Filing Scope and Business Context
The supplied filing is Landec Corporation’s Form 10-K for the fiscal year ended May 28, 2017, not a Lifecore Biomedical filing or a 2016 fourth-quarter filing. Lifecore is a Landec subsidiary and is reported within the Biomaterials segment. Landec operates Packaged Fresh Vegetables, Food Export, Biomaterials and Other businesses, including O Olive, acquired March 1, 2017.
Financial Results and Key Metrics
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Revenue | $532.3 million | $541.1 million | Down 2% |
| Gross profit | $83.2 million | $71.0 million | Up 17% |
| Gross margin | 15.6% | 13.1% | Up 250 basis points |
| Operating income (loss) | $15.5 million | $(19.8) million | Improved |
| Net income applicable to common stockholders | $10.6 million | $(11.6) million | Improved |
| Diluted EPS | $0.38 | $(0.43) | Improved |
| Cash from operating activities | $29.3 million | $21.9 million | Up $7.4 million |
- Packaged Fresh Vegetables revenue was $408.0 million, down 4%; gross profit was $51.1 million, up 26%, and segment gross margin increased to 12.5% from 9.6%.
- Food Export revenue was $62.5 million, down 3%, with gross profit of $4.0 million and a 6.4% gross margin.
- Biomaterials revenue, primarily from Lifecore, was $59.4 million, up 18%; gross profit was $26.8 million, up 11%. Ophthalmic, orthopedic and other/non-HA products represented approximately 65%, 15% and 20% of Lifecore revenue, respectively.
- Research and development expense rose 31% to $9.5 million; selling, general and administrative expense rose 12% to $55.6 million.
- Cash and cash equivalents were $5.4 million at year-end, compared with $9.9 million a year earlier. Total assets were $358.6 million and total stockholders’ equity was $226.6 million.
- Capital expenditures were $22.6 million, primarily for Apio and Lifecore facility expansions and equipment.
Material Changes Versus the Prior Comparable Period
- Landec returned to profitability after fiscal 2016’s $34.0 million GreenLine trade-name impairment. No intangible-asset impairments were recorded in fiscal 2017.
- Apio’s revenue declined because of lower unit volumes, the loss of certain low-margin retail and club-store business, produce shortages and product-mix changes. The prior year included approximately $15.6 million of excess produce-sourcing costs.
- Lifecore growth reflected an $8.0 million increase in fermentation sales and a $4.5 million increase in aseptic filling revenue, partly offset by a $3.6 million decline in development revenue.
- Landec acquired O Olive for $2.5 million in cash and recorded a $5.9 million liability for estimated contingent consideration. O Olive contributed $773,000 of revenue and a $231,000 pretax loss from acquisition through year-end.
- The Company refinanced its debt in September 2016, obtained a $50.0 million term loan and a $100.0 million revolving facility, and recorded a $1.2 million loss on debt refinancing.
Cash Flow, Debt and Liquidity
- Operating cash flow of $29.3 million exceeded capital expenditures of $22.6 million, but investing activities used $25.0 million and financing activities used $8.8 million, resulting in a $4.5 million decline in cash.
- Debt principal outstanding was $47.5 million under the term loan, plus $3.0 million drawn on the revolver. Net long-term debt was $42.3 million, excluding the current portion.
- The term loan matures September 23, 2021 and requires quarterly principal payments of $1.25 million, with $27.5 million due at maturity. The Company reported compliance with all financial covenants at May 28, 2017.
- An interest-rate swap covering a $50.0 million notional amount effectively fixed the term-loan rate at a 1.22% 30-day LIBOR component; the reported term-loan interest rate was approximately 2.7% to 3.0%, depending on the filing disclosure.
- Management stated that existing cash and expected operating cash flow should fund operating and capital requirements for at least the next twelve months.
Outlook, Risks and Unusual Items
- No specific revenue or earnings guidance was provided. Management expects continued investment in product development, Lifecore aseptic filling and fermentation capacity, new food products and O Olive integration.
- Key risks include adverse weather, produce shortages and pricing, seasonality, customer concentration, international sales, single-source suppliers, manufacturing disruptions, regulatory approvals, competition, product liability, intellectual-property claims and acquisition integration.
- Costco and Walmart represented approximately 18% and 14% of fiscal 2017 revenue, respectively; the top five customers represented approximately 44%.
- Approximately 30% of consolidated revenue came from international customers. Food Export revenue is concentrated in Asian markets and generally carries a 5% to 10% gross margin.
- Apio recorded a $2.6 million legal settlement charge related to labor-contractor litigation and incurred $2.1 million of related legal expenses. A $3.2 million liability was accrued at year-end. The broader settlement required $6.0 million of payments, with Landec responsible for one-half, subject to reimbursement arrangements with Pacific Harvest.
- O Olive carries contingent consideration of up to $7.5 million through fiscal 2020 based on EBITDA targets. The filing states that the potential earn-out liability recorded at year-end was $5.9 million.
- Landec expects future adoption of revenue-recognition guidance to potentially affect gross-versus-net reporting for Food Export and timing of Biomaterials development and contract-manufacturing revenue, but the impact could not yet be estimated. Lease accounting adoption is expected to materially increase reported assets and liabilities.
Important Facts for Investors to Verify
- Confirm the requested issuer and period: the source is Landec’s fiscal 2017 10-K, while the request identifies Lifecore Biomedical and 2016 Q4.
- Review Lifecore’s standalone financial information, customer concentration, order timing, development revenue and aseptic-filling capacity if the investment focus is Lifecore.
- Verify the sustainability of Apio’s improved gross margin after the prior year’s weather-related sourcing costs and the loss of lower-margin business.
- Assess liquidity against scheduled debt payments, capital expenditures, lease commitments, purchase commitments and remaining legal-settlement payments.
- Evaluate the $63.6 million fair value of the Windset investment, which depends on Level 3 assumptions and generated $900,000 of fiscal 2017 fair-value gain plus $1.65 million of dividend income.
- Monitor O Olive’s integration, operating performance and potential earn-out payments of up to $7.5 million.