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Martek Biosciences (MATK) Announces Record Fourth Quarter And FY 2004 Financial Results


10/19/2005 5:12:26 PM

COLUMBIA, Md., Dec. 9 /PRNewswire-FirstCall/ -- Martek Biosciences Corporation today announced its financial results for the fourth quarter and year ended October 31, 2004. For the fourth quarter of 2004 (4th Qtr 04), revenues of $59.7 million were achieved, up from $38.6 million for the fourth quarter of 2003 (4th Qtr 03), and for year ended October 31, 2004 (FY 04), revenues of $184.5 million were achieved, up from $114.7 million for the year ended October 31, 2003 (FY 03). For the 4th Qtr 04, Martek generated income before income taxes of $10.1 million compared to income before income taxes of $6.2 million in the 4th Qtr 03. For FY 04, Martek generated income before income taxes of $21.9 million compared to income before income taxes of $16.0 million for FY 03. Net income was $35.3 million, or $1.16 per diluted share, for the 4th Qtr 04 compared to net income of $6.2 million, or $0.21 per diluted share, for the 4th Qtr 03 and net income was $47.0 million, or $1.55 per diluted share, for FY 04 compared to net income of $16.0 million, or $0.58 per diluted share, for FY 03. Both the 4th Qtr 04 and FY 04 net income amounts reflect a one-time, non-cash income tax benefit of $25.2 million. See below for additional discussion.

"Martek continued its robust growth in earnings and revenue in the fourth quarter. This growth is expected to continue throughout 2005 as the Kingstree facility expands production and demand grows from existing and new products," stated Henry "Pete" Linsert, Jr., Chief Executive Officer of Martek.

4th Qtr Consolidated Financial Results

Total revenues for the 4th Qtr 04 were $59.7 million, an increase of $21.0 million or 54% over the 4th Qtr 03. A significant portion of this increase is due to higher sales of nutritional products to the Company's infant formula licensees (For a history of the Company's nutritional product sales by quarter see the chart at http://www.martekbio.com/images/corporatePages/VAM143.gif). Approximately 90% of Martek's 4th Qtr 04 nutritional product sales were generated from sales of docosahexaenoic acid (DHA) and arachidonic acid (ARA) oils to four of the Company's infant formula licensees: Mead Johnson, Wyeth, Abbott Laboratories and Nestle. Supplemented term infant formulas manufactured by three of these companies were introduced in the U.S. in 2002, and the fourth, Nestle, launched a supplemented formula in the U.S. in 2003. Also included in Martek's 4th Qtr 04 revenues were the Company's initial sales of DHA oil for the pregnancy and lactation market as well as $3.6 million related to contract manufacturing revenues generated by the former FermPro business in Kingstree, SC, which was acquired in September 2003. To prepare the Company for future growth, the Company has expanded both the research and development and selling, general and administrative efforts during fiscal 2004. See below for additional discussion.

Gross profit margin on total revenues was 39% for both the 4th Qtr 04 and the 4th Qtr 03. The gross profit margin for the current quarter was negatively impacted by an increase in the Company's overall cost of ARA due to the continued decline in the U.S. dollar against the euro and the continued use of air freight in connection with ARA shipments from Europe; however, such impacts were offset by the benefits of certain DHA production improvements recently developed and significant growth in the ARA volume received from DSM's Belvidere, New Jersey manufacturing plant. The Company expects its gross profit margins to improve in fiscal 2005 as the newly implemented production methods further improve production yields, economies of scale are achieved at the recently expanded Kingstree, South Carolina manufacturing facility and DSM's Belvidere plant continues to increase its ARA production volumes.

Research and development expenses increased by $1.2 million or 31% in the 4th Qtr 04 compared to the 4th Qtr 03. The increase is primarily the result of the additional resources directed toward the Company's continuing efforts to lower its DHA production cost by increasing fermentation production yields and developing new downstream processing techniques. In addition, costs were incurred in connection with the development of DHA products for the food and beverage industry and development activities associated with Martek's internal ARA production as well as other research in connection with the development of plant-based DHA under a collaboration agreement with SemBioSys.

Selling, general and administrative expenses increased by $2.3 million or 49% during the 4th Qtr 04 over the 4th Qtr 03. Of this increase, approximately $800,000 relates to the Company's Kingstree, SC plant acquired in September 2003, for which additional administrative infrastructure has been added to support the new facility and its expansion. The remaining increase is primarily due to additional personnel and insurance costs required to accelerate and manage the Company's overall growth. Specifically, the Company has increased staffing in its business development, food and beverage sales and marketing and finance departments.

