Filing Scope and Business Context
The provided filing is Landec Corporation’s Form 10-K for the fiscal year ended May 27, 2018, filed August 9, 2018. The request metadata identifies Lifecore Biomedical, Inc. and “2017 Q4,” but the source filing is for Landec Corporation; Lifecore is its Biomaterials subsidiary. Fiscal 2017 comparatives refer to the year ended May 28, 2017.
Landec operated primarily through Packaged Fresh Vegetables, led by Apio, and Biomaterials, led by Lifecore. Other includes corporate activities and O Olive & Vinegar, acquired March 1, 2017. The Food Export business was discontinued in the fourth quarter and presented as discontinued operations.
Financial Performance and Position
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $524.2 million | $469.8 million | +12% |
| Gross profit | $78.3 million | $79.2 million | -1% |
| Gross margin | 14.9% | 16.9% | Down approximately 200 bps |
| Operating income | $13.6 million | $14.7 million | -7% |
| Net income from continuing operations | $25.8 million | $10.1 million | +154% |
| Net income applicable to common stockholders | $24.8 million | $10.6 million | +134% |
| Diluted EPS from continuing operations | $0.92 | $0.36 | +0.56 |
| Net cash from operating activities | $19.8 million | $29.7 million | Down $9.9 million |
| Capital expenditures | $33.6 million | $23.0 million | +46% |
FY2018 consolidated revenue growth was driven by Packaged Fresh Vegetables revenue of $455.0 million, up 12%, and Biomaterials revenue of $65.4 million, up 10%. Other revenue was $3.8 million, primarily from O.
- Apio: Gross profit fell to $49.1 million from $51.1 million, and gross margin declined to 10.8% from 12.5%. Revenue growth reflected a 9% increase in unit volumes, particularly higher-priced salad products, but $7.8 million of incremental produce sourcing costs related to hurricanes, tropical storms and unseasonably hot California weather pressured margins.
- Lifecore: Revenue increased to $65.4 million from $59.4 million and gross profit rose to $28.6 million from $26.8 million. Gross margin declined to 43.7% from 45.0% because of a mix shift toward lower-margin aseptic filling revenue.
- Operating costs: Research and development increased 35% to $12.8 million, primarily from expanded Apio product development. SG&A declined slightly to $52.0 million.
- Taxes and unusual income: A $9.4 million income tax benefit, principally related to the Tax Cuts and Jobs Act, materially increased net income. Other income included a $2.9 million increase in the fair value of the Windset investment.
Cash Flow, Liquidity and Debt
- Cash and cash equivalents were $2.9 million at May 27, 2018, compared with $6.0 million at May 28, 2017. The cash flow statement reported $2.9 million at year-end after excluding cash associated with discontinued operations.
- Operating cash flow was $19.8 million. Working capital used cash, including a $7.3 million increase in accounts receivable and a $6.5 million increase in inventory.
- Investing cash outflows were $35.6 million, including $33.6 million for facility expansions and equipment and $2.1 million for a note receivable.
- Financing activities provided $13.3 million, primarily from $24.0 million of net revolving-credit borrowings, offset by debt principal payments, the $4.1 million purchase of the remaining Apio Cooling non-controlling interest and employee tax payments.
- Debt consisted of $42.5 million of term-loan principal and $27.0 million outstanding under a $100 million revolving facility. The term loan and revolver mature September 23, 2021; the term loan requires quarterly principal payments and a $27.5 million maturity payment. The Company was in compliance with all financial covenants at year-end.
- An interest-rate swap fixed the term loan at a 30-day LIBOR rate of 1.22%; the term-loan interest rate was 3.22% at year-end. On June 25, 2018, the Company entered into an additional $30.0 million swap for the revolver at a fixed 30-day LIBOR rate of 2.74%.
- Management stated that cash from operations, together with existing cash, was expected to fund operating and capital requirements for at least the next twelve months.
Material Changes, Outlook and Unusual Items
- The Company discontinued Food Export, which generated $29.2 million of revenue and an $0.8 million net loss in FY2018, versus $62.5 million of revenue and $0.5 million of net income in FY2017. Prior periods were reclassified.
- O generated $3.8 million of FY2018 revenue and a $1.0 million loss. Delays in completing its vinegar production facility reduced projected performance and resulted in a $1.9 million reduction of contingent acquisition consideration, leaving a $4.0 million liability.
- The Company incurred $33.6 million of capital expenditures to support Apio and Lifecore expansion. Future performance depends on increased salad distribution, Lifecore aseptic and development opportunities, and commercialization of new products and technologies.
- The Company did not provide formal quantitative revenue or earnings guidance in the supplied filing. It described anticipated growth opportunities but cautioned that future profits are uncertain.
- Landec identified a material weakness in internal control over financial reporting involving the classification of accrued capital expenditures in cash flows. Quarterly cash flow information for FY2018 and FY2017 was restated; management initiated remediation procedures. Ernst & Young issued an adverse opinion on internal control but an unqualified opinion on the financial statements.
- The FY2018 tax benefit included a provisional $16.2 million deferred-tax remeasurement and a $1.8 million transition-tax expense. The accounting for the Tax Cuts and Jobs Act was not complete at filing.
- Apio labor-related litigation settlements totaled $6.0 million, shared equally with Pacific Harvest. Landec had paid the first two installments and recorded a $2.1 million receivable from Pacific Harvest; $1.0 million remained accrued at year-end. The final installment was paid in July 2018.
Key Risks and Contingencies
- Severe weather, crop shortages, commodity pricing and labor or water availability can materially reduce Apio volumes and margins.
- Customer concentration is significant: Costco and Wal-Mart represented approximately 19% and 18% of FY2018 revenue, respectively; the top five customers represented approximately 49%.
- Lifecore depends on regulatory approvals, FDA and international compliance, customer development programs and a relatively small customer base.
- Several raw materials and services are sourced from single suppliers, creating supply interruption and cost risks.
- The Company is exposed to regulatory, product liability, intellectual-property, environmental, employment, cybersecurity and acquisition-integration risks.
- Windset is a material Level 3 fair-value investment valued at $66.5 million. Its valuation is sensitive to projected growth, expenses, taxes and discount rates; the investment also generated $1.7 million of dividend income.
- Total disclosed contractual obligations were $104.4 million, including $42.5 million of debt principal, $21.0 million of operating leases, $30.7 million of purchase commitments and $5.4 million of capital-lease payments.
Investor Verification Checklist
- Confirm the issuer and period: the source is Landec’s FY2018 10-K, not a standalone Lifecore filing or a 2017 quarterly filing.
- Reconcile reported cash balances and the corrected cash-flow presentation, including the accrued-capital-expenditure restatement.
- Assess whether Apio can recover margins after the $7.8 million weather-related sourcing cost and whether customer concentration has changed.
- Evaluate Lifecore’s revenue mix, contract manufacturing termination provisions and regulatory status.
- Review liquidity against the $27.5 million term-loan maturity payment in FY2022, revolving borrowings and planned capital expenditures.
- Monitor remediation of the material weakness and the effect of subsequent accounting conclusions on reported cash flows.
- Validate the Windset Level 3 valuation, O earn-out liability, Pacific Harvest receivable and remaining legal accruals.
- Review the effect of adopting revenue-recognition and lease-accounting standards in subsequent fiscal years.