Columbia, Md., Sep, 3, 2009 - Martek Biosciences Corporation announced its financial results for the third quarter of fiscal 2009. Revenues for the third quarter were $77.8 million, down 12% from $88.4 million in the third quarter of fiscal 2008.
Net income was $8.9 million, or $0.27 per diluted share, for the third quarter of fiscal 2009, a 4% decrease compared with $9.3 million, or $0.28 per diluted share, in last year's third quarter.
Commenting on the quarter, Chief Executive Officer Steve Dubin said, "Martek's third quarter 2009 financial results benefited from a 41% quarter over quarter increase in non-infant formula product sales, a 220 basis point gross margin improvement from last year, and our cost control efforts, but, as anticipated and disclosed at the time of our second quarter earnings press release, we were negatively impacted by de-stocking of inventory by certain of our infant formula customers. Despite some continuing effects of this customer de-stocking, I expect a strong fourth quarter for both revenues and earnings. Looking forward to 2010, the de-stocking issue should be behind us and our growing non-infant formula business coupled with an expected resumption in growth in our infant formula business should lay a solid foundation for 2010."
Revenue Summary
Product sales in the third quarter of fiscal 2009 decreased to $75.0 million from $83.5 million in the third quarter of fiscal 2008. The revenue decline in the current year's third quarter was caused by the previously announced de-stocking of inventory by certain infant formula customers. The effect of the de-stocking was partially offset by record non-infant formula nutritional revenues of $10.6 million in the third quarter of fiscal 2009. The 41% increase in non-infant formula nutritional products compared to the prior year's third quarter was led by significantly higher sales to the pregnancy and nursing market.
A breakdown of product sales by market for the third quarter and year-to-date periods (in thousands) follows:
Three months ended Nine months ended
July 31, July 31,
--------------------- -----------------------
% %
incr incr
2009 2008 (decr) 2009 2008 (decr)
------------------------------------------------------------------------
Infant formula market $63,320 $74,815 (15%) $215,294 $223,483 (4%)
Food and beverage market 2,681 2,526 6% 8,278 7,793 6%
Pregnancy and nursing,
nutritional supplements
and animal feeds 7,931 5,019 58% 20,396 15,424 32%
Non-nutritional products 1,112 1,121 (1%) 3,250 3,265 (1%)
----- ----- ----- -----
Total product sales $75,044 $83,481 (10%) $247,218 $249,965 (1%)
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In addition, contract manufacturing sales in the third quarter totaled $2.8 million, compared with $4.9 million a year ago due to a planned reduction in the scope of the Company's contract manufacturing activities over the long-term. While the Company expects to continue reducing the scope of its contract manufacturing activities, Martek will provide contract services to both existing and new customers if reasonable profit margins can be generated, there is no impact to the Company's higher margin nutritional oils business or the Company believes that such services could have a strategic fit.
Gross Margin and Operating Expenses
Overall gross margin for the third quarter of fiscal 2009 was 43.7%, a record gross margin, and a significant increase over the 41.5% gross margin realized in the third quarter of fiscal 2008. The improvement resulted largely from ARA cost reductions and DHA productivity increases.
Research and development expenses in the third quarter of fiscal 2009 were $6.6 million, an increase of 5% over the corresponding quarter of last year. The increase relates primarily to development work focusing on offerings for new markets and broadening the array of foods and beverages in which the Company's life'sDHA(TM) can be incorporated. The Company continues to expect quarter-to-quarter fluctuations in research and development expenses mainly due to the timing of outside services, including third-party clinical trial services.
During the third quarter of fiscal 2009, selling, general and administrative expenses ("SG&A") were $11.4 million, a decrease from $13.6 million in last year's third quarter. The Company continues to closely manage its SG&A spending levels. Martek expects that for fiscal 2009, SG&A will be lower than fiscal 2008 levels on both a percentage of revenue and absolute dollar basis reflecting the cost management measures employed by the Company to address economic challenges. Such cost management measures during the third quarter included reductions to estimated annual incentive compensation payouts which resulted in a reversal of certain previously accrued incentive compensation expenses.
