Martek Announces First Quarter 2007 Financial Results

COLUMBIA, Md., March 7, 2007 /PRNewswire-FirstCall via COMTEX/ -- Martek Biosciences Corporation (MATK today announced its financial results for the first quarter of fiscal 2007 (1st Qtr 07), which ended January 31, 2007. For the 1st Qtr 07, revenues of $70.3 million were achieved, a 12% increase compared to $62.9 million for the first quarter of fiscal 2006 (1st Qtr 06). For the 1st Qtr 07, Martek generated net income of approximately $3.8 million, or $0.12 per diluted share, compared to net income of $5.6 million, or $0.17 per diluted share, for the 1st Qtr 06. Excluding expenses related to the Company's October 2006 plant restructuring, the Company's net income on a non- GAAP basis would have been $4.1 million, or $0.13 per diluted share, for the 1st Qtr 07 (see "Reconciliation of GAAP to Non-GAAP Net Income Measure" below).

Commenting on the quarter, Chief Executive Officer Steve Dubin stated: "I am encouraged by the progress made in each of Martek's key focus areas during the first quarter: increasing penetration in the international infant formula markets, expanding the use of DHA outside of infant formula, improving gross margins, and developing new products. We will continue to focus on these areas throughout the remainder of the year. Revenues for the first quarter reflect growth in all market segments. The use of our DHA and ARA oils in infant formulas outside of the U.S., particularly in Asia, continues to increase, and at the same time we continue to gain momentum in markets beyond infant formula. Two perinatal products and nine food and beverage products containing life'sDHA(TM) have been launched since the start of fiscal 2007, and I expect approximately 15 to 20 additional food and beverage products containing life'sDHA(TM), with varying distribution volumes, to hit store shelves by the end of our fiscal year. Lastly, we experienced an improvement in our gross margin during the quarter when compared to the fourth quarter of 2006, and anticipate further improvements later in the year as a result of the previous restructuring of our manufacturing operations and a decrease in the cost of our 2007 ARA purchases."

Product sales of $66.7 million were generated in the 1st Qtr 07, a 10% increase from $60.5 million for the 1st Qtr 06.

Increased sales to the infant formula market reflect growth in sales to Martek's customers in both the U.S. and international infant formula markets. Launches of new products with life'sDHA(TM) resulted in higher sales to the food and beverage market in the 1st Qtr 07. Sales related to other non-infant formula nutritional applications increased significantly due to an overall expansion of Martek's customer base in both the pregnancy and nursing and nutritional supplements markets.

Contract manufacturing revenues in the 1st Qtr 07 totaled $3.5 million compared to $2.4 million in the same period in 2006.

Gross Margin and Operating Expenses
Gross margin percentage for the 1st Qtr 07 was 36.3%, the low-end of our predicted margin range for the first quarter. The 1st Qtr 07 gross margin represents a decrease compared to 39.2% for the 1st Qtr 06, but an increase compared to 35.0% for the fourth quarter of fiscal 2006. As previously disclosed, Martek's gross margin for the 1st Qtr 06 was negatively affected by ARA cost increases. However, in addition, our 1st Qtr 07 gross margin was impacted by lower than expected contract manufacturing margins (4% in the 1st Qtr 07). These negative effects were partially offset by a significant reduction in idle capacity costs as the Company has begun realizing the projected benefits of its October 2006 restructuring of plant operations. As discussed below, in fiscal 2007, we expect a reduction to the purchase cost of ARA which should yield improvements to our gross margin percentage in the second half of this fiscal year.

Research and development expenses in the 1st Qtr 07 were $6.2 million, an increase of $700,000 from the 1st Qtr 06 due mainly to additional costs incurred by the Company on food application and new product development.
Selling, general and administrative expenses increased to $12.0 million in the 1st Qtr 07 compared to $9.9 million in the 1st Qtr 06. The increase is due mainly to higher sales and marketing costs associated with the Company's efforts to accelerate its penetration into non-infant formula markets through sales force growth and increases in public relations and advertising.

Consistent with our expectations, restructuring charges in the 1st Qtr 07 were $500,000 and related primarily to outplacement-related professional services. The Company anticipates incurring approximately $400,000 of additional restructuring costs during the remainder of fiscal 2007.

