Business Context and Reporting Period
The filing is Landec Corporation’s unaudited Form 10-Q for the fiscal quarter ended March 1, 2015. The supplied metadata identifies Lifecore Biomedical, Inc., but the filing registrant is Landec Corporation, which owns Lifecore as its HA-based Biomaterials subsidiary. Landec operates Food Products Technology, Food Export, and HA-based Biomaterials businesses.
The reported quarter was compared with the three months ended February 23, 2014; the nine-month period was compared with the nine months ended February 23, 2014. Results are subject to seasonality, customer ordering patterns, and the first fiscal quarter’s extra week.
Financial Highlights
| Metric | Q3 FY2015 | Q3 FY2014 | Change |
|---|---|---|---|
| Revenue | $138.5 million | $126.4 million | +10% |
| Gross profit | $16.9 million | $20.2 million | -16% |
| Gross margin | 12.2% | 16.0% | Down 3.8 percentage points |
| Operating income | $4.8 million | $9.7 million | -50% |
| Net income attributable to common stockholders | $3.8 million | $6.4 million | -41% |
| Diluted EPS | $0.14 | $0.24 | -42% |
| Metric | Nine Months FY2015 | Nine Months FY2014 | Change |
|---|---|---|---|
| Revenue | $404.8 million | $355.9 million | +14% |
| Gross profit | $46.7 million | $46.4 million | +1% |
| Gross margin | 11.5% | 13.0% | Down 1.5 percentage points |
| Operating income | $12.3 million | $14.9 million | -18% |
| Net income attributable to common stockholders | $9.3 million | $14.6 million | -36% |
| Diluted EPS | $0.34 | $0.54 | -37% |
Segment and Operating Changes
- Food Products Technology revenue increased 21% in both the quarter and nine-month period, driven by higher unit volumes, new products, and favorable product mix. Quarterly gross profit increased 34%.
- Food Export revenue declined 23% in the quarter because of a West Coast longshoreman labor dispute, lower unit volumes, and unfavorable product mix. Nine-month revenue increased 3%, while gross profit declined 13% and the gross margin fell to 6.2% from 7.3%.
- HA-based Biomaterials revenue declined 27% in the quarter and 20% year to date. Lifecore experienced lower ophthalmic fermentation shipments to a major customer that was reducing inventory, delayed development activities, and a shift toward lower-margin aseptic filling revenue. Segment gross profit declined 47% in the quarter and 43% year to date.
- Consolidated selling, general and administrative expense increased 18% in the quarter and 12% year to date, primarily due to higher Apio sales and marketing costs for new products.
- Top five customers represented 45% of nine-month revenue. Costco and Wal-Mart represented 21% and 11%, respectively, creating material customer concentration.
Cash Flow, Liquidity, Debt and Other Metrics
- Cash and cash equivalents were $15.7 million at March 1, 2015, compared with $14.2 million at May 25, 2014.
- Nine-month operating cash flow was $13.4 million, versus $13.8 million in the prior-year period.
- Investing cash usage was $27.3 million, including $10.2 million of capital expenditures and $18.0 million invested in Windset.
- Financing cash inflow was $15.4 million, including $11.2 million of long-term debt proceeds and $9.3 million of net borrowings under Apio’s revolving line of credit.
- Total debt was approximately $49.8 million at March 1, 2015, consisting of $40.5 million of long-term debt, including the current portion, and $9.3 million outstanding under Apio’s line of credit.
- Apio’s $40 million revolving facility had $18.8 million of availability. Lifecore’s $10 million working-capital facility had $7.3 million of availability, with no amount outstanding.
- All reported financial covenants were satisfied. Management stated that cash from operations, existing cash, cash equivalents, and marketable securities should fund operations and capital requirements for at least the next twelve months.
- Total assets were $340.3 million and total equity was $215.5 million at March 1, 2015.
Guidance, Outlook, Risks and Unusual Items
- The filing provides no formal quantitative earnings or revenue guidance.
- Management highlighted seasonality in Apio’s food business, variable Lifecore customer ordering patterns, customer concentration, produce sourcing costs, export disruptions, and dependence on major customers.
- Windset was valued at $61.1 million using a Level 3 discounted cash flow model. The company recorded $3.5 million of year-to-date fair-value appreciation and $1.0 million of dividend income from the investment. The valuation is sensitive to projected growth, expenses, tax rates, and discount rates.
- Landec wrote off its remaining $793,000 investment in Aesthetic Sciences as impaired; the charge was included in other income.
- The company reversed $677,000 of previously accrued long-term incentive compensation because management determined the performance target was unlikely to be achieved.
- The $20 million interest-rate swap had a fair value liability of $2,000 and was scheduled to expire April 30, 2015.
- The filing states that there were no significant changes to previously disclosed risk factors, no legal proceedings, no debt defaults, and no material changes in internal controls.
Investor Verification Points
- Confirm the correct issuer and security: the filing is for Landec Corporation, not a standalone Lifecore Biomedical filing.
- Assess whether Food Products Technology growth and new-product margins can offset the decline in Lifecore’s higher-margin fermentation and development revenue.
- Monitor Lifecore’s major customer inventory normalization and the timing of delayed development activities.
- Evaluate the sustainability and valuation sensitivity of the $61.1 million Windset investment and its related fair-value gains.
- Review customer concentration, produce costs, export disruptions, debt maturities, borrowing-base availability, and covenant headroom.
- Verify capital spending requirements and whether operating cash flow remains sufficient as debt and investment commitments increase.