SEC Filing Summary
Filing and period: The provided document is Landec Corporation’s Form 10-K for the fiscal year ended May 26, 2019, filed August 1, 2019. The request metadata identifies Lifecore Biomedical, Inc. and “2018 Q4,” but the filing is for Landec Corporation and covers fiscal 2019, including the fourth quarter. Lifecore is a reportable segment of Landec.
Business Context
Landec operates through Curation Foods, Lifecore Biomedical, and Other. Curation Foods sells packaged vegetables, salads, O olive oils and vinegars, and Yucatan and Cabo Fresh guacamole and avocado products. Lifecore develops and manufactures pharmaceutical-grade hyaluronan products and provides contract development and aseptic manufacturing services for medical-device and pharmaceutical customers.
- Curation Foods was renamed from Apio in January 2019.
- Landec acquired Yucatan Foods on December 1, 2018, adding guacamole and avocado products and a production facility in Mexico.
- The Food Export business was discontinued in fiscal 2018, and Now Planting was discontinued in fiscal 2019. Both are presented as discontinued operations.
Financial Performance
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Revenue | $557.6 million | $524.2 million | 6% increase |
| Gross profit | $81.0 million | $78.3 million | 3% increase |
| Operating income | $5.5 million | $13.6 million | Decrease |
| Net income from continuing operations | $2.1 million | $25.8 million | Decrease |
| Net income applicable to common stockholders | $0.4 million | $24.8 million | Decrease |
| Diluted earnings per share from continuing operations | $0.07 | $0.92 | Decrease |
| Consolidated diluted earnings per share | $0.01 | $0.89 | Decrease |
- Consolidated gross margin was approximately 14.5%, compared with approximately 14.9% in fiscal 2018.
- Curation Foods revenue increased 5% to $481.7 million, primarily from $27.3 million of Yucatan revenue and higher salad and O sales. Its gross margin declined to 10.2% from 10.8% because of weather-related green-bean shortages and higher raw-material, labor, packaging, and freight costs.
- Lifecore revenue increased 16% to $75.9 million. Gross profit increased 11% to $31.7 million, while gross margin declined to 41.8% from 43.7% because of a less favorable mix weighted toward lower-margin aseptic filling.
- SG&A increased 23% to $64.1 million, reflecting Yucatan expenses, $3.3 million of acquisition costs, higher Eat Smart expenses, consulting costs, and a $2.0 million GreenLine tradename impairment.
- Fiscal 2018 benefited from a $9.4 million income-tax benefit associated largely with the Tax Cuts and Jobs Act. Fiscal 2019 recorded $1.5 million of income-tax expense, contributing to the year-over-year earnings decline.
Fourth-Quarter Results
| Metric | Fourth quarter fiscal 2019 |
|---|---|
| Revenue | $152.8 million |
| Gross profit | $26.2 million |
| Net income from continuing operations | $0.4 million |
| Net loss applicable to common stockholders | $0.3 million |
Cash Flow, Liquidity, and Debt
- Cash provided by operating activities was $16.0 million, compared with $19.8 million in fiscal 2018.
- Cash used in investing activities was $96.8 million, including $59.9 million for the Yucatan acquisition and $44.7 million of capital expenditures. The company received $7.0 million from exercising its put feature on Windset Senior B preferred shares.
- Cash provided by financing activities was $79.0 million, primarily from $60.0 million of term-loan borrowings and a $25.0 million increase in the line of credit.
- Cash and cash equivalents were $1.1 million at May 26, 2019, compared with $2.9 million at May 27, 2018. Including restricted cash, cash reported in the statement of cash flows was $1.5 million.
- Total debt, net, was $149.0 million, compared with $69.3 million a year earlier. The balance included $52.0 million outstanding under the revolver and $97.5 million of term-loan principal.
- The amended credit agreement increased the term loan commitment to $100.0 million and the revolver to $105.0 million. Both mature September 23, 2021. The company was in compliance with its financial covenants at year-end.
