Landec Corporation
(Nasdaq:LNDC - News), a developer and marketer of
technology-based polymer products for food, agricultural and
licensed partner applications, today reported results for the
second quarter ended April 27, 2003. Unless otherwise noted, all
financial statement amounts are stated on a basis consistent
with accounting principles generally accepted in the United
States ("GAAP basis"). As previously disclosed, Landec changed
its fiscal year end from the last Sunday in October to the last
Sunday in May effective May 25, 2003.
Total revenues for the quarter were $56.8 million versus
$57.1 million in the second quarter of fiscal year 2002. Landec
reported net income of $4.7 million, or $0.18 per diluted share,
compared with net income of $5.4 million, or $0.24 per diluted
share, for the same quarter in fiscal year 2002. Revenues for
the first six months of fiscal 2003 were $98.0 million versus
revenues of $97.5 million a year ago. The Company reported net
income for the first six months of fiscal year 2003 of $2.6
million or $0.10 per diluted share compared to net income of
$1.9 million or $0.08 per diluted share, in the first six months
of fiscal 2002.
Results for our second quarter reflect the seasonality of
Landec's business. The Company typically realizes its highest
revenues and net income in its current second fiscal quarter due
to the Company's agricultural seed subsidiary, Landec Ag,
recognizing virtually all of its revenues and profits during the
three months ending April.
Revenues for the quarter and first six months include
continued planned revenue reductions in Apio's "fee-for-service"
commodity business in order to focus on Apio's proprietary
specialty packaged value-added business. Over the last year and
a half, Apio has reduced revenues and costs by exiting segments
of its "fee-for-service" commodity business and exiting its
domestic fruit business. For the first six months of fiscal year
2003, with relatively flat revenues, operating income increased
7% and net income increased 39% compared to the first six months
of fiscal year 2002.
"The results for the quarter ended April 27, 2003 and for the
first six months of fiscal year 2003 are in line with our goal
to continue to grow Apio's value-added technology-based
specialty packaging produce business and Landec Ag's seed
business, while at the same time continuing to reduce our
operating costs," commented Gary Steele, President and CEO of
Landec.
"During the second quarter of fiscal year 2003, sales of our
value-added specialty packaging vegetable products grew 14% to
$21.6 million compared to $18.9 million in the second quarter of
fiscal year 2002," stated Steele. "In addition, Landec Ag seed
revenues grew 11% in the second quarter of fiscal year 2003 to
$20.4 million from $18.4 million in the second quarter of fiscal
year 2002. Net income for the second quarter of fiscal year 2003
decreased $752,000 as compared to the same quarter a year ago
due to (1) expected lower licensing fees, (2) planned increased
investments in our banana program and (3) unplanned seasonal
farming losses in Apio's commodity produce business associated
with winter sourcing of produce. The farming losses in Apio's
"fee-for-service" commodity business reduced net income by
approximately $500,000 in the second quarter of fiscal year 2003
compared to a benefit from farming income of $1.4 million in the
second quarter of fiscal year 2002, a negative year-to-year
change of $1.9 million which is equivalent to $0.08 per diluted
share."
"For the first six months of fiscal year 2003, sales of our
value-added specialty packaging vegetable products grew 18% to
$46.4 million compared to $39.2 million in the six months of
fiscal year 2002," added Steele. "Net income for the first six
months of fiscal year 2003 increased to $2.6 million from $1.9
million in the first six months of fiscal year 2002. This
increase in net income is due to (1) higher gross profits for
Apio's value-added specialty packaging vegetable business which
increased by $1.9 million due to increased sales and product mix
changes, (2) higher gross profits for Landec Ag which increased
nearly $700,000, (3) lower Company-wide selling, general and
administrative expenses which decreased $553,000 and (4) lower
interest expenses of $413,000. These improvements in net income
were partially offset by (1) a $1.3 million loss from farming
activities in the first six months of fiscal year 2003 compared
to a benefit from farming income of $1.2 million during the same
period a year ago, resulting in a $2.5 million, or an $0.11 per
diluted share, negative year-to-year change in farming
activities and (2) a $339,000 planned increase in research and
development expenses to support our banana and seed technology
programs."
