Business Context and Reporting Period
The provided filing is a Form 10-Q for Landec Corporation, not Lifecore Biomedical, Inc. It covers the fiscal quarter ended February 28, 2016 and the nine months ended February 28, 2016, compared with the quarter and nine months ended March 1, 2015. Lifecore Biomedical is a wholly owned Biomaterials segment of Landec.
Landec operates through Packaged Fresh Vegetables, Food Export, Biomaterials, and Corporate activities. The Biomaterials segment, operated through Lifecore, sells hyaluronan and non-hyaluronan products and provides development, fermentation, and aseptic filling services for ophthalmic, orthopedic, veterinary, and other medical applications.
Financial Performance and Position
| Metric | Three Months Ended Feb. 28, 2016 | Three Months Ended Mar. 1, 2015 | Nine Months Ended Feb. 28, 2016 | Nine Months Ended Mar. 1, 2015 |
|---|---|---|---|---|
| Revenue | $130.0 million | $138.5 million | $405.8 million | $404.8 million |
| Gross profit | $12.9 million | $16.9 million | $48.2 million | $46.7 million |
| Gross margin | 9.9% | 12.2% | 11.9% | 11.5% |
| Operating income (loss) | $(33.6) million | $4.8 million | $(26.9) million | $12.3 million |
| Net income (loss) applicable to common stockholders | $(21.2) million | $3.8 million | $(16.4) million | $9.3 million |
| Diluted earnings (loss) per share | $(0.78) | $0.14 | $(0.61) | $0.34 |
- Operating expenses included a $34.0 million impairment charge for the GreenLine tradename. Excluding this charge, reported operating results would have been materially better, although the filing does not present a non-GAAP adjusted operating profit measure.
- Cash provided by operating activities was $6.3 million, down from $13.4 million in the comparable nine-month period.
- Investing activities used $26.9 million, including $26.2 million of capital expenditures for facility expansions and equipment.
- Financing activities provided $14.7 million, primarily from $26.7 million of long-term borrowings, partly offset by $12.2 million of debt and capital-lease payments.
- Cash and cash equivalents were $8.2 million at February 28, 2016, compared with $14.1 million at May 31, 2015.
- Total current assets were $83.9 million and current liabilities were $46.4 million, implying a current ratio of approximately 1.8x.
- Long-term debt and current debt totaled $57.2 million; the capital lease obligation totaled approximately $3.7 million. The balance sheet also included $21.7 million of deferred tax liabilities.
- Available borrowing capacity was approximately $26.9 million under Apio's revolving facility and $9.3 million under Lifecore's asset-based facility; neither facility had an outstanding balance at period-end.
- The Windset investment was carried at a Level 3 fair value of $62.5 million, up from $61.5 million at May 31, 2015. Dividend income was $1.2 million for the nine-month period.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 6% in the quarter but was approximately flat for the nine-month period. Quarterly revenue declines were concentrated in Packaged Fresh Vegetables and Food Export.
- Packaged Fresh Vegetables revenue declined 7% in the quarter, while gross profit fell 55%. Management attributed the deterioration primarily to severe produce shortages caused by unseasonably warm California weather. Excess produce costs were approximately $6.6 million in the quarter and $12.6 million for the nine-month period.
- Food Export revenue declined 22% in the quarter and 11% year to date, reflecting lower unit volumes, produce shortages, and the strong U.S. dollar.
- Biomaterials revenue increased 6% in the quarter and 16% year to date. Development-service revenue increased $2.4 million in the quarter and $7.8 million year to date, partly offset by lower aseptic revenue due to customer inventory-management initiatives.
- Biomaterials gross profit increased 22% in the quarter and 55% year to date, aided by a favorable mix toward development services and fermentation products.
- SG&A increased 4% in the quarter and 22% year to date, driven by Lifecore bonuses and headcount additions, as well as Apio product launches, advertising, promotions, and additional staffing.
- The company strategically decided to convert GreenLine retail products to the Eat Smart brand over six months, resulting in the $34.0 million GreenLine tradename impairment. The remaining GreenLine tradename value was $2.0 million.
- Property and equipment increased to $108.7 million from $84.5 million at May 31, 2015, reflecting substantial capital investment. Lifecore also entered into a capital lease for a 65,000-square-foot building, recorded at approximately $3.8 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that existing cash, operating cash flow, and available financing are expected to be sufficient for operational and capital requirements for at least the next twelve months. The filing does not provide formal revenue or earnings guidance.
- Management expects quarterly results to remain subject to seasonality in Apio's food and export operations and fluctuations in Lifecore customer ordering patterns.
- Key operating risks include produce availability and pricing, weather conditions, foreign exchange effects on exports, customer concentration, inventory-management actions by Lifecore customers, and execution of new product and facility investments.
- The top five customers represented 45% of revenue for both nine-month periods. Costco and Wal-Mart represented 20% and 12%, respectively, of nine-month fiscal 2016 revenue.
- The company is defending a wage-and-hour class action filed in September 2015 involving non-exempt employees of Apio's contract labor provider. The outcome and potential loss could not be estimated, although management believes it has meritorious defenses.
- Landec and its subsidiaries were in compliance with applicable debt covenants at February 28, 2016. Debt agreements are secured by company assets and include customary restrictions and financial covenants.
- The Windset investment valuation depends on significant unobservable assumptions, including projected growth, expenses, taxes, and discount rates. A 10% increase in the discount rate would reduce the estimated investment value by approximately $0.3 million based on the disclosed sensitivity analysis.
- On March 11, 2016, Apio purchased eight acres adjacent to its Guadalupe, California facility for $3.2 million for planned expansion.
Important Facts for Investors to Verify
- Confirm the issuer and period: the filing is for Landec Corporation for the quarter ended February 28, 2016, rather than a standalone Lifecore Biomedical filing or a 2015 third-quarter filing.
- Assess underlying operating performance excluding, but not ignoring, the $34.0 million GreenLine impairment and the related $12.5 million tax benefit.
- Monitor whether produce shortages and related excess costs normalize and whether salad-kit growth offsets weakness in the historical packaged-vegetable business.
- Evaluate Lifecore's development-service growth, customer inventory levels, aseptic demand, and the return on significant capacity expansion.
- Review liquidity after $26.2 million of capital expenditures, the decline in cash to $8.2 million, and the company's reliance on secured debt facilities.
- Assess customer concentration, the unresolved wage-and-hour litigation, and the valuation sensitivity of the $62.5 million Windset investment.