As of January 31, 2007, Martek had $19.2 million in cash and had $94 million available under its long-term revolving credit facility. During the 1st Qtr 07, the Company used $4.9 million in connection with its operating activities. This cash outflow was due primarily to an inventory increase, employee separation payments associated with the October 2006 plant restructuring, and year-end incentive compensation payments. During the 1st Qtr 07, the Company's inventory balance grew by approximately $6 million. This growth was the result of increases to ARA on-hand primarily due to the campaign nature of third-party production which is designed to optimize economies of scale through large production runs several times per year. Although Martek expects a slight increase in inventory during the Company's second quarter, we expect a decline in our inventory balances during the third and fourth quarters of fiscal 2007 to levels close to that at the end of fiscal 2006. We also anticipate generating positive cash from operations in the second quarter as well as for the full fiscal year 2007.
Recent Highlights
-- New Products Launched Containing life'sDHA(TM) and Co-Branded with the
life'sDHA(TM) logo

Foods and Beverages
-- General Mills launched Yoplait Kids(R) with life'sDHA(TM).
-- WhiteWave Foods launched Silk(R) Plus Omega-3 DHA Soymilk with
-- ZenSoy launched "Soy on the Go" Soymilk with life'sDHA(TM).
-- Life Science Nutritionals launched Nutri-Kids Nutrition-2-Go(TM)
with life'sDHA(TM).
-- NutraBella launched new Bellybar(TM) flavor with life'sDHA(TM).
-- FoodTech International launched Veggie Patch(TM) All Natural
California Veggie Burgers with life'sDHA(TM).

Perinatal Products
-- Everett Laboratories launched Vitafol(R) -OB+DHA with
-- Mission Pharmacal launched Citracal(R) Prenatal 90 + DHA with

-- New Data Published on Benefits of DHA -- Recently published reports
further discuss the benefits of DHA supplementation.

-- An independent study published in the Journal of the American
College of Nutrition (December 2006) compared Martek's
life'sDHA(TM) (algal oil) to DHA plus EPA (fish oil) for their
ability to lower triglycerides in subjects with coronary artery
disease and elevated triglycerides, most of whom were undergoing
statin therapy. Both supplements significantly lowered
triglycerides, but only life'sDHA(TM) increased high density
(good) cholesterol. The authors concluded that there was no added
benefit provided by EPA for lowering triglycerides at this level.
The authors of the study also indicated that life'sDHA(TM) was
better tolerated by the study participants than fish oil, noting
that a greater proportion of subjects in the fish oil group
reported fishy taste as a problem with their treatment.

-- An independent study published online in the journal Early Human
Development (January 2007) reported the results of a comparison
between children who were breastfed as infants to both children
who as infants used DHA and ARA supplemented formula and children
who as infants did not use DHA and ARA supplemented formula. The
results indicated that children who received the supplemented
formula had visual and verbal IQ scores that did not differ
significantly from children who had been breastfed and such scores
were better than children that did not receive supplemented
formula. Martek's oils were used in the study.

Management Outlook

For the second quarter of fiscal 2007 (2nd Qtr 07), we expect total revenues to be between $73 million and $75 million, net income to be between $4.8 million and $5.8 million, and diluted earnings per share to be between $0.15 and $0.18. Costs associated with the October 2006 plant restructuring in the 2nd Qtr 07 are estimated to be approximately $200,000.

We anticipate that our gross margin will be between 36.5% and 37.5% in the 2nd Qtr 07. This margin will continue to reflect the negative effects of higher ARA purchase costs during 2006. However, because we are now purchasing ARA at costs lower than in 2006 and beginning to realize the full economic benefit of the Company's October 2006 plant restructuring, we expect improvement in our gross margin over the last six months of fiscal 2007 with fourth quarter gross margin projected to be at least 40%. This improvement will occur gradually each quarter due to Martek's "first-in first-out" accounting for inventory.

Our total revenues in fiscal 2006 included approximately $12 million in nutritional oil sales to non-infant formula markets, primarily the pregnancy and nursing, nutritional supplements and food and beverage markets. For fiscal 2007, we expect these non-infant formula revenues to be between $22 million and $26 million. In addition, although we may experience quarter-to-quarter fluctuations in sales to our core infant formula customers, we expect growth in our core infant formula business in 2007. Through this revenue growth and the gross margin recovery described above, we anticipate improvement in overall profitability as compared with fiscal 2006.

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