Martek Biosciences Corporation today announced its financial results for the fourth quarter and fiscal year ended October 31, 2008. Revenues for the fourth quarter were $90.4 million, up 10% from $82.0 million in the fourth quarter of fiscal 2007. Net income was $10.5 million, or $0.31 per diluted share, for the fourth quarter of fiscal 2008 compared with $18.3 million, or $0.55 per diluted share, in last year's fourth quarter. Both the fourth quarter of fiscal 2008 and 2007 included a non-recurring tax benefit with such tax benefits totaling $1.5 million and $10.8 million in the fiscal 2008 and fiscal 2007 periods, respectively.
Excluding the impact of the tax benefits, the Company's net income on a non-GAAP basis would have been $8.9 million, or $0.27 per diluted share, in the fourth quarter of fiscal 2008 compared to $7.5 million, or $0.23 per diluted share, in the fourth quarter of fiscal 2007, a 17% increase. (see "Reconciliation of GAAP to Non-GAAP Net Income Measure" below).
Commenting on the quarter, Chief Executive Officer Steve Dubin said, "Our results in this year's fourth quarter as well as the full fiscal year 2008 reflect the continued execution of our business plan. During the year, we increased penetration in international infant formula markets, expanded the use of DHA outside of infant formula and significantly improved our profitability and cash flow generation. These solid results have yielded a strong year-end balance sheet that includes over $100 million in cash and cash equivalents and is essentially debt-free. While economic conditions will present challenges, I believe that Martek is well-positioned to deliver revenue and profit growth in the year ahead."
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 $336.6 million, a 15% increase over prior year levels. These increases reflect higher revenues from Martek's infant formula customers, particularly outside of the United States, and a solid growth in sales of life'sDHA(TM) to non-infant formula markets which grew more than 30% in both the fourth quarter and full fiscal year periods.
Contract manufacturing sales in the fourth quarter totaled $3.7 million, compared with $3.0 million a year ago, and in fiscal 2008 totaled $15.8 million, compared with $14.3 million in the prior year. These increases were primarily due to additional orders from one existing customer. During fiscal 2009, the Company anticipates continuing to reduce the scope of its contract manufacturing activities focusing more of its resources on the Company's higher margin nutritional oils business.
Gross Margin and Operating Expenses
Overall gross margin for the fourth quarter of fiscal 2008 was 41.3%, an increase over the 40.2% gross margin realized in the fourth quarter of fiscal 2007. The improvement resulted largely from enhanced DHA production yields, increased capacity utilization at Martek's manufacturing facilities, and reductions in ARA costs. These margin improvements were attained by the Company despite experiencing increases in both utility and raw material costs during fiscal 2008.
Research and development expenses in the fourth quarter of fiscal 2008 were $7.1 million, or approximately 8% of revenue, consistent, on a percentage of revenue basis, with the fourth quarter of fiscal 2007. The Company's research and development efforts continue to focus on developing new food and beverage applications for life'sDHA(TM), broadening the scientific evidence supporting the benefits of life'sDHA(TM) throughout life, improving manufacturing processes and developing new products to expand the Company's market offerings. In the future, the Company expects to continue to experience quarter-to-quarter fluctuations in research and development expenses primarily due to the timing of outside services, including third-party clinical trial services. Research and development expenses in fiscal 2008 were $26.2 million, or 7.4% of revenue, fairly consistent, on a percentage of revenue basis, with research and development spending levels in fiscal 2007.
During the fourth quarter of fiscal 2008, selling, general and administrative expenses were $13.4 million, or 14.8% of revenue, which is consistent with the prior year's fourth quarter. For the full fiscal year 2008, selling, general and administrative expenses as a percentage of revenue were approximately 15.4%, compared to 14.6% in fiscal 2007.
For the fiscal year ended October 31, 2008, the Company generated $106.5 million of cash from operating activities with the fourth quarter providing $44.6 million of this total. The Company's fiscal 2008 operating cash generation more than doubled the amounts achieved in fiscal 2007. In the fourth quarter, Martek's cash flow was nearly equivalent to the Company's total operating cash generation for all of fiscal 2007, underscoring the inherent leverage in Martek's business model. Contributing to the 2008 cash generation were strong current year profits as well as a nearly $10 million reduction in inventory held during fiscal 2008, bringing the year-end inventory balance to $99.6 million, the Company's lowest inventory level since mid-2006.
At the end of the year, Martek had $102.5 million in cash and cash equivalents and had the entire balance of its long-term revolving credit facility ($135 million) available for future borrowing. Excluded from the Company's October 31, 2008 cash balance are $11.3 million of long-term auction rate security investments backed by student loans and guaranteed by the U.S. Department of Education.
Martek expects total revenues for the first quarter of fiscal 2009 to be between $86 million and $89 million with first quarter infant formula revenue projected to be between $74 million and $77 million and first quarter non-infant formula nutritional revenue projected to be between $7 million and $8.5 million. First quarter gross margin is expected to be approximately 42.5%. Net income for the first quarter is projected to be between $8.7 million and $9.7 million, and diluted earnings per share are projected to be between $0.27 and $0.29.
With respect to fiscal 2009, the Company expects moderate growth of both revenues and profitability over fiscal 2008 with profitability growing at a higher rate than revenues primarily due to improvements in gross profit margins; however, a deep, prolonged economic recession would yield additional uncertainty with respect to the Company's attainment of its forecasted operating results.
Reconciliation of GAAP to Non-GAAP Net Income Measure
The Company makes reference in this release to non-GAAP presentations of net income and earnings per share that exclude certain non-recurring tax benefits and restructuring charge. We are providing this information to assist investors in comparing the results of the current period to those in the prior year periods when the non-recurring items were not present. We caution investors, however, that these non-GAAP results should only be considered in addition to results that are reported under current GAAP and should not be considered as a substitute for results that are presented under GAAP.
Investor Conference Call Webcast
Martek will host a conference call and Webcast for investors to review its fourth quarter results and fiscal 2009 outlook at 4:45 p.m. Eastern Time on Thursday, December 11, 2008. Access to the live audio Webcast is available through Martek's website at http://investors.martek.com. The webcast will be available for replay through the close of business on January 11, 2009.
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; (2) its expectations regarding revenue, gross margin, operating expense and income for the first quarter of and full fiscal 2009; and (3) its expectations regarding launches by customers of products containing Martek's life'sDHA(TM) and its contract manufacturing business. Furthermore, Martek's operating results are subject to quarter-to-quarter fluctuations, some of which may be significant. 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, 2007 and other filed reports on Form 10-K, Form 10-Q and Form 8-K.
Martek Biosciences Corporation 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. For more information on Martek Biosciences, visit http://www.martek.com.