Martek Announces Third Quarter 2008 Financial Results
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Source: Martek Biosciences Corporation
05/09/2008
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Columbia, Md., Sept. 4 - Martek Biosciences Corporation today announced its financial results for the third quarter of fiscal 2008. Revenues for the third quarter were $88.4 million, up 14% from $77.8 million in the third quarter of fiscal 2007. Net income was $9.3 million, or $0.28 per diluted share, for the third quarter of fiscal 2008, up 47% compared with $6.1 million, or $0.19 per diluted share, in last year's third quarter.
Commenting on the quarter, Chief Executive Officer Steve Dubin said, "Martek's third quarter was another solid quarter for the Company reflecting revenues and earnings in excess of our projections as well as the continued execution of our business plan. Our core infant formula business showed ongoing strength due mainly to sales growth internationally, and our margin improvement was primarily the result of process improvements and increased utilization of our manufacturing plants. While third quarter non-infant formula revenues were below anticipated levels, due to some extent to seasonality and the current challenging economic environment, Martek's sales of DHA to non-infant formula markets are up 38% year-to-date and I expect improvements in the fourth quarter based on an increased number of new product launches planned by our food, beverage and supplement customers. With a stronger fourth quarter sales outlook along with our margin growth, we are again raising our revenue and earnings estimates for the year."
Third Quarter and Year-to-Date Revenue Summary
Product sales in the third quarter of fiscal 2008 increased 12% over the third quarter of fiscal 2007 to $83.5 million. Product sales in fiscal 2008 year-to-date increased 17% over fiscal 2007 year-to-date to $250.0 million. These increases reflect continued strong demand from Martek's U.S. and international infant formula customers and the launch of new and the growth of existing food and beverage products containing life'sDHA(TM). In the third quarter of fiscal 2008, total sales to non-infant formula nutritional markets, which include DHA capsules, foods and beverages and animal feeds, were $7.5 million, a 12% increase over the same period of fiscal 2007, but below the $9 million to $10 million range previously provided. This difference from projected levels was caused by unevenness in ordering patterns, resulting to some degree from the seasonality of customer products, as well as by delays in the launch of certain new customer offerings due in part to the challenging economic environment currently being faced in the United States. As discussed below, the Company expects non-infant formula nutritional product revenues to be between $31 million and $33 million for the full fiscal year 2008, which would represent an increase over fiscal 2007 of approximately 40%.
Following is a breakdown of product sales by market for the third quarter and year-to-date periods (in thousands):
Three months Nine months
ended July 31, ended July 31,
% %
incr incr
2008 2007 (decr) 2008 2007 (decr)
Infant formula
market $74,815 $66,536 12% $223,483 $193,317 16%
Food and beverage
market 2,526 1,909 32% 7,793 3,777 106%
Pregnancy and nursing,
nutritional
supplements
and animal feeds 5,019 4,846 4% 15,424 12,995 19%
Non-nutritional
products 1,121 1,185 (5%) 3,265 3,435 (5%)
Total product sales $83,481 $74,476 12% $249,965 $213,524 17%
New products recently launched with Martek's life'sDHA(TM) include:
Food and Beverage Products
-- Starbucks' Apple Bran Muffin and Baked Berry Stella with life'sDHA(TM)
(United States)
-- The J.M. Smuckers Company's Crisco(R) Puritan(R) Canola Oil with
Omega-3 DHA with life'sDHA(TM) (United States)
-- Cabot Creamery Cooperative's 50% Reduced Fat Cheddar with Omega-3 DHA
with life'sDHA(TM) (United States)
Pregnancy and Nursing and Nutritional Supplement Products
-- Spectrum Organics' Prenatal DHA for Pregnant and Nursing Mothers,
Toddler DHA, Chewable Children's DHA and Vegetarian DHA with
life'sDHA(TM) (United States)
-- Walmark's Pregnium prenatal supplement with life'sDHA(TM) (Czech
Republic, Slovakia and Romania)
-- CVS Corporation's Life Fitness(TM) Life'sDHA(TM) Multivitamins (3 new
products in the United States)
-- CVS Corporation's DHA Prenatal Supplement with life'sDHA(TM) (United
States)
-- Walgreen's Finest Natural(TM) DHA Complete with life'sDHA(TM) (United
States)
-- Walgreen's Prenatal + DHA with life'sDHA(TM) (United States)
Contract manufacturing sales in the third quarter totaled $4.9 million, compared with $3.4 million a year ago, and in the year-to-date period totaled $12.0 million, compared with $11.3 million in the prior year. These increases were primarily due to additional orders from one existing customer. The Company's contract manufacturing services continue to include only products with expected reasonable profit margins or those that the Company believes could have a strategic fit in the future.
