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Martek Announces Fourth Quarter and FY 2007 Financial Results

Fourth Quarter Highlights: -- Record revenues of $82.0 million, up 22% from the prior year's fourth


-- Non-recurring income tax benefit of $10.8 million -- Non-GAAP earnings per share of $0.23, a 130% increase over last year's

non-GAAP earnings per share -- Operating cash flow of $24.3 million, revolving debt facility paid off -- Launch of four new food and beverage products and one new pregnancy and

nursing product containing life'sDHA(TM)

COLUMBIA, Md., Dec. 12 /PRNewswire-FirstCall/ -- Martek Biosciences Corporation (Nasdaq: MATK) today announced its financial results for the fourth quarter and fiscal year ended October 31, 2007. Revenues for the fourth quarter were $82.0 million, up 22% from $67.2 million in the fourth quarter of fiscal 2006. During the fourth quarter, the Company recorded a tax benefit of $10.8 million which resulted from the Company's reversal of its deferred tax asset valuation allowance upon the determination that all of its net operating loss carryforwards will be realizable in the future. Net income, including this non-recurring tax benefit was $18.3 million, or $0.55 per diluted share, for the fourth quarter of fiscal 2007 compared with $100,000, or $0.00 per diluted share, in last year's fourth quarter. The fourth quarter of fiscal 2006 included a charge of $4.7 million related to the restructuring of the Company's plant operations.

Excluding the impact of this tax benefit in fiscal 2007 and the effects of the restructuring charge in both fiscal 2006 and fiscal 2007, the Company's net income on a non-GAAP basis would have been $7.5 million, or $0.23 per diluted share,

disclosed by the Company, the conclusions of these experts include a

recommendation for pregnant and lactating women to consume at least

200 mg of DHA per day.

Management Outlook

For the first quarter of fiscal 2008, Martek expects total revenues to be between $79 million and $83 million, which include projected non-infant formula nutritional revenue of between $6.2 million and $7.6 million. First quarter gross margin is expected to be between 39% and 39.5%. Net income is projected to be between $6.8 million and $7.5 million, and diluted earnings per share are projected to be between $0.21 and $0.23.

For fiscal 2008, the Company expects growth in both revenues and profitability as compared with fiscal 2007. Martek expects to grow its core infant formula business and expand its penetration into the pregnancy and nursing, nutritional supplements and food and beverage markets. Although the Company expects such growth, Martek is likely to experience quarter-to-quarter fluctuations in both infant formula and non-infant formula nutritional revenues due primarily to variability in customer ordering patterns and the timing of product launches.

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 tax benefit from reversal of deferred tax asset valuation allowance and 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 items were 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 to the non-GAAP financial measure included herein ($ in thousands):

Three months ended Year ended

October 31, October 31,

2007 2006 2007 2006

Net income, as reported under GAAP $18,268 $102 $32,013 $14,938

Deduct: Tax benefit from reversal

of deferred tax asset

valuation allowance (10,841) - (10,841) -

Add: Restructuring charge 106 4,729 853 4,729

Deduct: Tax benefit of

restructuring charge (38) (1,726) (307) (1,726)

Non-GAAP net income measure $7,495 $3,105 $21,718 $17,941

Non-GAAP diluted earnings per share $0.23 $0.10 $0.67 $0.55

Investor Conference Call Webcast

Martek will host a conference call and Webcast for investors to review its fourth quarter results and fiscal 2008 outlook at 4:45 p.m. Eastern Time on Wednesday, December 12, 2007. Access to the live audio Webcast is available through Martek's website at The webcast will be available for replay through the close of business on January 12, 2008.


Sections of this release contain forward-looking statements concerning, among other things: (1) Martek's expectations regarding future revenue growth in and customer demand from the infant formula, pregnancy and nursing, nutritional supplements and food and beverage markets; (2) its expectations regarding revenues, profitability, cash flows from operations and changes in inventory levels during fiscal 2008; (3) statements regarding specific revenue, gross margin and income expectations for the first quarter of fiscal 2008; (4) statements regarding customer supply arrangements and pricing; (4) expectations regarding the outcome and impact of the various litigation proceedings in which the Company is involved; and (5) its expectations regarding launches by customers of products containing Martek's life'sDHA(TM). Furthermore, Martek's 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/A for the fiscal year ended October 31, 2006 and other filed reports on Form 10-K, Form 10-Q, Form 10-Q/A and Form 8- K.