Other operating expenses totaled $1.3 million and $600,000 in the 4th Qtr 04 and 4th Qtr 03, respectively. During 4th Qtr 04, the Company accrued an additional $500,000 associated with the 2003 Winchester wastewater treatment matter. Other expenditures related primarily to production start-up costs associated with the expansion at our Kingstree, SC facility and qualifications of certain third-party manufacturers.

As of October 31, 2004, Martek, for the first time in its history, generated three years of cumulative operating profits. As a result of this positive earnings trend and projected future operating results, the Company, as required by generally accepted accounting principles, recorded a one-time, non-cash income tax benefit. The benefit was created by Martek's reversal of its deferred tax asset valuation allowance, such deferred tax asset consisting primarily of net operating loss carryforwards. This reversal resulted in the recognition of an income tax benefit totalling $25.2 million as well as a direct increase to stockholders' equity of approximately $22.8 million. Although the Company will continue to have significant net operating loss carryforwards which are expected to mitigate some of Martek's cash tax expenditures over the next several years, Martek will begin recording, in fiscal 2005, a provision for income taxes based on the appropriate effective tax rate.

Net income of $35.3 million, or $1.16 per share on a diluted basis, was realized in the 4th Qtr 04, compared to net income of $6.2 million, or $0.21 per share on a diluted basis for the 4th Qtr 03.

Fiscal Year 2004 Consolidated Financial Results

Total revenues for FY 04 were $184.5 million, an increase of $69.8 million or 61% over FY 03, due primarily to higher sales of nutritional products to the Company's infant formula licensees. Gross profit margin decreased to 38% for FY 04, from 40% for FY 03, primarily due to higher freight costs and continued unfavorable exchange rate fluctuations, both related to the Company's ARA costs from DSM. Research and development expenses increased by $5.4 million or 41% in FY 04 compared to FY 03 due to the commencement of various development projects including both DHA and ARA production method initiatives as well as DHA food applications. Selling, general and administrative expenses increased by $9.5 million or 58% in FY 04 over FY 03 due to increased personnel and insurance costs required to support the Company's growth as well as the addition of the new Kingstree, SC facility. Other operating expenses, as described above, of $4.0 million and $1.9 million, were incurred in FY 04 and FY 03, respectively. A net benefit for income taxes, also as described above, totaling $25.1 million was recognized in FY 04. Net income of $47.0 million, or $1.55 per diluted share was realized for FY 04, compared to net income of $16.0 million, or $0.58 per diluted share for FY 03.

The Company generated cash flow from operations of $10.1 million for FY 04. Positive cash flow from operations was primarily the result of Martek's profitability offset by a continued buildup of DHA inventory. Capital expenditures for FY 04 were $180.4 million, the majority of which related to the expansion of the Kingstree, SC facility to increase output of the Company's nutritional oils. The Company generated cash flow from financing activities of $114.5 million primarily due to borrowings under the Company's revolving credit facility and proceeds from the exercise of stock options and the issuance of common stock. At the end of the year, Martek had approximately $42.7 million in cash, cash equivalents and short-term investments, a decrease of $54.3 million from October 31, 2003. In order to meet its capital needs, the Company may raise capital in the public or private markets, in the form of debt or equity, in the coming quarters.

As noted above, the Company continues to add manufacturing capacity and expand its business to meet market demand for its products. In order to support this expansion, Martek has increased overall staffing levels. As of October 31, 2004, the Company employed 541 full-time employees, of which 189 have been hired during the year ended October 31, 2004, including 160 whose focus relates to production or research and development activities.

                            Recent Highlights

  * Production and Supply of Nutritional Oils -- Since fiscal 2003, the
    demand for the Company's nutritional oils for use in infant formula
    products has significantly exceeded production capacity. These
    shortfalls have resulted from an acceleration of such demand over what
    customers had projected coupled with a shortage of ARA production
    capacity from DSM that began in the first quarter of fiscal 2004. Martek
    has historically produced the DHA component at its Winchester, KY
    facility and purchased the ARA component from DSM as manufactured at its
    Capua, Italy plant. Recently, Martek began shipping product containing
    DHA manufactured at the Company's Kingstree, SC plant and ARA
    manufactured at DSM's Belvidere, NJ plant.

