Martek Sales Up on Branded Consumer Products

Fourth quarter and full year 2010 growth was attributable to sales of branded consumer health products resulting from the acquisition of Amerifit in 2010, as well as increased sales of nutritional ingredients in both the infant formula and non-infant formula markets.

12/9/2010 --- Martek Biosciences Corporation announced its financial results for the fourth quarter and fiscal year ended October 31, 2010. Total revenues for the fourth quarter were $119.1 million, up 36% from the fourth quarter of fiscal 2009. Fourth quarter non-GAAP earnings per share (EPS) were $0.41, a 24% increase from $0.33 per diluted share in last year's fourth quarter. For the full year 2010, revenues increased 30% to $450.0 million, and full year non-GAAP EPS were $1.55, an increase of 27% versus 2009.  Non-GAAP EPS for the fourth quarter and full year 2010 exclude, for the applicable periods, certain acquisition and restructuring charges (see Table II "Reconciliation of GAAP to Non-GAAP Net Income Measure" below).  On a GAAP basis, earnings (loss) per share were ($0.18) and $0.83 for the fourth quarter and full year 2010, respectively.  Revenue and earnings for the fourth quarter include the results of Amerifit Brands ("Amerifit" or "branded consumer health products"), and revenue and earnings for the full year fiscal 2010 include the results of Amerifit since the February 12, 2010 date of acquisition by Martek.

Commenting on the quarter and year, Chief Executive Officer Steve Dubin said, "Martek's fourth quarter came in at the high end of our expectations and concluded a year of many accomplishments for Martek.  Revenue grew across all business segments in 2010, our core infant formula ingredients business was strengthened through the extension of the terms of two of our key infant formula sole source supply agreements, and significant improvements on the operational side of the business were implemented which helped drive growth in both margins and income.  In addition, we expanded our business platform through the acquisition of Amerifit, and made significant progress on our product and technology pipeline, both of which provide Martek with exciting opportunities for future growth."

Product sales in the fourth quarter of fiscal 2010 grew to $117.6 million, up 44% as compared to the fourth quarter of fiscal 2009.  For the full year 2010, product sales increased 32% from full year 2009, to $434.8 million. "Fourth quarter and full year 2010 growth was attributable to our sales of branded consumer health products resulting from our acquisition of Amerifit in 2010, as well as increased sales of our nutritional ingredients in both the infant formula and non-infant formula markets. Fourth quarter infant formula sales growth resulted primarily from increased sales of ARA and DHA for use in international markets and, to a lesser extent, from certain non-recurring stocking orders in the United States."

Contract manufacturing and services revenue totaled $1.5 million and $15.3 million for the fourth quarter and full year 2010, respectively, of which $1.0 million and $4.1 million, respectively, was recognized in connection with the Company's ongoing joint development agreement with a subsidiary of BP p.l.c. ("BP") for production of microbial oils for use as biofuels.  Consistent with previous disclosures, as of October 31, 2010, we have effectively ceased all contract manufacturing activities.

Overall gross margin for the fourth quarter of fiscal 2010 was 52%, an increase over the 44% gross margin realized in the fourth quarter of fiscal 2009.  For the full year 2010, gross margin was 48%, an increase from the 43% gross margin realized for the full year 2009.  Gross margin improvements were largely due to both ARA and DHA cost reductions and the positive impact of higher gross margins on sales of branded consumer health products.

Research and development (R&D) expenses for the fourth quarter of fiscal 2010 were $9.2 million, or 8% of sales, consistent with previously stated guidance. R&D expenses for the full year increased to $33.6 million, up from $27.4 million in fiscal 2009.  R&D continues to focus on broadening the market applications for life'sDHA through new product and process innovations, as well as leveraging the Company's microbial technology platform to develop new product offerings for its core nutritional markets and new high-value opportunities beyond nutrition. 

Selling, general and administrative (SG&A) expenses for the fourth quarter of fiscal 2010 were $21.6 million, or 18% of sales, consistent with prior guidance.  Full year SG&A expenses increased to $71.2 million, or 16% of sales.  Year-to-year increases in fourth quarter and full year 2010 SG&A expenses are attributable to incremental expenses associated with Amerifit, and to a lesser extent, increases in the variable component of Company-wide compensation resulting from Martek's improved overall financial performance.

