Business Context and Reporting Period
This Form 10-Q is filed by Landec Corporation, the parent company of Lifecore Biomedical, Inc., for the fiscal quarter and six months ended November 27, 2016. Landec operates three reportable segments: Packaged Fresh Vegetables, Food Export, and Biomaterials. Lifecore constitutes the Biomaterials segment and develops and manufactures pharmaceutical-grade hyaluronan products and provides aseptic contract manufacturing services.
The filing presents unaudited results compared with the quarter and six months ended November 29, 2015. Results are subject to seasonality in Apio’s food business and fluctuations in Lifecore customer orders.
Key Financial Metrics
| Metric | Three Months Ended Nov. 27, 2016 | Prior-Year Quarter | Six Months Ended Nov. 27, 2016 | Prior-Year Period |
|---|---|---|---|---|
| Revenue | $135.9 million | $140.4 million | $268.3 million | $275.8 million |
| Gross profit | $19.0 million | $17.3 million | $40.1 million | $35.2 million |
| Gross margin | 13.9% | 12.3% | 14.9% | 12.8% |
| Operating income | $3.3 million | $2.8 million | $8.7 million | $6.7 million |
| Net income attributable to common stockholders | $1.3 million | $1.9 million | $4.6 million | $4.8 million |
| Diluted earnings per share | $0.05 | $0.07 | $0.17 | $0.18 |
| Cash flow from operations | Not provided for the quarter | Not provided for the quarter | $5.5 million | $2.3 million |
Quarterly operating expenses were $15.7 million, including $2.0 million of research and development and $13.7 million of selling, general and administrative expense. Six-month operating expenses were $31.4 million, including $3.9 million of research and development and $27.5 million of SG&A.
At November 27, 2016, cash and cash equivalents were $2.6 million, compared with $9.9 million at May 29, 2016. Accounts receivable were $50.0 million and inventories were $28.0 million. Total assets were $341.3 million and total equity was $219.5 million.
Total debt, including current and long-term portions and net of debt issuance costs, was approximately $49.7 million. The company also had $1.5 million outstanding under its revolving credit facility and a $100 million revolving commitment. The company was in compliance with all financial covenants at period end.
Material Changes Versus the Prior Comparable Period
- Total revenue declined 3% for both the quarter and six-month period.
- Packaged Fresh Vegetables revenue declined 9% for the quarter and 8% year to date, primarily due to a 9% reduction in unit volume following the loss of lower-margin business. Gross margin improved to 12.2% from 9.3% in the quarter and to 13.6% from 11.0% year to date, aided by product mix, productivity initiatives, and the absence of $4.7 million of prior-year excess produce-shortage costs.
- Food Export revenue increased 16% for the quarter and 10% year to date, driven by higher unit volumes, although product mix shifted toward lower-priced commodities and margins declined modestly.
- Biomaterials revenue increased 16% for the quarter and 27% year to date. Lifecore benefited from higher fermentation sales and increased aseptic filling revenue, partly offset by lower development revenue following commercial approval of a drug product.
- Consolidated gross profit increased 10% for the quarter and 14% year to date. SG&A increased 7% and 10%, respectively, primarily because of Apio product launches, advertising, promotions, and additional headcount. R&D increased 20% and 11%, respectively.
- Net income declined despite higher operating income because the company recorded a $1.2 million loss on debt refinancing and had no Windset fair-value gain, compared with $200,000 in the prior-year quarter and $1.0 million in the prior-year six-month period.
- Operating cash flow increased to $5.5 million from $2.3 million, while capital expenditures decreased to $4.7 million from $16.0 million.
Guidance, Outlook, Risks, and Unusual Items
Management stated that existing cash, cash generated from operations, and available financing are expected to be sufficient to fund operating and capital requirements for at least the next twelve months. The filing does not provide specific revenue or earnings guidance.
- On September 23, 2016, Landec refinanced its prior debt with a $50 million term loan and a $100 million revolving facility, both maturing in September 2021. The term loan requires quarterly principal payments of $1.25 million beginning December 1, 2016.
- The company entered into a $50 million interest-rate swap that effectively fixed the term loan’s 30-day LIBOR component at 1.22%. The term-loan rate was 2.97% at November 27, 2016. The swap generated a $327,000 after-tax unrealized gain recorded in other comprehensive income.
- The refinancing generated a $1.2 million loss, including $233,000 of early debt-extinguishment penalties and the write-off of prior debt issuance costs.
- The company recorded a $500,000 legal charge during the six months for wage-and-hour and other matters. Management does not expect current legal proceedings to have a material adverse effect, but an unfavorable resolution could affect a particular quarter’s results or cash flows.
- Windset, a non-public company in which Landec holds a 26.9% interest, was carried at a Level 3 fair value of $62.7 million. The investment produced $825,000 of dividend income during the six months, but no fair-value gain. Its valuation is sensitive to projected growth, expenses, taxes, and discount rates.
- Customer concentration remains significant: the top five customers represented 44% of six-month sales, while Costco and Wal-Mart represented 17% and 13%, respectively.
- The filing identifies risks related to seasonality, customer and order concentration, commodity and produce availability, international sales, self-insurance estimates, legal contingencies, valuation of the Windset investment, and debt covenant and interest-rate exposure.
Important Facts for Investors to Verify
- Confirm the filing entity and exposure to Lifecore: the report is filed by Landec Corporation, with Lifecore reported as the Biomaterials segment.
- Assess whether Lifecore’s growth in fermentation and aseptic filling can offset lower development revenue and unfavorable product mix.
- Monitor liquidity after the decline in cash to $2.6 million and the commencement of quarterly term-loan principal payments.
- Evaluate the sustainability of improved packaged-vegetable margins after the benefit of prior-year shortage costs and the exit from low-margin business.
- Review customer concentration, export receivables and inventory growth, particularly because increased Food Export activity lengthened collection and inventory cycles.
- Reassess the $62.7 million Windset valuation and the assumptions supporting its Level 3 fair value.
- Track legal settlement exposure, the $500,000 accrued charge, and the company’s remaining debt covenant headroom.