SEC Form 10-Q Summary
Registrant: Landec Corporation, not Lifecore Biomedical, Inc. Lifecore is a wholly owned subsidiary and reportable operating segment.
Reporting period: Fiscal quarter and six months ended November 24, 2013, compared with November 25, 2012. Balance-sheet comparisons are to May 26, 2013. The financial statements are unaudited.
Business Context
Landec develops and sells differentiated food and biomaterials products and licenses polymer technologies. Its principal businesses are Food Products Technology and Food Export, operated primarily through Apio, and Hyaluronan-based Biomaterials, operated through Lifecore. Apio sells packaged fresh-cut and whole produce using BreatheWay packaging; Lifecore manufactures hyaluronan-based products and provides aseptic filling and fermentation services.
Financial Performance and Position
| Metric | Three months ended Nov. 24, 2013 | Three months ended Nov. 25, 2012 | Six months ended Nov. 24, 2013 | Six months ended Nov. 25, 2012 |
|---|---|---|---|---|
| Total revenue | $120.0 million | $114.7 million | $229.5 million | $216.7 million |
| Gross profit | $13.7 million | $18.5 million | $26.3 million | $32.2 million |
| Gross margin | 11.4% | 16.1% | 11.4% | 14.9% |
| Operating income | $3.2 million | $11.1 million | $5.2 million | $14.1 million |
| Net income attributable to common stockholders | $3.5 million | $8.9 million | $8.2 million | $13.3 million |
| Diluted earnings per share | $0.13 | $0.34 | $0.30 | $0.50 |
Revenue increased 5% in the quarter and 6% year to date. Gross profit declined 26% in the quarter and 18% year to date, primarily because of elevated produce sourcing costs. The filing states that unfavorable weather and lower yields reduced Food Products Technology gross profit by approximately $4.4 million in the quarter and $6.8 million year to date.
Operating income declined 71% in the quarter and 63% year to date. Results in the prior-year periods benefited from a $3.9 million reversal of the GreenLine acquisition earn-out liability; no comparable reversal occurred in 2013. Other income included $2.3 million in the quarter and $7.7 million year to date from increases in the fair value of the Windset investment.
Cash and cash equivalents were $5.8 million at November 24, 2013, down from $13.7 million at May 26, 2013. Current assets were $85.5 million and total assets were $302.3 million. The company held $37.3 million of fair-value investment in Windset, a Level 3 private-company investment.
Total debt, including lines of credit and the current portion of long-term debt, was approximately $38.2 million at November 24, 2013, compared with $44.3 million at May 26, 2013. Long-term debt was $31.2 million. Apio had $1.0 million outstanding on its revolving credit facility, with $18.3 million of availability; Lifecore had no revolving-credit borrowings and $9.4 million of availability. The company reported compliance with all debt covenants.
Cash Flow, Liquidity and Capital Expenditures
- Operating cash flow was $4.3 million for the six months ended November 24, 2013, compared with $2.4 million in the prior-year period.
- Investing cash flow was negative $6.1 million, including $7.7 million of property and equipment purchases primarily supporting Apio and Lifecore growth.
- Financing cash flow was negative $6.1 million, primarily reflecting $6.1 million of payments on lines of credit and long-term debt.
- Cash decreased by $8.0 million during the first six months, ending at $5.8 million.
- Management stated that cash from operations, existing cash, cash equivalents and marketable securities should be sufficient to fund operating and capital requirements for at least the next twelve months.
Material Changes Versus Prior Comparable Period
- Food Products Technology revenue increased 12% for the quarter and 14% year to date, driven by higher unit volumes, expanded offerings and new products; gross profit fell 37% and 26%, respectively, because of higher raw produce costs.
- Food Export revenue declined 18% for the quarter and 17% year to date, primarily due to Indonesian fruit-import quotas. Gross margins improved to 7.9% and 6.8%, respectively, from 7.2% and 6.3%.
- HA-based Biomaterials revenue increased 13% for the quarter and 11% year to date. Aseptic filling revenue rose, partly offset by lower Ophthalmic fermentation shipments due to shipment timing.
- Selling, general and administrative expense increased 64% for the quarter and 25% year to date, largely because the prior-year periods included the $3.9 million earn-out reversal.
- Interest expense decreased 12% for the quarter and 17% year to date, reflecting approximately $12.6 million of debt paydown over the preceding twelve months.
- The effective tax rate was 35% for the quarter and 34% year to date, compared with 25% and 29% in the prior-year periods.
Outlook, Risks and Unusual Items
The filing does not provide specific revenue, earnings or margin guidance. Management highlights seasonality in Apio’s food business and customer order patterns in Lifecore, which can cause substantial quarterly fluctuations.
- Produce costs and supply are exposed to weather, crop yields, sourcing conditions and product mix.
- Customer concentration increased: the top five customers represented 43% of year-to-date revenue, compared with 36% in the prior-year period. The two largest Food Products Technology customers represented 20% and 11% of year-to-date revenue.
- The Windset investment is valued using Level 3 discounted-cash-flow assumptions. Its $7.7 million year-to-date fair-value gain is non-cash and sensitive to revenue growth, expense growth, tax rates and discount rates.
- Debt is secured by company and subsidiary assets and includes financial covenants and restrictions on additional debt, liens, investments, dividends, asset sales and other corporate actions.
- The company has approximately $1.0 million of unrecognized tax benefits and is subject to tax examinations for older U.S. and state tax years.
- Related-party transactions included $1.1 million of revenue and $2.7 million of product costs year to date involving parties associated with Apio’s chairman; the filing states these transactions were reviewed and approved by the Audit Committee.
- The company reported no legal proceedings, no defaults, no share repurchases and no material changes to previously disclosed risk factors.
Investor Verification Points
- Confirm that the requested issuer is Landec Corporation and assess Lifecore only as a subsidiary segment.
- Reconcile reported earnings with the $7.7 million non-cash Windset fair-value gain and evaluate the sensitivity of that valuation.
- Track whether produce sourcing costs normalize and whether the significant gross-margin decline reverses.
- Review customer concentration, Indonesian import restrictions and seasonal shipment patterns.
- Verify liquidity after the $7.7 million capital-expenditure program, debt maturities and required covenant levels.
- Assess whether the company’s stated twelve-month liquidity expectation remains supported by operating cash flow and available borrowing capacity.