Filing Scope and Business Context
The provided filing is Landec Corporation’s Form 10-Q for the fiscal quarter ended February 26, 2017, covering the three and nine months ended February 26, 2017, compared with February 28, 2016. The request metadata identifies Lifecore Biomedical and “2016 Q3,” but the source filing is for Landec Corporation, whose Biomaterials segment includes Lifecore. The filing is unaudited.
Landec operates through Packaged Fresh Vegetables, Food Export, and Biomaterials businesses. Lifecore manufactures pharmaceutical-grade hyaluronan and provides aseptic filling, fermentation, and contract development services.
Key Financial Metrics
| Metric | Three Months Ended Feb. 26, 2017 | Three Months Ended Feb. 28, 2016 | Nine Months Ended Feb. 26, 2017 | Nine Months Ended Feb. 28, 2016 |
|---|---|---|---|---|
| Revenue | $136.6 million | $130.0 million | $404.8 million | $405.8 million |
| Gross profit | $23.4 million | $12.9 million | $63.5 million | $48.2 million |
| Gross margin | 17.2% | 9.9% | 15.7% | 11.9% |
| Operating income (loss) | $4.3 million | $(33.6) million | $13.1 million | $(26.9) million |
| Net income (loss) applicable to common stockholders | $3.5 million | $(21.2) million | $8.1 million | $(16.4) million |
| Diluted earnings (loss) per share | $0.13 | $(0.78) | $0.29 | $(0.61) |
| Cash flow from operations | Not separately provided for the quarter | Not separately provided for the quarter | $23.2 million | $6.4 million |
Operating expenses for the nine-month period were $50.5 million, including $42.0 million of selling, general and administrative expense, $5.9 million of research and development expense, and a $2.6 million legal settlement charge. Interest expense was $1.4 million, and the company recorded $0.7 million of other income from an increase in the fair value of its Windset investment.
Segment Performance and Material Changes
- Packaged Fresh Vegetables: Third-quarter revenue declined 2% to $105.4 million, while nine-month revenue declined 6% to $299.4 million. Gross profit increased 133% for the quarter and 32% for the nine-month period, primarily from a more favorable product mix, productivity improvements, and the absence of prior-year excess produce costs.
- Food Export: Revenue increased 14% for the quarter and 11% for the nine-month period, driven by higher unit volumes and additional fruit supplies. Gross margins were 7.7% for the quarter and 6.1% year to date.
- Biomaterials/Lifecore: Revenue increased 50% to $23.5 million for the quarter and 38% to $47.8 million for the nine-month period. Growth reflected higher fermentation sales and increased aseptic filling revenue, partially offset by lower development revenue following customer product approvals. Gross profit rose 65% for the quarter and 44% year to date.
- Operating leverage: Consolidated gross margin improved substantially, but SG&A increased 41% in the quarter and 17% year to date, largely due to Apio product launches, advertising, promotions, additional personnel, and higher corporate stock-based compensation and business-development spending.
- Prior-year comparison: The prior-year results included a $34.0 million GreenLine tradename impairment charge and a related $12.5 million discrete tax benefit. These items materially affected the year-over-year improvement in operating income and net income.
Liquidity, Cash Flow, Debt, and Other Matters
- Cash and cash equivalents were $12.7 million at February 26, 2017, up from $9.9 million at May 29, 2016.
- Operating cash flow was $23.2 million for the first nine months, compared with $6.4 million in the prior-year period.
- Capital expenditures were $9.5 million, primarily for equipment supporting Apio and Lifecore. Investing cash use was $9.4 million.
- On September 23, 2016, Landec refinanced its debt with a $50.0 million term loan and a $100.0 million revolving facility. No balance was outstanding on the revolver at February 26, 2017.
- Long-term debt, net, was $43.5 million, and current debt obligations included $4.9 million of current long-term debt. The company was in compliance with all financial covenants.
- The company entered into a $50.0 million interest-rate swap, effectively fixing the term loan’s 30-day LIBOR component at 1.22%. The term-loan interest rate was 2.97% at February 26, 2017.
- Management stated that cash from operations, existing cash, and cash equivalents should be sufficient to fund operational and capital requirements for at least the next twelve months.
Guidance, Outlook, Risks, and Unusual Items
- The filing does not provide specific quantitative revenue or earnings guidance. Management emphasized growth opportunities in Lifecore fermentation and aseptic filling, Apio product launches, and expansion of manufacturing capabilities.
- Results are subject to seasonality in Apio’s food and export businesses and fluctuations in Lifecore customer order patterns; nine-month results are not necessarily indicative of full-year results.
- Customer concentration remains material: the top five customers represented 43% of nine-month revenue, with Costco and Wal-Mart representing 17% and 14%, respectively.
- Apio recorded a $2.1 million third-quarter and $2.6 million nine-month legal settlement charge related to labor and employment claims. As of February 26, 2017, $3.2 million was accrued. A proposed $6.0 million class settlement, to be split equally with Pacific Harvest, remained subject to execution and court approval; Landec’s expected share was approximately $3.0 million.
- On March 1, 2017, Landec acquired substantially all assets of O Olive Oil for $2.5 million in cash plus up to $7.5 million of contingent consideration based on EBITDA targets.
- The $63.4 million Windset investment is a Level 3 fair-value asset dependent on unobservable assumptions. A 10% increase in the discount rate would reduce estimated value by approximately $4.3 million, according to the filing.
- The company identifies risks involving produce availability and pricing, customer concentration, execution of new product launches, regulatory and quality requirements, litigation, leverage and interest rates, and the timing of Lifecore customer orders.
Investor Verification Checklist
- Confirm that the intended issuer and period are Landec Corporation and fiscal third quarter 2017, rather than Lifecore Biomedical or fiscal 2016.
- Reconcile the reported improvement in profitability for the impact of the prior-year $34.0 million GreenLine impairment and $12.5 million tax benefit.
- Monitor Lifecore fermentation and aseptic filling growth, customer concentration, and development-revenue volatility.
- Verify court approval, payment timing, and final cash impact of the Apio-related labor settlement.
- Review debt covenant compliance, term-loan amortization, interest-rate swap performance, and availability under the undrawn revolver.
- Assess the valuation sensitivity and liquidity implications of the Windset investment and the O Olive acquisition, including contingent consideration.