Financial Position
As of the end of the third quarter, Martek had $129.3 million in cash and cash equivalents, a minimal amount of debt and the entire balance of its long-term revolving credit facility ($135 million) available for future borrowing. For the nine months ended July 31, 2009, the Company generated $40.0 million of cash from operating activities, with the third quarter providing $14.4 million of this total. Year-to-date operating cash flows were impacted by an increase in ARA inventory levels. Consistent with prior years, the timing of Martek's purchases of ARA are largely dependent upon DSM's scheduled production runs. Significant ARA production runs by DSM during the third quarter coupled with lower sales served to increase ARA inventory by approximately $15 million compared to the second quarter. In general, Martek purchases a minimal amount of ARA from DSM during the fourth quarter. As a result, the Company's total inventory value at October 31, 2009 is projected to be between $115 million and S118 million.
Significant Recent Events
-- Joint Development Agreement with BP - Martek entered into a Joint
Development Agreement (JDA) with BP to work on the production of
microbial oils for biofuels applications. Under the terms of the
multi-year agreement, Martek and BP will work together to establish
proof of concept for large-scale, cost effective microbial biodiesel
production through fermentation. BP has agreed to contribute up to $10
million to this initial phase of the collaboration with Martek
performing the biotechnology research and development associated with
these initial development activities. All intellectual property
developed under the JDA will be owned by BP, with an exclusive license
to Martek for application and commercialization in nutrition, cosmetic
and pharmaceutical applications. Additionally, each party is entitled to
certain payments from technology that is commercialized in the other
party's field.
-- Multi-Year Sole-Source Infant Formula Supply Agreements - Martek
entered into a multi-year sole-source supply agreement with Puleva Food
for the use of ARA in infant formulas produced by Puleva and sold in
Spain. Puleva is part of the Ebro-Puleva group, Spain's largest
agro-food business. Martek also entered into a multi-year sole-source
supply agreement with Milk Powder Solutions under which Martek will
serve as Milk Powder Solutions' exclusive supplier for all of its
ARA needs for infant formula products in China and Vietnam under the
Gold Cow brand name.
-- Non-Infant Formula Product Launches - Several non-infant formula
nutritional products with Martek's life'sDHA(TM) were launched
by Martek's customers, including Parent's Choice(TM) Pediatric
Drink, Walgreens Finest Natural Multi-vitamins and Walgreens Flax + DHA
dietary supplement.
-- Approval in European Union of New Food Applications for
life'sDHA(TM) - Martek received approval from the Standing
Committee On The Food Chain and Animal Health (SCFCAH) of the European
Union for the use of Martek's life'sDHA(TM) in bakery
products, cereal bars, and beverages, including milk-based and milk
analogue drinks, throughout the 27 Member States of the European Union.
This expands the current categories approved in 2003 which include
breakfast cereals, spreadable fat and dressings, certain dairy products
and food supplements.
-- New Scientific Data Published on DHA - The benefits of DHA
supplementation were recently discussed in the following publications.
-- A report published in Developmental Neuropsychology (June 2009)
evaluated resting heart rate during the first six months of life in
healthy, full-term infants. The newborns were either breastfed or
given cow's milk-based or soy-based commercial infant formula
containing different levels of DHA and ARA throughout the study
period. Results showed that infants fed higher levels of DHA and
ARA from either breast milk or infant formula had lower heart rates
and higher values for heart rate variability measures compared to
infants fed lower levels of DHA and ARA. According to the authors,
these results indicate that adequate DHA is important for
parasympathetic tone during this important period in development of
cardiovascular regulation.
-- A study published in the British Journal of Ophthalmology
(March/April 2009) reported findings from a multi-year study of the
effects of diet on the progression of age-related macular
degeneration. This large clinical trial supplemented over 2,000
people with 5, 6, and 18 times the Recommended Dietary Allowance
levels of vitamins C, E and/or zinc and other minerals. In this
current report, the investigators quantified the dietary intake of
DHA and EPA in the study groups as well. Results showed that
consuming a diet rich in DHA slowed the progression of early
age-related macular degeneration and that the DHA benefit occurred
independently from EPA and the usual study supplements.
Financial Guidance
Martek expects total revenues for the fourth quarter of fiscal 2009 to be between $87 million and $92 million with fourth quarter infant formula revenue projected to be between $69 million and $75 million and fourth quarter non-infant formula nutritional revenue projected to be between $9.5 million and $11.5 million. Contract manufacturing and services revenue is projected to be between $6.0 million and $6.5 million in the fourth quarter. The expected revenue increase from prior periods in the contract area is attributable to the additional production by Martek of the starting material used to produce an anti-viral drug for the treatment of influenza and the BP arrangement noted above. Fourth quarter gross margin is expected to be between 43% and 44%. Net income for the fourth quarter is projected to be between $10.4 million and $11.8 million, and diluted earnings per share are projected to be between $0.31 and $0.35.