- Approximately $67.5 million of $149.0 million in floating-rate debt was hedged. A 100-basis-point increase in interest rates would increase annual interest expense by approximately $0.8 million, based on year-end debt.
- Management stated that operating cash flow, cash on hand, and available credit were expected to fund operating and capital requirements for at least the next twelve months.
Material Changes and Unusual Items
- The Yucatan acquisition was funded with $59.9 million of cash and $15.1 million of Landec stock. It contributed $27.3 million of revenue and $3.8 million of gross profit in fiscal 2019.
- Goodwill increased to $76.7 million from $54.5 million, primarily because of the Yucatan acquisition. The company reported $90.3 million of Yucatan total assets at year-end.
- The company recorded a $2.0 million impairment of the GreenLine tradename after repackaging those products under the Eat Smart brand.
- The fair value of the Windset investment was $61.1 million at year-end, including a $1.6 million fair-value gain. Windset also generated $1.65 million of dividend income.
- Discontinued operations generated a $1.7 million after-tax loss in fiscal 2019, compared with an $0.8 million loss in fiscal 2018.
- A material weakness related to cash-flow reconciliation identified as of May 27, 2018 was remediated during fiscal 2019. Management and Ernst & Young concluded that internal control over financial reporting was effective as of May 26, 2019; however, Yucatan Foods was excluded from management’s year-end control assessment under applicable SEC guidance.
- The company adopted the new revenue-recognition standard without a material effect. It expected adoption of the new lease standard in fiscal 2020 to add approximately $30.0 million of operating lease right-of-use assets and $31.1 million of lease liabilities to the balance sheet.
Outlook and Key Risks
The filing does not provide formal revenue or earnings guidance. Management identified growth opportunities in Yucatan and Cabo Fresh, natural foods, Lifecore development services, aseptic filling, hyaluronan applications, and expanded manufacturing capacity.
- Weather, crop shortages, commodity prices, labor availability, water availability, and perishability may materially affect Curation Foods’ costs and sales.
- Customer concentration is significant: the top five customers represented approximately 43% of fiscal 2019 revenue; Costco and Walmart represented approximately 14% and 16%, respectively.
- Competition, regulatory approvals, product liability, food safety, recalls, and medical-device and drug manufacturing requirements could adversely affect results.
- Manufacturing is concentrated in a limited number of facilities, and the company relies on certain single-source suppliers and third-party labor contractors.
- Yucatan integration, Mexico-related operating and foreign-currency risks, tariffs, and geopolitical conditions may affect performance.
- Debt increased substantially to fund acquisitions and capital expenditures, and the company remains exposed to floating interest rates and covenant requirements.
- The Windset investment is valued using Level 3 inputs and is sensitive to projected revenue, expenses, taxes, and discount rates; changes in valuation may cause earnings volatility.
- Future contractual obligations totaled $230.7 million, including $149.5 million of debt principal, $28.4 million of operating leases, $30.6 million of purchase commitments, and $17.3 million of debt interest payments.
Investor Verification Items
- Verify the requested issuer and period: the source is Landec Corporation’s fiscal 2019 10-K, not a Lifecore Biomedical standalone filing or a fiscal 2018 fourth-quarter filing.
- Assess whether Yucatan’s revenue and margin contribution can offset Curation Foods’ low margin and integration costs.
- Review debt maturities, covenant headroom, floating-rate exposure, and the company’s ability to fund required capital expenditures.
- Reconcile reported earnings with operating cash flow, discontinued-operation losses, tax effects, fair-value gains, and the GreenLine impairment.
- Evaluate customer concentration, weather and sourcing exposure, Mexico operations, regulatory requirements, and potential product-liability or recall costs.
- Review the valuation assumptions supporting the $61.1 million Windset investment and the company’s goodwill and other intangible assets.
- Confirm the effectiveness and ongoing remediation of internal controls, particularly because Yucatan was excluded from the year-end assessment.