Landec Reports Results for Second Quarter and First Half Fiscal Year 2013 and Increases Guidance for Fiscal Year 2013

Revenues and net income for the second quarter and the first half of fiscal year 2013 reflect strong operating results in our fresh-cut specialty packaged food subsidiary, Apio, Inc.’s value-added business that includes GreenLine Holding Company (“GreenLine”), which was acquired in April 2012, and Apio’s export business. In addition to the strong operating results, the Company concluded at the end of the second quarter of fiscal year 2013, based on GreenLine’s revenues for the first eleven months of calendar year 2012 and projections for December of 2012, that the required revenue target to meet the minimum earn-out payment to the former GreenLine owners, a target derived from the revenue projections of the former owners of GreenLine, will not be met. As a result, the $3.9 million earn-out liability recorded at the close of the GreenLine acquisition was reversed as of November 25, 2012 and the corresponding increase in operating income is reflected on the Consolidated Condensed Statements of Income under the caption “Change in value of contingent consideration” in this release (see Question 5 in the Questions and Answers section for more details). Also today, as reported in a separate release by Landec, the Company has restated its financial statements for the first quarter of fiscal year 2013 to reflect a $2.9 million increase in the previously reported fair market value of Windset Holdings 2010 Ltd. (“Windset”).

Gary Steele, Landec’s Chairman and CEO, commented, “We had an excellent second quarter and first half of fiscal year 2013, achieving revenue growth of 41% and 40%, respectively, and net income growth of 49% and 81%, respectively, before including the $3.9 million non-recurring earn-out adjustment. The second quarter and first half operating highlights include: (1) growing our Apio food business unit volume sales by 20% and 21%, respectively, compared to the industry category growth of 9%, (2) increasing Apio’s gross margin during both the second quarter and first six months of fiscal year 2013 compared to the same periods last year, (3) increasing Apio’s export revenues by 16% and 17%, respectively, while maintaining margins, (4) achieving GreenLine’s earning expectations for the second quarter and first six months of fiscal year 2013 despite lower revenues than originally expected due to the summer drought and underperformance of a few new products, (5) completing our ERP systems integration work generating operating efficiencies from the GreenLine acquisition, (6) launching the first in our family of super food products with significant initial nationwide demand, (7) our strategic partner Windset initiating construction of an additional 64 acres of hydroponic greenhouses in Santa Maria, California which will double Windset’s capacity in California, and (8) initiating shipments of new products recently approved by the FDA at Lifecore Biomedical, Inc., Landec’s biomaterials subsidiary. Our second quarter was one of the most productive operating quarters in Landec’s history.”

As reflected in our financial results, Landec had a very good first half of fiscal year 2013 with revenue growth of 40% and net income growth of 158% compared to the same period last year. Our original guidance for all of fiscal year 2013 was to grow revenues by approximately 30% and net income by 25% to 35% compared to fiscal year 2012. Based on the results for the first half of fiscal year 2013, and barring any major adverse financial impact from winter weather in our food business, we now expect revenues to grow 33% to 38% and net income to grow 60% to 70%, which includes the additional $3.9 million, or $0.15 per share, from the non-recurring earn-out adjustment. In addition, we expect to generate $20 million to $25 million in cash flow from operations and we expect to spend approximately $8.0 million to $9.0 million in capital expenditures, slightly higher than the $7.5 million to $8.0 million in our original guidance for fiscal year 2013.

Revenue growth of $33.1 million during the second quarter of fiscal year 2013 compared to the second quarter of last year was due to (1) $24.3 million of revenues from GreenLine, (2) a $7.6 million increase in revenues in Apio’s non-GreenLine value-added businesses, which includes Apio Cooling and Apio Packaging, and (3) a $3.9 million increase in Apio’s export revenues due to a 3% increase in export unit volume sales and favorable pricing. The second quarter growth of $7.6 million in Apio’s non-GreenLine value-added businesses resulted primarily from a year-over-year 20% increase in unit volume sales of fresh-cut specialty packaged products due to new product offerings, new distribution gains and overall growth in the fresh-cut vegetable category. These increases in revenue were partially offset by a $1.5 million decrease in revenues at Lifecore due primarily to product shipments that had historically occurred during the Company’s second quarter being delayed until the third quarter this year and a $1.2 million decrease in Corporate revenues primarily due to the termination of the Monsanto license agreement at the end of the second quarter of fiscal year 2012.

