Business Context and Reporting Period
This Form 10-Q is for Landec Corporation, including its Apio and Lifecore Biomedical subsidiaries, for the three months ended August 28, 2016, compared with the three months ended August 30, 2015. Landec operates in packaged fresh vegetables, food exports, and biomaterials, including Lifecore’s hyaluronan and aseptic manufacturing businesses.
The filing identifies Landec Corporation as the registrant, although the request metadata references Lifecore Biomedical, Inc. The company had 27.2 million common shares outstanding as of September 23, 2016.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $132.4 million | $135.4 million | Down 2% |
| Gross profit | $21.1 million | $18.0 million | Up 18% |
| Operating income | $5.5 million | $3.9 million | Up 39% |
| Net income attributable to common stockholders | $3.3 million | $3.0 million | Up 12% |
| Diluted earnings per share | $0.12 | $0.11 | Up $0.01 |
| Cash flow from operations | $6.5 million | $(1.8) million | Improved by $8.2 million |
- Gross margin increased to approximately 16.0% from 13.3%; operating margin increased to approximately 4.1% from 2.9%; net margin increased to approximately 2.5% from 2.2%.
- Cash and cash equivalents were $8.6 million at August 28, 2016, compared with $9.9 million at May 29, 2016.
- Current assets were $87.8 million and current liabilities were $53.4 million. Accounts receivable were $44.2 million and inventories were $30.2 million.
- Total debt, including current and long-term debt net of issuance costs, was approximately $52.0 million; the company had no outstanding balance on its revolving line of credit at quarter-end and reported $23 million of availability.
- Capital expenditures were $2.1 million, primarily for Apio and Lifecore capacity and equipment.
- The $62.7 million fair value of the Windset investment represented approximately 18% of total assets and was measured using Level 3 unobservable inputs.
Material Changes Versus the Prior Comparable Period
- Packaged Fresh Vegetables revenue declined 7% to $95.9 million, primarily because core packaged vegetable unit volume fell 8% following the loss of lower-margin business.
- Despite lower packaged vegetable revenue, segment gross profit increased 9% to $14.4 million, and gross margin rose to 15.0% from 12.8% due to a more favorable product mix.
- Food Export revenue increased 4% to $23.3 million on an 11% increase in unit volume, partly offset by a shift toward lower-priced fruit commodities.
- Biomaterials revenue increased 40% to $12.3 million, primarily due to a $4 million increase in fermentation sales, partly offset by lower aseptic filling revenue. Biomaterials gross profit increased 59% to $5.1 million.
- Research and development expense increased 3% to $1.9 million. SG&A increased 13% to $13.7 million, reflecting Apio product launches, advertising and promotions, and additional personnel at Apio and Lifecore.
- Interest expense increased 30% to $653,000 due to approximately $20.4 million of new borrowings during fiscal 2016. The prior-year period included an $800,000 fair-value gain on the Windset investment; no such gain was recorded in the current quarter.
- Operating cash flow improved principally from higher net income, noncash depreciation and stock compensation, deferred tax changes, and favorable receivables and payables movements, partially offset by higher inventory.
- The company early adopted ASU 2016-09 for stock-based compensation and recorded cumulative-effect adjustments that increased total equity by $623,000. Adoption of the debt issuance cost guidance reduced reported assets and liabilities by $817,000 at May 29, 2016, without affecting net income.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that cash from operations, existing cash, and available financing should be sufficient to fund operating and capital requirements for at least the next twelve months. No formal revenue or earnings guidance was provided.
- On September 23, 2016, after quarter-end, Landec entered into a $150 million syndicated refinancing consisting of a $50 million term loan and a $100 million revolving credit facility. The company expects to record a $1.2 million charge in the second fiscal quarter, primarily for the noncash write-off of existing debt issuance costs.
- The company recorded a $350,000 legal charge, or approximately $0.01 per diluted share after tax, related to wage-and-hour and other legal matters. Management does not expect current proceedings to have a material adverse consolidated impact, but an unfavorable resolution could affect a future quarter.
- Results are subject to seasonality in Apio’s food and export businesses and fluctuations in Lifecore customer ordering patterns.
- Customer concentration is significant: the top five customers represented 47% of revenue, with Costco and Wal-Mart representing 17% and 13%, respectively.
- Windset valuation depends on projected cash flows, growth rates, taxes, and discount rates. A 10% increase in the assumed discount rate would reduce the investment’s estimated value by approximately $200,000, according to the filing’s sensitivity analysis.
- Unrecognized tax benefits were approximately $904,000 at quarter-end; approximately $300,000 may be recognized within the succeeding twelve months.
- The company reported compliance with its financial covenants and no defaults. Management stated that there were no significant changes to previously disclosed risk factors or market risks.
Investor Verification Items
- Verify the impact of the September 2016 refinancing, including the $1.2 million debt-cost write-off, interest-rate range, covenant requirements, and revolver availability.
- Assess whether the loss of lower-margin packaged vegetable volume is offset by sustained margin improvement and new salad-kit product growth.
- Monitor Lifecore fermentation growth, aseptic filling demand, customer concentration, and the timing of customer orders.
- Reconcile inventory growth, working-capital requirements, and operating cash flow in subsequent quarters.
- Review the valuation and liquidity implications of the $62.7 million Level 3 Windset investment.
- Track legal settlements, unrecognized tax benefits, and any changes in self-insurance or other loss-contingency estimates.