Landec Corporation Form 10-Q Summary
Note: The supplied filing is for Landec Corporation, not Lifecore Biomedical, Inc. Lifecore is reported as Landec’s Biomaterials subsidiary.
Business Context and Reporting Period
The filing covers the fiscal quarter and nine months ended February 25, 2018, compared with February 26, 2017. Landec operates through Packaged Fresh Vegetables, Food Export, Biomaterials, and Other segments. The Biomaterials segment is operated by Lifecore and provides hyaluronan-based products, contract development, fermentation, aseptic formulation, and filling services. Landec also acquired O Olive on March 1, 2017.
Key Financial Metrics
| Metric | Three Months Ended Feb. 25, 2018 | Three Months Ended Feb. 26, 2017 | Nine Months Ended Feb. 25, 2018 | Nine Months Ended Feb. 26, 2017 |
|---|---|---|---|---|
| Revenue | $149.3 million | $136.6 million | $409.1 million | $404.8 million |
| Gross profit | $20.1 million | $23.4 million | $55.2 million | $63.5 million |
| Gross margin | 13.5% | 17.2% | 13.5% | 15.7% |
| Operating income | $3.2 million | $4.3 million | $5.2 million | $13.1 million |
| Net income applicable to common stockholders | $16.1 million | $3.5 million | $18.7 million | $8.1 million |
| Diluted earnings per share | $0.58 | $0.13 | $0.67 | $0.29 |
Reported net income benefited materially from income tax benefits related primarily to the Tax Cuts and Jobs Act. The nine-month tax benefit was $11.5 million, including a $13.9 million discrete benefit from remeasurement of deferred tax liabilities. Excluding this tax effect, operating and pretax performance was substantially weaker than the reported net income suggests.
- Research and development expense increased 55% in the quarter and 56% year to date, primarily from expanded Apio product development and new natural-food initiatives.
- SG&A decreased 8% in the quarter and 3% year to date, partly because the prior-year period included labor-related legal costs, settlement costs, and severance.
- Cash provided by operating activities was $18.1 million for the nine months, compared with $23.2 million in the prior-year period.
- Capital expenditures were $18.5 million, primarily for Apio and Lifecore growth projects. Investing cash outflow was $20.5 million, including a $2.1 million note receivable.
- Cash and cash equivalents were $7.7 million at February 25, 2018, versus $5.4 million at May 28, 2017.
- Total assets were $385.8 million and total equity was $250.2 million at February 25, 2018.
- Debt included $43.75 million of term-loan principal, $12.0 million outstanding under the revolving line of credit, and $4.9 million of current term-debt principal. The term loan and revolver mature September 23, 2021.
- The company was in compliance with all debt covenants at February 25, 2018. Management stated that cash from operations, existing cash, and available resources should fund operational and capital requirements for at least the next twelve months.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 9% in the quarter but only 1% for the nine-month period.
- Packaged Fresh Vegetables revenue increased 15% in the quarter and 10% year to date, driven primarily by higher unit volumes and salad products.
- Food Export revenue declined 39% in the quarter and 54% year to date as Landec reduced lower-margin export fruit operations.
- Biomaterials revenue declined 2% in the quarter but increased 3% year to date. Growth in business-development and aseptic-filling revenue was partly offset by lower fermentation sales and shipment timing.
- Total gross profit declined 14% in the quarter and 13% year to date. Apio incurred incremental produce sourcing costs of $3.6 million in the quarter and $7.7 million year to date due to hurricanes, tropical storms, and unseasonably hot California weather.
- Lifecore gross profit declined 8% in the quarter and 10% year to date, primarily because of an unfavorable mix toward lower-margin aseptic filling and the timing of production and overhead absorption.
- Landec announced plans to discontinue the Cal-Ex Food Export business by May 27, 2018. Management expected the business to be classified as discontinued operations in fiscal 2018 financial statements, with prior periods retrospectively reclassified.
- O Olive contributed $1.0 million of quarterly revenue and $3.3 million of year-to-date revenue; the prior-year comparison primarily reflected licensing revenue.
Outlook, Commentary, Risks, and Unusual Items
- No specific quantitative revenue or earnings guidance is provided in the filing.
- Management cited seasonality in Apio’s food business and customer order patterns in Lifecore, which can cause significant quarterly fluctuations.
- Customer concentration is significant: the top five customers represented 46% of nine-month revenue, while Costco and Walmart represented 18% and 17%, respectively.
- Landec is exposed to produce availability, weather-related sourcing costs, product mix, manufacturing costs, customer concentration, and international food-export conditions.
- Apio labor-related litigation settlements totaled $6.0 million, payable in three installments. The first two installments totaling $4.2 million had been paid; $1.8 million was due in July 2018. Landec was responsible for half, subject to reimbursement arrangements with Pacific Harvest.
- Landec recorded a $2.1 million receivable for Pacific Harvest’s share of the first two settlement installments. Collection is expected through monthly payments through December 2020, secured by Pacific Harvest assets.
- The O Olive acquisition includes contingent consideration of up to $7.5 million. The recorded liability declined from $5.9 million to $5.4 million during the first nine months.
- The $65.8 million Windset investment is a Level 3 fair-value measurement dependent on unobservable cash-flow, growth, tax, and discount-rate assumptions. A 10% increase in the assumed discount rate would reduce estimated value by approximately $4.2 million, according to the filing.
- The company had not completed its accounting for the Tax Cuts and Jobs Act. The reported tax benefit was provisional and could change as additional information or guidance became available.
- Adoption of the new revenue-recognition standard was expected in fiscal 2019, but the company could not yet reasonably estimate its consolidated financial statement impact. Lease accounting adoption was expected in fiscal 2020 and was anticipated to materially increase reported assets and liabilities.
Important Facts for Investors to Verify
- Confirm that the intended issuer is Landec Corporation rather than Lifecore Biomedical, Inc.
- Separate recurring operating profitability from the one-time or provisional $11.5 million tax benefit.
- Assess whether produce-cost inflation and weather-related sourcing pressures normalized after the quarter.
- Monitor the planned discontinuation and discontinued-operations accounting for the Food Export business.
- Review Lifecore’s fermentation versus aseptic-filling mix, customer demand, and shipment timing.
- Verify the July 2018 labor-settlement payment and the collectability of Pacific Harvest’s reimbursement obligation.
- Evaluate liquidity after $18.5 million of capital expenditures, scheduled debt amortization, and the $12.0 million revolver balance.
- Reassess the valuation sensitivity of the Windset investment and the O Olive contingent consideration liability.