This FAQ represents a set of Questions and Answers that were included in the most recent Landec Quarter Earnings Release (Read Press Release issued on March 31, 2020 for the quarter ended February 23, 2020) and offers comments for understanding Landec's business. Following the Disclaimer below, there is a list of questions. Thank you for your interest in Landec.
Important Cautions Regarding Forward-Looking Statements
Except for the historical information contained herein, the matters discussed in this news release are forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially, including such factors among others, as the timing and expenses associated with operations, the ability to achieve acceptance of the Company's new products in the market place, weather conditions that can affect the supply and price of produce, the timing of regulatory approvals, the ability to successfully integrate Yucatan Foods into the Landec Curation Foods business, and the mix between domestic and international sales. For additional information about factors that could cause actual results to differ materially from those described in the forward-looking statements, please refer to our filings with the Securities and Exchange Commission (“SEC”), including the risk factors contained in our most recent Quarterly Report on Form 10-Q and Annual Report on Form 10-K. Forward-looking statements represent management’s current expectations and are inherently uncertain. Except as required by law, we do not undertake any obligation to update forward-looking statements made by us to reflect subsequent events or circumstances.
On March 19, 2020, the Company entered into the Seventh Amendment to the Credit Agreement which, among other things, temporarily increased the leverage ratio covenant to 5.75 to 1.00 from 5.0 to 1.0 for the fiscal third quarter ended February 23, 2020. If the Company’s leverage ratio is in excess of 5.0 to 1.0 as measured under the terms of the credit agreement, the Company will incur a 50 basis point increase in the underlying interest rate and will incur an incremental 5 basis point increase to the commitment fee, compared to the existing pricing terms. The Company also agreed to minimum monthly EBITDA and maximum capital expenditure covenants through May 31, 2020, as well as additional reporting requirements. Following May 31, 2020, all other covenants remain substantively unchanged compared to the existing terms of the Credit Agreement. The Company incurred a one-time loan amendment fee equal to 15 basis points of the total borrowings under the credit facility and certain other administrative and legal costs.
Landec prioritizes the health and safety of its employees, products, consumers, partners and communities. We are following the guidance from the World Health Organization (WHO) and the Centers for Disease Control and Prevention (CDC) about the escalated global public health threat of COVID-19 and we are taking it very seriously. In response, we immediately activated emergency preparedness teams and they are working closely with a consortium of leaders to establish and share best practices. The goal is to ensure business continuity and to do everything possible to keep our employees and products safe. This team is responsible for tracking the most updated information about COVID-19 so that we can communicate and adapt quickly. Food supply and pharmaceutical product manufacturing are considered essential businesses for the ongoing health and safety of the public; therefore, our operations currently remain fully functional, even with the current shelter in place orders in effect, and we expect that to continue until otherwise required by relevant authorities or as we may otherwise determine.
1. Financial Impact: Given the ongoing uncertainty surrounding the duration, magnitude and geographic reach of COVID-19 pandemic, we are unable to accurately forecast the impact on the Company’s financial performance. While it is too early to project outcomes, business has remained largely unaffected at Lifecore. For the Curation Foods business, we are quickly shifting to changing customer demand and product mix shifts. For example, as consumers prepare for the pandemic, the Company has seen an increase in the demand for salads and packaged fresh cut vegetables sold to retail and club channels, and a reduction in demand for guacamole sold in 12oz and 16oz tubs and vegetable trays, as these products are typically consumed in group social settings.
2. Risk Mitigation: At each of the Company’s business units, the emergency preparedness teams monitor the situation on a real-time basis and are focused on areas that have potential to impact the ongoing operations of the business, including but not limited to, raw material sourcing, shifting demand, continuity of workforce, product distribution, new product innovation and development, and sales, general and administrative.
Project SWIFT is a value creation program that will continue network optimization initiatives at Curation Foods, as well as focus the business on strategic assets and redesign the organization to be the appropriate size to compete and thrive. As a result of Project SWIFT, the Company has made several strategic decisions surrounding its operations that, when fully implemented, the Company expects total annualized cost savings from these actions of approximately $5.0 million.
1. Network & Operational Optimization: Maximizing efficiency and productivity with the consolidation and centralization of Curation Foods offices into its Innovation Center headquarters in Santa Maria, CA, as well as continuous improvement in plant operations with lean manufacturing practices. With this activity, the Company expects annual cost savings of approximately $0.9 million.
2. Focus on Strategic Assets: Simplifying the business and divesting non-core assets, includes exploring strategic alternatives for the vegetable and tray business, together with intent to divest the Company’s assets related to the Company's Ontario, CA, salad dressing manufacturing facility. The Company is unable to estimate costs and savings associated with the divestiture of the vegetable bag and tray business.
3. Organizational Redesign: The Company has taken action to right size and redesign the organization so that it is appropriate for the Company’s size, focusing on strategic initiatives, developing and elevating internal talent and reducing headcount. With this rightsizing, the Company expects annual cost savings of approximately $4.1 million.
In summary, the Company expects to realize total annualized cost savings from these actions of $5.0 million. The Company has recorded $13.5 million and $13.9 million of restructuring charges during the third quarter and first nine months of fiscal year 2020, respectively.
1. Yucatan Foods Related Expenses: As previously disclosed, the Company discovered and reported to U.S. regulators a compliance issue at its Yucatan Foods production facility in Guanajuato, Mexico. The conduct at issue began prior to Landec’s acquisition of Yucatan Foods in December 2018 and relates to potential environmental and foreign corrupt practices act compliance matters associated with regulatory permitting at the facility. The Company is taking appropriate remedial measures and is cooperating in the U.S. government investigation that followed the Company’s disclosure. In addition, the Company has disclosed the conduct to regulators in Mexico and is cooperating with them. Because this is an ongoing legal matter, the Company is not able to provide more details at this time. However, the issue does not relate to the health, safety or quality of the food the Company sells. The Company has incurred $4.0 million of expenses, approximately $0.8 million in the second quarter and $3.2 million in the third quarter, which are primarily related to legal expenses associated with this matter, and it expects to incur additional expenses in future quarters until the matter is resolved. The Company intends to pursue recovery for those expenses in future quarters.
2. Cost Out Program: As part of the previously announced $18 to $20 million cost out initiatives, the Company has taken action to consolidate from two labor contractors to one labor contractor in the second quarter, which streamlined its Guadalupe facility. The new labor contract will result in year one annual savings of approximately $1.7 million. The labor contractor the Company is no longer using owes the Company $1.2 million. Since the full collectability of this loan is now in doubt, the Company elected to fully reserve the loan and recorded a reserve of $1.2 million during the fiscal second quarter. The Company intends to use all legal recourse to collect the full amount owed.
In summary, in the third quarter and first nine months of fiscal 2020, the Company incurred non-recurring charges associated with cost out initiatives and the acquisition of Yucatan Foods of $3.2 million and $5.2 million respectively, as general and administrative expenses.