Landec Corporation 10-Q Summary
Filing identity: The supplied filing is for Landec Corporation (NASDAQ: LNDC), not Lifecore Biomedical, Inc. Lifecore is reported as Landec’s Biomaterials subsidiary.
Business Context and Reporting Period
The filing covers the fiscal quarter and six months ended November 25, 2018, with comparisons to November 26, 2017. Landec operates Natural Foods, Biomaterials, and Other segments. Natural Foods includes Apio packaged produce, O olive oils and vinegars, and the newly launched Now Planting refrigerated soups. Biomaterials is operated through Lifecore and includes hyaluronic-acid products, aseptic manufacturing, fermentation, and development services.
The previously reported Food Export segment was discontinued in fiscal 2018 and is presented as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended Nov. 25, 2018 | Six Months Ended Nov. 25, 2018 | Comparable Change |
|---|---|---|---|
| Revenue | $124.9 million | $249.6 million | Up 2% and 5% |
| Gross profit | $16.6 million | $32.9 million | Up 11%; down 2% |
| Gross margin | 13.3% | 13.2% | Prior periods: 12.2% and 14.2% |
| Operating income/(loss) | $(0.6) million | $(1.1) million | Prior periods: $(0.7) million and $2.0 million |
| Net income/(loss) applicable to common stockholders | $(0.6) million | $(0.4) million | Prior periods: $0.5 million and $2.6 million |
| Diluted EPS | $(0.02) | $(0.01) | Prior periods: $0.02 and $0.10 |
Six-month revenue growth was driven by Natural Foods revenue of $221.5 million, up 5%, and Biomaterials revenue of $28.1 million, up 7%. Six-month gross profit declined despite higher revenue, reflecting startup costs for Now Planting soups, lower BreatheWay membrane sales, unfavorable Biomaterials mix, and shipment timing.
Operating expenses increased to $17.2 million in the quarter and $34.0 million for six months. Six-month SG&A rose 12% to $28.6 million, primarily due to professional fees, cost-out initiatives, and merger and acquisition costs. Research and development declined 12% to $5.4 million.
Cash Flow, Liquidity, and Debt
| Metric | Six Months Ended Nov. 25, 2018 | Prior Comparable Period |
|---|---|---|
| Cash from operating activities | $4.8 million | $6.3 million |
| Cash used in investing activities | $(18.4) million | $(11.5) million |
| Capital expenditures | $18.6 million | $9.4 million |
| Cash provided by financing activities | $12.2 million | $4.1 million |
| Cash and cash equivalents at period end | $1.5 million | $2.9 million at fiscal year-end |
Including restricted cash, period-end cash was $1.8 million. The company funded substantial capital spending with $15.0 million of additional revolver borrowings. At November 25, 2018, the revolver balance was $42.0 million and gross term-loan principal was $40.0 million, with $3.6 million of capital lease obligations. The company was in compliance with its debt covenants.
Management stated that operating cash flow, existing cash, and cash equivalents were expected to fund operational and capital requirements for at least the next twelve months. Liquidity was nevertheless constrained, with current liabilities of $97.1 million versus current assets of $92.5 million.
Material Changes Versus Prior Period
- Revenue increased, but six-month operating results moved from $2.0 million of income to a $1.1 million loss.
- Interest expense increased 70% for six months, primarily because the revolver balance rose from $10.0 million to $42.0 million year over year.
- Natural Foods volume increased 6% in the quarter and 9% for six months, but product mix shifted toward lower-priced core vegetables.
- Biomaterials quarterly revenue increased 9%, supported by development services and aseptic filling; six-month revenue increased 7%, while product shipment timing reduced aseptic and fermentation revenue.
- The fair value increase in the Windset investment declined to $1.6 million from $2.2 million for six months, reducing other income.
- The contingent consideration liability for the O acquisition declined by $0.9 million to $3.1 million, with the reduction recorded as lower SG&A.
- The company adopted revenue recognition Topic 606, restricted-cash guidance, and other accounting standards without a material reported impact on revenue timing or measurement.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management highlighted growth initiatives in Natural Foods, including Now Planting soups, and continued investment in Lifecore’s aseptic filling, fermentation, and contract development capabilities.
On December 1, 2018, after the reporting date, Landec acquired Yucatan Foods and related entities for initial consideration of $60.0 million in cash and $20.0 million in Landec common stock. Purchase accounting was incomplete at the filing date. On November 30, 2018, the company amended its credit agreement, increasing the revolver to $105.0 million and the term-loan facility to $100.0 million, primarily to fund the acquisition.
- Management disclosed that disclosure controls were not effective as of November 25, 2018 because remediation of a material weakness in internal control over financial reporting was ongoing.
- The company remains exposed to leverage, interest-rate, covenant, and refinancing risk. Interest-rate swaps hedge portions of its variable-rate borrowings.
- Customer concentration is significant: the top five customers represented 45% of six-month revenue, and Costco and Walmart each represented 17%.
- The $68.1 million Windset investment is a Level 3 fair-value asset based on unobservable assumptions. A 10% increase in the discount rate would reduce its estimated value by approximately $3.7 million.
- Apio’s labor-related settlement is substantially paid, but Landec had a $1.9 million receivable from Pacific Harvest, expected to be collected through December 2020 and secured by Pacific Harvest assets.
- The six-month comparison cash-flow statement was restated for previously misstated classification of accrued capital expenditures.
- The effective tax rate and tax accounting remain subject to uncertainty related to the Tax Cuts and Jobs Act. A $0.3 million tax charge was recorded in the quarter for completion of the transition-tax analysis.
Investor Verification Checklist
- Confirm the issuer identity: Landec Corporation, rather than Lifecore Biomedical, Inc.
- Review the financing and liquidity impact of the Yucatan acquisition, including post-closing debt, leverage ratios, and covenant compliance.
- Assess whether Now Planting startup costs and higher SG&A can be offset by Natural Foods volume growth and margin improvement.
- Evaluate the sustainability and valuation sensitivity of the Windset investment and related dividend income.
- Review remediation of the material weakness in internal controls and any subsequent restatements or control deficiencies.
- Monitor customer concentration, Pacific Harvest receivable collections, acquisition integration, and exposure to variable interest rates.