COLUMBIA, Md., March 7 /PRNewswire-FirstCall/ -- Martek Biosciences Corporation today announced its financial results for the first quarter of fiscal 2007 (1st Qtr 07), which ended January 31, 2007. For the 1st Qtr 07, revenues of $70.3 million were achieved, a 12% increase compared to $62.9 million for the first quarter of fiscal 2006 (1st Qtr 06). For the 1st Qtr 07, Martek generated net income of approximately $3.8 million, or $0.12 per diluted share, compared to net income of $5.6 million, or $0.17 per diluted share, for the 1st Qtr 06. Excluding expenses related to the Company’s October 2006 plant restructuring, the Company’s net income on a non- GAAP basis would have been $4.1 million, or $0.13 per diluted share, for the 1st Qtr 07 (see “Reconciliation of GAAP to Non-GAAP Net Income Measure” below).
Commenting on the quarter, Chief Executive Officer Steve Dubin stated: “I am encouraged by the progress made in each of Martek’s key focus areas during the first quarter: increasing penetration in the international infant formula markets, expanding the use of DHA outside of infant formula, improving gross margins, and developing new products. We will continue to focus on these areas throughout the remainder of the year. Revenues for the first quarter reflect growth in all market segments. The use of our DHA and ARA oils in infant formulas outside of the U.S., particularly in Asia, continues to increase, and at the same time we continue to gain momentum in markets beyond infant formula. Two perinatal products and nine food and beverage products containing life’sDHA(TM) have been launched since the start of fiscal 2007, and I expect approximately 15 to 20 additional food and beverage products containing life’sDHA(TM), with varying distribution volumes, to hit store shelves by the end of our fiscal year. Lastly, we experienced an improvement in our gross margin during the quarter when compared to the fourth quarter of 2006, and anticipate further improvements later in the year as a result of the previous restructuring of our manufacturing operations and a decrease in the cost of our 2007 ARA purchases.”
Revenues
Product sales of $66.7 million were generated in the 1st Qtr 07, a 10% increase from $60.5 million for the 1st Qtr 06. The breakdown of product sales by market in the 1st Qtr 07 as compared to the 1st Qtr 06 is as follows:
Three months ended January 31, 2007 2006 Infant formula market $ 60,852 $ 56,911 Food and beverage market 721 300 Pregnancy and nursing, nutritional supplements and animal feeds 3,973 2,422 Other non-nutritionals 1,166 864 Total product sales $ 66,712 $ 60,497
Increased sales to the infant formula market reflect growth in sales to Martek’s customers in both the U.S. and international infant formula markets. Launches of new products with life’sDHA(TM) resulted in higher sales to the food and beverage market in the 1st Qtr 07. Sales related to other non-infant formula nutritional applications increased significantly due to an overall expansion of Martek’s customer base in both the pregnancy and nursing and nutritional supplements markets.
Contract manufacturing revenues in the 1st Qtr 07 totaled $3.5 million compared to $2.4 million in the same period in 2006.
Gross Margin and Operating Expenses
Gross margin percentage for the 1st Qtr 07 was 36.3%, the low-end of our predicted margin range for the first quarter. The 1st Qtr 07 gross margin represents a decrease compared to 39.2% for the 1st Qtr 06, but an increase compared to 35.0% for the fourth quarter of fiscal 2006. As previously disclosed, Martek’s gross margin for the 1st Qtr 06 was negatively affected by ARA cost increases. However, in addition, our 1st Qtr 07 gross margin was impacted by lower than expected contract manufacturing margins (4% in the 1st Qtr 07). These negative effects were partially offset by a significant reduction in idle capacity costs as the Company has begun realizing the projected benefits of its October 2006 restructuring of plant operations. As discussed below, in fiscal 2007, we expect a reduction to the purchase cost of ARA which should yield improvements to our gross margin percentage in the second half of this fiscal year.
Research and development expenses in the 1st Qtr 07 were $6.2 million, an increase of $700,000 from the 1st Qtr 06 due mainly to additional costs incurred by the Company on food application and new product development.
Selling, general and administrative expenses increased to $12.0 million in the 1st Qtr 07 compared to $9.9 million in the 1st Qtr 06. The increase is due mainly to higher sales and marketing costs associated with the Company’s efforts to accelerate its penetration into non-infant formula markets through sales force growth and increases in public relations and advertising.
Consistent with our expectations, restructuring charges in the 1st Qtr 07 were $500,000 and related primarily to outplacement-related professional services. The Company anticipates incurring approximately $400,000 of additional restructuring costs during the remainder of fiscal 2007.
Liquidity
As of January 31, 2007, Martek had $19.2 million in cash and had $94 million available under its long-term revolving credit facility. During the 1st Qtr 07, the Company used $4.9 million in connection with its operating activities. This cash outflow was due primarily to an inventory increase, employee separation payments associated with the October 2006 plant restructuring, and year-end incentive compensation payments. During the 1st Qtr 07, the Company’s inventory balance grew by approximately $6 million. This growth was the result of increases to ARA on-hand primarily due to the campaign nature of third-party production which is designed to optimize economies of scale through large production runs several times per year. Although Martek expects a slight increase in inventory during the Company’s second quarter, we expect a decline in our inventory balances during the third and fourth quarters of fiscal 2007 to levels close to that at the end of fiscal 2006. We also anticipate generating positive cash from operations in the second quarter as well as for the full fiscal year 2007.
