Martek Announces Third Quarter FY 2010 Financial Results

COLUMBIA, Md., Sept. 1 /PRNewswire-FirstCall/ -- Martek Biosciences Corporation (Nasdaq: MATK) today announced its financial results for the third quarter of fiscal 2010. Revenues for the third quarter were $117.2 million, up 51% from $77.8 million in the third quarter of fiscal 2009. GAAP net income was $11.9 million, or $0.35 per diluted share, for the third quarter of fiscal 2010, an increase of 33% compared to $8.9 million, or $0.27 per diluted share, for the third quarter of fiscal 2009.  The revenues and earnings for the third quarter of fiscal 2010 include the results of Amerifit Brands ("Amerifit" or "branded consumer health products"), the acquisition of which was completed by Martek on February 12, 2010.  

The third quarter of fiscal 2010 included charges related to the acquisition of Amerifit of $700,000 and charges related to the Winchester restructuring (see discussion below) of $600,000.  Excluding these amounts, net of tax, the fiscal 2010 third quarter earnings on a non-GAAP basis would have been $12.7 million, or $0.38 per diluted share, an increase of 42% over the third quarter of fiscal 2009  (see Table II "Reconciliation of GAAP to Non-GAAP Net Income Measure" below).

Commenting on the quarter, Chief Executive Officer Steve Dubin said, "Martek's strong third quarter results reflect another good quarter for DHA and ARA sales to our infant formula customers, another record quarter of DHA sales in non-infant formula markets, strong sales of Amerifit's consumer branded products and improved gross margins. I believe that Martek's strong run rate coming out of fiscal 2010 will provide an excellent platform from which to grow as we continue to expand our DHA ingredients business beyond infant formula, begin to commercialize new products currently in development as consumer branded products sold through Amerifit's marketing and distribution channels and continue our efforts to reduce production costs. Accordingly, I expect growth in revenues, margin and earnings in 2011. It is also worth noting that, as a result of our strong earnings and robust cash flow generation, our Amerifit acquisition debt has been repaid earlier than expected and Martek is once again essentially debt-free. Martek's solid balance sheet and strong financial performance provides us with great flexibility which, among other things, should allow us to launch new Martek products, as noted above, during our next fiscal year, continue to prudently invest in our promising R&D pipeline and explore new complementary business opportunities."

Revenue Summary

Product sales in the third quarter of fiscal 2010 were $114 million, an increase of $38.9 million from the third quarter of fiscal 2009. This increase was partially attributable to the branded consumer health product sales of Amerifit which totaled $20.3 million in the third quarter.  The remainder of the increase, or $18.6 million, was the result of sales of our nutritional ingredients in both the infant formula and non-infant formula markets.  Demand increases outside the United States, particularly in Asia, were a key driver of the growth in both markets.  

A breakdown of product sales for the third quarter and fiscal year to date periods (in thousands) follows:

Contract manufacturing and collaborations revenues in the third quarter totaled $3.2 million, of which approximately $900,000 relates to revenues associated with Martek's joint development agreement with a subsidiary of BP p.l.c. ("BP") for work on microbial oils for use as biofuels and the remaining $2.3 million relates to contract manufacturing activities. Consistent with previous disclosures, as of July 31, 2010, we have ceased nearly all contract manufacturing activities.  

Gross Margin and Operating Expenses

Overall gross margin for the third quarter of fiscal 2010 was nearly 50%, an increase over the 44% gross margin realized in the third quarter of fiscal 2009.  This improvement was largely due to both ARA and DHA cost reductions in the 2010 period and the positive impact of higher gross margins on branded consumer health product sales. Included in the third quarter's gross margin is the negative effect of approximately $200,000 (gross margin impact of 0.2%) related to one-time inventory step-up costs resulting from the Amerifit acquisition.     

Research and development expenses in the third quarter of fiscal 2010 were $8.5 million, consistent with previously stated guidance and up from $6.6 million in last year's third quarter. As anticipated, the increase was due to the volume of the Company's pre-clinical research activities during the current quarter, primarily associated with the development of Martek's next generation DHA product for infant formula, as well as higher personnel costs. Martek's research and development focuses on both broadening the market applications for life'sDHA™ as well as leveraging the Company's microbial technology platform to develop new high-value product offerings. 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 2010, selling, general and administrative expenses were $18.9 million, or 16% of revenue, consistent with prior guidance and an increase from $11.0 million, or 14% of revenue, in last year's third quarter due partially to the incremental expenses attributable to Amerifit.    

Advertising and promotion costs during the third quarter totaled $5.6 million, or 5% of revenue. As a percentage of revenue, we anticipate similar advertising and promotion expenses for our current products each quarter, with such costs fluctuating from quarter to quarter due to the timing of particular advertising and promotional campaigns and the launch of new branded consumer health products.  

