Landec Corporation Form 10-Q Summary
Business Context and Reporting Period
This filing is for Landec Corporation, which owns Lifecore Biomedical, Inc. The fiscal third quarter and nine-month period ended February 27, 2022 are compared with periods ended February 28, 2021. Landec reports Lifecore, Curation Foods, and Other segments. Lifecore provides pharmaceutical contract development and manufacturing, aseptic fill-finish, and fermentation services; Curation Foods sells avocado products, olive oil and vinegars, and BreatheWay packaging technology.
The filing metadata identifies Lifecore Biomedical, but the registrant is Landec Corporation (NASDAQ: LNDC).
Key Financial Metrics
| Metric | Q3 FY2022 | 9M FY2022 | Comparable period |
|---|---|---|---|
| Revenue | $53.1 million | $138.2 million | $44.7 million / $126.6 million |
| Gross profit | $13.9 million | $39.0 million | $14.4 million / $35.9 million |
| Gross margin | 26.2% | 28.3% | 32.3% / 28.3% |
| Operating loss | $3.8 million | $2.4 million | $2.4 million income / $2.2 million loss |
| Net loss | $12.9 million | $60.8 million | $5.5 million / $29.8 million |
| Diluted loss per share | $0.43 | $2.07 | $0.19 / $1.02 |
| Cash flow from operations | Not separately provided | $(24.4) million | $10.6 million provided |
Lifecore revenue increased 28% in the quarter and 13% year to date, driven primarily by higher CDMO activity and aseptic commercial shipments. Curation Foods revenue increased 5% in the quarter and 4% year to date, but its gross profit declined because of higher freight and raw-product sourcing costs.
At February 27, 2022, cash and cash equivalents were $1.9 million, accounts receivable were $49.6 million, and inventory was $73.7 million. Total assets were $325.6 million and stockholders’ equity was $144.1 million.
Debt consisted of $83.7 million of term-loan principal, net reported long-term debt of $79.6 million, and $39.9 million outstanding under the revolving credit facility. The term loan carried a 9.5% interest rate and the revolver carried a 3.0% rate at quarter-end. The company reported compliance with its financial covenants and no defaults.
Material Changes Versus the Prior Comparable Period
- Revenue rose $8.4 million, or 19%, in the quarter and $11.5 million, or 9%, for the nine months.
- Quarterly gross profit declined $0.5 million despite higher revenue, primarily because Curation Foods gross profit fell 66%; nine-month gross profit increased $3.2 million.
- Quarterly operating results shifted from income of $2.4 million to a loss of $3.8 million, partly due to restructuring costs of $5.9 million versus $2.0 million.
- Interest expense increased 40% in the quarter and 110% year to date, reflecting debt prepayment-related costs, higher rates, and refinancing costs.
- Operating cash flow deteriorated from $10.6 million provided to $24.4 million used, driven by the net loss and working-capital investment, including higher inventory and receivables.
- On December 13, 2021, Landec sold the Eat Smart business to Taylor Farms for $73.5 million, subject to working-capital adjustments. The business is reported as discontinued operations for all periods.
- The company used proceeds from the Eat Smart sale to repay approximately $67.9 million of borrowings and also sold its Windset investment for $45.1 million.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal quantitative earnings or revenue guidance. Management describes Lifecore demand and CDMO development activity as growth drivers and continued capital investment as necessary to expand capacity.
- The nine-month net loss includes a $32.1 million goodwill impairment related to Eat Smart and a $4.4 million loss on its sale.
- Restructuring costs totaled $8.4 million for the nine months and $16.2 million since the restructuring plan began. Total expected restructuring costs are approximately $20.0 million.
- The company recognized a $5.3 million impairment associated with its Santa Maria office and expects to pursue a sublease within 12 months.
- COVID-19 continues to create uncertainty affecting sales, customer behavior, manufacturing, inventory, employees, and broader economic conditions.
- The SEC and DOJ continue investigating potential environmental and Foreign Corrupt Practices Act compliance matters involving the Tanok facility in Mexico. The ultimate outcome, timing, and potential loss remain uncertain; no recoverable amounts have been recorded.
- A former Yucatan owner seeks more than $10 million in damages, while Landec has asserted counterclaims seeking at least $80 million. The filing states that outcomes cannot reasonably be predicted.
- Two Lifecore customers represented 17% and 13% of nine-month revenue and 25% and 19% of accounts receivable at quarter-end, creating customer-concentration exposure.
Investor Verification Items
- Verify the post-sale operating profile and remaining obligations of Curation Foods after the Eat Smart disposition.
- Assess Lifecore’s CDMO backlog, customer concentration, capacity expansion, regulatory execution, and timing of commercial shipments.
- Reconcile cash needs with only $1.9 million of cash, negative operating cash flow, high interest rates, and secured debt maturities beginning in 2025.
- Review the potential financial impact of the Tanok investigations, related litigation, indemnification rights, and insurance recoveries.
- Monitor whether Curation Foods can recover margins amid freight, raw-material, supply-chain, and produce-cost pressures.
- Evaluate the assumptions supporting goodwill, intangible assets, inventory, and deferred-tax-asset valuations.