Landec Corporation 10-Q Summary
Filing identity: The provided filing is for Landec Corporation, not Lifecore Biomedical, Inc. It covers the fiscal quarter and six months ended November 29, 2015; the comparable prior period ended November 30, 2014. The financial statements are unaudited.
Business Context and Reporting Period
Landec operates through Packaged Fresh Vegetables, Food Export, and Biomaterials businesses. Apio produces and distributes packaged vegetables and commodity produce, while Lifecore manufactures hyaluronan and other biomaterials and provides development, fermentation, and aseptic filling services. Landec also licenses polymer and packaging technologies.
Results are subject to seasonality in Apio’s food business and fluctuations in Lifecore customer order patterns. The company reported approximately 27.0 million common shares outstanding as of December 28, 2015.
Key Financial Metrics
| Metric | Three Months Ended Nov. 29, 2015 | Three Months Ended Nov. 30, 2014 | Six Months Ended Nov. 29, 2015 | Six Months Ended Nov. 30, 2014 |
|---|---|---|---|---|
| Revenue | $140.4 million | $132.7 million | $275.8 million | $266.3 million |
| Gross profit | $17.3 million | $15.7 million | $35.2 million | $29.9 million |
| Gross margin | 12.3% | 11.8% | 12.8% | 11.2% |
| Operating income | $2.8 million | $3.9 million | $6.7 million | $7.4 million |
| Operating margin | 2.0% | 2.9% | 2.4% | 2.8% |
| Net income attributable to common stockholders | $1.9 million | $3.2 million | $4.8 million | $5.6 million |
| Diluted earnings per share | $0.07 | $0.12 | $0.18 | $0.20 |
| Operating cash flow | Not separately provided | Not separately provided | $2.2 million | $3.4 million |
Cash and cash equivalents were $6.0 million at November 29, 2015, compared with $14.1 million at May 31, 2015. Total assets were $361.1 million and total liabilities were $134.4 million. Inventory increased to $28.9 million from $25.0 million at fiscal year-end, while accounts receivable increased to $50.3 million from $46.5 million.
Total debt was $48.2 million, including $13.5 million classified as current. The company had no outstanding balances on Apio’s $40.0 million revolving credit facility or Lifecore’s $10.0 million working-capital facility. Availability was approximately $29.0 million under Apio’s facility and $7.8 million under Lifecore’s facility. Management stated that the company was in compliance with applicable debt covenants.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 6% in the quarter and 4% for the six-month period.
- Packaged Fresh Vegetables revenue increased 5% in the quarter and 4% year to date, supported by higher sales of salad kits. Gross profit declined 11% in the quarter because of produce shortages, but increased 1% for the six-month period.
- Food Export revenue was flat in the quarter and decreased 9% year to date, primarily because of a 7% unit-volume decline and the stronger U.S. dollar. Six-month gross profit declined 2%.
- Biomaterials revenue increased 23% in the quarter and 26% year to date. Growth was driven by higher development-service revenue, partially offset by shipment timing and lower fermentation and aseptic revenue.
- Consolidated gross profit increased 10% in the quarter and 18% year to date, but operating income declined 28% and 9%, respectively, as selling, general and administrative expense rose 29% in the quarter and 33% year to date.
- Net income attributable to common stockholders declined 42% in the quarter and 14% year to date. The prior-year periods benefited from higher Windset fair-value gains and, for the prior-year six-month period, a $677,000 reversal of the long-term incentive plan accrual.
- Operating cash flow decreased to $2.2 million from $3.4 million, while capital expenditures increased to $15.2 million from $7.1 million, primarily for Apio and Lifecore facility expansions and equipment.
- Stock-based compensation increased to $1.7 million for the first six months from $748,000 in the prior-year period, contributing to higher operating expenses.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
No specific quantitative revenue or earnings guidance was provided. Management stated that existing cash, operating cash flow, and available financing were expected to fund operational and capital requirements for at least the next twelve months.
- Apio experienced approximately $4.7 million of excess produce costs in the quarter and approximately $6.0 million for the first six months due to severe produce shortages associated with unseasonably warm California weather.
- Apio’s Sweet Kale Salad and other “superfood” salad kits showed strong adoption; weekly Sweet Kale Salad sales exceeded $2.5 million as of November 2015. The filing does not provide a formal forecast for sustaining this performance.
- The company’s $62.5 million Windset investment is a Level 3 fair-value measurement based on unobservable assumptions. A 10% increase in projected discount rates would reduce estimated value by approximately $1.0 million, according to the filing.
- Major customer concentration remains material: the five largest customers represented 45% of six-month revenue; Costco and Wal-Mart represented 19% and 11%, respectively.
- A wage-and-hour class action was filed in California against Apio’s contract labor provider, with Landec and the provider co-defending. The company could not estimate a potential loss but stated that it believed it had meritorious defenses.
- The company also disclosed a product liability matter but did not expect the disclosed legal proceedings to have a material adverse effect.
- Lifecore entered into a lease for a 65,000-square-foot facility that became effective January 1, 2016 and is expected to be accounted for as a capital lease with an initial asset and liability of approximately $3.8 million.
- Revenue recognition, fair-value estimates, inventory valuation, tax positions, self-insurance liabilities, and impairment assessments involve significant management judgment.
Most Important Facts for Investors to Verify
- Confirm that the filing entity is Landec Corporation and reconcile it with the requested Lifecore Biomedical company identifier.
- Assess whether produce shortages and related excess costs were temporary or could continue affecting Apio margins.
- Monitor whether salad-kit growth offsets pressure in Apio’s historical packaged-vegetable products.
- Evaluate Lifecore’s development-service growth, shipment timing, customer concentration, and regulatory or execution risks.
- Review liquidity after the $15.2 million capital-spending program and the decline in cash to $6.0 million.
- Examine debt maturities, variable-rate exposure, covenant compliance, and the availability of revolving credit facilities.
- Assess the valuation sensitivity and realizability of the $62.5 million Windset investment.
- Track the wage-and-hour litigation, product liability matter, customer concentration, and the effective date and accounting impact of the Lifecore facility lease.