Recent Highlights -- New Products Launched Containing life’sDHA(TM) and Co-Branded with the life’sDHA(TM) logo Foods and Beverages -- General Mills launched Yoplait Kids(R) with life’sDHA(TM). -- WhiteWave Foods launched Silk(R) Plus Omega-3 DHA Soymilk with life’sDHA(TM). -- ZenSoy launched “Soy on the Go” Soymilk with life’sDHA(TM). -- Life Science Nutritionals launched Nutri-Kids Nutrition-2-Go(TM) with life’sDHA(TM). -- NutraBella launched new Bellybar(TM) flavor with life’sDHA(TM). -- FoodTech International launched Veggie Patch(TM) All Natural California Veggie Burgers with life’sDHA(TM). Perinatal Products -- Everett Laboratories launched Vitafol(R) -OB+DHA with life’sDHA(TM). -- Mission Pharmacal launched Citracal(R) Prenatal 90 + DHA with life’sDHA(TM). -- New Data Published on Benefits of DHA -- Recently published reports further discuss the benefits of DHA supplementation. -- An independent study published in the Journal of the American College of Nutrition (December 2006) compared Martek’s life’sDHA(TM) (algal oil) to DHA plus EPA (fish oil) for their ability to lower triglycerides in subjects with coronary artery disease and elevated triglycerides, most of whom were undergoing statin therapy. Both supplements significantly lowered triglycerides, but only life’sDHA(TM) increased high density (good) cholesterol. The authors concluded that there was no added benefit provided by EPA for lowering triglycerides at this level. The authors of the study also indicated that life’sDHA(TM) was better tolerated by the study participants than fish oil, noting that a greater proportion of subjects in the fish oil group reported fishy taste as a problem with their treatment. -- An independent study published online in the journal Early Human Development (January 2007) reported the results of a comparison between children who were breastfed as infants to both children who as infants used DHA and ARA supplemented formula and children who as infants did not use DHA and ARA supplemented formula. The results indicated that children who received the supplemented formula had visual and verbal IQ scores that did not differ significantly from children who had been breastfed and such scores were better than children that did not receive supplemented formula. Martek’s oils were used in the study. Management Outlook
For the second quarter of fiscal 2007 (2nd Qtr 07), we expect total revenues to be between $73 million and $75 million, net income to be between $4.8 million and $5.8 million, and diluted earnings per share to be between $0.15 and $0.18. Costs associated with the October 2006 plant restructuring in the 2nd Qtr 07 are estimated to be approximately $200,000.
We anticipate that our gross margin will be between 36.5% and 37.5% in the 2nd Qtr 07. This margin will continue to reflect the negative effects of higher ARA purchase costs during 2006. However, because we are now purchasing ARA at costs lower than in 2006 and beginning to realize the full economic benefit of the Company’s October 2006 plant restructuring, we expect improvement in our gross margin over the last six months of fiscal 2007 with fourth quarter gross margin projected to be at least 40%. This improvement will occur gradually each quarter due to Martek’s “first-in first-out” accounting for inventory.
Our total revenues in fiscal 2006 included approximately $12 million in nutritional oil sales to non-infant formula markets, primarily the pregnancy and nursing, nutritional supplements and food and beverage markets. For fiscal 2007, we expect these non-infant formula revenues to be between $22 million and $26 million. In addition, although we may experience quarter-to-quarter fluctuations in sales to our core infant formula customers, we expect growth in our core infant formula business in 2007. Through this revenue growth and the gross margin recovery described above, we anticipate improvement in overall profitability as compared with fiscal 2006.
Reconciliation of GAAP to Non-GAAP Net Income Measure
The Company makes reference in this release to non-GAAP presentations of net income and earnings per share that exclude the restructuring charge. We are providing this information to assist investors in comparing the results of the current period to those in the prior year periods when the non-recurring restructuring charge was not present. We caution investors, however, that these non-GAAP results should only be considered in addition to results that are reported under current GAAP and should not be considered as a substitute for results that are presented under GAAP. Following is a schedule showing the reconciliation of net income reported under GAAP for the 1st Qtr 07 to the non-GAAP financial measure included herein ($ in thousands):
Net income, as reported under GAAP $ 3,779 Add: Restructuring charge 518 Deduct: Tax benefit of restructuring charge (188) Non-GAAP net income measure $ 4,109 Non-GAAP diluted earnings per share $ 0.13 Investor Conference Call Webcast
Investors may listen to Martek’s management discuss the Company’s quarterly and annual earnings and other current business issues on Wednesday, March 7, 2007 at 4:45 p.m. Eastern Time by accessing Martek’s website at http://investors.martek.com. The webcast will be available for replay through the close of business on April 7, 2007.