"Our second quarter and first six months results reflect the
impact of the expanded efforts we are undertaking in our banana
packaging technology program. Relative to the same periods a
year-ago, we have increased our efforts in our banana sourcing
and research and development trials in order to capitalize on
this opportunity. For the second quarter and first six months of
fiscal year 2003, the Company spent approximately $690,000 and
$1.2 million, respectively, to expand its banana program
compared to $560,000 and $880,000, respectively, during the same
periods in fiscal year 2002," Steele commented.
"As previously communicated, our R&D and trial work for the
banana technology program is focused on three main objectives:
(1) qualifying sources from large, banana producing countries,
(2) optimizing the design and use of our 40 lb. Intelimer® based
package so that the extended shelf life we deliver can be
translated into consistent savings and increased sales for the
retail grocery chains and (3) developing new package sizes for
customers that will allow bananas to be sold in ways that are
unique to the industry. We know the market needs technology that
can extend banana shelf life and lower the costs to retailers.
As we continue to work on optimizing our banana technology for
retail applications, we are focusing our short-term
opportunities in market segments such as the food service
industry. We have qualified sources of bananas in Costa Rica and
Ecuador and will be working on qualifying other key banana
producing countries later this year. The large retail market
trials are planned to begin this summer as we work on our own
and with banana companies to identify retailers and qualify
sources well suited for conducting large retail trials," stated
Steele.
Commenting on the financial condition of the Company, Steele
said, "During the second quarter of fiscal year 2003, we
continued to pay down debt. During fiscal year 2002, we reduced
our debt from $33.4 million to $17.5 million and our debt at the
end of the second quarter of fiscal year 2003 was further
reduced to $14.1 million. Our debt to equity ratio has decreased
to 24% at the end of the second quarter of fiscal year 2003 from
31% at the end of fiscal year 2002 and 67% at the end of fiscal
year 2001. In addition, our working capital has nearly doubled
to $6.2 million as of the end of the second quarter from $3.3
million at the end of fiscal year 2002. The $4.4 million
decrease in cash during the first six months of fiscal year 2003
was primarily due to: (a) the purchase of $1.1 million of
property, plant and equipment; (b) the $2.3 million reduction of
net borrowings under the Company's lines of credit, (c) the net
reduction of long term debt of $ 1.1 million, and (d)
acquisition costs related to earn-out provisions and payments
thereon of $422,000, partially offset by (e) net cash provided
from operations of $1.4 million. At the end of the second
quarter, we had availability under our lines of credit of $3.5
million, which does not include the recent $4.5 million increase
in Landec Ag's line of credit to $7.5 million from $3.0 million.
In addition, $2.4 million of restricted cash will become
available for use within the next ten months as we pay off a
capital lease and upon the release of funds held in escrow
pursuant to the Dock Resins Stock Purchase Agreement."
"We have five primary objectives for our new fiscal year
2004, (1) increase profits, (2) significantly reduce our winter
farming investment risk (3) continue to strengthen our balance
sheet, (4) commercially launch our banana packaging technology
for retail applications while expanding our food service banana
business and (5) continue to grow our food and ag technology
businesses," commented Steele.
"Earlier today the Company announced that it had entered into
an exclusive packaging and marketing agreement with Dole Fresh
Vegetables, Inc. for Apio to package, market and sell a broad
line of fresh-cut produce under the Dole® brand in the United
States. This licensing agreement is market validation of our
successful proprietary Intelimer packaging technology and of our
quality programs and operational efficiencies which will support
one of the premier consumer brands in the world," stated Steele.
"This agreement is consistent with our stated goal to continue
to aggressively grow our value-added specialty packaging
business."
