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 March 26, 2013 for the quarter ended February 24, 2013) 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.
Disclaimer
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, the ability to integrate GreenLine's operations into the Company, 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, 2012 (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.
Apio's gross margin for the third quarter of fiscal year 2013 was lower than the third quarter of last year due to weather-related produce sourcing issues in California which reduced gross profit by $3.0 million this quarter (see Question 5 below). In addition, in GreenLine's business, the normal and expected sourcing pattern for green beans during the third quarter winter months, when green beans are almost exclusively grown in southern Florida, historically result in the lowest gross margin for the year and low to negative profitability for those months depending on the supply and market prices of green beans. During this year's third quarter winter months, although the sourcing of green beans for GreenLine was more favorable than normal, the realized gross margin for GreenLine further lowered Apio's overall gross margin during the quarter.
For the twelve months ended December 2012, the fresh-cut produce category grew by 8.4% according to A.C. Nielsen, compared to Apio's unit volume growth of 24% for the same period.
The integration is going well and is ahead of our original plan. We now have a single integrated ERP system in place that will result in significant efficiencies in the upcoming quarters. After a pause during the busy holiday season, we have resumed further integration efforts with the primary focus on cross selling efforts since our new integrated ERP system now allows us to offer "one stop shopping" to our customers. We expect the new system capabilities to lead to new sales of Eat Smart® products to GreenLine customers and new sales of GreenLine products to Eat Smart customers.
For the non-green bean business, during December and January we experienced weather-related produce sourcing issues in California. These weather-related produce sourcing issues resulted in a reduction in gross profit of approximately $3.0 million during the third quarter due to: (1) poor harvest and production yields, (2) purchases on the open market considerably above contracted prices, (3) lost revenues and gross profit due to not being able to fully meet customer demand, (4) increased handling costs to sort poor quality produce, and (5) losses on sourcing arrangements with produce growers.
As mentioned above, for the GreenLine green bean business we have experienced significant cost increases during the month of March as a result of the freezes in southern Florida at the beginning of the month. These cost increases, coupled with a shortage of green beans, could result in a reduction of pre-tax income of up to $2.0 million during the fourth quarter of fiscal year 2013 which is reflected in our guidance.
As with all companies, we are subject to global economic risks like those we experienced during the recent severe recession. Specific toLandec, the primary risk at Apio aside from weather-related produce sourcing risks, would be the loss of a key customer at the time of a contract renewal. This loss would typically be due to pricing pressure that can result in margins that are not acceptable to Landec, leading the Company to make a conscious decision to walk away from that business, which we have done in the past.
Regarding Lifecore, the greatest risk is generally associated with the timing of the regulatory approval process for new opportunities, and secondarily, maintaining the existing contractual supply relationships. Any regulatory risk is accounted for in the financial projections and the supply risk is mitigated by longstanding, long-term, renewable supply contracts.
Windset has been in full production with its first 64 acres of greenhouses in Santa Maria since December of 2011 with different varieties of tomatoes. Production performance has been exceeding Windset's original expectations, and in September 2012 they completed their second planting of tomatoes for all 64 acres. Late last fall Windset started the construction on the next 64 acres of greenhouses on their Santa Mariaproperty adjacent to the first 64 acres. The additional 64 acres of greenhouses will utilize the same packaging and processing facilities as the first 64 acres thus reducing the overall construction costs for this expansion.
During the first nine months of fiscal year 2013, we have recognized a total of $7.1 million in pre-tax income from our investment in Windset which included $6.3 million from our portion of the increase in Windset's fair market value and $844,000 of dividend income from our Windset preferred stock.
For the fourth quarter of fiscal year 2013, we currently expect to recognize approximately $1.0 million from our portion of the increase in Windset's fair market value and $281,000 of dividend income from our Windset preferred stock.
Since February 15, 2011, the date of our original $15 million investment in Windset, we have recognized $15.1 million of pre-tax income, equal to our original investment. We are very pleased with our 20% ownership and investment in Windset and with the future prospects for Windset.
We intend to introduce a number of new products and product lines at Apio. Most recently, we introduced a new line of Vegetable Salad Kits to address a growing demand from consumers for packaged foods that are highly nutritious and taste great. The first product in this new line is Sweet Kale Salad which was launched in November 2012. This new product has been well received by consumers and we are scaling operations to meet increasing demand. The Sweet Kale Salad will be followed by additional Vegetable Salad Kits over the next several months to create a full product line.
We expect our partner Windset to launch new BreatheWay® packaged products for cucumbers and peppers, as our testing has demonstrated a significant increase in shelf life for these products using Landec's technology and we are in the process of testing our packaging technology for the shelf life extension of tomatoes.
At Lifecore, we plan to expand product offerings to our customers as a result of the recent clearance by the FDA of several of our new products. Commercial shipments have begun for all of these products.
Our top priorities are as follows: (1) continue integrating GreenLine into Apio's operations, (2) grow Apio's business by launching new products and gaining new customers through cross-selling opportunities utilizing our two leading fresh-cut produce brands, Eat Smart and GreenLine®, while maintaining or improving Apio's margins and (3) grow Lifecore's business by expanding services and products with existing customers, as well as utilizing its manufacturing capabilities to expand into new partnerships.
a) Apio's Value-Added business includes revenues and gross profit from Apio Cooling LP. and Apio Packaging.
b) Included in Corporate are the non-Apio license and R&D fee revenues and gross profit.
c) Included in Other is net interest income/(expense), dividend income, change in the FMV of Windset, non-operating income/(expense) and income tax expense.
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