Business Context and Reporting Period
This Form 10-Q is filed by Landec Corporation, not Lifecore Biomedical, Inc., for the fiscal quarter ended August 29, 2021. Landec operates through Curation Foods, Lifecore Biomedical, and corporate/Other activities. Lifecore is a contract development and manufacturing organization focused on sterile injectable products and pharmaceutical-grade hyaluronic acid.
The filing presents unaudited results for the three months ended August 29, 2021, compared with the three months ended August 30, 2020. Results may be affected by seasonality, customer ordering patterns, and COVID-19-related disruption.
Key Financial Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $128.8 million | $135.6 million | Down 5% |
| Gross profit | $17.5 million | $16.3 million | Up 7% |
| Gross margin | 13.6% | 12.1% | Up approximately 150 bps |
| Operating loss | $3.8 million | $12.5 million | Improved by $8.7 million |
| Net loss | $9.5 million | $11.0 million | Improved by $1.5 million |
| Diluted loss per share | $0.32 | $0.38 | Improved by $0.06 |
| Cash flow from operations | $0.8 million | $17.0 million | Down $16.2 million |
| Capital expenditures | $7.9 million | $4.6 million | Up $3.3 million |
Curation Foods generated $106.8 million of revenue and $11.8 million of gross profit. Lifecore generated $22.0 million of revenue and $5.8 million of gross profit. Lifecore revenue increased 1%, including a $1.3 million increase in CDMO revenue that was largely offset by a $1.2 million decrease in fermentation revenue due to shipment timing.
Operating expenses included $2.8 million of research and development, $15.9 million of selling, general and administrative expense, and $2.6 million of restructuring costs. Interest expense increased to $7.9 million from $3.1 million, primarily due to debt prepayment-related interest and penalties, higher interest rates, and refinancing costs.
Liquidity, Debt, and Cash Flow
- Cash and cash equivalents were $1.4 million at August 29, 2021, compared with $1.3 million at May 30, 2021.
- Operating cash flow was $0.8 million, while investing cash flow was $38.3 million, primarily reflecting $45.1 million received from the sale of the Windset investment.
- Financing activities used $38.9 million, including $41.4 million of term-debt repayments and a $3.0 million net increase in borrowings under the revolving line of credit.
- Long-term debt, net of issuance costs, was $123.8 million, and $32.0 million was outstanding under the revolving line of credit.
- The term loan had an interest rate of 9.5%, and the revolver had an interest rate of 3.0% at quarter-end.
- The term loan matures December 31, 2025. Scheduled principal amortization begins March 30, 2023, with the remaining balance due at maturity.
- The company reported compliance with all financial covenants and no events of default at August 29, 2021.
Material Changes Versus the Prior Comparable Period
- Total revenue declined 5%, driven by a 6% decrease in Curation Foods revenue. Management attributed the decline to the planned reduction of legacy vegetable and tray business and continuing COVID-19 effects on store resets, product innovation penetration, and foodservice demand.
- Gross profit increased despite lower revenue. Curation Foods benefited from improved product mix and operational efficiency, while Lifecore benefited from higher revenue and favorable mix.
- SG&A declined 11% to $15.9 million, reflecting restructuring-related cost savings and lower corporate legal fees, partially offset by increased Lifecore compensation expense.
- Restructuring costs declined to $2.6 million from $8.4 million. Cumulative restructuring costs since the fiscal 2020 plan began were $37.5 million, against an expected total cost of approximately $45.0 million.
- Interest expense rose 155% to $7.9 million, materially offsetting operating improvement.
- The company sold its 26.9% Windset investment on June 1, 2021 for $45.1 million. Accordingly, the quarter included no Windset dividend income compared with $0.3 million in the prior-year quarter.
- Accounts receivable decreased to $62.0 million from $70.0 million, while inventory was broadly stable at $69.4 million.
Outlook, Commentary, Risks, and Unusual Items
Management did not provide quantitative revenue or earnings guidance in the filing. It expects COVID-19-related uncertainty to continue affecting sales, customer behavior, manufacturing operations, inventory, employees, and market conditions.
- The company continues to execute Project SWIFT, involving operational optimization, strategic-asset dispositions, cost reductions, facility actions, and organizational redesign.
- Capital spending increased to support Curation Foods and Lifecore growth, including $5.7 million for Lifecore and $2.2 million for Curation Foods.
- The company faces environmental and Foreign Corrupt Practices Act investigations involving the Tanok facility in Mexico. Related litigation includes a former Yucatan owner’s claim seeking more than $10.0 million and the company’s cross-complaint seeking at least $80 million. The ultimate outcomes and any net loss after indemnification cannot currently be estimated.
- The company received a $1.6 million insurance recovery during the prior fiscal year and does not expect additional material insurance recovery absent further developments.
- Customer concentration remains significant: the top five customers represented 50% of revenue, while Costco and Walmart represented 15% and 17%, respectively.
- The company expects to reclassify approximately $0.7 million of accumulated other comprehensive loss into earnings over the next 12 months from interest-rate swap activity.
- Key risks include produce supply and pricing volatility, weather, customer concentration, COVID-19 disruption, regulatory approvals, litigation and investigations, debt service and covenant compliance, and execution of the restructuring plan.
Investor Verification Checklist
- Verify the filing entity: the provided filing is for Landec Corporation, while the request metadata identifies Lifecore Biomedical, Inc.
- Assess whether the $45.1 million Windset sale proceeds and debt repayments materially changed leverage and future interest expense.
- Evaluate whether Curation Foods revenue declines are stabilizing and whether margin gains are sustainable after restructuring benefits.
- Review Lifecore’s CDMO growth, fermentation shipment timing, backlog, capacity expansion, and customer concentration.
- Confirm available revolver capacity, debt covenants, mandatory amortization, maturity provisions, and the company’s ability to fund capital expenditures with only $1.4 million of cash.
- Monitor the Tanok-related government investigations and litigation for potential financial statement effects.
- Determine the continuing impact of COVID-19, supply-chain conditions, foodservice demand, and customer store resets on operating results.