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Martek Announces Third Quarter 2007 Financial Results

Third Quarter Highlights: - Record revenues of $77.8 million, up 11% from the prior year - Earnings per share of $0.19, a 36% increase over last year and a 27% increase over the second quarter of 2007 - Operating cash flow of

nearly $14 million - Launch of eight new food and beverage products

containing life'sDHA(TM)

COLUMBIA, Md., Sept. 5 /PRNewswire-FirstCall/ -- Martek Biosciences Corporation (Nasdaq: MATK) today announced its financial results for the third quarter of fiscal 2007, which ended July 31, 2007. Revenues for the third quarter were $77.8 million, up 11% from $70.4 million in the third quarter of fiscal 2006. Net income was $6.1 million, or $0.19 per diluted share, compared with $4.6 million, or $0.14 per diluted share, in last year's third quarter.

Commenting on the quarter, Chief Executive Officer Steve Dubin said, "Martek's improved financial performance this quarter resulted from growth in both sales of DHA for uses other than infant formula and sales of DHA and ARA to infant formula customers, combined with an improved gross margin. We have dedicated much time and effort on the Company's key 2007 focus areas: increasing penetration in international infant formula markets; expanding the use of DHA outside of infant formula; improving gross margin and profitability and developing new products to support future growth. These efforts are beginning to pay off as indicated by this quarter's operating results."

Third Quarter and Year-to-Date Revenue Summary

Product sales in the third quarter increased 12% to $74.5 million and contract manufacturing sales totaled $3.4 million compared to $4.0 million in contract manufacturing sales a year ago. The decl007 2006


Product sales $74,476 $66,322 $213,524 $192,029



sales 3,370 4,036 11,269 11,439

Total revenues 77,846 70,358 224,793 203,468

Cost of revenues:

Cost of product

sales, including

idle capacity

costs 44,217 41,009 133,003 117,975

Cost of contract


sales 3,681 3,943 11,296 10,759

Total cost of

revenues 47,898 44,952 144,299 128,734

Gross margin 29,948 25,406 80,494 74,734

Operating expenses:

Research and

development 6,802 6,231 19,229 17,969

Selling, general

and administrative 12,939 11,328 36,526 31,465


charge 146 -- 747 --

Other operating

expenses 156 207 1,252 683

Total operating

expenses 20,043 17,766 57,754 50,117

Income from

operations 9,905 7,640 22,740 24,617

Interest and other,

net (288) (372) (1,162) (1,253)

Income before income

tax provision 9,617 7,268 21,578 23,364

Income tax

provision 3,491 2,653 7,833 8,528

Net income $6,126 $4,615 $13,745 $14,836

Basic earnings

per share $ 0.19 $0.14 $0.43 $0.46

Diluted earnings

per share $0.19 $0.14 $0.42 $0.46

Shares used in

computing basic

earnings per

share 32,272,938 32,143,695 32,230,671 32,099,641

Shares used in

computing diluted

earnings per

share 32,519,324 32,473,578 32,463,488 32,471,120

Condensed Consolidated Balance Sheets Data

July 31, October 31,

2007 2006


Cash, cash equivalents and short-term

investments $17,875 $26,828

Accounts receivable, net 37,308 32,746

Inventories, net 111,049 112,320

Other current assets 6,888 10,074

Property, plant and equipment, net 280,592 286,922

Long-term deferred tax asset 34,536 41,619

Goodwill and other, net 85,037 87,464

Total assets $573,285 $597,973

Liabilities and stockholders' equity:

Current liabilities $26,633 $49,786

Non-current liabilities 36,184 55,612

Stockholders' equity 510,468 492,575

Total liabilities and stockholders' equity $573,285 $597,973

Condensed Consolidated Cash Flow Data

Nine months ended July 31,

2007 2006

Operating activities:

Net income $13,745 $14,836

Non-cash items 29,202 27,301

Changes in operating assets and liabilities,

net (21,424) (18,981)

Net cash provided by operating activities 21,523 23,156

Investing activities:

Expenditures for property, plant and equipment (5,110) (6,743)

Proceeds from sale of fluorescent detection

products business 900 --

Repurchase from sale-leaseback transaction (3,910) --

Capitalization of intangible assets (4,806) (3,928)

Net cash used in investing activities (12,926) (10,671)

Financing activities:

Repayments of notes payable and other long-term

obligations, net (759) (2,756)

Repayments under revolving credit facility, net (19,000) (22,000)

Proceeds from stock option exercises and other,

net 2,209 2,901

Net cash used in financing activities (17,550) (21,855)

Net change in cash, cash equivalents and

short-term investments (8,953) (9,370)

Cash, cash equivalents and short-term

investments, beginning of period 26,828 33,347

Cash, cash equivalents and short-term

investments, end of period $17,875 $23,977

ine in third 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 could have a strategic fit in the future.

Year-to-date product sales increased 11% to $213.5 million and year-to- date contract manufacturing sales were $11.3 million.

