SEC Filing Summary
Filing: Landec Corporation Form 10-K for the fiscal year ended May 31, 2020. The request metadata identifies Lifecore Biomedical, Inc. and “2019 Q4,” but the supplied filing is for Landec Corporation and covers fiscal 2020. Lifecore is a reportable segment of Landec, not the registrant.
Business Context and Reporting Period
Landec operates through Curation Foods, Lifecore Biomedical, and Other. Curation Foods sells packaged salads and vegetables, avocado products, olive oils and vinegars, and BreatheWay packaging technology. Lifecore is a contract development and manufacturing organization focused on pharmaceutical-grade hyaluronic acid and sterile injectable products in syringes and vials.
The fiscal year ended May 31, 2020 was materially affected by COVID-19, weather-related produce sourcing issues, restructuring under Project SWIFT, and the integration and performance of the Yucatan Foods acquisition. Prior-period results exclude discontinued Now Planting and Food Export operations.
Key Financial Metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $590.4 million | $557.6 million | Up 6% |
| Gross profit | $75.0 million | $81.0 million | Down 7% |
| Gross margin | 12.7% | 14.5% | Down 180 basis points |
| Operating income | $(38.5) million | $5.5 million | Declined materially |
| Net income from continuing operations | $(38.2) million | $2.1 million | Turned to loss |
| Net loss per diluted share | $(1.31) | $0.07 from continuing operations | Declined |
| Cash flow from operations | $(17.0) million | $16.0 million | Turned negative |
| Capital expenditures | $26.7 million | $44.7 million | Down 40% |
| Cash and cash equivalents | $0.4 million | $1.1 million | Down $0.7 million |
| Total debt, net | $190.3 million | $149.0 million | Up $41.3 million |
| Total assets | $541.3 million | $519.1 million | Up $22.2 million |
Curation Foods revenue increased 5% to $504.5 million, primarily from a full-year contribution from Yucatan Foods, higher salad revenue, and higher BreatheWay revenue. Curation Foods gross profit fell to $42.1 million, with margin pressured by high avocado costs, adverse weather, and reduced emphasis on packaged vegetables.
Lifecore revenue increased 13% to $85.8 million, driven by higher development services and aseptic filling shipments. Gross profit increased to $32.9 million, but gross margin declined to 38.3% from 41.8%, partly because of COVID-19-related manufacturing inefficiencies and safety protocols.
Operating costs included $13.0 million of goodwill and intangible-asset impairment and $17.3 million of restructuring costs. The Company recorded a $13.1 million income tax benefit, including benefits from net operating loss carrybacks under the CARES Act.
Liquidity, Debt, and Commitments
Cash, cash equivalents, and restricted cash totaled $0.6 million at year-end, while cash flow from operations was negative. Financing activities provided $40.0 million, including increased revolver and term-loan borrowings, and supported operating needs, capital expenditures, and debt payments.
At May 31, 2020, the Company had $77.4 million outstanding on its revolver and $114.0 million of term-loan principal before debt issuance costs. The revolver and term loan mature on October 25, 2022, with quarterly term-loan principal payments of $3.0 million. Debt is secured by substantially all Company assets other than the Windset investment.
The Company was not in compliance with its maximum total leverage ratio covenant at May 31, 2020; the lenders waived the breach in the July 15, 2020 Eighth Amendment. The amendment increased borrowing-rate spreads, restricted capital expenditures, added covenant restrictions, and required $0.3 million of lender fees. Management stated that available cash, operating cash flow, and borrowing availability were expected to fund requirements for at least the next twelve months.
Contractual obligations totaled approximately $330.2 million, including $191.4 million of debt obligations, $37.3 million of operating leases, $4.4 million of finance leases, and $87.7 million of purchase commitments.
Material Changes Versus the Prior Comparable Period
- Revenue increased 6%, but gross profit declined 7% because of lower Curation Foods profitability and lower Lifecore margin.
- The Company moved from $2.1 million of continuing-operations income to a $38.2 million loss.
- Operating cash flow declined from positive $16.0 million to negative $17.0 million, driven by the net loss and working-capital investment, including higher inventory and receivables.
- Total debt increased from $149.0 million to $190.3 million, while cash remained very limited.
- Project SWIFT generated $17.3 million of restructuring costs, including a $10.9 million impairment related to the Ontario salad-dressing facility and costs associated with workforce, office, and operating-network changes.
- Goodwill and intangible-asset impairments totaled $13.0 million, including charges related to the O and Yucatan Foods reporting units.
- The fair value of the Windset investment declined $4.2 million, compared with a $1.6 million increase in the prior year.
- The Company adopted lease accounting guidance, recognizing significant operating lease right-of-use assets and liabilities.
Guidance, Outlook, Risks, and Unusual Items
No specific quantitative revenue or earnings guidance is provided. Management planned to continue Project SWIFT through fiscal 2021, including operational-network optimization, divestiture of non-core assets, organizational redesign, and potential closure or sale of the underutilized Hanover facility.
Subsequent to year-end, the Ontario facility was sold for net proceeds of $4.6 million, with management estimating a $2.6 million gain. The Company also approved plans to close and sell the Hanover facility, which had a $17.2 million carrying value and could require an impairment charge.
COVID-19 created risks from changing consumer demand, supply-chain disruption, labor shortages, increased safety costs, and manufacturing interruptions. Lifecore was exposed to fewer elective medical procedures, while Curation Foods was exposed to changes in retail and foodservice purchasing patterns.
The Company disclosed ongoing U.S. and Mexican government investigations concerning potential environmental and Foreign Corrupt Practices Act compliance matters related to permitting at the Yucatan Foods facility in Mexico. The ultimate outcome, potential liability, and recoveries under acquisition indemnities could not be estimated, and no recovery was recorded.
Other significant risks include covenant compliance and possible debt acceleration, customer concentration, adverse weather and commodity costs, regulatory approvals, product liability and recalls, dependence on single-source suppliers, international and foreign-currency exposure, competition, labor and employment claims, and execution risk associated with Project SWIFT.
Important Facts for Investors to Verify
- Confirm the filing identity and period: the supplied document is Landec Corporation’s FY2020 10-K, not a standalone Lifecore Biomedical filing or a 2019 Q4 report.
- Review the July 15, 2020 credit agreement amendment, covenant waivers, borrowing rates, capital-expenditure restrictions, and maturity schedule.
- Assess liquidity risk given $0.4 million of unrestricted cash, negative operating cash flow, and approximately $190.3 million of net debt.
- Evaluate whether Project SWIFT can restore Curation Foods margins and whether the planned Hanover sale will generate additional impairment charges.
- Review the Yucatan-related environmental and FCPA investigations, indemnification provisions, and potential unrecorded exposure.
- Separate recurring operating performance from restructuring, impairment, fair-value, tax, and other unusual items.
- Monitor COVID-19 effects on Lifecore elective-procedure demand, Curation Foods sourcing and labor, and customer purchasing patterns.
- Consider customer concentration: the top five customers represented approximately 48% of FY2020 revenue, with Walmart and Costco representing approximately 18% and 15%, respectively.