SEC Form 10-Q Summary
Filing entity: Landec Corporation, although the request metadata identifies Lifecore Biomedical, Inc. Lifecore is a wholly owned subsidiary and reportable segment of Landec. The filing covers the fiscal quarter ended August 26, 2012, compared with the three months ended August 28, 2011.
Business Context and Reporting Period
Landec develops and commercializes polymer technologies through three principal businesses: Food Products Technology, Food Export, and Hyaluronan-based Biomaterials operated by Lifecore. The quarter includes the acquisition of GreenLine by Apio in April 2012 and the sale of Landec Ag to INCOTEC in June 2012.
Results are subject to seasonality in Apio’s food business and fluctuations in Lifecore customer ordering patterns. The interim financial statements are unaudited.
Financial Performance and Position
| Metric | Q1 Fiscal 2013 | Q1 Fiscal 2012 | Change |
|---|---|---|---|
| Total revenue | $102.1 million | $73.3 million | +39% |
| Gross profit | $13.8 million | $11.3 million | +22% |
| Operating income | $3.0 million | $2.9 million | +5% |
| Net income attributable to common stockholders | $2.5 million | $1.8 million | +40% |
| Diluted earnings per share | $0.10 | $0.07 | +43% |
| Cash flow from operating activities | $5.1 million | $4.4 million | +17% |
- Gross margin was approximately 13.5%, compared with 15.3% in the prior-year quarter.
- Operating margin was approximately 2.9%, compared with 3.9%.
- Net margin attributable to common stockholders was approximately 2.5% in both periods.
- Apio revenue increased 45% to $94.0 million, led by a $19.9 million contribution from GreenLine and a 22% increase in unit volume among existing non-green-bean customers.
- Food Export revenue increased 19% to $25.4 million; the segment reported a 5.3% gross margin versus 4.7% in the prior-year quarter.
- Lifecore revenue increased 12% to $8.0 million, but gross profit declined 13% to $2.4 million. Lifecore gross margin fell to 30% from 38% because of production timing and lower overhead absorption.
- Other income included a $1.4 million increase in the fair value of the Windset investment. Dividend income from Windset was $281,000.
- Interest expense increased to $541,000 from $176,000, primarily because of debt incurred in the GreenLine acquisition.
- Income tax expense was $1.5 million, representing an effective tax rate of approximately 37%, compared with 38% in the prior-year quarter.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $10.0 million at August 26, 2012, down from $22.2 million at May 27, 2012. Marketable securities added $756,000 of short-term liquidity.
- Operating cash flow was $5.1 million. Investing cash outflow was $2.8 million, including $2.0 million of capital expenditures and $756,000 of marketable securities purchases.
- Financing cash outflow was $14.4 million, primarily reflecting the $10.0 million Lifecore earn-out payment and $5.6 million of payments on lines of credit and long-term debt.
- Long-term debt totaled $45.9 million, including $7.0 million current maturities. An additional $7.5 million was outstanding under Apio’s revolving line of credit, implying total reported debt and revolving borrowings of approximately $53.4 million.
- Apio had a $25.0 million asset-based revolving facility, with $7.5 million outstanding. Lifecore had an $8.0 million revolving facility with no balance outstanding and a $12.0 million term loan with $11.3 million outstanding.
- Apio and Lifecore were in compliance with their financial covenants at quarter-end. Management stated that operating cash flow, existing cash, and marketable securities should be sufficient to fund operating and capital requirements for at least the next twelve months.
Material Changes, Outlook and Risks
- GreenLine expanded Apio’s product offerings and foodservice presence but added acquisition-related debt, amortization, operating expenses, and contingent consideration. The potential GreenLine earn-out is up to $7.0 million; the recorded fair value was approximately $4.0 million, and at least $4.0 million would be payable in the third quarter of fiscal 2013 if the revenue target was achieved.
- The $10.0 million Lifecore acquisition earn-out was paid on May 29, 2012 and was the principal driver of the quarter’s financing cash outflow.
- The Monsanto seed-coating agreement had terminated in December 2011, eliminating approximately $1.35 million of quarterly licensing revenue and gross profit previously recognized by Corporate.
- Landec Ag was sold to INCOTEC for $600,000, generating a $400,000 gain, of which $100,000 was recognized in the quarter and $300,000 was deferred over the seven-year license term.
- Management cited continued growth in Apio value-added products, expanded distribution, new product offerings, and expected growth in Lifecore’s ophthalmic and other medical applications. No specific quantitative revenue or earnings guidance was provided.
- Key risks include customer concentration, produce and commodity pricing, seasonal demand, product mix, inventory and overhead absorption, dependence on major customers and partners, acquisition integration, debt covenant compliance, variable interest rates, and valuation uncertainty in the Level 3 Windset investment.
- The top five customers represented 36% of quarterly revenue, and the largest customer represented 12%. The filing states that no significant changes occurred in previously disclosed risk factors.
- The filing reports no legal proceedings, no defaults, no share repurchases, and no material changes in internal controls. Disclosure controls were deemed effective.
Investor Verification Checklist
- Confirm the reporting entity and relationship between Landec Corporation and Lifecore Biomedical, Inc.
- Verify the sustainability of GreenLine revenue growth, margins, integration benefits, and the potential earn-out obligation.
- Monitor Lifecore’s recovery from the 38% to 30% gross-margin decline and its compliance with minimum fixed-charge, quick-ratio, and tangible-net-worth covenants.
- Reconcile cash availability with scheduled debt maturities, revolving credit availability, capital expenditures, and contingent consideration.
- Assess the valuation sensitivity of the $22.9 million Windset investment, which relies on Level 3 discounted-cash-flow assumptions.
- Evaluate the effect of the discontinued Monsanto licensing revenue and the replacement INCOTEC license economics.
- Review customer concentration, seasonal working-capital needs, inventory growth, and the impact of produce pricing and product mix on margins.