Gross Margin and Operating Expenses
Overall gross margin for the third quarter of fiscal 2008 was 41.5%, an increase over the 41.2% gross margin realized in the second quarter of 2008 and the 38.5% gross margin realized in the third quarter of fiscal 2007. The gross profit margin improvements resulted largely from DHA productivity gains and increased capacity utilization at Martek's manufacturing facilities, as well as reductions in ARA costs. The Company expects its fourth quarter gross margin percentage to be consistent with that of the third quarter, and anticipates further gross margin improvements in fiscal 2009.
Research and development expenses in the third quarter of fiscal 2008 were $6.3 million, or 7% of revenue, a slight decrease from the $6.6 million, or 8% of revenue, in the third quarter of fiscal 2007. 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. In the future, the Company expects to continue to experience quarter-to-quarter fluctuations in research and development expenses primarily due to the timing of outside services, including third-party clinical trial services. As noted last quarter, the Company anticipates that its research and development spend for the full fiscal year 2008 will approximate 7.5% of revenue, which includes higher planned expenditures in the fourth quarter for outside clinical trials.
During the third quarter of fiscal 2008, selling, general and administrative expenses were $13.6 million, or 15% of revenue, which is fairly consistent, on a percentage of revenue basis, with the prior year's third quarter and the second quarter of fiscal 2008. As noted last quarter, for the full fiscal year 2008, the Company expects selling, general and administrative expenses as a percentage of revenue to be approximately 15.5%, compared to 15% in fiscal 2007.
Liquidity
For the nine months ended July 31, 2008, the Company generated $61.9 million of cash from operating activities with the third quarter providing $23.2 million of this total, primarily through strong profits. At the end of the quarter, Martek had $57.6 million in cash and cash equivalents and had the entire balance of its long-term revolving credit facility ($135 million) available for future borrowing. Excluded from the Company's July 31, 2008 cash balance are $14.7 million of long-term auction rate security investments backed by student loans and guaranteed by the Department of Education.
Inventory levels are approximately $4 million higher than amounts at October 31, 2007 due to the timing of the Company's ARA purchases from Martek's ARA supplier. The Company anticipates that overall inventory levels at year-end will ultimately be lower than that of the previous year, further contributing to the projected improved cash flow generation.
Management Outlook
Revenue and earnings for the full year 2008 are projected to be slightly higher than previously estimated. Martek expects total revenues for the fourth quarter of fiscal 2008 to be between $87 million and $91 million. Fourth quarter infant formula revenue is projected to be between $74 million and $77 million; fourth quarter non-infant formula nutritional revenue is projected to be between $8 million and $9.5 million; fourth quarter other non-nutritional revenue is projected to be approximately $1.0 million and fourth quarter contract manufacturing revenue is projected to be between $3 million and $3.5 million. Fourth quarter gross margin is expected to be approximately 41.5%. Net income for the fourth quarter is projected to be between $8 million and $9 million, and diluted earnings per share are projected to be between $0.24 and $0.27.
