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Excluding the impact of the tax benefits, the Company's net income on anon-GAAP basis would have been $8.9 million, or $0.27 per diluted share, inthe fourth quarter of fiscal 2008 compared to $7.5 million, or $0.23 perdiluted share, in the fourth quarter of fiscal 2007, a 17% increase. (see"Reconciliation of GAAP to Non-GAAP Net Income Measure" below).
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Commenting on the quarter, Chief Executive Officer Steve Dubin said, "Ourresults in this year's fourth quarter as well as the full fiscal year 2008reflect the continued execution of our business plan. During the year, weincreased penetration in international infant formula markets, expanded theuse of DHA outside of infant formula and significantly improved ourprofitability and cash flow generation. These solid results have yielded astrong year-end balance sheet that includes over $100 million in cash and cashequivalents and is essentially debt-free. While economic conditions willpresent challenges, I believe that Martek is well-positioned to deliverrevenue and profit growth in the year ahead."
Revenue Summary
Product sales in the fourth quarter of fiscal 2008 increased 10%year-over-year to $86.6 million, and product sales for FY08 grew to $336.6million, a 15% increase over prior year levels. These increases reflecthigher revenues from Martek's infant formula customers, particularly outsideof the United States, and a solid growth in sales of life'sDHA(TM) tonon-infant formula markets which grew more than 30% in both the fourth quarterand full fiscal year periods.
Following is a breakdown of product sales by market for the fourth quarterand fiscal year 2008 periods (in thousands):
Contract manufacturing sales in the fourth quarter totaled $3.7 million,compared with $3.0 million a year ago, and in fiscal 2008 totaled $15.8million, compared with $14.3 million in the prior year. These increases wereprimarily due to additional orders from one existing customer. During fiscal2009, the Company anticipates continuing to reduce the scope of its contractmanufacturing activities focusing more of its resources on the Company'shigher margin nutritional oils business.
Gross Margin and Operating Expenses
Overall gross margin for the fourth quarter of fiscal 2008 was 41.3%, anincrease over the 40.2% gross margin realized in the fourth quarter of fiscal2007. The improvement resulted largely from enhanced DHA production yields,increased capacity utilization at Martek's manufacturing facilities, andreductions in ARA costs. These margin improvements were attained by theCompany despite experiencing increases in both utility and raw material costsduring fiscal 2008.
Research and development expenses in the fourth quarter of fiscal 2008were $7.1 million, or approximately 8% of revenue, consistent, on a percentageof revenue basis, with the fourth quarter of fiscal 2007. The Company'sresearch and development efforts continue to focus on developing new food andbeverage applications for life'sDHA(TM), broadening the scientific evidencesupporting the benefits of life'sDHA(TM) throughout life, improvingmanufacturing processes and developing new products to expand the Company'smarket offerings. In the future, the Company expects to continue to experiencequarter-to-quarter fluctuations in research and development expenses primarilydue to the timing of outside services, including third-party clinical trialservices. Research and development expenses in fiscal 2008 were $26.2million, or 7.4% of revenue, fairly consistent, on a percentage of revenuebasis, with research and development spending levels in fiscal 2007.
During the fourth quarter of fiscal 2008, selling, general andadministrative expenses were $13.4 million, or 14.8% of revenue, which isconsistent with the prior year's fourth quarter. For the full fiscal year2008, selling, general and administrative expenses as a percentage of revenuewere approximately 15.4%, compared to 14.6% in fiscal 2007.
Financial Position
For the fiscal year ended October 31, 2008, the Company generated $106.5million of cash from operating activities with the fourth quarter providing$44.6 million of this total. The Company's fiscal 2008 operating cashgeneration more than doubled the amounts achieved in fiscal 2007. In thefourth quarter, Martek's cash flow was nearly equivalent to the Company'stotal operating cash generation for all of fiscal 2007, underscoring theinherent leverage in Martek's business model. Contributing to the 2008 cashgeneration were strong current year profits as well as a nearly $10 millionreduction in inventory held during fiscal 2008, bringing the year-endinventory balance to $99.6 million, the Company's lowest inventory level sincemid-2006.