Financial Position  

As previously noted, Martek financed its February 2010 acquisition of Amerifit through available cash, a new term debt facility totaling $75 million, and $11 million drawn from a new revolving credit facility. Strong cash generation since the acquisition, including over $36 million in the third quarter of fiscal 2010, enabled a full repayment of all acquisition financing within five months of the acquisition date. As such, as of July 31, 2010, the Company returned to being essentially debt-free and now has its entire $100 million credit line available.  

Restructuring of Winchester Manufacturing Site

In June 2010, Martek announced plans to restructure its Winchester, Kentucky manufacturing facilities in an effort to streamline operations, improve capacity utilization, and reduce manufacturing costs and operating expenses. As a result of this restructuring plan, a charge of approximately $600,000 was recorded in the third quarter of fiscal 2010 related to employee separation costs. The Company anticipates incurring approximately $1.0 million of additional restructuring costs in the fourth quarter of fiscal 2010 related to employee separation costs. Also, as previously announced, Martek is evaluating the potential sale or lease of a portion of its Winchester operations. Any such sale or lease would be contingent upon Martek's ability to maintain necessary production redundancies through continuing access to certain key processes at the Winchester facility and/or arrangements with contract manufacturers. We expect that the plant restructuring will result in a non-cash asset impairment charge or loss upon sale of $30 million to $40 million in the fourth quarter of fiscal 2010.

Significant Recent Events

• Extended Global Sole-Source Supply Agreement with Mead Johnson – In June 2010, Martek extended its sole-source supply agreement with Mead Johnson & Company, LLC, for DHA and ARA for infant formula products. Under the terms of the amendment, Martek will remain Mead Johnson's global sole-source supplier of DHA and ARA for all of its infant formula products through at least December 31, 2015, an extension of four years beyond the earliest possible termination date of the current agreement. The amendment also provides graduated price reductions to Mead Johnson over the term of the extension, beginning in 2010.

• Supply Agreements with Chinese Dairies – Martek entered into nutritional ingredient supply agreements with two leading Chinese dairies. A five-year agreement with Chinese dairy Mengniu Dairy Company Limited was executed for the use of Martek's life'sDHA™ in Mengniu-brand UHT milk and potentially other categories. In addition, the Company entered into a multi-year DHA and ARA agreement with Feihe Dairy, a wholly-owned subsidiary of American Dairy, Inc. Under the terms of the agreement, Feihe Dairy will purchase its total requirements of DHA and ARA for its new premium infant formula and growing-up milk products sold in China.

• Non-Infant Formula Product Launches with life'sDHA™ –
  • Foods and Beverages – O' Sole Mio™ Vivi Bene® medaglioni with basil and O' Sole Mio™ Vivi Bene® medaglioni with sundried tomato (Les aliments O'Sole Mio – Canada); Dairyland™ Cool Ones yogurt (Saputo Inc. – Canada); Little Bear® Kid Growing Milk (Uni-President – China); Babyliqi – Professor Qiqi Drink (Hong Kong Babyliqi Biotechnology Co., Ltd.™ – China);  Yubao Goat-Goat Dairy Drink (Xi'an Yubao Goat Dairy Industry Co., Ltd – China).
  • Pregnancy and nursing and nutritional supplements – CitraNatal®Harmony™ with 250 mg life'sDHA™ (Mission Pharmacal®  – U.S.); Prenexa® with 300 mg life'sDHA™ (Upsher-Smith Laboratories – U.S.); Organic Nutritional Mommy Bars (Earth's Best Organic® – U.S.);  Opti3 (Chrysalis – UK); Supradyn® Junior Gummies with 60 mg life'sDHA™ per daily dose (Bayer  – Spain); Stop Aging Now with 100 mg life'sDHA™ per day (Avema Pharma Solutions – U.S.); Neurofen (Laboratoria Natury – Poland); Z.K. 200 Cereboost (Guarana, DHA, Vitamins + Zinc) with 15 mg life'sDHA™ (Artisan Gida – EU); Meydunig Mama and Maydunig Baby with 200 mg and 100 mg life'sDHA™ respectively (Shanghai Baojialijia – China).

• New Scientific Data Published on DHA and ARA – The journal Acta Paediatrica (online, July 2010) published the results of the continuation of a study previously reported from the University of Oslo, Norway. The study was a randomized, double-blinded, placebo-controlled intervention in which additional DHA and ARA or placebo oil were added to the human milk given to very low birth weight infants (< 1500 g). The intervention and control group included 44 and 48 children, respectively. Supplementation began one week after birth until discharge from hospital (9 weeks on average). The infants were tested at 2 years of age using various measures. The authors concluded that "a positive effect of early supplementation with DHA and ARA on 20 months attention capacity was indicated". Martek supplied oils used in this study.

Financial Guidance

The projected results are shown below for Martek (not including Amerifit), Amerifit (stand-alone, post-acquisition) and on a consolidated basis for the three months ending October 31, 2010. The consolidated net income and earnings per share information is shown inclusive of any charges resulting from the Winchester restructuring described above as well as exclusive of such charges through the pro forma non-GAAP disclosures shown below.

