Landec Corporation Form 10-Q Summary
Filing scope: The provided filing is for Landec Corporation, which owns Lifecore Biomedical, rather than Lifecore Biomedical as a standalone registrant. It covers the fiscal quarter and nine months ended February 28, 2021, compared with February 23, 2020. Landec reports three segments: Curation Foods, Lifecore, and Other.
Business Context and Reporting Period
Landec operates a natural foods business through Curation Foods and a pharmaceutical contract development and manufacturing organization through Lifecore. Lifecore develops and manufactures sterile injectable products, hyaluronic acid, and related products and services.
Results are subject to seasonality in Curation Foods and customer order timing at Lifecore. Management states that COVID-19 has adversely affected sales, customer behavior, transportation costs, manufacturing operations, inventory, employees, and the broader market.
Financial Performance and Key Metrics
| Metric | Three Months Ended February 28, 2021 | Prior Comparable Period | Nine Months Ended February 28, 2021 | Prior Comparable Period |
|---|---|---|---|---|
| Revenue | $137.8 million | $152.9 million | $404.3 million | $434.2 million |
| Gross profit | $19.7 million | $20.0 million | $56.7 million | $50.9 million |
| Gross margin | 14.3% | 13.1% | 14.0% | 11.7% |
| Operating loss | $0.8 million | $15.0 million | $14.7 million | $25.4 million |
| Net loss | $5.5 million | $11.5 million | $29.8 million | $23.0 million |
| Net loss per diluted share | $0.19 | $0.39 | $1.02 | $0.79 |
| Cash flow from operating activities | Not separately reported for the quarter | Not separately reported for the quarter | $10.6 million provided | $4.3 million used |
Segment revenue: Curation Foods revenue declined 13% to $110.6 million for the quarter and 11% to $332.1 million for the nine-month period. Lifecore revenue increased 7% to $27.2 million for the quarter and 20% to $72.2 million for the nine-month period.
Segment profitability: Lifecore generated $11.6 million of quarterly gross profit and $5.1 million of net income. Curation Foods generated $8.1 million of quarterly gross profit but reported a $5.6 million net loss. For the nine-month period, Lifecore reported $9.7 million of net income, while Curation Foods reported a $26.3 million net loss.
Balance sheet and liquidity: Cash and cash equivalents were $2.2 million at February 28, 2021, compared with $0.4 million at May 31, 2020. Total assets were $509.8 million and stockholders’ equity was $204.6 million. Inventories increased to $76.8 million from $66.3 million, while accounts receivable declined to $69.6 million from $76.2 million.
Debt: The company had $41.0 million outstanding under its revolving facility and $145.1 million of net term debt. The term loan bears interest at 9.5% at the reporting date. Total reported debt was approximately $186.1 million before considering lease liabilities. The company refinanced its debt on December 31, 2020, with facilities maturing in 2025, incurred approximately $9.3 million of debt issuance costs, and recognized a $1.1 million non-cash loss on refinancing.
Capital expenditures and investing: Nine-month capital expenditures were $11.4 million, including $6.9 million for Lifecore and $4.5 million for Curation Foods. Investing activities provided $1.5 million, primarily due to $12.9 million of proceeds from the sale of facilities, partly offset by capital expenditures.
Material Changes Versus the Prior Comparable Period
- Total revenue decreased 10% for the quarter and 7% for the nine months, primarily because of lower Curation Foods sales.
- Curation Foods fresh packaged salads and vegetables revenue declined due to a planned reduction in non-strategic revenue streams and lower foodservice demand during COVID-19. Avocado products increased modestly for the quarter and nine months.
- Lifecore growth was driven by higher CDMO and aseptic filling shipments. Fermentation revenue declined in the quarter because of customer order and shipment timing but increased for the nine-month period.
- Gross margin improved for the nine-month period, supported by favorable avocado product costs and Lifecore’s higher revenue and product mix.
- Operating loss narrowed substantially because of lower restructuring costs, reduced SG&A, and higher gross profit for the nine-month period; however, net loss increased because of the $11.8 million decline in the fair value of the Windset investment and higher interest expense.
- Interest expense increased 60% for the nine-month period, reflecting higher debt levels, higher borrowing rates, refinancing costs, and amortization of financing costs.
- Restructuring costs were $2.7 million in the quarter and $12.8 million for the nine months. Cumulative restructuring costs since inception of the plan were $30.1 million, against an expected total cost of approximately $32.0 million.
Outlook, Risks, Contingencies, and Unusual Items
Management states that cash, cash equivalents, and availability under the new credit facilities are expected to support operations for at least the next twelve months. The company was in compliance with its financial covenants and reported no defaults as of February 28, 2021.
- COVID-19 may continue to affect demand, particularly foodservice demand, as well as supply chains, transportation, production, inventory, and employee operations.
- The company remains exposed to high leverage, elevated interest expense, restrictive debt covenants, refinancing requirements, and variable interest rates.
- The fair value of the 26.9% Windset investment declined by $11.8 million during the nine months. The investment is a Level 3 valuation based on unobservable assumptions, including projected growth and discount rates.
- Government investigations concerning potential environmental and Foreign Corrupt Practices Act compliance matters at the Tanok facility in Mexico remain unresolved. The company cannot predict the timing, outcome, or net financial impact after potential indemnification.
- A former Yucatan owner seeks more than $10 million in damages, while Landec has asserted counterclaims seeking at least $80 million. The ultimate outcome is uncertain.
- A Pacific Harvest-related litigation matter was settled after the quarter, with an estimated net loss contingency of approximately $1.8 million recorded for the nine months. Payment was expected by April 14, 2021.
- The company recorded a $1.6 million insurance recovery related to compliance and litigation matters in the third quarter, and does not expect additional material recovery absent further developments.
- Interest-rate swap hedge accounting was discontinued prospectively during the quarter because the derivatives were no longer considered highly effective. Approximately $1.4 million of accumulated amounts are expected to be reclassified into earnings over the next twelve months.
Most Important Facts for Investors to Verify
- Whether Lifecore’s CDMO growth and margins can offset continued weakness and restructuring at Curation Foods.
- The company’s ability to service approximately $186 million of reported debt while operating at a net loss and paying a 9.5% term-loan interest rate.
- Compliance with debt covenants and available borrowing capacity under the new credit agreements.
- The sustainability of operating cash flow, given that nine-month cash generation benefited materially from non-cash expenses, working-capital timing, and asset sales.
- The final outcomes and potential financial exposure from the Tanok investigations and related litigation.
- The assumptions supporting the $45.1 million fair value of the Windset investment and the sensitivity of that value to growth, expense, and discount-rate changes.
- The remaining costs and benefits of the restructuring plan, including whether the expected approximately $32 million total cost is sufficient.
- The effect of COVID-19, foodservice demand, customer concentration, produce costs, and seasonal inventory requirements on future results.