"Landec's proprietary temperature-activated Intelimer
polymers solutions are patent protected and are changing the
economics and the quality of the food and seed products we have
targeted. In addition, our technology is opening up new
solutions in the medical, consumer and adhesive markets. We have
numerous technology-driven applications in our pipeline and look
forward to introducing several new products during the upcoming
year," concluded Steele.
Operating Highlights and Outlook
Apio's Intelimer Based Packaging Products Business Continues
to Grow
Since the beginning of fiscal year 2002, Apio has introduced
fifteen new value-added produce product offerings and has
expanded its retail and club store presence to over 9,800
stores, an increase of 2,000 stores in the past twelve months.
The success of Landec's Intelimer-based food packaging
technology allows the Company to convert not only fresh-cut
produce but also whole produce into value added products that
bring real differentiation to retailers and to growers. As a
result, Apio's Eat Smart® products using our proprietary
specialty packaging grew to 62% of Apio's revenues during the
first six months of fiscal year 2003 from 53% during the same
period last year.
In addition, during the first six months of fiscal year 2003
Apio has realized record volumes and revenues from its
value-added products. The three fastest-growing product lines,
which include, party trays, iceless case liner products and
12-ounce retail packages, collectively grew 70% compared to the
first six months of fiscal year 2002.
Landec Ag's Intellicoat® Seed Coating Product Sales
Accelerate
Landec Ag, the Company's Intellicoat seed coating subsidiary,
commercially launched its Early Plant(TM) hybrid corn during
fiscal year 2003. Early Plant hybrid corn joins the existing
line-up of Landec Ag commercial products which include
Pollinator Plus® coatings for inbred corn seed, Relay(TM)
Intercropping of wheat and Intellicoat coated soybean, Fielder's
Choice Direct® hybrid corn and the Harvestar(TM) product line,
introduced in 2000, which offers high performance alfalfa and
nutrient enhanced hybrid corn seed.
Early Plant hybrid corn is designed to allow corn farmers to
safely and reliably plant hybrid corn three to four weeks
earlier than normal, by using Landec Ag's proprietary
Intellicoat coating which delays germination until the soil
reaches the optimal soil germination temperature. Otherwise,
planting earlier in cold, wet soil could cause poor or no
germination to occur. Allowing the farmer to have a wider
planting window lowers costs, reduces risks and potentially
increases yields. The program for Early Plant hybrid corn has
increased three-fold to over 40,000 acres this spring from
13,000 acres in 2002.
In 2002 Early Plant corn trials, when comparing Intellicoat
coated corn seeds to uncoated corn seeds, the Intellicoat coated
seeds showed better, more uniform emergence and higher stand
counts for improved yield potential. In 2003, Landec Ag
commercially launched its Intellicoat Early Plant corn seed
coating technology using Fielder's Choice Direct brand of hybrid
seed corn and using brands of two regional seed companies. In
addition, 34 U.S. seed companies are conducting separate
evaluations of the Intellicoat Early Plant hybrid corn
technology on their own hybrids during 2003, up from eight seed
companies conducting similar trials last year.
Landec Ag's first Intellicoat-based commercial product is
called Pollinator Plus. Pollinator Plus seed coatings are
applied to inbred seed corn to delay seed germination and extend
the pollination window thus reducing risks and increasing yields
for seed companies. Pollinator Plus is already being used by 30
major seed companies in the production of hybrid seed corn. This
product line has been planted on over 60,000 acres in 2003 which
is comparable to 2002. In addition, Landec Ag has entered into a
joint licensing agreement with Incotec International BV, a
recognized world leader in seed coating enhancement
technologies, that will make Pollinator Plus coatings available
to the European Union market starting this year.
