Landec Corporation — Form 10-Q Summary
Reporting period: Fiscal quarter ended August 30, 2020. The filing is for Landec Corporation, not a standalone Lifecore Biomedical filing. Landec reports three segments: Curation Foods, Lifecore, and Other. Lifecore is the biomedical contract development and manufacturing organization segment.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $135.6 million | $138.7 million | Down 2% |
| Gross profit | $16.3 million | $15.3 million | Up 7% |
| Gross margin | 12.1% | 11.1% | Up approximately 100 basis points |
| Operating loss | $12.5 million | $4.4 million | Loss increased |
| Operating margin | (9.2%) | (3.2%) | Declined |
| Net loss | $11.0 million | $4.8 million | Loss increased |
| Net loss per share | $0.38 | $0.16 | Loss increased |
| Cash flow from operations | $17.0 million | $(5.4) million | Improved by $22.5 million |
Segment results
- Curation Foods: Revenue was $113.8 million, down 10%; gross profit was $11.3 million, down 12%. The revenue decline reflected a $6.6 million planned reduction in non-strategic products, a $3.5 million decline in green bean sales, and a $2.9 million decline in salads, with the latter two affected by COVID-19-related foodservice weakness.
- Lifecore: Revenue was $21.8 million, up 81%; gross profit was $5.0 million, up 99%. CDMO revenue increased $5.2 million from higher aseptic filling shipments, while fermentation revenue increased $4.6 million, primarily due to shipment timing.
- Other: The segment reported a $2.8 million net loss, compared with a $1.2 million loss in the prior-year quarter, primarily reflecting higher corporate legal expenses and interest costs.
Cash, debt, and liquidity
- Cash and cash equivalents were $0.6 million at August 30, 2020, compared with $0.4 million at May 31, 2020. Cash, cash equivalents, and restricted cash totaled $0.8 million.
- Operating cash flow of $17.0 million benefited substantially from a $20.4 million working-capital improvement, including lower receivables and inventory, and $6.0 million of non-cash restructuring and impairment charges.
- Capital expenditures were $4.6 million, compared with $10.0 million in the prior-year quarter. Lifecore accounted for $2.7 million and Curation Foods for $1.9 million.
- Total outstanding debt under the credit agreement was approximately $173.9 million, consisting of $69.0 million drawn on the revolver and $104.9 million of term debt, net of issuance costs.
- The revolver carried a 4.66% interest rate at quarter-end. The credit facility matures on September 23, 2021, and the term loan requires quarterly principal payments of $3.0 million.
- Management stated that current liquidity and expected operating cash flow are not sufficient to repay the debt at maturity without additional financing. The company is pursuing refinancing and believes refinancing is probable, but disclosed that it cannot guarantee availability or favorable terms.
- The company was in compliance with its debt covenants at August 30, 2020. The credit agreement is secured by substantially all company assets, excluding the Windset investment.
Material changes and unusual items
- Restructuring costs were $8.4 million in the quarter, including $6.0 million of asset write-offs, $0.9 million of severance costs, and $1.5 million of other restructuring costs. Total restructuring costs incurred since inception of the plan reached $25.7 million, against expected total costs of approximately $27.0 million.
- The company sold its Ontario, California facility for net proceeds of $4.9 million and recorded a $2.8 million gain.
- The Hanover, Pennsylvania facility was impaired by $8.8 million and classified as held for sale. It was subsequently sold on September 4, 2020, for net proceeds of $8.0 million; no additional second-quarter earnings impact was expected from the sale.
- Interest expense increased 50% to $3.1 million, primarily due to higher debt balances and financing costs.
- Income tax benefit increased to $4.3 million from $1.4 million, producing effective tax rates of 28% and 22%, respectively.
- The company recorded no change in the $56.9 million fair value of its 26.9% Windset investment. Windset generated $0.3 million of dividend income.
- The company adopted new credit-loss and cloud-computing accounting guidance without a material financial statement impact.
Outlook, commentary, and risks
- Management did not provide quantitative revenue or earnings guidance in the filing. Results may fluctuate because of Curation Foods seasonality and Lifecore customer order patterns.
- COVID-19 adversely affected Curation Foods demand, particularly foodservice-related sales, and could continue to affect customers, employees, manufacturing, supply chains, inventory, and consumer behavior. Lifecore may be affected by reductions or delays in elective medical procedures.
- Project SWIFT is intended to improve Curation Foods profitability through facility optimization, asset sales, workforce and organizational changes, and a focus on strategic assets. The company cautioned that expected benefits may not materialize and that additional costs or operational disruption may occur.
- The company is subject to significant customer concentration: the top five customers represented approximately 51% of quarterly revenue; Costco and Walmart represented approximately 19% and 14%, respectively.
- The company disclosed ongoing SEC, U.S. Department of Justice, 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 outcome and potential financial exposure cannot currently be estimated.
- A former Yucatan owner filed a lawsuit on September 2, 2020 seeking more than $10.0 million in damages and delivery of escrowed shares. The company intends to contest the claims and pursue indemnification rights.
- Other litigation includes claims by former labor contractors; the company has not accrued a liability because loss is not considered probable or reasonably estimable.
Important facts for investors to verify
- Confirm that the requested issuer is Landec Corporation, ticker LNDC, and that the filing is not a Lifecore Biomedical standalone filing.
- Monitor refinancing progress before the September 23, 2021 debt maturity and the company’s compliance with progressively tighter leverage covenants.
- Assess whether Curation Foods’ restructuring, facility closures, and product rationalization improve recurring margins after excluding unusual restructuring items.
- Evaluate the sustainability of Lifecore’s 81% revenue growth, including the impact of shipment timing and customer concentration.
- Track COVID-19 effects on foodservice demand, elective medical procedures, labor availability, supply chains, and customer orders.
- Review developments in the Tanok compliance investigations, related litigation, indemnification claims, and any resulting fines or remediation costs.
- Consider the sensitivity of the $56.9 million Windset valuation to unobservable assumptions, particularly the discount rate and projected growth.