General
Sections of this release contain forward-looking statements concerning, among other things: (1) our expectations regarding customer penetration levels, and our rate of revenue and profitability growth in fiscal 2007; (2) our expectations regarding future revenue growth in and customer demand from the infant formula, pregnancy and nursing, nutritional supplements and food and beverage markets; (3) our expectations regarding cash flows from operations and changes in inventory levels during fiscal 2007; (4) our expectations regarding the effects of the plant restructuring on future manufacturing costs, operating expenses and improvement in gross profit margin, and the timing of these effects; (5) our expectations regarding additional costs in fiscal 2007 associated with the plant restructuring; (6) our statements regarding specific revenue, gross margin and income expectations for the second quarter of fiscal 2007; (7) our expectations regarding 2007 ARA purchase costs; (8) our expectations regarding the effect of ARA costs and the plant restructuring on gross profit margins in fiscal 2007; and (9) our expectations regarding launches by our customers of products containing life’sDHA(TM). Furthermore, although we anticipate growth in annual sales and profitability, our operating results are subject to quarter-to- quarter fluctuations, some of which may be significant. The forward-looking statements noted above 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 and cautionary statements set forth herein and in the Company’s filings with the Securities and Exchange Commission, including, but not limited to, Part I, Item 1A of the Company’s Form 10-K for the fiscal year ended October 31, 2006 and other filed reports on Form 10-K, Form 10-Q and Form 8-K.
About Martek
Martek Biosciences Corporation is a leader in the innovation and development of omega-3 DHA products that promote health and wellness through every stage of life. The Company produces life’sDHA(TM), a vegetarian source of the omega-3 fatty acid DHA (docosahexaenoic acid), for use in foods, infant formula and supplements, and ARA (arachidonic acid), an omega-6 fatty acid, for use in infant formula. For more information on Martek Biosciences, visit http://www.martek.com.
Kyle Stults Investor Relations (410) 740-0081 kstults@martek.com 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 January 31, 2007 2006 Revenues: Product sales $ 66,712 $ 60,497 Contract manufacturing sales 3,549 2,395 Total revenues 70,261 62,892 Cost of revenues: Cost of product sales 40,770 34,467 Cost of contract manufacturing sales 3,423 2,039 Idle capacity costs 584 1,703 Total cost of revenues 44,777 38,209 Gross margin 25,484 24,683 Operating expenses: Research and development (1) 6,166 5,480 Selling, general and administrative (1) 11,954 9,867 Restructuring charge 518 - Other operating expenses 473 41 Total operating expenses 19,111 15,388 Income from operations 6,373 9,295 Interest and other, net (441) (501) Income before income tax provision 5,932 8,794 Income tax provision (1) 2,153 3,211 Net income $ 3,779 $ 5,583 Basic earnings per share $ 0.12 $ 0.17 Diluted earnings per share $ 0.12 $ 0.17 Shares used in computing basic earnings per share 32,180,760 32,055,930 Shares used in computing diluted earnings per share 32,366,426 32,431,559 (1) Includes the following amounts related to equity-based compensation expense: Research and development $ 209 $ 352 Selling, general and administrative 400 636 Income tax provision (221) (361) Condensed Consolidated Balance Sheets Data January 31, October 31, 2007 2006 Assets: Cash, cash equivalents and short- term investments $ 19,152 $ 26,828 Accounts receivable, net 34,401 32,746 Inventories, net 118,731 112,320 Other current assets 9,733 10,074 Property, plant and equipment, net 293,564 291,445 Long-term deferred tax asset 38,082 39,969 Goodwill and other, net 86,979 87,464 Total assets $ 600,642 $ 600,846 Liabilities and stockholders’ equity: Current liabilities $ 39,409 $ 49,786 Non-current liabilities 60,693 55,612 Stockholders’ equity 500,540 495,448 Total liabilities and stockholders’ equity $ 600,642 $ 600,846 Condensed Consolidated Cash Flow Data Three months ended January 31, 2007 2006 Operating activities: $ $ Net income 3,779 5,583 Non-cash items 7,612 8,271 Changes in operating assets and liabilities, net (16,323) (13,676) Net cash (used in) provided by operating activities (4,932) 178 Investing activities: Expenditures for property, plant and equipment (1,628) (2,415) Lease repurchase and other investing activities, net (6,620) (880) Net cash used in investing activities (8,248) (3,295) Financing activities: Repayments of notes payable and other long-term obligations, net (252) (2,252) Borrowings under revolving credit facility, net 5,000 8,000 Proceeds from stock option exercises and other, net 756 707 Net cash provided by financing activities 5,504 6,455 Net change in cash, cash equivalents and short-term investments (7,676) 3,338 Cash, cash equivalents and short-term investments, beginning of period 26,828 33,347 Cash, cash equivalents and short-term investments, end of period $ 19,152 $ 36,685
Martek Biosciences Corporation
CONTACT: Kyle Stults, Investor Relations of Martek BiosciencesCorporation, +1-410-740-0081, kstults@martek.com
Web site: http://www.martekbio.com/