Tables and Q&A to Follow--
LANDEC CORPORATION
Consolidated Condensed Balance Sheets
(In thousands)
April 27, October 27,
2003 2002
----------- -------------
ASSETS (unaudited)
------
Current Assets:
Cash and cash equivalents $ 3,562 $ 7,849
Restricted cash 2,382 1,032
Accounts receivable, net 16,224 19,040
Inventory 13,186 10,121
Investment in farming activities 411 1,591
Notes and advances receivable 2,217 4,396
Prepaid expenses and other
current assets 1,179 2,456
----------- -------------
Total Current Assets 39,161 46,485
Property and equipment, net 18,689 19,902
Intangible assets, net 37,838 37,480
Other assets 1,485 3,936
$97,173 $107,803
========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $13,365 $ 11,512
Grower payables 3,616 6,910
Accrued compensation 1,101 1,518
Other accrued liabilities 3,955 7,771
Deferred revenue 641 3,215
Lines of credit 7,790 10,098
Current maturities of long term
debt 2,515 2,193
----------- -------------
Total Current Liabilities 32,983 43,217
Non-current portion of long term debt 3,818 5,252
Other non-current liabilities 768 1,791
Minority interest 844 1,580
Shareholders' Equity:
Convertible preferred stock 5,531 14,461
Common stock 110,110 100,802
Accumulated deficit (56,881) (59,300)
----------- -------------
Total Shareholders' Equity 58,760 55,963
----------- -------------
$97,173 $107,803
=========== =============
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share data)
Three Months Ended Six Months Ended
April April April April
27, 28, 27, 28,
2003 2002 2003 2002
-------- -------- --------- --------
Revenues:
Product sales $51,767 $49,685 $85,969 $82,609
Services revenues 4,829 6,603 11,279 13,477
License fees 77 621 349 1,048
Research, development,
and royalty revenues 172 211 372 332
-------- -------- --------- --------
Total revenues 56,845 57,120 97,969 97,466
Cost of revenue:
Cost of product sales 40,521 37,593 71,294 67,858
Cost of services
revenues 3,586 5,727 8,215 11,121
-------- -------- --------- --------
Total cost of
revenue 44,107 43,320 79,509 78,979
Gross profit 12,738 13,800 18,460 18,487
Operating costs and expenses:
Research and
development 993 891 2,062 1,723
Selling, general and
administrative 6,859 7,152 13,382 13,935
-------- -------- --------- --------
Total operating
costs and expenses 7,852 8,043 15,444 15,658
-------- -------- --------- --------
Operating income 4,886 5,757 3,016 2,829
Interest income 66 107 129 140
Interest expense (216) (320) (538) (951)
Other income (expense) (63) (119) 31 (114)
-------- -------- --------- --------
Net income 4,673 5,425 2,638 1,904
Dividends on Series B
preferred stock (110) (102) (219) (202)
-------- -------- --------- --------
Net income applicable to
common shareholders $ 4,563 $ 5,323 $ 2,419 $ 1,702
======== ======== ========= ========
Basic net income per
share $ 0.22 $ 0.30 $ 0.12 $ 0.10
======== ======== ========= ========
Diluted net income per
share $ 0.18 $ 0.24 $ 0.10 $ 0.08
======== ======== ========= ========
Shares used in per share
computations:
Basic 21,106 17,463 20,868 17,028
========= ======== ========= ========
Diluted 22,856 20,808 22,572 20,358
========= ======== ========= ========
LANDEC CORPORATION
SECOND QUARTER ENDED APRIL 27, 2003
QUESTIONS AND ANSWERS
1) What are the primary areas of operational focus for the Company
during fiscal year 2004?
During fiscal year 2004, (which began on May 26, 2003) the Company
will be focusing on the following areas of operation:
a. With our proprietary packaging technology for bananas we need
to accomplish the following:
1. Complete the validation and qualification of sourcing of our
bananas using Landec's packaging technology from the
significant banana growing countries in Central and South
America, in addition to Costa Rica and Ecuador already
qualified.