For the full fiscal year 2009, Martek expects total revenues to be between $345 million and $350 million. Net income for the full fiscal year 2009 is projected to be between $40.0 million and $41.4 million, and diluted earnings per share are projected to be between $1.20 and $1.24, a pre-tax earnings increase of between 10% and 15% over fiscal 2008.
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.
MARTEK BIOSCIENCES CORPORATION
Summary Consolidated Financial Information
(Unaudited - $ in thousands, except per share data)
Unaudited Condensed Consolidated Statements of Income Data
Three months ended Nine months ended
July 31, July 31,
2009 2008 2009 2008
Revenues:
Product sales $75,044 $83,481 $247,218 $249,965
Contract manufacturing sales 2,790 4,922 10,390 12,045
----- ----- ------ ------
Total revenues 77,834 88,403 257,608 262,010
------ ------ ------- -------
Cost of revenues:
Cost of product sales 41,129 47,334 137,337 143,010
Cost of contract manufacturing
sales 2,675 4,374 10,101 10,826
----- ----- ------ ------
Total cost of revenues 43,804 51,708 147,438 153,836
------ ------ ------- -------
Gross margin 34,030 36,695 110,170 108,174
------ ------ ------- -------
Operating expenses:
Research and development 6,604 6,278 20,510 19,078
Selling, general and
administrative 11,439 13,554 37,411 40,769
Amortization of intangible
assets 1,534 1,919 4,910 5,475
Other operating expenses 234 341 956 590
--- --- --- ---
Total operating expenses 19,811 22,092 63,787 65,912
------ ------ ------ ------
Income from operations 14,219 14,603 46,383 42,262
Interest income (expense) and
other, net 81 337 427 863
-- --- --- ---
Income before income tax
provision 14,300 14,940 46,810 43,125
Income tax provision 5,372 5,608 17,259 15,922
----- ----- ------ ------
Net income $8,928 $9,332 $29,551 $27,203
====== ===== ======= =======
Basic earnings per share $0.27 $0.28 $0.89 $0.83
==== ==== ===== =====
Diluted earnings per share $0.27 $0.28 $0.89 $0.82
==== ==== ===== =====
Shares used in computing basic
earnings per share 33,234 33,016 33,191 32,892
Shares used in computing diluted
earnings per share 33,346 33,408 33,346 33,235
Unaudited Condensed Consolidated Balance Sheets Data
July 31, October 31,
2009 2008
---- ----
Assets:
Cash and cash equivalents $129,345 $102,495
Short-term investments 7,383 -
Accounts receivable, net 37,318 40,438
Inventories, net 125,339 99,553
Other current assets 3,029 4,866
Property, plant and equipment, net 255,651 265,900
Deferred tax asset 20,936 38,356
Long-term investments 4,197 11,336
Goodwill and other, net 95,110 83,037
------ ------
Total assets $678,308 $645,981
======= =======
Liabilities and stockholders' equity:
Current liabilities $45,556 $47,342
Non-current liabilities 9,114 10,056
Stockholders' equity 623,638 588,583
------- -------
Total liabilities and stockholders' equity $678,308 $645,981
======= ========
Unaudited Condensed Consolidated Cash Flow Data
Nine months ended July 31,
--------------------------
2009 2008
---- ----
Operating activities:
Net income $29,551 $27,203
Non-cash items 40,945 38,359
Changes in operating assets and
liabilities, net (30,494) (3,623)
------- ------
Net cash provided by operating activities 40,002 61,939
------ ------
Investing activities:
Sale (purchase) of investments and
marketable securities, net 100 (10,850)
Expenditures for property, plant and
equipment (6,733) (5,587)
Capitalization of intangible assets (6,129) (3,208)
------ ------
Net cash used in investing activities (12,762) (19,645)
------- -------
Financing activities:
Repayments of notes payable and other
long-term obligations, net (88) (8,888)
(Payments) proceeds from equity
transactions, net (302) 7,243
---- -----
Net cash used in financing activities (390) (1,645)
---- ------
Net change in cash and cash equivalents 26,850 40,649
Cash and cash equivalents, beginning of
period 102,495 16,973
------- ------
Cash and cash equivalents, end of period $129,345 $57,622
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