About Martek

Martek Biosciences Corporation (Nasdaq: MATK) 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 life'sARA(TM) (arachidonic acid), an omega-6 fatty acid, for use in infant formula. For more information on Martek Biosciences, visit


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,

2007 2006 2007 2006


Product sales $79,025 $63,809 $292,549 $255,838

Contract manufacturing

sales 2,995 3,377 14,264 14,816

Total revenues 82,020 67,186 306,813 270,654

Cost of revenues:

Cost of product sales,

including idle

capacity costs 46,364 40,625 179,367 158,600

Cost of contract

manufacturing sales 2,656 3,917 13,952 14,676

Total cost of

revenues 49,020 44,542 193,319 173,276

Gross margin 33,000 22,644 113,494 97,378

Operating expenses:

Research and

development 6,852 6,854 26,081 24,823

Selling, general and

administrative 13,659 10,149 50,185 41,614

Restructuring charge 106 4,729 853 4,729

Other operating

expenses 362 475 1,614 1,158

Total operating

expenses 20,979 22,207 78,733 72,324

Income from operations 12,021 437 34,761 25,054

Interest and other, net 73 (275) (1,089) (1,528)

Income before income

tax (benefit) provision 12,094 162 33,672 23,526

Income tax (benefit)

provision (6,174) 60 1,659 8,588

Net income $18,268 $102 $32,013 $14,938

Basic earnings

per share $0.56 $0.00 $0.99 $0.47

Diluted earnings

per share $0.55 $0.00 $0.98 $0.46

Shares used in

computing basic

earnings per share 32,649,799 32,153,835 32,336,314 32,113,301

Shares used in

computing diluted

earnings per share 32,975,155 32,341,835 32,593,125 32,343,015

Unaudited Condensed Consolidated Balance Sheets Data

October 31, October 31,

2007 2006


Cash, cash equivalents and short-term

investments $21,648 $26,828

Accounts receivable, net 41,643 32,746

Inventories, net 109,409 112,320

Other current assets 8,237 8,893

Property, plant and equipment, net 277,915 286,922

Deferred tax asset 51,306 42,800

Goodwill and other, net 86,537 87,464

Total assets $596,695 $597,973

Liabilities and stockholders' equity:

Current liabilities $46,141 $49,786

Non-current liabilities 18,827 55,612

Stockholders' equity 531,727 492,575

Total liabilities and stockholders' equity $596,695 $597,973

Unaudited Condensed Consolidated Cash Flow Data

Year ended October 31,

2007 2006

Operating activities:

Net income $32,013 $14,938

Non-cash items 31,706 35,290

Changes in operating assets and

liabilities, net (17,859) (14,606)

Net cash provided by operating activities 45,860 35,622

Investing activities:

Expenditures for property, plant and

equipment (8,279) (10,902)

Proceeds from sale of fluorescent detection

products business 900 -

Repurchase of sale-leaseback equipment (3,910) (6,877)

Capitalization of intangible assets (6,010) (6,862)

Net cash used in investing activities (17,299) (24,641)

Financing activities:

Repayments of notes payable and other

long-term obligations, net (1,013) (3,009)

Repayments under revolving credit

facility, net (36,000) (19,000)

Proceeds from stock option exercises

and other, net 3,272 4,509

Net cash used in financing activities (33,741) (17,500)

Net change in cash, cash equivalents and

short-term investments (5,180) (6,519)

Cash, cash equivalents and short-term

investments, beginning of period 26,828 33,347

Cash, cash equivalents and short-term

investments, end of period $21,648 $26,828


Kyle Stults

Investor Relations

(410) 740-0081

and $3.1 million, or $0.10 per diluted share for the fourth quarters ending October 31, 2007 and 2006, respectively (see "Reconciliation of GAAP to Non-GAAP Net Income Measure" below).