For the fourth quarter of fiscal 2010, Martek expects infant formula revenue to be between $71 million and $75 million, non-infant formula nutritional revenue to be between $13 million and $14 million, and contract manufacturing and collaborations revenue to be between $1.0 million and $1.3 million. Such projected fourth quarter revenues would equate to year-over-year growth of more than 23%.

Consolidated gross margin in the fourth quarter of fiscal 2010 is expected to be between 51% and 52%.  Furthermore, due to the Company's early repayment of its term loan and related debt issuance cost amortization acceleration in the third quarter, we expect interest expense to decline significantly in the fourth quarter of fiscal 2010 as compared to the third quarter of 2010.  

Based on this fourth quarter guidance, Martek expects full fiscal year 2010 revenue to be between $439 million and $444 million, including infant formula revenues of between $308 million and $312 million. The projected 2010 annual revenues would represent year-over-year growth in total revenues of 27% to 29% (10% to 11% excluding Amerifit-related revenues) and reflects meaningful gains in nearly all markets for our nutritional ingredients, including growth in infant formula revenues of 8% to 9% and growth in non-infant formula nutritional revenues of  31% to 34%.  

With the recently-extended infant formula supply agreements along with the pending Winchester restructuring, the Company has greater visibility into its expected results for fiscal 2011. As such, we are projecting revenue and net income growth over fiscal 2010. Contributing to this anticipated earnings increase is projected gross margin growth of at least 400 basis points over the expected full year fiscal 2010 level. Gross margin for fiscal 2011 will be favorably impacted by a full year of Amerifit operations, the discontinuation of the Company's low margin contract manufacturing business, production cost efficiencies and lower ARA pricing.

Investor Conference Call Webcast

Martek will host a conference call and webcast for investors to review its third quarter results and fourth quarter of fiscal 2010 outlook at 4:45 p.m. Eastern Time on September 1, 2010. Access to the live audio webcast is available through Martek's website at http://investors.martek.com.  The webcast will be available for replay for 30 days.

Cautionary Note Regarding Forward-Looking Statements

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, animal feeds and food and beverage markets as well as markets for Amerifit products; (2) its expectations regarding revenue, gross margin, operating expenses and income for the fourth quarter of and full year fiscal 2010 for both Martek and Amerifit; (3) its expectations regarding revenue, gross margin and income for fiscal 2011; (4) its expectations regarding launches by customers of products containing Martek's life'sDHA™ and future revenues associated with Martek's contract manufacturing; (5) its expectations regarding future capabilities of and benefits from the Amerifit acquisition; and (6) its expectations regarding charges to be recorded in the fourth quarter of fiscal 2010 related to the restructuring of the Winchester plant.  Furthermore, Martek's operating results are subject to quarter-to-quarter fluctuations, some of which may be significant, and are also subject to future changes in the Company's preliminary purchase price allocation for its Amerifit acquisition.  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, 2009 and other filed reports on Form 10-K, Form 10-Q and Form 8-K.

About Martek

Martek Biosciences Corporation (Nasdaq: MATK) is a leader in the innovation, development, production and sale of high-value products from microbial sources that promote health and wellness through nutrition. The Company's technology platform consists of its core expertise, broad experience and proprietary technology in areas such as microbial biology, algal genomics, fermentation and downstream processing. This technology platform has resulted in Martek's development of a number of products,  including the company's flagship product, life'sDHA™, a sustainable and vegetarian source of algal DHA (docosahexaenoic acid) important for brain, heart and eye health throughout life for use in infant formula, pregnancy and nursing products, foods and beverages, dietary supplements and animal feeds. The Company also produces life'sARA™ (arachidonic acid), an omega-6 fatty acid, for use in infant formula and growing-up milks. Martek's subsidiary, Amerifit Brands, develops, markets and distributes branded consumer health and wellness products and holds leading brand positions in all of its key product categories. Amerifit products are sold in most major mass, club, drug, grocery and specialty stores and include: Culturelle®, a leading probiotic supplement; AZO, the leading OTC brand addressing symptom relief and detection of urinary tract infections; and ESTROVEN®, the leading all-natural nutritional supplement brand addressing the symptoms of menopause. Martek currently has a number of nutritional health and wellness products under development that it plans to commercialize and distribute through Amerifit's distribution channels.

Martek's technology platform has also made it a sought-after partner on a range of groundbreaking projects in process, including the development of microbially-derived biofuels and the development of DHA-containing oilseeds. For more information on Martek Biosciences, visit http://www.martek.com/. For a complete list of life'sDHA™ and life'sARA™ products, visit http://www.lifesdha.com/. For more information about Amerifit Brands, visit www.amerifit.com.

SOURCE Martek Biosciences Corporation