    The Company is in the process of a significant production expansion
    including additional ARA production from DSM. These initiatives include
    the following:

    -- Expansion of Kingstree Production Facility -- Martek has continued
       its extensive expansion at its Kingstree, SC location for the
       fermentation and processing of the Company's nutritional oils. The
       overall expansion is expected to cost approximately $180 million when
       complete. Certain components of the initial phase of the expansion,
       including the fermentation area, commenced commercial operation
       during the last six months of fiscal 2004. The second expansion phase
       is expected to commence commercial operation in 2nd Qtr 05.

    -- Production at DSM's Belvidere Facility -- After the fire incident in
       May 2004 at the Belvidere, NJ manufacturing plant of DSM, the ARA
       production line was restarted in June. Since that time, Belvidere has
       continued to increase its monthly output of ARA. Martek is now
       receiving approximately 40% of its ARA from DSM's Belvidere facility,
       with that percentage expected to grow as DSM completes its current
       expansion at Belvidere, in phases, over the next 12 to 16 months.

    -- Martek Production of ARA -- The Company is also in the process of
       scaling up internal production of ARA at its Winchester, KY and
       Kingstree, SC facilities. This production will supplement DSM's
       manufacturing capabilities until its expansion at the Belvidere plant
       is complete.

  * Adverse Ruling on European Blends Patent -- In November 2004, the
    Opposition Division of the European Patent Office revoked Martek's
    European DHA/ARA oil blends patent as a result of challenges made by two
    potential competitors. The Company immediately filed an appeal of this
    decision; as a consequence, the blends patent has been reinstated and
    will remain in force during the appeal. The appeal process is
    anticipated to take 18 to 24 months to complete. Martek believes it has
    substantive grounds for the appeal and intends to vigorously pursue the
    matter.

  * Supply of Proprietary Detection Dye -- In November 2004, Martek signed a
    10-year supply agreement with Beckman Coulter. Under the terms of the
    agreement, Beckman Coulter has primarily non-exclusive rights to
    Martek's proprietary PBXL-1 protein detection dye. Beckman Coulter is
    expected to utilize the dye on a variety of its research platforms.

  * New DHA-based Product Launches -- During 4th Qtr 04, several new
    products were launched which contained Martek DHA. Specifically, Mead
    Johnson launched a DHA supplement for pregnant and nursing women
    containing Martek DHA. This product, Expecta, extends Mead Johnson's use
    of Martek DHA beyond infant formula and responds to the growing body of
    evidence suggesting both mothers and their babies benefit from an
    adequate maternal intake of DHA. In addition, PBM Products launched the
    first beverage containing Martek DHA that is formulated to meet the
    special needs of diabetics and people with abnormal glucose tolerance.
    Finally, GlaxoSmithKline launched a second powdered drink mix containing
    Martek DHA in India. The product, Junior Horlicks, is specially
    formulated to meet the needs of a child's developing brain and nervous
    system and is available in selected outlets in south and east India. All
    of these products are expected to generate additional revenue for Martek
    during fiscal 2005.

  * New Country Launches by Nestle -- In addition to the United States,
    Nestle has now launched its fortified infant formula, containing
    Martek's product, in China, Hong Kong, Canada, Mexico and Australia.

  * New Vice President of Medical Research -- In November 2004, Dr. Edward
    Nelson joined Martek as Vice President of Medical Research. Prior to
    joining Martek, Dr. Nelson spent 10 years at McNeil Consumer and
    Specialty Pharmaceuticals serving as Vice President. In this position,
    he was responsible for research and development and clinical affairs.
    Prior to that, Dr. Nelson served as a Senior Director at Merck Research
    Laboratories. Dr. Nelson received his M.D. from the University of Texas
    Medical Branch in 1974 and Ph.D. in Biochemistry from Michigan State
    University in 1970.


                     Investor Conference Call Webcast

Investors may listen to Martek's senior management discuss the Company's quarterly and annual earnings and other current business issues on Thursday, December 9, 2004 at 4:45 p.m. EST by accessing Martek's website at http://www.martekbio.com/, selecting the "Investors" tab, choosing "Live Webcast" and following the related instructions. The webcast will be available for replay through the close of business on December 23, 2004.

