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 31, 2018 for the quarter ended May 27, 2018) 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 28, 2017 (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.
- Labor costs continue to increase.
- Abnormal weather conditions continue to add volatility to our food business.
- The vegetable tray category is declining.
- The shifting landscape in U.S. retail to more private label products from branded products.
- The trend for pharmaceutical and biotech companies to outsource product development and aseptic filling to CDMOs is growing and the need for a CDMO which specializes in difficult-to-handle materials has never been greater.
- The North America healthy eating trend continues as packaged salad kit, core vegetable and green bean categories continue to grow.
- The rapidly growing consumer segments for plant-based, 100% clean and natural products are looking for solutions.
Starting in fiscal 2019, Landec’s statutory federal rate will be 21%, however, we are projecting that our overall effective tax rate, including state income taxes, will be approximately 25% to 27% as we will be losing certain tax benefits the Company has been able to utilize to reduce its overall effective rate during past years, such as the domestic manufacturing tax deduction. This compares to our effective tax rate in fiscal 2018, before the one-time tax reform benefits, of 31%. We currently expect to reinvest a majority, if not all, of the tax savings in fiscal 2019 back into our businesses in order to drive future revenue and margin growth.>
The gross margin in our packaged fresh vegetables business was 10.8% for fiscal 2018 compared to 12.5% in fiscal 2017. The gross margin was lower in fiscal 2018 due to the negative impacts from significant weather events during the first nine months of fiscal 2018 which resulted in a significant increase in the cost of produce. These events include the aftermath of the hurricanes and tropical storms during the summer and fall of 2017 which were exacerbated by freezing temperatures that impacted green bean growing regions of Florida during January, and by persistent unseasonably warm temperatures in Western growing areas that affected the sourcing costs of our lower-margin vegetable bag business.These weather events resulted in incremental produce sourcing costs of approximately $7.8 million, or $0.19 per share after taxes, during fiscal 2018. Excluding these excess sourcing costs, the gross margin in our packaged fresh vegetable business would have been 12.5% or the same as last year even after taking into account a 10% increase in labor rates this fiscal year compared to last fiscal year and a significant increase in promotional expenses.
- Investing in capital expenditures, R&D, people and systems to drive growth in our three growth pillars: (1) Lifecore, (2) Eat Smart salads, and (3) new natural food products.
- Increasing demand for our CDMO products and branded natural food products to fill existing capacity, drive plant efficiencies and increase our return on invested capital.
- Implement new strategies to reduce our exposure to weather related events including: (1) changing our produce sourcing agreements to reduce our risks when yields and/or costs are impacted by weather, (2) reducing our dependency on the more difficult to source produce items by changing our product mix, (3) continuing to change product mix through innovation while rationalizing the size of our core fresh-cut packaged bag business in order to reduce the quantity of certain volatile produce items needed to meet the revised demand, and (4) implementing aggressive cost cutting programs to offset cost increases.
The results are as follows (unaudited and in thousands):
|Three Months Ended||Twelve Months Ended|
May 27, 2018
|May 28, 2017||
May 27, 2018
|May 28, 2017|
|Apio Packaged Fresh Vegetables (a)||$||124,296||$||108,651||$||454,953||$||408,021|
|Apio Packaged Fresh Vegetables||16,726||14,626||49,130||51,148|
|Total Gross Profit||24,809||19,120||78,338||79,212|
|Research and Development:|
|Selling, General and Administrative:|
|Operating Income before Allocation of Corporate Expenses|
|Total Operating Income before Allocation of Corporate Expenses||
|Corporate Expenses Allocation:|
|Operating Income after Allocations of Corporate Expenses:|
|Total Operating Income after Allocations of Corporate Expenses||
|Non-Operating Income (Expense) (c):|
|Total Non-Operating Income||(1,361||)||(50||)||12,174||(4,533||)|
|Net Income from Continuing Operations:|
|Net Income from Continuing Operations||$||6,713||$||2,596||$||25,761||$||10,135|
(a) Apio’s packaged fresh vegetables business includes revenues and gross profit from Apio Cooling LP. and Apio Packaging.
(b) Included in Other are Corporate licensing and R&D revenues and Corporate expenses, the non-Apio and non-Lifecore royalties and profit sharing and the O operations.
(c) Non-Operating income (expense) includes: Windset dividends and FMV change, net interest expense and income taxes.