Advanced Medical Optics (EYE)

Gross profit declined 6.7 percent to $152.2 million. Gross profit was impacted by approximately $20.7 million in returns and costs, and an estimated $24.5 million impact related to lost sales associated with the recall.

R&D expense rose 30.2 percent to $21.0 million, or approximately 7.7 percent of sales, compared to 6.2 percent of sales in the third quarter of 2006. The increase was due primarily to the additions of IntraLase and WaveFront Sciences.

SG&A expense rose 43.2 percent to $137.9 million or approximately 50.5 percent of sales, compared to 37.2 percent in the third quarter of 2006. SG&A expense was impacted by the additions of IntraLase and WaveFront Sciences, and costs associated with the May 2007 recall.

Operating loss of $6.7 million included an estimated negative impact from the recall of approximately $47.6 million, including a $17.5 million net impact of estimated lost sales. Third-quarter 2006 operating income of $154.2 million included a $102.9 million net gain related to the settlement of legal matters, and $4.0 million in net charges associated with rationalization and repositioning initiatives.

Non-operating expense increased 103.9 percent to $24.5 million, and included a $2.4 million unrealized loss on currency derivatives. Interest expense rose to $20.6 million, due primarily to increased debt associated with the IntraLase acquisition. Third-quarter 2006 non-operating expense of $12.0 million included $3.9 million in charges and write-offs associated with a note repurchase, and a $2.3 million unrealized gain on derivative instruments. Interest expense in the year-ago quarter was $9.8 million.

The company reported an income tax benefit of $5.3 million. The recall continued to impact lower-tax foreign jurisdictions and resulted in a reduced tax benefit for the quarter. AMO expects the recall to adversely affect its future tax liability and effective tax rate, and estimates its 2008 effective tax rate to be 38 to 40 percent. The company also expects that the rate will decline to the low 30 percent range by 2010.

Gross profit decreased 22.3 percent to $127.9 million, including a $7.7 million non-cash inventory step-up to fair value charge related to the IntraLase acquisition. Gross profit was also impacted by approximately $50.9 million in returns and costs and an estimated $15.9 million related to lost sales associated with the recall.

R&D expense rose 24.8 percent to $20.7 million, or approximately 7.9 percent of sales, compared to 6.4 percent in the second quarter of 2006. The increase was due primarily to the addition of IntraLase and WaveFront Sciences Inc.

SG&A expense rose 42.0 percent to $149.7 million, including approximately $14.5 million in transaction-related charges. SG&A expense was also impacted by the addition of IntraLase and WaveFront Sciences, and approximately $7.5 million in recall-related expenses.

Operating loss of $127.9 million included an $85.4 million non-cash in-process R&D charge related to the IntraLase acquisition and $22.2 million in transaction-related charges. The company estimated that the recall reduced operating income by approximately $72.2 million, including a $13.8 million impact of estimated lost sales. Second-quarter 2006 operating income of $25.0 million included $32.0 million in charges related primarily to rationalization and repositioning initiatives.

Non-operating expense declined 12.5 percent to $23.5 million. Interest expense rose to $22.0 million, due primarily to increased debt and a $1.3 million deferred financing cost write-off associated with the IntraLase acquisition. Second-quarter 2006 non-operating expense of $26.8 million included a $15.8 million charge for the early retirement of convertible senior subordinated notes. Interest expense in the year-ago quarter was $8.0 million and included a $2.4 million deferred financing cost write-off.

The company reported an income tax provision of $15.4 million, which included a $9.8 million unfavorable tax impact related primarily to acquisitions. The tax rate was also negatively affected by the non-deductible in-process R&D charge and the impact of the recall, including the related impact on utilization of foreign tax credits. AMO expects the recall to adversely affect its future tax liability and effective tax rate, and estimates its 2008 effective tax rate in the upper 30 percent range. The company also expects that the rate will decline to the low 30 percent range by 2010.

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Gross profit rose 4.0 percent and included a $2.3 million negative impact from the recall and a $4.7 million non-cash charge related to the termination of the Amadeus^TM microkeratome distribution agreement. AMO decided to exit the mechanical microkeratome business effective May 1, following the completion of the IntraLase acquisition. Gross profit in the year-ago quarter included $3.2 million in charges related to rationalization and repositioning initiatives.

R&D expense rose 12.9 percent to represent approximately 7.6 percent of sales, compared to 7.1 percent in the first quarter of 2006. The increase was due primarily to the addition of WaveFront Sciences and an impairment charge related to an R&D licensing agreement.

SG&A expense rose 14.8 percent and included approximately $2.1 million in recall-related expenses. SG&A expense in the year-ago quarter included $2.3 million in other expenses.

Operating income of $27.2 million included $7.3 million in non-cash charges related to the termination of the microkeratome distribution agreement, in-process R&D related to the WaveFront Sciences acquisition and the impairment charge related to an R&D licensing agreement. First- quarter 2006 operating income of $9.7 million included $34.8 million in charges related primarily to rationalization and repositioning initiatives.

Non-operating expense rose 30.5 percent, reflecting increased interest expense associated with the company’s June 2006 recapitalization and a $0.4 million unrealized loss on currency derivatives.

The company reported an income tax provision of $7.4 million, compared to $1.1 million in the year-ago quarter. The effective tax rate in the quarter was approximately 38 percent, compared to 30 percent in the year-ago quarter. The increase was primarily due to higher pre-tax income and the impact of non-deductible charges in the first quarter of 2007. The company continues to estimate its effective tax rate for 2007 to be in the 32 percent to 33 percent range.