Business Context and Reporting Period
The filing is for Landec Corporation, not Lifecore Biomedical, Inc. Landec reports three segments: Curation Foods, Lifecore, and Other. The company sells packaged fresh foods, olive oils and vinegars, guacamole and avocado products, pharmaceutical-grade hyaluronan, and contract development and aseptic manufacturing services.
This Form 10-Q covers the fiscal quarter ended August 25, 2019, compared with the quarter ended August 26, 2018. The financial statements are unaudited. The Yucatan Foods acquisition, completed December 1, 2018, is included in the current-period results. The discontinued Now Planting business was reclassified from continuing operations.
Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $138.7 million | $124.7 million |
| Gross profit | $15.3 million | $16.3 million |
| Gross margin | 11.1% | 13.1% |
| Operating loss | $4.4 million | $0.3 million |
| Operating margin | (3.2%) | (0.2%) |
| Net loss from continuing operations | $4.8 million | Net income of $0.3 million |
| Diluted EPS | $(0.16) | $0.01 |
| Net cash from operating activities | $(5.4) million | $2.2 million |
| Capital expenditures | $10.0 million | $14.4 million |
Curation Foods revenue increased 13% to $126.7 million, including $16.2 million from Yucatan Foods and a $2.2 million increase in salad revenue. Lifecore revenue declined 5% to $12.0 million, primarily because of lower fermentation shipments, partly offset by higher development-services revenue.
Gross profit declined 6% to $15.3 million. Curation Foods gross profit decreased 4% because of unfavorable product mix, while Lifecore gross profit decreased 15% because of shipment timing. Research and development expense was essentially flat at $2.8 million, while SG&A increased 22% to $16.9 million, including $2.1 million of Yucatan-related SG&A and higher consulting, salary, and benefit costs.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $2.0 million at August 25, 2019, compared with $1.1 million at May 26, 2019. Including restricted cash, total cash, cash equivalents, and restricted cash was $2.4 million.
- Accounts receivable was $61.4 million and inventory was $55.0 million.
- The revolving line of credit had $70.6 million outstanding at a 4.98% interest rate. Net term debt was $94.5 million, including the current portion.
- Total debt excluding lease liabilities was approximately $165.1 million before considering other debt-related items. Lease liabilities totaled $33.6 million following adoption of the new lease standard.
- The company used $5.4 million in operating cash flow and $9.7 million in investing cash flow, funded primarily by $16.0 million of financing cash flow, including net revolver borrowings.
- Management stated that cash from operations, existing cash, and cash equivalents should be sufficient to finance operational and capital requirements for at least the next twelve months.
- The company was in compliance with all financial covenants at August 25, 2019. The credit facilities mature September 23, 2021, with quarterly term-loan principal payments of $2.5 million and the remaining balance due at maturity.
Material Changes Versus the Prior Comparable Period
- Revenue increased 11%, driven primarily by the Yucatan Foods acquisition. However, gross profit declined because of product mix and shipment timing.
- The company moved from $0.3 million of continuing-operations net income to a $4.8 million net loss.
- Interest expense increased to $2.1 million from $0.8 million, reflecting acquisition-related borrowings and a higher revolver balance used in part to fund equipment purchases.
- Prior-year other income included a $1.0 million increase in the fair value of the Windset investment; no fair-value increase was recorded in the current quarter.
- Operating cash flow shifted from a $2.2 million source to a $5.4 million use, while capital expenditures remained substantial at $10.0 million.
- Adoption of ASC 842 added approximately $30.0 million of operating lease right-of-use assets and $31.1 million of operating lease liabilities, with a $0.3 million reduction to opening retained earnings.
- The company recognized $2.4 million of business-interruption insurance recoveries related to the prior Eat Smart product recall, recorded as a reduction of cost of sales.
Outlook, Commentary, Risks, and Unusual Items
No quantitative financial guidance was provided in the filing. Management cited seasonality in Curation Foods and variable customer order patterns at Lifecore, so quarterly results may not represent full-year performance.
- Weather-related events reduced green bean yields to approximately 35% to 50% of normal and lowered related revenue by $3.2 million.
- Customer concentration remains significant: the top five customers represented 49% of revenue, while Costco and Walmart represented 14% and 20%, respectively.
- The company carries substantial leverage and relies on revolver borrowings to fund capital expenditures and debt service. Interest-rate exposure is partly managed through swaps.
- The $61.1 million Windset investment is a Level 3 fair-value asset based on unobservable assumptions. Its valuation is sensitive to revenue growth, expense growth, tax rates, and discount rates.
- A $1.3 million receivable from labor contractor Pacific Harvest is expected to be collected through monthly payments by December 2020 and is secured by Pacific Harvest assets. Management concluded it was not impaired.
- The San Rafael office was classified as held for sale, with a carrying value of approximately $2.8 million; disposal was expected by the end of calendar 2019 and was not expected to be material.
- Management reported no material changes to previously disclosed risk factors, market risks, critical accounting policies, or internal controls.
Investor Verification Items
- Confirm that the intended issuer is Landec Corporation rather than Lifecore Biomedical, Inc.
- Assess whether Yucatan Foods can improve Curation Foods’ margins sufficiently to offset acquisition-related SG&A, financing costs, and product-mix pressure.
- Monitor revolver utilization, required term-loan amortization, covenant headroom, and the September 2021 debt maturity.
- Evaluate whether negative operating cash flow and approximately $10 million of quarterly capital spending are sustainable.
- Review customer concentration, weather and produce-supply exposure, and the effect of shipment timing on Lifecore revenue and margins.
- Validate the assumptions supporting the $61.1 million Windset valuation and the collectability of the Pacific Harvest receivable.
- Reconcile the insurance recovery and discontinued-operations presentation when comparing results with future periods.