due in fiscal 2016.
- Apio had $30.3 million of availability under its $40 million revolving facility and no outstanding balance. Lifecore had $9.4 million of availability under its $10 million revolving facility and no outstanding balance.
- The company reported compliance with all applicable debt covenants at May 31, 2015 and stated that existing cash and operating cash flow were expected to fund operating and capital requirements for at least the next twelve months.
Outlook, Commentary, Risks, and Unusual Items
- Management expects growth opportunities from new Apio customers, product introductions, expanded distribution, export activity, and increased Lifecore aseptic-filling and medical applications.
- No quantitative revenue or earnings guidance was provided in the filing.
- Major risks include adverse weather, crop shortages, labor and water availability, produce perishability, manufacturing concentration, single-source suppliers, customer concentration, regulatory approvals, product liability, intellectual-property protection, competition, and international sales exposure.
- Costco and Wal-Mart represented approximately 21% and 11%, respectively, of fiscal 2015 revenue; the top five customers represented approximately 46%. Loss of a major customer could materially affect results.
- Approximately 30% of fiscal 2015 revenue came from international customers, and approximately 30% of revenue was exposed to international sales risks.
- The company had $49.6 million of goodwill and $48.4 million of trademarks and trade names. Annual testing identified no impairment, but future impairment could materially reduce earnings.
- Management reported effective disclosure controls and effective internal control over financial reporting as of May 31, 2015. Ernst & Young issued unqualified opinions on the financial statements and internal controls.
- The company paid no common-stock dividends and repurchased no shares during fiscal 2015; up to $3.8 million remained available under its repurchase authorization.
- Management disclosed a planned October 2015 CEO transition, with Molly Hemmeter succeeding Gary Steele, who was expected to remain on the board.
Investor Verification Checklist
- Verify that the intended issuer is Landec Corporation rather than Lifecore Biomedical, Inc.
- Assess whether Apio’s salad-kit growth and favorable product mix can offset customer concentration, commodity costs, weather exposure, and seasonal volatility.
- Monitor Lifecore’s recovery in ophthalmic fermentation revenue, customer inventory normalization, and the profitability of aseptic-filling activities.
- Reconcile reported earnings with cash generation, including the effect of non-cash Windset fair-value gains and the Aesthetic Sciences write-off.
- Evaluate debt maturities, covenant requirements, collateral arrangements, and the company’s planned capital expenditures.
- Review the $61.5 million Level 3 Windset valuation, including its sensitivity to discount rates, revenue growth, expense growth, and tax assumptions.
- Review customer concentration, international revenue, single-source suppliers, regulatory requirements, and the $15.1 million fiscal 2016 produce purchase commitment.