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 October 1, 2019 for the quarter ended August 25, 2019) 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.
There are five primary factors that gives us confidence in being able to achieve our fiscal 2020 EPS guidance:
a. Lifecore plans to recognize approximately 65% of its revenues and 80% of its operating income during the second half of fiscal 2020, in line with historical results based on customer order patterns. And Lifecore has a very good track record of meeting or exceeding its plan on a fiscal year basis.
b. Avocado products production began over three months earlier than last year with a fully trained labor force which will result in a much higher level of efficiency and productivity. Starting production this early will also allow us to complete production in the late April to early May timeframe before the cost of avocados typically increase.
c. A large majority of the projected $18 million to $20 million in cost savings from our cost out initiatives will be recognized during the second half of fiscal 2020 as a result of the new automation being installed primarily during the first half of fiscal 2020. Because the cost increases went into effect at the beginning of fiscal 2020 and the majority of the cost savings won’t be realized until the second half of fiscal 2020, the projected cost increases will have a net negative impact during the first half of the year and a net positive impact during the second half of the year.
d. New initiatives we have implemented in the area of food safety, new packaging, network optimization and information technology are going to start benefiting the Company in the second half of fiscal 2020 and beyond.
e. We expect the growth of salads to accelerate during the second half of fiscal 2020 and we expect green beans to rebound from the sourcing issues experienced during the first quarter of fiscal 2020 and be profitable for the remainder of the year.
Lifecore currently has approximately fifteen FDA regulated drug and medical device products in its development pipeline that are in various stages of development and that range from early phase pre-clinical work to late phase pivotal clinical studies. It is important to understand that Lifecore does not own the regulatory submission process or the Design History File of the products that we are developing with our partners. Lifecore actively supports the submission process by providing the necessary documentation requested by our partners and by hosting the regulatory agencies who audit Lifecore as part of the regulatory approval process (Pre-Approval Inspections). Lifecore anticipates that at least 1-2 of the current products under development will be commercially approved within the next 24 months. Moving forward Lifecore is working towards having a pipeline that provides an average of 1 to 2 products that receive commercial approval annually.
Curation Foods is projecting cost savings of $18 million to $20 million in fiscal 2020. A majority of the capital expenditures in the Curation Foods business during fiscal 2020 is for new automation associated with the cost out program. The acquisition and installation of the new automation is in progress and therefore a large majority of the savings will be realized during the second half of the fiscal year.
The cost savings realized during fiscal 2020 from the cost out initiatives will be used to offset projected price increases, primarily due to increased labor, freight and raw material sourcing costs. In addition, we have set aside in our plan and guidance a contingency for unforeseeable produce sourcing issues which we believe is more than adequate to cover sourcing issues during the last three quarters of fiscal 2020.
At the end of the first quarter of fiscal 2020 the Company’s debt-to-equity ratio was 62% and our debt-to-tangible assets ratio was 39%. Our fixed coverage ratio at the end of the first quarter of fiscal 2020 was 1.9 which is well above our covenant of 1.2 or greater. Our leverage ratio at the end of the first quarter of fiscal 2020 was 4.4, and our debt covenant is 4.5 or less. At the end of the first quarter our borrowing availability was less than $10 million, however, based on projected positive cash flow from operations over the remainder of fiscal 2020, coupled with the expected amended debt agreement described in (5) below, we expect to have adequate liquidity to continue to grow our business and invest in capital to advance both our Curation and Lifecore businesses.
The Company is in late stage discussions with its banks (JPMorgan, BMO and City National Bank) to amend its current debt agreement. We are discussing a financing structure that will extend the term of our debt, increase the amount of availability and amend our current covenants. The amendment should give us the necessary liquidity, along with cash flows from operations, to accelerate our cost out automation projects at Curation Foods and to expand our capacity at Lifecore. We expect the amendment to be completed within the next 30 days.
Our top priorities over the next 12-24 months are:
Focus: Manage fewer, high-impact projects that will drive positive EBITDA growth.
Innovation: Commitment to the consumer with on-trend plant-based food with 100% clean-ingredients from Curation Foods core growth platforms: Eat Smart® salads and green beans, Cabo Fresh® and Yucatan® avocado products, and O Olive Oil & Vinegar® premium artisan products.
Productivity: Deliver ongoing savings by creating a culture of trust, respect and continuous improvement by clarifying people’s roles and building highly accountable, productive teams.
Operational Excellence: Commitment to the customer by creating a Project Management Office to improve efficiencies throughout the supply chain and operations, with a concentration on network optimization. Initial focus will be on the integration and improvement of Yucatan and Cabo Fresh operations in Mexico.
Sustainability: As a mission-based company, continuing to institute and follow business practices that respect people and the planet as part of everyday culture through evolving goals and publishing achievements, in order to further differentiate the company in the market.