A breakdown of product sales by market for the third quarter and year-to- date periods are as follows (in thousands):

Three months ended July 31, Nine months ended July 31,

2007 2006 2007 2006

Infant formula market $66,536 $62,230 $193,317 $180,991

Food and beverage

market 1,909 470 3,777 1,006

Pregnancy and nursing,

nutritional supplements

and animal feeds 4,846 2,605 12,995 7,186


products 1,185 1,017 3,435 2,846

Total product sales $74,476 $66,322 $213,524 $192,029

The 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.

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

Food and Beverage Products

-- Dean Foods Company (including WhiteWave Foods) products:

-- WhiteWave Foods' Horizon Organic(R) Milk Plus DHA with life'sDHA(TM)

-- WhiteWave Foods' Silk(R) Plus Omega-3 DHA with life'sDHA(TM)

(expanded launch to Canada)

-- WhiteWave Foods' Rachel's(R) Wickedly Delicious Yogurt with


-- Central Lechera Asturiana's ABC infant yogurt with life'sDHA(TM)


-- National Foods' Pura(R) Kids milk product with life'sDHA(TM)


-- Stremicks Heritage Foods(TM) Organic Milk Enriched with Omega-3 DHA

with life'sDHA(TM)

-- Breyers Yogurt Company's Breyers Smart! Yogurt with life'sDHA(TM)

-- General Mills' Yoplait Kids(R) Yogurt Drink with life'sDHA(TM)

Pregnancy and Nursing Products

-- Life Fitness Life's DHA(TM) Prenatal Multivitamin and DHA with

life'sDHA(TM), available exclusively at CVS/pharmacy and online at

-- British Biologicals' Pro-PL Protein Supplement with life'sDHA(TM)

Gross Margin and Operating Expenses

Martek's gross margin for the third quarter of fiscal 2007 was 38.5%, which represents the third straight quarter of margin improvement as well as growth from the 36.1% gross margin in last year's third quarter. Compared to second quarter margins of 34.8%, third quarter gross margins were positively affected by lower ARA costs as a result of higher volumes compared to 2006 and the recent amendment to the Company's ARA license and supply agreement with DSM, as well as continued improvement in DHA productivity. These improvements offset the decrease in contract manufacturing margins caused by costs incurred in discontinuing certain products. As part of the amendment noted above, certain issues related to ARA purchased in prior years were resolved between the parties resulting in a third quarter margin gain to Martek of approximately 2.5%. The Company expects gross margins in the fourth quarter to approximate or exceed the gross margins realized in the current quarter as a result of ongoing improved ARA pricing resulting from higher ARA volumes and the continuing cost reductions resulting from the amended agreement with DSM as well as more efficient DHA production.

Research and development expenses increased to $6.8 million in the third quarter of fiscal 2007 compared to $6.2 million in last year's third quarter. 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.

Selling, general and administrative expenses increased to $12.9 million in the third quarter of fiscal 2007 compared to $11.3 million in last year's third quarter. The increase was primarily attributable to growth in the Company's sales, customer support and marketing personnel, particularly in the non-infant formula area, as well as higher advertising and public relations costs designed to continue developing the life'sDHA(TM) brand across all target markets.


For the nine months ended July 31, 2007, the Company generated $21.5 million of cash from operating activities with the third quarter contributing nearly $14 million. The third quarter's cash generation was driven primarily by the Company's earnings as well as a $6 million reduction in inventories held during the quarter. Martek's inventory balance at quarter-end approximates the amount on-hand at the end of fiscal 2006 despite significant revenue growth between years.

At the end of the quarter, Martek had $17.9 million in cash and $118 million of funds available under its long-term revolving credit facility. The outstanding balance on the Company's credit facility was $17 million at quarter-end, a reduction of $19 million since October 31, 2006.

Other Highlights

-- Regulatory Approval in China - In August 2007, Martek received

authorization from the Ministry of Health in China to use the Company's

life'sDHA(TM) as a novel food ingredient. This new designation will

permit the immediate use of life'sDHA(TM) in foods, beverages and

supplements in China for persons older than twelve months. Since 2001,

Martek's life'sDHA(TM) and life'sARA(TM) have been used in infant

formula throughout China. This initial authorization runs through

August 5, 2009, at which time the Company may seek final authorization

for novel food approval. The Company plans to aggressively pursue

customers in China for the incorporation of our oils in foods,

beverages and nutritional supplements sold there.

-- Amended ARA Supply Agreement - In July 2007, Martek and DSM Food

Specialties B.V. ("DSM") entered into the Second Amendment to the ARA

Alliance, Purchase, and Production Agreement (the "Amendment"). Among

other things, the Amendment finalized ARA pricing to Martek for

calendar year 2007 as well as the parameters and methodologies for the

establishment of ARA pricing for calendar years 2008, 2009 and, if

certain criteria are met, 2010. The Amendment also resolved all

outstanding issues related to periods prior to January 1, 2007 and

established a means by which DSM and Martek will share in the economic

risks associated with exchange rate fluctuations between the U.S.

dollar and the Euro, the currency in which a portion of the ARA

purchase price is denominated.