At the end of the year, Martek had $102.5 million in cash and cashequivalents and had the entire balance of its long-term revolving creditfacility ($135 million) available for future borrowing. Excluded from theCompany's October 31, 2008 cash balance are $11.3 million of long-term auctionrate security investments backed by student loans and guaranteed by the U.S.Department of Education.
Financial Guidance
Martek expects total revenues for the first quarter of fiscal 2009 to bebetween $86 million and $89 million with first quarter infant formula revenueprojected to be between $74 million and $77 million and first quarternon-infant formula nutritional revenue projected to be between $7 million and$8.5 million. First quarter gross margin is expected to be approximately42.5%. Net income for the first quarter is projected to be between $8.7million and $9.7 million, and diluted earnings per share are projected to bebetween $0.27 and $0.29.
With respect to fiscal 2009, the Company expects moderate growth of bothrevenues and profitability over fiscal 2008 with profitability growing at ahigher rate than revenues primarily due to improvements in gross profitmargins; however, a deep, prolonged economic recession would yield additionaluncertainty with respect to the Company's attainment of its forecastedoperating results.
Reconciliation of GAAP to Non-GAAP Net Income Measure
The Company makes reference in this release to non-GAAP presentations ofnet income and earnings per share that exclude certain non-recurring taxbenefits and restructuring charge. We are providing this information to assistinvestors in comparing the results of the current period to those in the prioryear periods when the non-recurring items were not present. We cautioninvestors, however, that these non-GAAP results should only be considered inaddition to results that are reported under current GAAP and should not beconsidered as a substitute for results that are presented under GAAP.Following is a schedule showing the reconciliation of net income reportedunder GAAP to the non-GAAP financial measure included herein ($ in thousands):
Investor Conference Call Webcast
Martek will host a conference call and Webcast for investors to review itsfourth quarter results and fiscal 2009 outlook at 4:45 p.m. Eastern Time onThursday, December 11, 2008. Access to the live audio Webcast is availablethrough Martek's website at http://investors.martek.com. The webcast will beavailable for replay through the close of business on January 11, 2009.
General
Sections of this release contain forward-looking statements concerning,among other things: (1) Martek's expectations regarding future revenue growthin and customer demand from the infant formula, pregnancy and nursing,nutritional supplements, animal feeds and food and beverage markets; (2) itsexpectations regarding revenue, gross margin, operating expense and income forthe first quarter of and full fiscal 2009; and (3) its expectations regardinglaunches by customers of products containing Martek's life'sDHA(TM) and itscontract manufacturing business. Furthermore, Martek's operating results aresubject to quarter-to-quarter fluctuations, some of which may be significant.The forward-looking statements noted above are based upon numerous assumptionswhich Martek cannot control and involve risks and uncertainties that couldcause actual results to differ. These statements should be understood in lightof the risk factors and cautionary statements set forth herein and in theCompany's filings with the Securities and Exchange Commission, including, butnot limited to, Part I, Item 1A of the Company's Form 10-K for the fiscal yearended October 31, 2007 and other filed reports on Form 10-K, Form 10-Q andForm 8-K.
About Martek
Martek Biosciences Corporation (Nasdaq: MATK) is a leader in theinnovation and development of omega-3 DHA products that promote health andwellness through every stage of life. The Company produces life'sDHA(TM), avegetarian source of the omega-3 fatty acid DHA (docosahexaenoic acid), foruse in foods, infant formula and supplements, and life'sARA(TM) (arachidonicacid), an omega-6 fatty acid, for use in infant formula. For more informationon Martek Biosciences, visit http://www.martek.com.Three months ended October 31, Year ended October 31, 2008 2007 %incr 2008 2007 %incr (decr) (decr) Infant formula market $77,259 $72,246 7% $300,742 $265,563 13% Food and beverage market 2,638 1,706 55% 10,431 5,483 90% Pregnancy and nursing, nutritional supplements and animal feeds 5,411 4,444 22% 20,835 17,439 19% Non-nutritional products 1,336 629 112% 4,601 4,064 13% Total product sales $86,644 $79,025 10% $336,609 $292,549 15%
SOURCE Martek Biosciences Corporation
