SEC Filing Summary
Registrant and period: The supplied filing is Landec Corporation’s Form 10-Q, not a standalone Lifecore Biomedical filing. It covers the fiscal quarter and six months ended November 25, 2012, compared with November 27, 2011. Landec operates through Apio’s food businesses and Lifecore’s hyaluronan-based biomaterials business.
Business Context and Reporting Period
Landec develops and commercializes Intelimer and hyaluronan polymer technologies. Its reportable segments are Food Products Technology, Food Export, HA-based Biomaterials, and Corporate. The period includes the GreenLine acquisition completed in April 2012, which materially increased Apio’s value-added produce revenue.
Key Financial Metrics
| Metric | Three months ended Nov. 25, 2012 | Six months ended Nov. 25, 2012 |
|---|---|---|
| Total revenue | $114.7 million | $216.7 million |
| Year-over-year revenue change | +41% | +40% |
| Gross profit | $18.5 million | $32.2 million |
| Gross margin | 16.1% | 14.9% |
| Operating income | $11.1 million | $14.1 million |
| Net income attributable to common stockholders | $8.9 million | $13.3 million |
| Diluted earnings per share | $0.34 | $0.50 |
| Operating cash flow | Not separately provided for the quarter | $2.4 million |
- Apio value-added revenue increased 68% for the quarter and 63% for the six-month period, primarily from GreenLine and higher unit volumes from existing customers.
- Apio Export revenue increased 16% for the quarter and 17% year to date; management describes the business as typically generating a 5%–8% gross margin.
- Lifecore revenue declined 16% for the quarter and 4% year to date because certain customer shipments were delayed into the third quarter.
- Interest expense increased to $498,000 for the quarter and $1.0 million year to date, primarily because of debt associated with the GreenLine acquisition.
- Other income included a $1.0 million quarterly and $5.3 million year-to-date increase in the fair value of the Windset investment.
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $4.9 million at November 25, 2012, compared with $22.2 million at May 27, 2012. Marketable securities were $2.0 million, producing cash and marketable securities of approximately $6.8 million.
- Current assets were $77.2 million and current liabilities were $50.2 million, implying a current ratio of approximately 1.5x.
- Debt consisted of $7.5 million outstanding under Apio’s revolving line of credit and $44.2 million of long-term debt, including the current portion. Total reported debt was approximately $51.7 million.
- Apio had $25.0 million of revolving credit capacity, subject to borrowing-base availability. Lifecore had an $8.0 million revolving facility with $7.3 million of availability and no amount outstanding.
- Landec stated that cash from operations, existing cash, and marketable securities should be sufficient to fund operating and capital requirements for at least the next twelve months.
- Apio and Lifecore were in compliance with their financial covenants at November 25, 2012.
Material Changes Versus the Prior Comparable Period
- Revenue increased 40% year to date, mainly from the GreenLine acquisition and growth in Apio’s value-added produce business.
- Gross profit increased 33% year to date, although Lifecore and Corporate gross profit declined due to shipment timing and the prior-year Monsanto licensing revenue, respectively.
- Operating income doubled year to date to $14.1 million from $7.1 million.
- Net income attributable to common stockholders increased to $13.3 million from $5.2 million.
- The company reversed a $3.9 million GreenLine contingent earn-out liability because drought conditions, weaker product launches, and uncompleted planned business made achievement of the earn-out target no longer probable. This reduced operating expense but was noncash.
- Operating cash flow improved from an outflow of $742,000 to an inflow of $2.4 million, but cash declined substantially because of debt repayment, a $9.7 million Lifecore earn-out payment, capital expenditures, and marketable securities purchases.
- Chiquita elected not to maintain its exclusive BreatheWay license for calendar 2013. The arrangement became non-exclusive, allowing Landec to sell the technology to other parties, but eliminating Chiquita’s minimum gross-profit commitment.
Outlook, Commentary, Risks, and Unusual Items
- No formal consolidated revenue or earnings guidance is provided. Management expects to recognize approximately $550,000 of additional Nitta research and development revenue during the second half of fiscal 2013.
- Results may fluctuate because of seasonality in Apio’s food business and variable customer order patterns at Lifecore.
- GreenLine performance was affected by the severe 2012 Midwest drought, lower-than-expected new product launches, and planned business that did not materialize.
- Customer concentration remains significant: the five largest customers represented 36% of year-to-date revenue, and the largest Food Products Technology customer represented 13%.
- The Windset investment was recorded at $26.8 million using Level 3 discounted cash-flow assumptions. The valuation is sensitive to projected growth, expenses, tax rates, and discount rates, and generated $5.3 million of year-to-date other income.
- Management reported ineffective disclosure controls and a material weakness in internal control over financial reporting relating to the valuation of the non-public Windset investment. The company had previously stated that its first-quarter fiscal 2013 interim financial statements should not be relied upon and that a restatement was required.
- The company identified no legal proceedings and no defaults under senior securities.
Most Important Facts to Verify
- Confirm the filing identity: the source is Landec Corporation’s 10-Q, despite the request naming Lifecore Biomedical.
- Review the subsequent restatement and remediation of the material weakness involving Windset’s fair value.
- Assess whether the GreenLine acquisition is meeting expected revenue, margin, and synergy objectives after the drought-related shortfall.
- Evaluate liquidity after the sharp decline in cash and the scheduled debt obligations, including the $1.2 million real estate loan payment due in 2013.
- Monitor Lifecore shipment timing, customer concentration, Chiquita’s non-exclusive transition, and the reliability of Level 3 investment gains included in earnings.