Business Context and Reporting Period
The filing is Landec Corporation’s unaudited Form 10-Q for the fiscal quarter and six months ended November 26, 2017. The submitted metadata identifies Lifecore Biomedical, Inc., but the filing registrant is Landec Corporation; Lifecore is reported as Landec’s Biomaterials segment.
Landec operates Packaged Fresh Vegetables, Food Export, Biomaterials, and Other segments. The company sells branded and private-label produce, exports whole produce, manufactures hyaluronan and other biomaterials through Lifecore, and, following its March 1, 2017 acquisition, sells specialty olive oils and vinegars through O Olive.
Key Financial Metrics
| Metric | Three Months Ended November 26, 2017 | Prior Comparable Period | Six Months Ended November 26, 2017 | Prior Comparable Period |
|---|---|---|---|---|
| Revenue | $136.5 million | $135.9 million | $259.8 million | $268.3 million |
| Gross profit | $15.8 million | $19.0 million | $35.0 million | $40.1 million |
| Gross margin | 11.5% | 14.0% | 13.5% | 14.9% |
| Operating income | $(0.6) million | $3.3 million | $2.0 million | $8.7 million |
| Net income applicable to common stockholders | $0.5 million | $1.3 million | $2.6 million | $4.6 million |
| Diluted EPS | $0.02 | $0.05 | $0.09 | $0.17 |
| Net cash from operating activities | Not separately provided | Not separately provided | $4.3 million | $5.5 million |
Six-month operating expenses were $33.1 million, including $6.1 million of research and development and $27.0 million of selling, general and administrative expenses. Stock-based compensation was $2.1 million.
At November 26, 2017, cash and cash equivalents were $4.4 million, accounts receivable were $56.4 million, inventory was $30.8 million, and total assets were $379.3 million. Total liabilities were $146.6 million and total equity was $232.7 million.
Debt included $45.0 million of term-loan principal, $10.0 million drawn on the revolving credit facility, and $3.7 million of capital lease obligations. The company had a $100 million revolving facility and a $50 million term loan, both maturing September 23, 2021. Management stated that all financial covenants were satisfied.
Material Changes Versus the Prior Comparable Period
- Total revenue was essentially flat in the quarter but declined 3% for the six-month period.
- Packaged Fresh Vegetables revenue increased 9% for the quarter and 8% year to date, driven primarily by approximately 5% higher unit volumes and stronger salad sales. Gross profit declined 21% for the quarter and 7% year to date.
- Food Export revenue declined 46% for the quarter and 56% year to date because the company discontinued lower-margin export fruit activity. Food Export gross profit declined 55% and 54%, respectively.
- Biomaterials revenue increased 18% for the quarter and 8% year to date. The six-month gross profit decline reflected unfavorable product mix and production timing, including a greater proportion of lower-margin aseptic filling revenue.
- Gross profit declined 17% in the quarter and 13% year to date. Management attributed the quarterly Packaged Fresh Vegetables pressure principally to $3.9 million of incremental produce sourcing costs related to hurricanes and tropical storms.
- Research and development expense increased 72% in the quarter and 56% year to date, primarily due to expanded Apio product-development staffing and activity. SG&A declined 6% in the quarter and 2% year to date.
- Net income included $1.3 million of quarterly and $2.2 million of year-to-date other income from increases in the fair value of the company’s Windset investment. Windset dividends contributed $0.4 million for the quarter and $0.8 million year to date.
- Prior-year results included a $1.2 million loss on debt refinancing that did not recur.
Cash Flow, Liquidity, Outlook, and Risks
Operating cash flow was $4.3 million for the first six months, while investing cash flow was $(9.5) million, including $7.4 million of capital expenditures and a $2.1 million note receivable. Financing cash flow was $4.1 million, primarily reflecting $7.0 million of net borrowings under the line of credit, partially offset by $2.5 million of term-debt payments. Cash decreased $1.0 million from fiscal year-end.
Management expects cash from operations, existing cash, and available financing to fund operational and capital requirements for at least the next twelve months. Capital spending is focused on growth at Apio and Lifecore.
The company did not provide formal revenue or earnings guidance in the filing. Management noted seasonality in Apio’s food business and variability in Lifecore customer order patterns, so interim results may not be indicative of full-year performance.
- Apio labor-related litigation settlement: total settlement payments of $6.0 million, with $1.8 million due in July 2018. Landec expects reimbursement of $2.1 million from Pacific Harvest over time; its recourse is a security interest in Pacific Harvest assets.
- O Olive contingent consideration was reduced from $5.9 million to $5.4 million based on revised projected EBITDA and discount rates. The earn-out can total up to $7.5 million through fiscal 2020.
- The Windset investment was carried at $65.8 million and valued using Level 3 assumptions. Its valuation is sensitive to projected growth, expenses, taxes, and discount rates.
- The company was evaluating adoption of the new revenue-recognition standard and could not yet reasonably estimate its impact. It was also evaluating the lease standard, which it expects to materially increase reported assets and liabilities.
- After the reporting date, the Tax Cuts and Jobs Act was enacted. Management anticipated a $7 million to $9 million tax benefit from remeasuring deferred tax liabilities, expected in the third quarter of fiscal 2018.
- Top-five customers represented 45% of six-month revenue; Costco and Walmart represented 18% and 17%, respectively, creating customer-concentration risk.
Important Facts for Investors to Verify
- Confirm that the intended filing is Landec Corporation rather than Lifecore Biomedical, Inc.
- Assess whether produce-cost inflation and weather-related sourcing costs were temporary or could continue affecting Packaged Fresh Vegetables margins.
- Review the sustainability and cash-conversion impact of elevated accounts receivable and inventory balances.
- Verify borrowing capacity, interest rates, covenant headroom, and required term-loan amortization under the secured credit agreement.
- Evaluate the collectability and repayment schedule of the $2.1 million Pacific Harvest reimbursement receivable.
- Review the assumptions supporting the $65.8 million Windset valuation and the potential O Olive earn-out liability.
- Assess the effects of revenue-recognition, lease-accounting, and tax-law changes on future reported results.