Commenting on the quarter, Chief Executive Officer Steve Dubin said, "Our results in this year's fourth quarter confirm that our strategies are on target and demonstrate the progress we have made against our key focus areas in 2007. During the year, we increased penetration in international infant formula markets, expanded the use of DHA outside of infant formula and improved our gross margin and profitability. We also continued to focus on developing new products to support our future growth. I believe that we are well-positioned to continue growing revenues and profits in the year ahead."

Fourth Quarter and Fiscal 2007 Revenue Summary

Product sales in the fourth quarter increased 24% to $79.0 million and contract manufacturing sales totaled $3.0 million compared with $3.4 million in contract manufacturing sales a year ago. The decline in fourth quarter contract manufacturing revenues resulted from the Company's decision to narrow its contract manufacturing services to include only products with reasonable profit margins or those that the Company expects could have a strategic fit in the future.

Fiscal 2007 product sales increased 14% to $292.5 million and contract manufacturing sales were $14.3 million.

Following is a breakdown of product sales by market for the fourth quarter and full year periods (in thousands):

Three months ended Year ended

October 31, October 31,

2007 2006 2007 2006

Infant formula market $72,246 $59,506 $265,563 $240,497

Food and beverage market 1,706 398 5,483 1,404

Pregnancy and nursing,

nutritional supplements

and animal feeds 4,444 2,935 17,439 10,121

Non-nutritional products 629 970 4,064 3,816

Total product sales $79,025 $63,809 $292,549 $255,838

The overall increase in product sales reflects continued strong demand from Martek's U.S. and international infant formula customers, the launch of new and growth of existing food and beverage products containing life'sDHA(TM) and the Company's increased penetration into the pregnancy and nursing and nutritional supplements markets. Compared to the third quarter of fiscal 2007, there was a decline of $600,000 in non-infant formula nutritional revenues as a result of customer ordering patterns associated with new product launches. Martek expects non-infant formula nutritional revenues to be between $6.2 million and $7.6 million in the first quarter of fiscal 2008.

New products launched during the fourth quarter co-branded with the Martek life'sDHA(TM) logo include:

Food and Beverage Products

-- Minute Maid(R) Pomegranate Blueberry Flavored 100% fruit juice blend

with life'sDHA(TM)

-- Beech-Nut(R) DHA Plus with life'sDHA(TM) baby food and cereals

-- British Biologicals' Kids-Pro Nutrition Drink with life'sDHA(TM)


-- Ricos(R) Cheese Sauce with life'sDHA(TM)

Pregnancy and Nursing Products

-- NutraBella's Bellybar(TM) with life'sDHA(TM) (expanded to entire

product line)

Gross Margin and Operating Expenses

The Company's gross margin has improved each quarter of fiscal 2007. Gross margin for the fourth quarter of fiscal 2007 was 40.2%, a sequential improvement over the third quarter gross margin of 38.5%. Gross profit margin continues to improve as a result of DHA productivity gains at Martek's plants and reductions in ARA costs. Gross profit margin in the fourth quarter also included a non-recurring property tax recovery that contributed approximately 1% to gross margin. If not for this non-recurring item, gross profit margin in the fourth quarter would have been approximately 39%. Gross margin for the first quarter of fiscal 2008 is expected to be between 39% and 39.5%.

Research and development expenses in fiscal 2007 were $26.1 million compared to $24.8 million in fiscal 2006, an increase of 5.1%. R&D expenses in the fourth quarter of fiscal 2007 of $6.9 million were essentially unchanged as compared to the fourth quarter of fiscal 2006. The Company's research and development efforts continue to focus on developing new food and beverage applications for life'sDHA(TM), broadening the scientific evidence supporting the benefits of life'sDHA(TM) throughout life, improving manufacturing processes and developing new products to expand the Company's market offerings.