Advertising and promotion (A&P) spending totaled $4.2 million, or 4% of revenue, and $14.3 million, or 3% of revenue, for the fourth quarter and full year 2010, respectively.  The increase in A&P as compared to 2009 is primarily attributable to increased spending in support of branded consumer health product sales as a result of the acquisition of Amerifit. 

The Company generated cash flow from operations of $46.3 million and $146.0 million, respectively, for the fourth quarter and full year 2010.  Martek ended fiscal 2010 with a cash balance of $63.7 million, essentially no debt, and its entire $100 million credit line available since paying off the $86 million of acquisition-related debt in the third quarter of 2010.

In November 2010, the company completed the previously announced sale of a significant portion of the assets at our Winchester, KY manufacturing facility in an effort to streamline operations, improve capacity utilization, and reduce manufacturing costs and operating expenses. As part of the restructuring, Martek also transferred certain manufacturing and distribution processes previously performed at our Winchester, KY site to our Kingstree, SC site. As a result of the restructuring and sale, consistent with previous disclosures, the Company recorded total restructuring charges of $30.7 million in the fourth quarter of fiscal 2010, comprised of a non-cash asset impairment charge of $29.2 million and cash charges for employee separation and other costs of $1.5 million. As previously disclosed, restructuring related cash charges for employee separation and other costs of approximately $600,000 were also recorded in the third quarter of fiscal 2010.

* Extended Global Sole-Source Supply Agreement — In December 2010, Martek extended its global sole-source DHA and ARA supply agreement with a major infant formula customer.  With the signing of this agreement, customers representing a total of 52% and 44% of Martek's current infant formula sales are now under contract through at least 2014 and 2015, respectively.
* New Scientific Data/Recommendations Published on DHA and ARA — In The Journal of Pediatrics (December 2010) Dr. C. Jensen and co-investigators reported 5-year follow-up data in children who had been breastfed as infants.  In the original study, nursing mothers received either 200 mg DHA per day or a placebo for 4 months as part of the randomized double blind study.  Milk lipid and infant plasma phospholipid DHA contents were 75% and 35% higher, respectively, at 4 months postpartum in the supplemented group. The children of supplemented mothers were previously shown to exhibit better psychomotor development at 30 months of age as compared to their unsupplemented counterparts.  In the current report, the 5-year old children whose mothers received DHA performed better than the unsupplemented group on a test of sustained attention.  The importance of Dr. C. Jensen's findings is highlighted by Dr. M. Clandinin and Dr. P. Larsen in an accompanying The Journal of Pediatrics editorial.  The editorial entitled "Docosahexaenoic Acid Is Essential to Development of Critical Functions in Infants" reviews and emphasizes the importance of early and continued supplementation of DHA for infants and children under normal as well as special medical circumstances.  Martek's life'sDHA was used in the study.  The study was also supported by grants from Martek and the U.S. Department of Agriculture/National Research Initiative; however, Martek did not have input into the conduct or reporting of the study or the editorial. 

Consolidated gross margin in the first quarter of fiscal 2011 is expected to be between 52.5% and 53.5%.  First quarter 2011 diluted EPS is expected to be between $0.38 and $0.40.

During fiscal 2010, a key strategic objective for the Company was to begin the process of securing Martek's leadership position in supplying DHA and ARA to the infant formula industry for several more years beyond the then current supply agreements whose sole-source provisions expired at the end of 2011.   As noted above, we have been successful in achieving this objective through extensions of our sole-source supply arrangements with two of our larger infant formula customers in fiscal 2010, and we have also extended the sole-source supply agreement with a third large customer in December 2010 and anticipate making further progress in fiscal 2011. As previously disclosed, these extensions include graduated price reductions to our customers over the term of the extensions. Martek's strategy is to offset a significant portion of these price reductions that result from its infant formula contract extensions by implementing manufacturing cost savings and product innovation initiatives, and by growing its non-infant formula businesses.

For the full year fiscal 2011, we project consolidated revenue growth resulting from the impact of a full year of Amerifit ownership and growth of our branded ingredients business, partially offset by the effects of the price reductions included in the current and anticipated future infant formula supply agreement extensions.  We also project net income growth over fiscal 2010, primarily driven by expected gross margin expansion of at least 400 basis points. This projected gross margin improvement results from the execution of the Company's strategy to significantly offset infant formula price reductions with lower ARA costs, product cost efficiencies (including those obtained from the Winchester plant restructuring and sale), and the discontinuation of the company's low margin contract manufacturing business.