SEC Form 10-Q Summary
Registrant: Landec Corporation (including Lifecore Biomedical, Inc.); the supplied metadata identifies Lifecore, but the filing registrant is Landec Corporation (NASDAQ: LNDC).
Reporting period: Fiscal quarter and six months ended November 29, 2020, compared with November 24, 2019. The filing was signed January 7, 2021.
Business Context
Landec operates through Curation Foods, Lifecore, and Other. Lifecore is an integrated contract development and manufacturing organization focused on sterile injectable pharmaceutical products, hyaluronic acid, fermentation, and aseptic filling. Curation Foods produces plant-based foods, fresh packaged salads and vegetables, avocado products, olive oils and vinegars, and BreatheWay packaging technology.
Financial Performance
| Metric | Three Months Ended November 29, 2020 | Six Months Ended November 29, 2020 | Comparable Change |
|---|---|---|---|
| Revenue | $130.9 million | $266.5 million | Down 8% and 5%, respectively |
| Gross profit | $20.6 million | $37.0 million | Up 33% and 20%, respectively |
| Gross margin | 15.8% | 13.9% | Improved from 10.9% and 11.0% |
| Operating loss | $1.5 million | $13.9 million | Improved quarterly; worsened for six months |
| Net loss | $13.3 million | $24.3 million | Compared with $6.7 million and $11.5 million losses |
| Loss per diluted share | $0.45 | $0.83 | Compared with $0.23 and $0.40 |
Lifecore revenue increased 2% for the quarter and 29% for the six-month period, while Curation Foods revenue declined 10% in both periods. Lifecore generated six-month gross profit of $15.5 million, up 39%; Curation Foods generated $21.5 million, up 9%.
The principal drivers of the net loss were an $11.8 million decrease in the fair value of the Windset investment, $10.1 million of restructuring costs for the six months, $1.8 million of legal settlement charges, and higher interest expense. The effective tax rate for the six-month period was 22%, producing a $7.0 million tax benefit.
Cash Flow, Liquidity, and Debt
| Metric | November 29, 2020 | May 31, 2020 |
|---|---|---|
| Cash and cash equivalents | $2.5 million | $0.4 million |
| Accounts receivable | $66.5 million | $76.2 million |
| Inventories | $71.2 million | $66.3 million |
| Revolver borrowings | $77.0 million | $77.4 million |
| Long-term debt, net | $82.0 million | $101.4 million |
| Total liabilities | $290.2 million | $310.3 million |
Six-month operating cash flow was $18.5 million, compared with $14.9 million used in the prior-year period. Investing cash flow was $5.5 million provided, primarily from $12.9 million of proceeds from facility sales, partly offset by $7.4 million of capital expenditures. Financing cash flow used $22.0 million, including $20.1 million of term-loan repayments. Capital expenditures were $4.3 million for Lifecore and $3.1 million for Curation Foods.
At November 29, 2020, the company reported compliance with its debt covenants. The prior credit agreement was subsequently refinanced on December 31, 2020. The new facilities consisted of a $170.0 million term loan and a $75.0 million revolver; $150.0 million and $36.0 million, respectively, were outstanding at closing. The term loan carries interest at base rate plus 7.50% or LIBOR plus 8.50% and matures December 31, 2025. Estimated new debt issuance costs were approximately $8.6 million.
Material Changes Versus the Prior Comparable Period
- Revenue decreased primarily because Curation Foods intentionally exited or reduced non-strategic packaged vegetable revenue and experienced lower foodservice demand during COVID-19. Lifecore revenue increased due to higher aseptic filling shipments and fermentation sales timing.
- Gross margin improved because of favorable avocado costs, restructuring-related operating improvements, increased Lifecore volume, and favorable product mix.
- SG&A declined 14% for the quarter and 5% for the six-month period, mainly from Curation Foods cost reductions, partly offset by higher corporate legal expenses.
- The Windset investment declined in fair value from $56.9 million to $45.1 million, primarily due to changes in EBITDA, nonproductive asset, and debt assumptions. The company corrected an immaterial valuation error that increased quarterly other expense by $1.8 million.
- The company recorded $10.1 million of restructuring costs for the six-month period, including an $8.8 million impairment related to the Hanover facility and a $2.8 million gain on the Ontario facility sale.
Outlook, Risks, and Unusual Items
Management stated that cash, together with availability under the refinancing facilities, is expected to support operations for at least the next twelve months. The filing does not provide formal revenue or earnings guidance.
- COVID-19 may continue to cause supply-chain disruptions, labor shortages, inventory and delivery issues, lower foodservice demand, and fewer elective medical procedures affecting Lifecore.
- The business is highly dependent on major customers; the top five customers represented 49% of six-month revenue, with Walmart and Costco representing 18% and 15%, respectively.
- The new credit facilities are secured by substantially all company and subsidiary assets and contain leverage, fixed-charge coverage, and other restrictive covenants. A covenant breach could permit acceleration and foreclosure remedies.
- Investigations by U.S. and Mexican authorities concerning potential environmental and FCPA compliance matters at the Tanok facility remain unresolved. The company cannot estimate the potential net loss after indemnification or insurance recovery.
- A former Yucatan owner seeks more than $10 million in damages; Landec has filed counterclaims seeking at least $80 million. No recovery has been recorded because the outcome is uncertain.
- The company recorded a $1.8 million reserve for the Pacific Harvest litigation settlement. It expects a $1.2 million loss in the third quarter of fiscal 2021 from refinancing-related debt-cost write-offs.
Investor Verification Items
- Verify the refinancing terms, borrowing levels, interest burden, covenant thresholds, and available revolver capacity after December 31, 2020.
- Assess whether Curation Foods revenue declines and restructuring benefits are recurring or temporary.
- Evaluate the assumptions supporting the $45.1 million Windset valuation, particularly revenue growth, expense growth, and discount rates.
- Monitor COVID-19 effects on foodservice demand, supply chains, labor availability, and Lifecore elective-procedure volumes.
- Follow the Tanok regulatory investigations, related litigation, indemnification rights, and potential contingent liabilities.
- Reconcile reported operating cash flow with working-capital movements, facility-sale proceeds, restructuring charges, and ongoing capital expenditure needs.