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 July 30, 2019 for the quarter ended May 26, 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 impacting the first half of fiscal 2020 resulting in a projected loss for the first half whereas the second half is projected to generate substantial net income:
a. We expect Lifecore 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. We are projecting that Lifecore will realize a loss during the first quarter of fiscal 2020 and be profitable for the remaining three quarters of fiscal 2020 due to the timing of shipments and production within the year.
b. During fiscal 2019, Yucatan production began three months later than normal due to financial constraints on the business prior to the close of the acquisition. This resulted in production being extended well past its ideal production window into June and July when labor is more scarce and avocado prices during those months were at extraordinarily high levels. This resulted in the cost for this production being much higher than normal. This inventory will be sold during the first half of fiscal 2020, with the majority of sales occurring in the first quarter, and thus sold at much lower margins than the inventory that will be produced starting in October when the price of avocados are lower and labor is more abundant. As a result, we expect the sale of avocado products to generate a loss during the first half of fiscal 2020, with a majority of that loss occurring in the first quarter, but generate substantial profits during the second half and thus a positive profit for all of fiscal 2020.
c. A large majority of the planned $20 million in cost savings from our cost out initiatives will be recognized during the second half of fiscal 2020 whereas the projected cost increases these cost savings are expected to offset for all of fiscal 2020 started at the beginning of fiscal 2020.
d. New initiatives being implemented by our new CEO, Dr. Bolles, in the area of food safety, new packaging, network optimization and information technology are going to result in increased expenses during the first half of fiscal year, particularly during the first quarter, that will benefit the Company starting in the second half of fiscal 2020 and beyond.
e. Due to the extremely heavy rains and flooding in the Ohio Valley during May and June, the green bean crop was severely impacted, with yields of 35% to 50% of normal, and although supply has now recovered, the extreme shortage of green beans during June and July resulted in a loss for this product line during the first quarter. We expect green beans to be profitable for the remainder of fiscal 2020.
In addition to the above items, which explain the majority of the timing of net income within the fiscal year, the Company’s interest expense is projected to be approximately $2.2 million per quarter in fiscal 2020 compared to approximately $750,000 per quarter for the first two quarters of last year and approximately $1.9 million per quarter in the last two quarter of fiscal 2019. Therefore the quarter over quarter impact from interest is much greater in the first half of fiscal 2020 than the second half.
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 targeting cost savings of approximately $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 approximate $20 million in 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, primarilydue 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 is considerably higher than the contingency we have set aside in prior years.
At the end of fiscal 2019 the Company’s debt-to-equity ratio was 55% and our debt-to-tangible assets ratio was 38%. Our fixed coverage ratio at the end of fiscal 2019 was 2.2 which is well above our covenant of 1.2 or greater. Our leverage ratio at the end of fiscal 2019 was 3.7, and our debt covenant is 4.5 or less, which means we had additional borrowing capacity of approximately $32 million.
The Company is currently in discussions with its banks and a new bank not currently part of the syndicate to refinance its debt. We are discussing a financing structure that will extend the overall term of our debt and result in a meaningful reduction in the average interest rate on all of our debt. We will disclose in a separate press release if we consummate a new bank arrangement.
During the fourth quarter of fiscal year 2019, we exercised our put option and sold back all 70,000 shares of Senior B preferred shares to Windset for $7 million. The proceeds from this sale were used to pay down a portion of our outstanding debt from the Yucatan acquisition.
In order to simplify our Curation Foods business and focus on lines of business with the greatest potential for generating meaningful profits, we discontinued the Now Planting line of plant-based soups. The losses from discontinued operations include both operating losses and the expenses from writing off all of the assets associated with the Now Planting line.
The earnout payment for the O acquisition is based on the EBITDA for the O business for the three years ended May 2020. Based on projections for fiscal 2020, we are currently estimating that the earnout liability should be $500,000 compared to $4.0 million at the end of fiscal 2018. The primary reason for the significant change recorded in fiscal 2019 is due to a very poor organic olive yield this year in California and a significantly lower than expected crush, resulting in a shortage of organic olive oil to meet our ever increasing demand for our O organic olive oil products. This has resulted in a reduction of projected EBITDA for the three year period ended May 2020. We have recently entered into several large scale sourcing contracts for olives which will significantly increase our organic olive oil supply in the future, some beginning as early as the fall 2019 crush.
Despite the sourcing challenges in fiscal 2019, O revenues increased 38% in fiscal 2019 compared to fiscal 2018.
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 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 implementing an enterprise-wide operations management system 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.
The results are as follows below (unaudited and in thousands):
|Three Months Ended||Twelve Months Ended|
|May 26, 2019||May 27, 2018||May 26, 2019||May 27, 2018|
|Curation Foods (a)||$||128,672||$||124,885||$||481,686||$||458,800|
|Total Gross Profit||26,212||24,809||81,003||78,338|
|Research and Development:|
|Selling, General and Administrative:|
|Operating (Loss) Income before Allocation of Corporate Expenses|
|Total Operating Income before Allocation of Corporate Expenses||2,480||8,074||5,475||13,587|
|Corporate Expenses Allocation:|
|Operating (Loss) Income after Allocations of Corporate Expenses:|
|Total Operating Income after Allocations of Corporate Expenses||2,480||8,074||5,475||13,587|
|EBITDA excluding Windset FMV Change:|
|Total EBITDA excluding Windset FMV Change||$||7,616||$||11,822||$||22,355||$||27,649|
|(a) Includes Curation Foods acquisition and integration related expenses from the acquisition of Yucatan.|
|(b) Includes the O earnout reversal.|
Non-GAAP Financial Information and Reconciliations
The table below presents the reconciliation of a non-GAAP financial measure to the most directly comparable financial measure calculated in accordance with GAAP and other supplemental information. See “Non-GAAP Financial Information” above for further information regarding the Company’s use of non-GAAP financial measures.
|Three Months Ended||Twelve Months Ended|
|May 26, 2019||May 27, 2018||May 26, 2019||May 27, 2018|
|FMV Change in Windset Investment||-||(700||)||(1,600||)||(2,900||)|
|Net Interest Expense||1,923||484||5,085||1,739|
|Yucatan Operating Loss (1)||978||-||3,945||-|
|GreenLine Tradename Write-off (non-cash)||2,000||-||2,000||-|
|Severances and related expenses (1)||976||-||976||-|
|EatSmart@Home Writeoffs (non-cash)||274||-||274||-|
|O Earnout reversal (non-cash)||-||(1,900||)||(3,500||)||(1,900||)|
|(1) Non-recurring cash expense||$||1,954||$||—||$||4,921||$||—|