For the second quarter of fiscal year 2013, net income increased $5.6 million, or 167%, due to a $9.6 million net increase in Apio’s pre-tax income. The increases in Apio’s pre-tax income were comprised of: (1) the $3.9 million non-recurring reversal of the GreenLine earn-out liability, (2) $5.3 million from GreenLine, and (3) a $1.3 million increase from Apio’s non-GreenLine value-added and export businesses, partially offset by interest and financing expenses and amortization expenses associated with the acquisition of GreenLine. The $9.6 million net increase in Apio’s pre-tax income was partially offset by: (1) a $1.3 million reduction in license fees from the termination of the Monsanto license agreement, (2) a $2.1 million decrease in pre-tax income at Lifecore due primarily to product shipments that had historically occurred during the Company’s second quarter being delayed until the third quarter this year, and (3) an $871,000 increase in the income tax expense.

Revenue growth of $61.9 million during the first six months of fiscal year 2013 compared to the same period last year was due to (1) $44.3 million of revenues from GreenLine, (2) a $12.9 million increase in revenues in Apio’s non-GreenLine value-added businesses, and (3) a $7.9 million increase in Apio’s export revenues due to a 3% increase in export unit volume sales and very favorable pricing. The first half growth of $12.9 million in Apio’s non-GreenLine value-added businesses resulted primarily from a year-over-year 21% increase in unit volume sales of fresh-cut specialty packaged products due to new product offerings, new distribution gains and overall growth in the fresh-cut vegetable category. These increases in revenue were partially offset by a $643,000 decrease in revenues at Lifecore due primarily to product shipments that had historically occurred during the Company’s second quarter being delayed until the third quarter this year and a $2.6 million decrease in Corporate revenues primarily due to the termination of the Monsanto license agreement at the end of the second quarter of fiscal year 2012.

For the first half of fiscal year 2013, net income increased $8.1 million, or 158% compared to the same period last year, due to a $15.4 million net increase in Apio’s pre-tax income. The increases in Apio’s pre-tax income were comprised of: (1) the $3.9 million non-recurring reversal of the GreenLine earn-out liability, (2) $6.5 million from GreenLine, (3) a $2.7 million increase from Apio’s non-GreenLine value-added and export businesses, and (4) a $4.1 million increase in the fair market value of our Windset investment compared to the increase in Windset Farm’s fair market value during the first six months of last year (see Question 2 in the Questions and Answers section for more details). These increases in Apio’s pre-tax income were partially offset by interest and financing expenses and amortization expenses associated with the acquisition of GreenLine. The $15.4 million net increase in Apio’s pre-tax income was partially offset by: (1) a $2.7 million reduction in license fees from the termination of the Monsanto license agreement, (2) a $2.7 million decrease in pre-tax income at Lifecore due primarily to product shipments that had historically occurred during the Company’s second quarter being delayed until the third quarter this year, and (3) a $2.3 million increase in the income tax expense.

Landec ended the second quarter of fiscal year 2013 with $6.8 million in cash and marketable securities. During the first six months of fiscal year 2013, cash and marketable securities decreased by $15.4 million due primarily to (1) capital expenditures of $3.3 million for property, plant and equipment, (2) principal debt payments of $7.3 million, and (3) the full earn-out payment of $10 million related to the acquisition of Lifecore. These decreases were partially offset by cash flow from operations and the tax benefits from stock based compensation. At November 25, 2012, the Company had $19.7 million available to borrow under its lines of credit.

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 severity of the current economic slowdown, 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.

1) Given your revised guidance for all of fiscal year 2013, how do the expected results break down between the third and fourth quarters?

2)In the Company’s original guidance for Landec’s fiscal year 2013, what was the planned fair market value change for Windset by quarter and how does that compare to what has been recorded and what is planned to be recorded over the next two quarters?

3) How is the integration of GreenLine into Apio progressing?

4)Regarding the recent acquisition of GreenLine, what are the future annual savings from already realized operating synergies?What are potential other future savings for operating synergies?

5)Was any of the earn-out associated with the GreenLine acquisition earned?

6)Is the fresh-cut produce category continuing to grow?How has the weather been in California thus far this fiscal year?

7)What is the status of Windset’s new Santa Maria, California operation?

8) What is the status of Landec’s license agreement with Chiquita?

9)What new products and/or programs does the Company plan to introduce during fiscal year 2013?

10)What are Landec’s priorities for the next 12 to 24 months?

11) How do the results by line of business for the three and six months ended November 25, 2012 compare with the same periods last year?