2. Work with several multinational banana shippers to qualify
their bananas in large retail trials.
3. Continue to expand current commercial opportunities for our
banana technology in additional market segments such as the
food service industry.
b. Grow Apio's value-added technology-based business by 20% or more
through increasing revenues to existing customers, adding new
customers and introducing new products utilizing our breathable
packaging technology.
c. Increase gross margins in Apio's value added business by
reducing production costs and focusing on higher margin
products.
d. Continue to reduce operating expenses at Apio.
e. Continue to implement our strategy of reducing winter season
sourcing issues at Apio.
f. Continue to reposition existing lines of business, such as our
fee-for-service business.
g. Grow Landec Ag's uncoated seed revenues by 10% to 20% and its
Intellicoat coated seed revenues by 50% or more.
h. Generate positive cash flow from operations.
2) What are some of the key milestones Landec achieved during the
first six months of fiscal year 2003?
The following key milestones were completed in the first six
months of fiscal year 2003:
a. Increased net income by $734,000 or 39% compared to the first
six months of fiscal year 2002.
b. Increased the number of stores Apio sells product to by 1,100
to 9,800.
c. Increased value-added specialty packaging vegetable revenues by
18% compared to the first six months of fiscal year 2002.
d. Increased Apio's revenues from value-added products to 62% of
Apio's total revenues from 53% of its revenues in the first six
months of fiscal year 2002.
e. Increased Landec Ag seed revenues by $1.4 million or 8% compared
to the first six months of fiscal year 2002.
f. Increased Landec Ag's coated seed revenues to $1.5 million, an
increase of over 90% compared to the first six months of fiscal
year 2002.
g. Reduced outstanding debt by $3.4 million to $14.1 million from
$17.5 million at the end of fiscal year 2002.
h. Reduced the Company's debt-to-equity ratio from 31% at the end
of fiscal year 2002 to 24% at the end of the second quarter of
fiscal year 2003.
i. Entered into a joint licensing agreement with Incotec
International BV that will make Pollinator Plus coatings
available to the European Union market starting this year.
3) Why did total product sales only increase 4% for the second
quarter and the first six months of fiscal year 2003 compared to
the same periods in fiscal year 2002 when the combined Apio
value-added produce business and Landec Ag seed business grew by
13% in the second quarter and 15% for the first six months of
fiscal year 2003?
Product sales include export and banana sales, in addition to
value-added produce and seed sales. For the quarter and six months
ended April 27, 2003, value-added vegetable produce sales increased
$2.7 million and $7.2 million, respectively, compared to the same
periods in the prior year and seed sales increased $2.0 million and
$1.4 million, respectively. Partially offsetting these product
sales increases were decreases in export and banana sales. For the
quarter and six months ended April 27, 2003, export sales decreased
$2.0 million and $4.7 million compared to the same periods in
fiscal year 2002 due to lower volume sales of fruit and broccoli to
Asia. In addition, banana sales decreased approximately $700,000
during the quarter and first six months of fiscal year 2003
compared to the prior year periods due to essentially no retail
banana sales in fiscal year 2003 as the Company prepares for its
upcoming large retail market trials.
4) What impact will the earlier announced Dole branding deal have
on fiscal year 2004 results?
There are a significant number of retail stores in which Apio
currently does not have a presence. The exclusive use of the
Dole brand in our major product categories will allow Apio to
expand its product line and customer base while also giving Apio
the flexibility to expand its own Eat Smart brand. We are unable to
estimate at this time the impact the Dole branding deal will have
on fiscal year 2004 results. Initial sales of Dole branded
specialty packaged products are planned to begin late summer of
2003. Until we determine penetration rates over a couple of
quarters, we will not be able to estimate the financial impact.
5) What is the current status of the banana program?
We are currently focused on marketing our banana packaging
technology to the food service industry and on qualifying banana
sources on our own and with major multinational banana suppliers.
