Business Context and Reporting Period
This filing is Landec Corporation’s Form 10-K for the fiscal year ended May 30, 2021, not a standalone Lifecore Biomedical filing or a 2020 Q4 filing. Landec operated through Curation Foods, Lifecore Biomedical, and Other. Curation Foods sells plant-based foods and packaging technology; Lifecore is a contract development and manufacturing organization for sterile injectable pharmaceuticals and pharmaceutical-grade hyaluronic acid.
Now Planting remained classified as a discontinued operation. Fiscal 2021 results contain no discontinued-operation activity. The filing was signed July 29, 2021.
Financial Results and Key Metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $544.2 million | $590.4 million | Down 8% |
| Gross profit | $81.5 million | $75.0 million | Up 9% |
| Gross margin | 15.0% | 12.7% | Up approximately 230 bps |
| Operating income (loss) | $(13.5) million | $(38.5) million | Improved |
| Operating margin | (2.5)% | (6.5)% | Improved |
| Net income (loss) | $(32.7) million | $(38.2) million | Improved |
| Basic and diluted EPS | $(1.12) | $(1.31) | Improved |
| Cash flow from operations | $15.0 million | $(17.0) million | Improved by $32.1 million |
| Capital expenditures | $23.8 million | $26.7 million | Down 11% |
- Curation Foods revenue declined 12% to $446.1 million, primarily from the planned reduction of non-strategic packaged vegetable revenue and COVID-19-related declines in foodservice green beans and salads. Gross profit increased 3% to $43.2 million.
- Lifecore revenue increased 14% to $98.1 million, including CDMO revenue of $75.3 million and fermentation revenue of $22.8 million. Gross profit increased 16% to $38.3 million, and gross margin rose to 39.0% from 38.3%.
- Research and development expense declined 8% to $10.2 million, while SG&A declined 9% to $65.4 million, reflecting Curation Foods cost reductions and Project SWIFT restructuring.
- Reported operating results included $17.6 million of restructuring costs and a $1.8 million legal settlement charge. There was no goodwill or indefinite-lived intangible impairment in FY2021, compared with $13.0 million in FY2020.
- Interest expense increased to $15.3 million from $9.6 million. The company also recorded a $1.1 million non-cash loss on debt refinancing and an $11.7 million net other expense, primarily reflecting a $11.8 million decline in the fair value of the Windset investment.
- Cash and cash equivalents were $1.3 million at year-end, compared with $0.4 million at May 31, 2020. Total assets were $502.9 million and stockholders’ equity was $202.8 million.
Debt, Liquidity, and Capital Structure
- At May 30, 2021, $29.0 million was outstanding under the refinance revolver and $170.0 million under the refinance term loan, for approximately $199.0 million of principal debt before unamortized issuance costs.
- The term loan carried a 9.5% interest rate and matures December 31, 2025. The revolver has capacity of up to $75.0 million and generally matures December 31, 2025, or October 2, 2025 if the term loan remains outstanding.
- Debt is secured by substantially all company and subsidiary assets. The company reported compliance with all financial covenants and no events of default at year-end.
- Management stated that cash from operations, existing cash, and available revolver capacity should be sufficient for operating and capital requirements for at least the next twelve months, although year-end cash was limited relative to obligations.
- Contractual obligations totaled $384.6 million, including $199.0 million of debt principal, $73.4 million of associated interest payments, $32.8 million of operating leases, and $75.4 million of purchase commitments.
Material Changes and Unusual Items
- Project SWIFT continued to reduce Curation Foods’ cost structure, dispose of non-core assets, and redesign the organization. FY2021 restructuring costs totaled $17.6 million; cumulative costs since inception were $34.9 million, against an estimated total program cost of approximately $37.0 million.
- The company sold its Ontario facility interest for $4.9 million of net proceeds and sold the Hanover building and assets for $8.0 million. It also agreed to outsource Curation Foods logistics to Castellini.
- On June 1, 2021, after year-end, Landec sold its Windset investment for $45.1 million. Net of $3.6 million of prepaid interest and prepayment penalties, $41.4 million was used to repay long-term debt.
- The Pacific Harvest litigation was settled and dismissed with prejudice in April 2021, after a $1.8 million net legal settlement charge.
- Landec disclosed ongoing SEC, DOJ, Mexican Attorney General, and Mexican regulatory investigations concerning potential environmental and Foreign Corrupt Practices Act compliance matters at the Tanok facility acquired with Yucatan Foods. The filing states that outcomes and potential losses cannot presently be estimated.
Outlook, Management Commentary, and Principal Risks
Management’s strategy is to improve Curation Foods’ operating margins, invest in Lifecore’s growth, expand Lifecore’s development and aseptic filling capacity, and advance customer products toward commercialization. Project SWIFT was expected to continue through fiscal 2022. The filing does not provide quantitative revenue, earnings, or margin guidance.
- COVID-19 may continue to affect consumer demand, foodservice sales, supply chains, labor availability, manufacturing, and elective medical procedures served by Lifecore.
- Curation Foods remains exposed to adverse weather, produce availability and pricing, crop yields, fixed production costs, and customer concentration. The top five customers represented approximately 49% of FY2021 revenue; Walmart and Costco represented approximately 16% and 15%, respectively.
- High leverage, substantial interest expense, restrictive covenants, asset collateralization, and significant 2025 debt maturities create refinancing and liquidity risks.
- Regulatory, quality, product liability, recall, environmental, labor, FCPA, and litigation risks could result in additional costs, production restrictions, penalties, or reputational harm.
- The valuation of goodwill, indefinite-lived trademarks, and the Windset investment depends on subjective forecasts and discount rates. Goodwill and indefinite-lived trademarks were $69.3 million and $25.3 million, respectively, at year-end.
- International operations, including the Mexican facility, expose the company to foreign currency, political, regulatory, tax, security, and supply-chain risks.
Investor Verification Checklist
- Confirm the applicable issuer and period: the source is Landec Corporation’s FY2021 Form 10-K, despite request metadata identifying Lifecore Biomedical and 2020 Q4.
- Verify the post-year-end Windset sale, the $45.1 million purchase price, and the $41.4 million debt repayment.
- Review the refinance agreements, interest rates, covenant thresholds, mandatory amortization, prepayment penalties, and 2025 maturity profile.
- Assess whether Curation Foods’ revenue reductions and restructuring actions are improving sustainable profitability rather than only reducing costs.
- Evaluate Lifecore’s customer concentration, development pipeline, capacity expansion, regulatory status, and ability to convert development activity into commercial shipments.
- Review the status and potential financial exposure of the Tanok environmental and FCPA investigations and related indemnification rights.
- Test the sensitivity of goodwill, trademark, and other fair-value estimates to changes in sales growth, margins, discount rates, and customer demand.