Business Context and Reporting Period
The filing is Landec Corporation’s unaudited Form 10-Q for the fiscal quarter ended February 23, 2014, covering the three and nine months ended February 23, 2014, compared with February 24, 2013. The request metadata identifies Lifecore Biomedical, Inc. and “2013 Q3,” but the filing registrant is Landec Corporation; Lifecore is its wholly owned HA-based Biomaterials subsidiary.
Landec operates through Food Products Technology, Food Export and Hyaluronan-based Biomaterials segments. Its principal businesses are Apio’s fresh-cut and whole produce operations and Lifecore’s pharmaceutical-grade hyaluronan, aseptic filling and related biomaterials products.
Key Financial Metrics
| Metric | Three Months Ended February 23, 2014 | Three Months Ended February 24, 2013 | Nine Months Ended February 23, 2014 | Nine Months Ended February 24, 2013 |
|---|---|---|---|---|
| Total revenue | $126.4 million | $117.9 million | $355.9 million | $334.6 million |
| Gross profit | $20.2 million | $17.5 million | $46.4 million | $49.7 million |
| Gross margin | 16.0% | 14.9% | 13.0% | 14.9% |
| Operating income | $9.7 million | $6.7 million | $14.9 million | $20.8 million |
| Net income attributable to common stockholders | $6.4 million | $4.8 million | $14.6 million | $18.1 million |
| Diluted EPS | $0.24 | $0.18 | $0.54 | $0.68 |
- Quarterly revenue increased 7%, while nine-month revenue increased 6%.
- Quarterly operating margin improved to approximately 7.7% from 5.7%; nine-month operating margin declined to approximately 4.2% from 6.2%.
- Quarterly net margin was approximately 5.1%; nine-month net margin was approximately 4.1%.
- Net cash provided by operating activities was $13.8 million for the nine months, compared with $13.5 million in the prior-year period.
- Capital expenditures were $10.2 million, primarily for capacity expansion at Apio and Lifecore.
- Cash and cash equivalents were $13.0 million at February 23, 2014, compared with $13.7 million at May 26, 2013. Marketable securities were zero versus $1.5 million at fiscal year-end.
- Total debt was $35.8 million, including $6.0 million current debt; lines of credit had no outstanding balance. Apio reported $19.2 million of revolving availability and Lifecore reported $9.4 million of availability.
- Total liabilities were $107.1 million and total equity was $199.6 million at February 23, 2014.
Material Changes Versus the Prior Comparable Period
- Food Products Technology: Revenue increased 10% in the quarter and 12% year to date, driven by higher unit volumes, expanded offerings and new products. Quarterly gross profit increased 25%, aided by favorable product mix, sourcing costs and weather conditions.
- Food Products Technology year-to-date profitability: Gross profit declined 16% because adverse weather, lower yields and higher produce sourcing and operating costs reduced gross profit by approximately $7.4 million during the first nine months.
- Food Export: Revenue declined 20% in the quarter and 18% year to date, primarily because of Indonesian fruit import quotas. Product mix supported higher reported gross margins of 9.3% quarterly and 7.3% year to date.
- HA-based Biomaterials: Revenue increased 16% in the quarter and 14% year to date, primarily due to growth in Lifecore’s aseptic filling business. Segment gross profit rose 15% and 13%, respectively.
- Operating expenses: Quarterly R&D expense decreased 26%; year-to-date R&D declined 16%, reflecting reduced corporate development and licensing activity. Year-to-date SG&A increased 16%, partly because the prior-year period included a $3.9 million reversal of the GreenLine acquisition earn-out liability.
- Other income: The company recorded $8.1 million of year-to-date other income from the increase in the fair value of its Windset investment, compared with $6.3 million in the prior-year period. This non-cash valuation gain materially supported results.
- Accounting estimates: Effective November 25, 2013, Landec extended estimated useful lives for certain buildings and machinery. The change reduced quarterly depreciation by $438,000 and increased quarterly net income by $284,000, or approximately $0.01 per share.
- Landec early adopted ASU 2013-11 concerning presentation of unrecognized tax benefits; the adoption did not materially affect the financial statements.
Guidance, Outlook, Risks and Unusual Items
- Management stated that cash from operations, existing cash and cash equivalents, and marketable securities should be sufficient to fund operating and capital requirements for at least the next twelve months. The filing does not provide quantified earnings or revenue guidance.
- Results are seasonal and may fluctuate because of Apio’s Food Export business and customer order patterns at Lifecore; nine-month results are not necessarily indicative of full-year results.
- Customer concentration is significant: the top five customers represented 43% of nine-month revenue, with Costco and Walmart representing 20% and 12%, respectively.
- Windset is a Level 3 fair-value investment carried at $37.7 million. Its valuation depends on unobservable cash-flow, growth and discount-rate assumptions; a 10% increase in the discount rate would reduce the estimated investment value by approximately $1.6 million under the disclosed sensitivity analysis.
- Debt agreements are secured and contain financial and operating covenants. Apio and Lifecore were in compliance with all covenants at February 23, 2014.
- Landec has exposure to produce prices, weather, crop yields, import restrictions, customer concentration, regulatory requirements for biomaterials, self-insurance estimates, tax matters and changes in fair-value assumptions.
- The company reported no legal proceedings, no defaults, no share repurchases and no significant changes to previously disclosed risk factors. Management concluded that disclosure controls were effective.
Most Important Facts for Investors to Verify
- Confirm the intended issuer and period: the supplied filing is Landec Corporation’s fiscal third-quarter 2014 report, not a standalone Lifecore Biomedical filing.
- Assess the sustainability of earnings excluding the $8.1 million year-to-date Windset fair-value gain and the $438,000 quarterly depreciation benefit from the useful-life change.
- Monitor whether Apio’s weather-related and produce-sourcing cost pressures continue to affect gross margins.
- Evaluate customer concentration, particularly Costco and Walmart, and the effect of Indonesian import quotas on Food Export revenue.
- Review the $37.7 million Level 3 Windset valuation and its sensitivity to growth, expense, tax and discount-rate assumptions.
- Verify debt maturities, covenant compliance, revolving-credit availability and the company’s ability to fund its capacity-expansion capital expenditures.
- Consider the effect of seasonality and Lifecore’s variable customer order patterns before extrapolating nine-month results to the full fiscal year.