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 April 3, 2019 for the quarter ended Feb 24, 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 amount and timing of research and development funding and license fees from the Company's collaborative partners, the timing of regulatory approvals, the mix between domestic and international sales, and the risk factors listed in the Company’s Form 10-K for the fiscal year ended May 27, 2018 (See item 1A: Risk Factors) which may be updated in Part II, Item 1A Risk Factors in the Company’s Quarterly Reports on Form 10-Q. As a result of these and other factors, the Company expects to continue to experience significant fluctuations in quarterly operating results and there can be no assurance that the Company will remain consistently profitable. The Company undertakes no obligation to update or revise any forward-looking statements whether as a result of new developments or otherwise.
There are several factors that have impacted our FY19 estimated results over the last three months:
a. Extremely heavy rains in California in February and March, coupled with cold temperatures, has caused and is projected to cause very poor yields and significant produce shortages of key crops within our non-salad vegetables business that is projected to result in a reduction in gross profit of approximately $4.0 million or $0.11 per share since the end of our second fiscal quarter.
b. Shipping and logistic charges are projected to be approximately $1.4 million or $0.04 per share higher than what we were projecting at the end of the second quarter due to an extreme shortage of drivers. We have instituted a new pay and bonus structure for drivers and we are optimistic that the new pay structure will solve this shortage issue.
c. A $900,000 or $0.02 per share reduction in the projected increase in the FMV of our Windset investment as further explained in Question #6 below.
d. A product mix change to higher sales of lower margin products, primarily in our non-salad vegetables line of products.
These estimated fiscal 2019 decreases in operating income are being partially offset by a $2.6 million or $0.07 per share reduction in the earnout liability associated with the O acquisition as further explained in Question #5 below. The projected loss from the acquisition of Yucatan Foods in fiscal 2019, which includes the acquisition-related costs and the operating loss after integration-related costs, has not changed and is still estimated to be $0.15 to $0.16 per share.
Through the third quarter of fiscal 2019, the purchase price for Yucatan Foods was $75.0 million. The recorded purchase price is lower than the price previously disclosed of $80.0 million due to working capital adjustments and from discounting the stock consideration due to the lock up of that stock for three years for half of the stock and four years for the other half. For more details see the Company’s Form 10-Q filing which is expected to be filed tomorrow.
The cost-out initiative is going very well. Our consulting firm, The Hackett Group, along with our dedicated internal teams, have identified numerous cost-out projects, with the initial projects beginning in the second half of fiscal 2019. We expect to start realizing a net positive impact from cost-out initiative projects during fiscal 2020 and beyond. Cost savings from these initiatives will be used initially to offset continued inflationary cost increases and mitigate the impact of weather volatility in order to deliver more predictable earnings in our food business.
For the 52-weeks ended January 26, 2019, the size of the North American market in which Eat Smart participates (vegetable bags, vegetable trays and multi-serve salad kits) was approximately $4.2 billion (in consumer retail dollars), including retail and club stores. Of this market, Eat Smart’s overall market share per Nielsen was approximately 15% while Eat Smart multi-serve salad kits had a market share of approximately 13%. In the retail market, excluding Costco, at January 26, 2019 our Eat Smart multi-serve salad kits in Canada had a 38% market share and an 85% ACV and in the U.S. achieved a 6.6% market share, an increase of 100 basis points from previous 52-week period, and a 44.8% ACV, an increase of 580 basis points from previous 52-week period.
The earnout for the O acquisition was based on the EBITDA (earnings before interest, taxes, depreciation and amortization) for the O business for the three years ended May 2020. Based on projections for the remainder of fiscal 2019 and our initial fiscal 2020 projections, we are currently estimating that the liability should be $500,000. The primary reason for the significant change this quarter is due to 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 loss of potential organic olive oil sales this fiscal year, O revenues are projected to increase approximately 45% in fiscal 2019 versus fiscal 2018.
We had originally projected that the fair market value change during fiscal 2019 from our Windset investment was going to be approximately $4.0 million and we now expect it to be $1.6 million. The primary reason for this change is due to the acceleration of the annual planned clean out of approximately 24 acres of greenhouses to this past winter from the normal summer cleaning time to accommodate a change in crop rotation. This change impacted Windset’s calendar 2018 and calendar 2019 results but does not impact projected results past calendar 2019. We will give guidance for the FMV change for fiscal 2020 in our fourth quarter results release.
At the end of the third quarter of fiscal 2019 the Company’s debt to equity ratio was 0.54 and our debt to tangible assets ratio was 0.39. Our fixed coverage ratio at the end of the third quarter was 1.81 which is well above our covenant of 1.2 or greater. Our leverage ratio at the end of the third quarter of fiscal 2019 was 3.70, and our debt covenant is 4.5 or less, which means we had borrowing capacity of approximately $28 million. We typically generate the most cash from operations during the fourth quarter, however, due to the projected increase in capital expenditures in the fourth quarter compared to the previous three quarters of fiscal 2019, we expect our debt and leverage ratio to increase by fiscal year end 2019 but still be well within our leverage covenant at fiscal year-end 2019 and beyond.
a) Identifying and implementing cost saving initiatives in our Curation Foods business including our new avocado products business.
b) Integrating the avocado products team and operations into our Curation Foods business.
c) Investing in our three growth platforms: 1) Lifecore, 2) Eat Smart salads, and 3) emerging natural food brands.
The results are as follows (unaudited and in thousands):
|Three Months Ended||Nine Months Ended|
|February 24, 2019||February 25, 2018||February 24, 2019||February 25, 2018|
|Curation Foods (a)||131,984||121,950||353,502||333,915|
|Total Gross Profit||21,217||19,806||54,147||53,529|
|Research and Development:|
|Selling, General and Administrative:|
|Operating (Loss) Income before Allocation of Corporate Expenses|
|Total Operating Income before Allocation of Corporate Expenses||2,633||3,485||1,580||5,515|
|Corporate Expenses Allocation:|
|Operating (Loss) Income after Allocations of Corporate Expenses:|
|Total Operating Income after Allocations of Corporate Expenses||2,633||3,485||1,580||5,515|
|Non-Operating Income (Expense) (c):|
|Total Non-Operating (Loss) Income||(1,566||)||12,796||(908||)||13,535|
|Net (Loss) Income from Continuing Operations:|
|Net Income from Continuing Operations||$||1,067||$||16,281||$||672||$||19,050|
(a) Curation Foods includes Eat Smart, BreatheWay, O, Now Planting, Yucatan, Cabo Fresh and acquisition-related expenses.
(b) Included in Other are Corporate expenses.
(c) Non-Operating income (expense) includes: Windset dividends and FMV change, net interest expense and income taxes.