Landec Corporation Fiscal Q3 2019 Form 10-Q Summary
Filing identification: The supplied filing is for Landec Corporation, not Lifecore Biomedical, Inc. It covers the three and nine months ended February 24, 2019, compared with February 25, 2018. This corresponds to fiscal 2019 third quarter, despite the request metadata stating “2018 Q3.”
Business context and reporting period
Landec operates through Curation Foods, Lifecore, and Other. Curation Foods sells packaged vegetables, salads, olive oils and vinegars, plant-based soups, and Yucatan and Cabo Fresh avocado products. Lifecore develops and manufactures pharmaceutical-grade hyaluronan and provides aseptic filling, fermentation, and contract development services.
In December 2018, Landec acquired Yucatan Foods for approximately $75.0 million, consisting of $59.9 million in cash and $15.1 million in Landec stock. The acquisition contributed $12.7 million of revenue and $1.9 million of gross profit during the nine-month period. In January 2019, the food business was renamed Curation Foods.
Key financial metrics
| Metric | Three months ended Feb. 24, 2019 | Three months ended Feb. 25, 2018 | Nine months ended Feb. 24, 2019 | Nine months ended Feb. 25, 2018 |
|---|---|---|---|---|
| Revenue | $155.7 million | $144.9 million | $405.3 million | $383.2 million |
| Gross profit | $21.2 million | $19.8 million | $54.1 million | $53.5 million |
| Gross margin | 13.6% | 13.7% | 13.4% | 14.0% |
| Operating income | $2.6 million | $3.5 million | $1.6 million | $5.5 million |
| Net income applicable to common stockholders | $1.1 million | $16.1 million | $0.7 million | $18.7 million |
| Diluted EPS | $0.04 | $0.57 | $0.02 | $0.67 |
Quarterly revenue increased 7%, led by Curation Foods, while nine-month revenue increased 6%. Quarterly operating margin was approximately 1.7%, compared with 2.4% in the prior-year quarter; nine-month operating margin was approximately 0.4%, compared with 1.4%. The prior-year results benefited from a significant tax benefit under the Tax Cuts and Jobs Act, making year-over-year net income comparisons less representative.
- Curation Foods revenue increased 8% in the quarter and 6% for the nine months. Curation Foods gross profit increased 18% in the quarter and 2% for the nine months.
- Lifecore revenue increased 3% in the quarter and 5% for the nine months, while gross profit was essentially flat for the quarter and declined 1% for the nine months, primarily due to shipment timing.
- Research and development expense declined 12% in both the quarter and nine-month period.
- SG&A increased 20% in the quarter and 15% for the nine months, primarily due to Yucatan Foods expenses, acquisition costs, consulting costs, and new product investments. The quarter included $1.7 million of acquisition-related costs.
- Interest expense increased to $1.8 million for the quarter and $3.3 million for the nine months, reflecting higher borrowings.
Cash flow, debt, and liquidity
- Net cash provided by operating activities was $17.4 million for the nine months, compared with $20.3 million in the prior-year period.
- Capital expenditures were $33.1 million, primarily for Curation Foods and Lifecore capacity and equipment.
- Cash used in investing activities was $92.4 million, including $59.9 million for the Yucatan acquisition.
- Financing activities provided $73.8 million, including $60.0 million of term-loan borrowings and a $17.0 million net increase in the line of credit.
- Cash and cash equivalents were $1.7 million at February 24, 2019, plus $0.4 million of restricted cash. Cash declined from $2.9 million at May 27, 2018.
- At period end, the company had $44.0 million outstanding under its revolving line of credit and $100.0 million of term-loan principal. The balance sheet also included $3.6 million of non-current capital lease obligations.
- The amended credit agreement increased the term loan to $100.0 million and the revolver commitment to $105.0 million. Both mature in September 2021. Quarterly term-loan principal payments increase to $2.5 million beginning March 1, 2019.
- Management stated that existing cash and operating cash flow should be sufficient to fund operating and capital requirements for at least the next twelve months. The company reported compliance with its financial covenants at February 24, 2019.
Material changes, outlook, and risks
- The Yucatan acquisition materially expanded Curation Foods and increased goodwill by $21.2 million, trademarks and tradenames by $15.9 million, and customer relationships by $11.0 million. Purchase accounting remained preliminary, particularly for tax and environmental indemnification matters.
- The company reported no formal quantitative earnings or revenue guidance in the supplied filing.
- Management expects Yucatan and Cabo Fresh to provide growth, higher-margin products, lower-cost Mexican manufacturing, and additional capacity. The company also expects Lifecore growth from development services and aseptic manufacturing opportunities.
- Curation Foods faced higher raw-material, labor, packaging, and freight costs. Weather-related green-bean shortages reduced sales, while lower unit volumes affected tray sales.
- A poor California olive harvest and slower-than-expected apple vinegar launch reduced projected O Olive Oil EBITDA and lowered the related contingent consideration liability from $4.0 million to $0.5 million.
- The company has a $1.7 million receivable from Pacific Harvest related to labor litigation settlement payments, expected to be collected through December 2020. Collection depends on Pacific Harvest and is secured by its assets.
- Key risks include seasonality, customer concentration, agricultural supply and weather conditions, Mexican operating and political risks, Mexican peso exposure, increased leverage and interest rates, tax-law uncertainty, acquisition integration, and the use of Level 3 fair-value estimates for the Windset investment and contingent consideration.
- The company completed remediation of the material weakness related to the timing and classification of property-and-equipment cash flows. Yucatan Foods was excluded from the current-year internal-control assessment because it was recently acquired.
Most important facts to verify
- Confirm the issuer and period: the filing is Landec Corporation’s fiscal Q3 2019 report, not a Lifecore Biomedical standalone filing.
- Assess whether the Yucatan acquisition generates the expected margin improvement and synergies relative to the additional debt incurred.
- Monitor liquidity, mandatory term-loan amortization beginning March 2019, covenant compliance, and refinancing needs before the September 2021 maturity.
- Separate recurring operating performance from acquisition costs, fair-value changes, contingent consideration adjustments, and prior-year tax benefits.
- Review Curation Foods’ cost inflation, agricultural supply constraints, customer concentration, and performance of the Now Planting, O, Yucatan, and Cabo Fresh brands.
- Evaluate the collectability of the Pacific Harvest receivable and the company’s exposure to legal, tax, Mexican operating, and foreign-currency risks.