During the first six months of fiscal year 2003, the Company
completed the qualification of Eat Smart bananas from Costa Rica
and Ecuador, two of the largest banana-producing countries in the
world. These milestones should lead to more qualifications of the
other major banana producing countries in Central and South America
and the beginning of new retail market tests within the next month
or two. The Company plans to conduct large retail trials on its
own and with one or more international banana companies beginning
this summer.
6) The Company's cash position is $3.6 million at the end of the
second quarter of fiscal year 2003. Does the Company have enough
cash resources to continue to effectively operate?
Since the beginning of fiscal year 2002 the Company has paid down
debt by $19.3 million. This will reduce our annual principal and
interest payments by approximately $3.7 million and interest
expense by $1.0 million. In addition, during the first six months
of fiscal year 2003, the Company has reduced payables and accrued
liabilities by $5.7 million and has paid for over 40% of Landec
Ag's production needs for fiscal year 2004 sales. With our plan to
be profitable in fiscal year 2004, the Company expects that cash
from operations coupled with lower debt payments and reduced
liabilities and inventory needs, should provide sufficient cash
resources to effectively operate the business for the foreseeable
future without additional equity placements.
7) The Company has been stating for a couple of years now that it
was developing strategic plans to minimize the impact of the winter
sourcing on net income, why is there a negative financial impact
from winter sourcing this year?
In order to be a year around provider of produce to our customers,
the Company has made investments in farming activities in the
desert areas of Southern California and Arizona during the winter
months when sources in Central California are not sufficient to
meet our needs. These investments are a way of managing our risk
against produce shortages during the winter months as a result of
weather related issues. Because of more normal weather this past
winter there was ample supply of product and thus lower market
prices. This resulted in the Company recognizing a loss from
farming activities of $1.3 million during the first six months of
fiscal year 2003 compared to a profit from farming activities of
$1.2 million during the first six months of fiscal year 2002 when
weather conditions resulted in a shortage of produce available for
sale. Unlike fiscal year 2002, however, the Company did not have
to buy product on the open market at elevated prices during the
winter months of fiscal year 2003 because of better planning and
purchasing controls and a greater supply of produce.
Going forward, the Company is diligently seeking ways to greatly
reduce its investment exposure in farming during the winter months.
8) What are the most significant challenges you face over the next
2-3 quarters?
First, for the banana program, complete several large retail market
tests and position the banana technology for commercial retail
sales, while in parallel, continuing to expand our banana sales for
food service.
Second, increase margins at Apio by reducing costs in both
production and G&A, and increasing efficiencies through full
utilization of Apio's new ERP business system and through
additional automation in the value-added facility.
Third, continue to mitigate the impact of the winter sourcing
issues at Apio by working with grower/processors outside of the
U.S. for alternate sources of produce during the winter months.
Also, closely monitor our desert sources of produce while
increasing the number of growers and acreage that supply our
value-added business.
Lastly, closely manage our cash resources to ensure the Company
can operate efficiently and take advantage of business
opportunities. This will be achieved in three ways, (1) renegotiate
Apio's working capital line with its current bank, (2) enter into
an equipment line of credit at Apio to meet future equipment needs
and (3) generate cash flow from operations to cover debt payments
and increase the Company's cash balance.
9) The Company recently disclosed a change in its fiscal year end from
October to May. Why did the Company choose May as its new fiscal
year end and why change now?
We have concluded that an October year end does not make sense for
Landec given its business and planning operating cycle. We did not
want to make a change while we were selling the Dock Resins
business and other non-strategic lines of business. Now that we
have sold non-strategic businesses and have positioned the Company
to focus on its core operating businesses, we have decided the time
is right to make the change. We elected May as the new fiscal year
end because it is the end of our operating and planning cycle for
both Landec Ag and Apio and because it positions the Company to
have progressively better fiscal quarterly results versus the
current fiscal structure of having one very large profitable
quarter.