For the full fiscal year 2008, the Company expects revenues to be between $349 million and $353 million, a projected increase over fiscal 2007 of between 14% and 15%. Net income for the full fiscal year 2008 is projected to be between $35.2 million and $36.2 million, and diluted earnings per share are projected to be between $1.06 and $1.09, an increase over fiscal 2007 of approximately 65% after excluding the effects of a $10.8 million non-recurring tax benefit recognized in the prior year.
MARTEK BIOSCIENCES CORPORATION
Summary Consolidated Financial Information
(Unaudited - $ in thousands, except per share data)
Condensed Consolidated Statements of Income Data
Three months Nine months
ended July 31, ended July 31,
2008 2007 2008 2007
Revenues:
Product sales $83,481 $74,476 $249,965 $213,524
Contract manufacturing
sales 4,922 3,370 12,045 11,269
Total revenues 88,403 77,846 262,010 224,793
Cost of revenues:
Cost of product sales 47,334 44,217 143,010 133,003
Cost of contract
manufacturing sales 4,374 3,681 10,826 11,296
Total cost of
revenues 51,708 47,898 153,836 144,299
Gross margin 36,695 29,948 108,174 80,494
Operating expenses:
Research and development 6,278 6,576 19,078 18,551
Selling, general and
administrative 13,554 11,563 40,769 32,683
Amortization of
intangible assets 1,919 1,602 5,475 4,521
Restructuring charge - 146 - 747
Other operating expenses 341 156 590 1,252
Total operating
expenses 22,092 20,043 65,912 57,754
Income from operations 14,603 9,905 42,262 22,740
Interest income (expense)
and other, net 337 (288) 863 (1,162)
Income before income
tax provision 14,940 9,617 43,125 21,578
Income tax provision 5,608 3,491 15,922 7,833
Net income $9,332 $6,126 $27,203 $13,745
Basic earnings per share $0.28 $0.19 $0.83 $0.43
Diluted earnings per
share $0.28 $0.19 $0.82 $0.42
Shares used in computing
basic earnings per
share 33,016 32,273 32,892 32,231
Shares used in computing
diluted earnings per
share 33,408 32,519 33,235 32,463
Unaudited Condensed Consolidated Balance Sheets Data
July 31, October 31,
2008 2007
Assets:
Cash and cash equivalents $57,622 $16,973
Short-term investments - 4,675
Accounts receivable, net 50,065 41,643
Inventories, net 113,116 109,409
Other current assets 5,190 8,237
Property, plant and equipment, net 266,988 277,915
Deferred tax asset 38,422 51,306
Long-term auction rate security investments 14,660 -
Goodwill and other, net 84,121 86,537
Total assets $630,184 $596,695
Liabilities and stockholders' equity:
Current liabilities $41,763 $46,141
Non-current liabilities 10,297 18,827
Stockholders' equity 578,124 531,727
Total liabilities and stockholders' equity $630,184 $596,695
Unaudited Condensed Consolidated Cash Flow Data
Nine months ended
July 31,
2008 2007
Operating activities:
Net income $27,203 $13,745
Non-cash items 38,160 28,792
Changes in operating assets and liabilities, net (3,424) (21,014)
Net cash provided by operating activities 61,939 21,523
Investing activities:
(Purchase) sale of investments and marketable
securities, net (10,850) 6,850
Expenditures for property, plant and equipment (5,587) (5,110)
Proceeds from sale of fluorescent detection
products business - 900
Repurchase from sale-leaseback transaction - (3,910)
Capitalization of intangible assets (3,208) (4,806)
Net cash used in investing activities (19,645) (6,076)
Financing activities:
Repayments of notes payable and other long-term
obligations, net (8,888) (759)
Repayments under revolving credit facility, net - (19,000)
Proceeds from stock option exercises and
other, net 7,243 2,209
Net cash used in financing activities (1,645) (17,550)
Net change in cash, cash equivalents 40,649 (2,103)
Cash and cash equivalents, beginning of period 16,973 15,578
Cash and cash equivalents, end of period $57,622 $13,475
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