During fiscal 2007, selling, general and administrative expenses increased by $8.6 million, or 20.6%, from $41.6 million in fiscal 2006 to $50.2 million. This increase resulted primarily from additional resources invested in the Company's sales and marketing initiatives designed to grow its sales to infant formula customers overseas and to grow DHA markets outside of infant formula. More specifically, increased expenditures were made to expand the Company's sales, customer support and marketing personnel as well as to broaden the scope of the Company's advertising and public relations campaigns. The increase in SG&A costs over 2006 also included approximately $3.0 million of costs related to the Company's patent portfolio. Martek's intellectual property, and protection thereof, is critical to the Company's commercial success, and as such, the Company continues to invest resources in acquiring, maintaining and defending its intellectual property. The $700,000 sequential increase of SG&A costs over the third quarter of fiscal 2007 also relates primarily to higher patent-related costs.


For the fiscal year ended October 31, 2007, the Company generated $45.9 million of cash from operating activities with the fourth quarter contributing $24.3 million. The $45.9 million represents a nearly 30% increase in operating cash flow as compared to fiscal 2006.

Martek's inventory balance at quarter-end declined as compared to the amount on-hand at the end of fiscal 2006 despite significant revenue growth between years. The Company's significant cash generation allowed for repayments on its credit facility totaling $36 million during fiscal 2007. At the end of the quarter, Martek had $21.6 million in cash and had the entire balance of its long-term revolving credit facility ($135 million) available for future borrowing.

Significant Recent Events

-- Multi-Year Worldwide Sole Source Supply Agreement with Abbott -- In

October 2007, Martek announced that it had entered into a 10-year

supply agreement with Abbott Nutrition, a leading worldwide producer of

infant formula products including the Similac(R) Advance(R) brand,

under which Martek will serve as Abbott's exclusive worldwide DHA and

ARA supplier for all of Abbott's infant formula products. Under terms

of the agreement, Abbott has the right to terminate the arrangement as

of January 2012. Martek has been supplying Abbott with DHA and ARA for

use in infant formula products under a 25-year license agreement signed

in 2000 which remains in effect.

-- New Infant Formula Licensee -- In October 2007, Martek announced that

it had entered into a multi-year license and supply agreement with

Alter Farmacia, S.A. for the inclusion of Martek's arachidonic acid oil

in Alter's infant formula products that contain ARA and are sold in

Spain and Portugal.

-- Worldwide Distributor Agreement for Animal Feed Products -- In

November 2007, Martek announced that it had entered into a worldwide

distributorship agreement for Martek's DHA Gold(R) animal feed product

with Novus International, Inc, an affiliate of Mitsui and Co., Ltd. and

Nippon Soda Co., Ltd. Martek will serve as Novus's sole source

supplier of DHA for all of its poultry and swine feed and enrichment

products. All Novus products containing DHA Gold(R) will display the

DHA Gold(R) trademark. Martek's DHA Gold(R) biomass animal feed

ingredient is a dried, whole-cell algae product used to provide DHA

enrichment for commercially raised animals. Novus International, Inc.

is an industry leader in animal nutrition and health.

-- Settlement of OmegaTech Milestone Litigation -- In October 2007, Martek

announced that it had reached a settlement with the representative of

the former stockholders of OmegaTech in the ongoing litigation

regarding the disputed contingent consideration associated with certain

milestones included in the April 2002 merger agreement. In connection

with the settlement, Martek is issuing 340,946 shares of Martek common

stock to the former stockholders of OmegaTech. As part of the

settlement, the litigation has been dismissed and Martek received a

full release and discharge from any and all future claims by former

stockholders of OmegaTech. The settlement eliminates the potential for

any additional shares to be issued to the former OmegaTech

stockholders. The shares being issued to the former OmegaTech

securities holders resulted in the recognition of approximately $10

million of additional purchase price consideration which has been

recorded as goodwill by Martek.

-- Settlement of Securities Class Action Litigation -- In December 2007,

Martek announced that it had entered into a tentative settlement of all

claims in the securities class action litigation filed in the United

States District Court for the District of Maryland alleging, among

other things, violations of Section 10(b) and 20(a) of the Securities

Exchange Act of 1934. The settlement will result in the dismissal of

the claims against Martek and all other defendants, subject to final

court approval. The proposed settlement of the class action will

include a cash payment to the settlement fund of $6 million, all of

which will be paid by the Company's insurer. The parties anticipate

filing in the near future a motion in the federal court asking for

approval of the proposed settlement, which is required before the

settlement becomes effective and final. No assurances can be given that

the settlement ultimately will be approved by the court.