-- Sale of Fluorescent Detection Products Business - In June 2007, Martek

sold its Fluorescent Detection Products business for $900,000 in cash

and a minority interest warrant position. Martek's senior management

determined that the fluorescent detection business did not fall within

the scope of the Company's current commercial focus. Net proceeds

from the sale approximated the value of assets sold which primarily

included inventory, equipment and certain patents. The buyer, Columbia

Biosciences Corporation, is a newly formed company that was founded and

is owned by Henry "Pete" Linsert and six other former-Martek employees

who had worked in the fluorescent detection area. Mr. Linsert retired

from his positions as Director and Chairman of the Board of Martek upon

closing of the sale.

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

supplementation were recently discussed in several publications,

including two that used Martek's life'sDHA(TM):

-- A study published in the American Journal of Clinical Nutrition

(August 2007) found that DHA is effective in reducing the level of

triglycerides in male hypertriglyceridemic patients. In this study,

DHA alone was effective without EPA, the other omega-3 commonly

found in fish oil, in reducing triglycerides. Hypertriglyceridemia

(high triglyceride levels) in men is associated with an increased

risk of cardiovascular disease and metabolic syndrome. Martek

contributed the DHA supplements and funding for this study.

-- An independent study published in the Society of Biological

Psychiatry (July 2007) found a deficit in the total fatty acid

composition of the orbitofrontal cortex and found a selective

deficit in the level of DHA compared with controls in brain

examinations of postmortem patients who had been diagnosed with

major depression compared with controls. These findings add to the

growing body of evidence showing a correlation between low tissue

levels of DHA in neuropsychiatric diseases such as depression.

-- A study published in Nature Medicine (July 2007) reported that

increasing consumption of long-chain omega-3 fatty acids, including

DHA, reduces destructive vascularization in the retina. In this

animal study of retinopathy associated with prematurity, the authors

summarize a series of experiments demonstrating that long-chain

omega-3 fatty acids, and selected metabolites, are effective in

reducing retinal vascular disease, a leading cause of blindness. A

portion of these studies included Martek oils as the source of long-

chain fatty acids.

Management Outlook

For the fourth quarter of fiscal 2007, Martek expects total revenues to be between $77 million and $80 million, which includes projected non-infant formula nutritional revenue of between $6 million and $7 million. Fourth quarter revenues from non-infant formula applications are expected to include growth in sales to the food and beverage market offset by declines in sales to other non-infant formula areas caused by quarter-to-quarter fluctuations in customer ordering patterns based on the timing of product launches. Fourth quarter gross margin is expected to be between 37.5% and 39%. Net income is projected to be between $6.5 million and $6.8 million, and diluted earnings per share are projected to be between $0.20 and $0.21.

With these projected fourth quarter results, Martek's fiscal year 2007 revenues are expected to be between $302 million and $305 million and full year diluted earnings per share are expected to be between $0.62 and $0.63 ("pro forma" diluted earnings per share of between $0.63 and $0.64 excluding the restructuring charge). This represents a revenue increase of approximately 12% and profitability growth of approximately 35% over fiscal 2006 "as reported" amounts and approximately 15% growth over "pro forma" fiscal 2006 results which exclude the restructuring charge.

In fiscal 2006, the Company entered into a supply agreement with its largest customer pursuant to which Martek serves as the exclusive worldwide DHA and ARA supplier for this customer's infant formula products. Since that time, Martek has been negotiating to secure similar agreements with its other major infant formula customers. Recently, the Company notified its infant formula customers without supply agreements of its intention to raise prices for its nutritional oils during the Company's fiscal fourth quarter. To the extent the Company is not able to enter into supply agreements, the Company could realize a slight increase in fourth quarter revenues over the amounts stated above. Alternatively, this price increase could cause delays in or changes to our customers' projected ordering patterns or could cause our customers to seek alternative sources of supply, all of which could negatively impact Martek's future financial results.

Investor Conference Call Webcast

Martek will host a conference call and Webcast for investors to review its third quarter results and fiscal 2007 outlook at 4:45 p.m. Eastern Time on Wednesday, September 5, 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 October 5, 2007.


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 cash flows from operations and changes in inventory levels during fiscal 2007; (3) statements regarding specific revenue, gross margin and income expectations for the fourth quarter of fiscal 2007 and the full fiscal year; (4) statements regarding customer supply arrangements and pricing; and (5) its expectations regarding launches by customers of products containing Martek's life'sDHA(TM). Furthermore, although the Company anticipates growth in annual sales and profitability, 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


Kyle Stults

Investor Relations

(410) 740-0081


Summary Consolidated Financial Information

(Unaudited - $ in thousands, except share and per share data)

Condensed Consolidated Statements of Income Data

Three months ended July 31, Nine months ended July 31,

2007 2006 2

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

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