General

Sections of this release contain forward-looking statements concerning, among other things: (1) expectations regarding future revenue and profit growth, product introductions, growth in nutritional product sales, production expansion, margin and productivity improvements, applications and potential collaborations; (2) expectations regarding sales to infant formula licensees; (3) expectations regarding future efficiencies in manufacturing processes and the costs of production of nutritional oils and purchase of third-party manufactured oils; (4) expectations regarding production capacity and the cost of expansion; and (5) expectations regarding intellectual property protection. These statements are based upon numerous assumptions which Martek cannot control and involve risks and uncertainties that could cause actual results to differ. These statements should be understood in light of the risk factors set forth above and in the Company's filings with the Securities and Exchange Commission, including, but not limited to the Company's Form 10-K for the fiscal year ended October 31, 2003 and other filed reports on Form 10-Q and Form 8-K.

About Martek

Martek Biosciences Corporation develops, manufactures and sells products from microalgae. The Company's products include: (1) specialty, nutritional oils for infant formula that aid in the development of the eyes and central nervous system in newborns; (2) nutritional supplements and food ingredients that may play a beneficial role in promoting mental and cardiovascular health throughout life; and (3) new, powerful fluorescent markers for diagnostics, rapid miniaturized screening, and gene and protein detection.

MARTEK BIOSCIENCES CORPORATION Summary Consolidated Financial Information (Unaudited - $ in thousands, except share and per share data) Condensed Consolidated Statements of Income Data Three months ended Year ended October 31, October 31, 2004 2003 2004 2003 (audited) Revenues: Product sales $56,083 $36,191 $170,565 $112,298 Contract manufacturing sales 3,578 2,439 13,928 2,439 Total revenues 59,661 38,630 184,493 114,737 Costs and expenses: Cost of product sales 33,381 21,346 103,423 66,347 Cost of contract manufacturing sales 3,021 2,192 11,570 2,192 Research and development 4,936 3,760 18,596 13,154 Selling, general and administrative 7,024 4,725 25,774 16,275 Restructuring reversal - - - (250) Other operating expenses 1,309 630 4,000 1,943 Total costs and expenses 49,671 32,653 163,363 99,661 Income from operations 9,990 5,977 21,130 15,076 Other income, net 121 260 772 916 Income before income tax benefit 10,111 6,237 21,902 15,992 Income tax benefit 25,176 - 25,146 - Net income $35,287 $6,237 $47,048 $15,992 Basic earnings per share $1.20 $0.23 $1.62 $0.63 Diluted earnings per share $1.16 $0.21 $1.55 $0.58 Shares used in computing basic earnings per share 29,377,131 27,689,308 29,033,241 25,510,376 Shares used in computing diluted earnings per share 30,469,814 30,191,517 30,385,707 27,416,757 Diluted earnings per share, excluding income tax benefit $0.33 $ 0.21 $0.72 $0.58 Condensed Consolidated Balance Sheets Data October 31, October 31, 2004 2003 (audited) Assets: Cash, cash equivalents and short-term investments $42,650 $96,971 Other current assets 74,464 41,373 Property, plant and equipment, net 255,287 88,314 Deferred tax asset 49,378 - Goodwill and other long-term assets, net 79,619 68,865 Total assets $501,398 $295,523 Liabilities and stockholders' equity: Current liabilities $48,919 $32,126 Non-current liabilities 106,315 19,433 Stockholders' equity 346,164 243,964 Total liabilities and stockholders' equity $501,398 $295,523 Condensed Consolidated Cash Flow Data Year Ended October 31, 2004 2003 Operating activities: Net income $47,048 $15,992 Non-cash items (16,320) 4,697 Changes in operating assets and liabilities, net (20,638) 3,899 Net cash provided by operating activities 10,090 24,588 Investing activities: Expenditures for property, plant and equipment (180,409) (45,219) Other investing activities, net 1,512 (6,040) Net cash used in investing activities (178,897) (51,259) Financing activities: Repayments of notes payable and other (2,747) (1,010) Borrowings under revolving credit facility 85,000 - Proceeds from the issuance of common stock and stock option exercises 32,233 102,233 Net cash provided by financing activities 114,486 101,223 Net change in cash, cash equivalents and short-term investments (54,321) 74,552 Cash, cash equivalents and short- term investments, beginning of year 96,971 22,419 Cash, cash equivalents and short- term investments, end of year $42,650 $96,971

CONTACT: Pete Buzy, Chief Financial Officer of Martek Biosciences Corporation, +1-410-740-0081.

Martek Biosciences Corporation

CONTACT: Pete Buzy, Chief Financial Officer of Martek BiosciencesCorporation, +1-410-740-0081


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