-- Developments in Patent Infringement Litigation -- There have been

several recent developments in Martek's patent infringement suits in

the U.S. and Germany, a summary of which follow:

-- Martek Wins German DHA Patent Infringement Actions -- In October

2007, Martek received a favorable judgment in its patent

infringement suit against (i) Lonza Ltd., (ii) Celanese Ventures

GmbH and (iii) Nutrinova Nutrition Specialties & Food Ingredients

GmbH. In a separate suit against Lichtwer Pharma GmbH, one of

Nutrinova's customers, a similar judgment was announced. The first

suit involves Lonza's German sale and use of a fatty acid product

currently marketed under the brand name Lonza DHA for use in

functional foods and dietary supplements. The second suit involves

Lichtwer's German sale and use of a DHA-containing oil in a

supplement marketed under the brand name AMEU(R) Alge. The decisions

may be appealed by Lonza and Lichtwer to the higher regional court

in Dusseldorf.

-- Martek Obtains Permanent Injunction Against Lonza in U.S. Patent

Infringement Suit -- In November 2007, a judge in the United States

District Court in Delaware ruled on various post-trial motions and

entered a permanent injunction in Martek's favor against the

defendants in Martek's patent infringement suit against Lonza Ltd.,

Nutrinova Inc. and Nutrinova Nutrition Specialties & Food

Ingredients GmbH. The judge upheld the October 2006 jury verdict

that the defendants infringed all of the asserted claims of two of

Martek's patents and that these patents were valid, and the judge

granted a permanent injunction with respect to these two patents.

Martek expects the defendant will appeal this decision, and the

permanent injunction will be in effect pending any appeal. With

respect to a third patent, the judge reversed the jury verdict;

however, Martek does not believe this will have an adverse effect on

the strength of the permanent injunction and is considering

alternatives regarding this patent. Martek plans to appeal the

judge's ruling on the third patent.

-- European Patent Office Upholds DHA Food Patent -- In November 2007,

the Opposition Division of the European Patent Office (EPO) upheld

one of the Company's European DHA patents. The modified claims of

the patent are narrower than the claims originally granted but

broader than the claims that were previously upheld in a December

2000 Opposition Division hearing. The patent, which expires in

November 2010, relates to fermentation processes, human and animal

food products, pharmaceutical uses of certain claimed microorganisms

and Martek's food DHA production strain. The Company believes that,

on an overall basis, the patent as modified remains an important

part of the Company's intellectual property portfolio and that the

narrowing of the claims of the patent should not have any material

adverse impact on the Company. The Company believes that it is

probable that at least one of the opponents of the patent will

appeal the Opposition Division's decision.

-- New Data Published on Benefits of DHA -- The benefits of DHA

supplementation were recently discussed in several publications:

-- An independent observational study published in the Journal of the

American Medical Association (September 2007) was designed to

determine whether the intake of omega-3 and omega-6 fatty acids is

associated with the development of Type 1 diabetes in children.

This study was conducted with a cohort of 1,770 children known to be

at genetic risk for developing Type 1 diabetes. Results showed that

the omega-3 fatty acid levels were inversely correlated with the

risk for developing diabetes in this group of at-risk children.

These investigators are further investigating this relationship in

an ongoing clinical trial to determine whether DHA, specifically,

has a role in Type 1 diabetes prevention.

-- A report in the Proceedings of the Nutrition Society (August 2007)

in the United Kingdom summarized the current knowledge on maternal

diet and human milk fatty acids. The author reviewed data

demonstrating that maternal intake of DHA during pregnancy and

lactation supports neural system maturation in the infant.

-- Results from the European research project PERILIP were published in

the British Journal of Nutrition (November 2007). As previously

SOURCE Martek Biosciences Corporation
Copyright©2007 PR Newswire.
All rights reserved

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