Business Context and Reporting Period
This Form 10-Q is filed by Landec Corporation, not Lifecore Biomedical, Inc. It covers the fiscal quarter and six months ended November 24, 2019, with comparative periods ended November 25, 2018. Landec operates through Curation Foods, Lifecore, and Other segments. Curation Foods includes fresh-cut vegetables, salads, olive oils and vinegars, and Yucatan and Cabo Fresh avocado products. Lifecore develops and manufactures pharmaceutical-grade hyaluronan and provides aseptic manufacturing and development services.
Financial Performance and Position
| Metric | Three Months Ended November 24, 2019 | Six Months Ended November 24, 2019 |
|---|---|---|
| Revenue | $142.6 million | $281.3 million |
| Revenue change versus prior period | Up 14% | Up 13% |
| Gross profit | $15.5 million | $30.9 million |
| Gross margin | 10.9% | 11.0% |
| Operating income (loss) | $(6.0) million | $(10.4) million |
| Net loss from continuing operations | $(6.7) million | $(11.5) million |
| Net loss per diluted share | $(0.23) | $(0.40) |
- Segment revenue: Curation Foods generated $119.8 million in the quarter and $246.4 million year to date; Lifecore generated $22.8 million and $34.9 million, respectively.
- Segment gross profit: Curation Foods gross profit declined 39% in the quarter and 20% year to date, while Lifecore gross profit increased 52% and 29%, respectively.
- Cash flow: Operating activities used $14.9 million in the first six months, compared with $4.8 million provided in the prior-year period. Investing activities used $15.6 million, including $16.0 million of capital expenditures. Financing activities provided $31.1 million.
- Liquidity: Cash and cash equivalents were $1.6 million at November 24, 2019; cash, cash equivalents and restricted cash totaled $2.0 million.
- Debt: The company had $61.5 million outstanding under its revolving credit facility and $120.0 million of term-loan principal, or $180.7 million of total debt before applicable net presentation adjustments. Debt increased primarily to fund the Yucatan Foods acquisition and equipment purchases.
- Balance sheet: Total assets were $560.0 million, total liabilities were $300.9 million, and stockholders’ equity was $259.1 million. Inventories increased to $58.6 million from $54.1 million at May 26, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue growth included the first full comparable-period contribution from the December 1, 2018 acquisition of Yucatan Foods, which contributed $14.0 million in second-quarter revenue and $30.2 million year to date.
- Curation Foods revenue increased, but gross profit declined because of weather-related raw-material supply issues, high-cost avocado inventory, and lower packaged vegetable revenue.
- Lifecore revenue and gross profit increased due to higher fermentation, development-services, and aseptic revenues. Development-services revenue increased particularly strongly.
- SG&A increased 30% in the quarter and 26% year to date. Key items included Yucatan Foods expenses, a $1.2 million reserve for a Pacific Harvest note receivable, consulting costs, legal fees related to compliance matters, and a $0.4 million impairment of the San Rafael property.
- Interest expense increased to $2.2 million in the quarter and $4.2 million year to date, compared with $0.7 million and $1.5 million in the respective prior periods, reflecting substantially higher debt.
- The company adopted ASC 842 lease accounting, recording approximately $31.1 million of operating lease liabilities and $30.0 million of operating lease right-of-use assets at adoption. The transition adjustment reduced retained earnings by $0.3 million.
- The company discontinued the Now Planting business; prior-year results were reclassified to discontinued operations. The discontinued operation generated a $0.5 million after-tax loss in the prior-year quarter and a $0.6 million loss year to date.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that cash from operations and existing cash are expected to be sufficient for operational and capital requirements for at least the next twelve months, although first-half operating cash flow was negative and liquidity was limited.
- On October 25, 2019, the credit agreement was amended to increase the term loan commitment to $120.0 million and reduce the revolver commitment to $100.0 million. Both facilities mature October 25, 2022. The company was in compliance with its financial covenants at November 24, 2019.
- On January 2, 2020, the company announced a restructuring plan involving workforce reductions, office closures, and sales of non-strategic assets. Estimated fiscal 2020 pre-tax costs are $1.2 million to $1.5 million for employee and severance expenses and $0.4 million to $0.6 million for lease-exit costs.
- The company plans to sell its Ontario, California salad dressing plant, with a carrying value of $13.0 million at November 24, 2019. The filing does not provide a reliable estimate of any resulting gain or loss.
- The San Rafael property was sold on December 24, 2019 for $2.4 million, with no material financial statement impact.
- On December 2, 2019, the company entered into a $110 million interest-rate swap that fixes the 30-day LIBOR component of the term loan at 1.53%.
- The company is investigating potential environmental and Foreign Corrupt Practices Act compliance matters relating to permitting at the Tanok facility in Mexico. The SEC and Department of Justice have commenced investigations. The company is cooperating and believes indemnification rights from the Yucatan acquisition may offset some liabilities, but the outcome, timing, and potential loss cannot be estimated.
- Customer concentration remains significant: the top five customers represented 44% of first-half revenue; Costco and Walmart represented 13% and 18%, respectively.
- Other risks include weather and produce-supply volatility, avocado costs, international and Mexican operating risks, potential FCPA violations, leverage and covenant compliance, interest-rate exposure, self-insurance estimates, and the fair-value sensitivity of the $61.3 million Windset investment.
Important Facts for Investors to Verify
- Confirm the issuer identity: the provided filing is for Landec Corporation, while the request metadata identifies Lifecore Biomedical, Inc.
- Assess whether Curation Foods can restore margins after weather-related costs, high-cost avocado inventory, and lower packaged-vegetable revenue.
- Evaluate liquidity and refinancing risk given $180.7 million of debt, approximately $2.0 million of cash and restricted cash, negative operating cash flow, and 2022 debt maturities.
- Monitor the SEC and DOJ investigations concerning the Tanok facility and the practical enforceability of related indemnification rights.
- Review the restructuring execution, expected savings, severance and lease-exit costs, and the planned Ontario asset sale.
- Validate the valuation assumptions supporting the $61.3 million Windset investment, which is a Level 3 fair-value measurement.
- Consider the sustainability and timing of Lifecore’s revenue growth, particularly development-services and fermentation revenue that may fluctuate based on customer shipment timing.