Advanced Medical Optics (EYE)

Below are additional highlights of fourth-quarter and 2006 results.  Growth rates reflect comparisons to the same period one year ago.

·                  Gross profit rose 9.0 percent to $618.2 million and was impacted by $30.7 million related to the recall, including approximately $19.0 million in returns and costs, and an estimated $11.7 million impact of lost sales.  Also included were $16.3 million in charges associated with business repositioning initiatives.

·                  Fourth-quarter gross profit declined 4.1 percent to $139.0 million and was impacted by the recall and the final $1.2 million in charges associated with business repositioning initiatives.

·                  Research and development (R&D) expense was $66.1 million, or 6.6 percent of sales, compared to 6.7 percent in 2005.

·                  Fourth-quarter R&D expense was $16.5 million, or 6.8 percent of sales, compared to 6.7 percent in the year-ago period.

·                  SG&A expense was $404.8 million, or 40.6 percent of sales, including $8.3 million associated with acquisitions, integrations, the recall and the termination of a distributor agreement.  SG&A in 2006 also included $14.8 million for stock-based compensation, which was not included in SG&A in 2005.  SG&A expense for 2005 was $396.6 million, or 43.1 percent of sales, including $23.2 million related to acquisitions, integrations and the termination of a distributor agreement.

·                  Fourth-quarter SG&A expense was $113.7 million, or 46.7 percent of sales, including $5.0 million associated with the recall.  Fourth-quarter SG&A also included $3.3 million for stock-based compensation, which was not included in the prior year’s period.  Fourth-quarter 2005 SG&A was $97.4 million, or 38.5 percent of sales, including $4.0 million related to acquisitions and integrations.

·                  Operating income of $197.7 million included a $96.9 million net gain related to the settlement of legal matters, $66.0 million in net charges associated with rationalization and repositioning initiatives, acquisitions, integrations and termination of a distributor contract.  Operating income was also impacted by $35.7 million related to the recall, including $10.8 million impact of estimated lost sales. The $411.3 million operating loss in 2005 reflected the impact of $536.9 million in charges related primarily to acquisitions, recapitalizations, and product rationalizations and repositioning actions.

·                  Fourth-quarter operating income of $8.9 million was also impacted by the $35.7 million related to the recall.  Fourth-quarter 2005 operating income of $1.0 million included charges of $46.3 million due primarily to product rationalization and repositioning initiatives.

·                  Non-operating expense was $52.9 million, including $22.1 million in charges and write-offs associated with note repurchases, and a $1.3 million unrealized loss on currency derivatives.  In 2005, non-operating expense was $29.0 million, including net charges of $7.7 million for debt repayment and exchange of convertible debt, offset by a $2.6 million unrealized gain on currency derivatives.

·                  Fourth-quarter non-operating expense was $8.1 million, including a $0.6 million unrealized gain on currency derivatives.  In the year-ago quarter, non-operating expense was $5.8 million, including a $1.4 million charge associated with note repurchases and a $1.3 million unrealized gain on currency derivatives.

·                  At year-end, the company’s cash and equivalents were $34.5 million, compared to $40.8 million at the end of 2005.  Total debt at year-end was $851.1 million, compared to $560.0 million at the end of 2005.  Year-end cash flow from operations was approximately $222 million, compared to cash flow from operations of $188 million for the first nine months of 2006.

·                  The company reported an income tax provision of $65.3 million, compared to $12.9 million in 2005. The increase was due primarily to the litigation settlement gain, recapitalization and the impact of the recall.

Below are additional highlights of the third-quarter 2006 results.

·                  Gross profit rose 1.5 percent to $163.1 million and included $4.5 million in charges associated with business repositioning initiatives.  The gross profit in the year-ago period was $160.8.million, including $1.6 million in charges associated with acquisitions and integrations.

·                  Research and development (R&D) expense was $16.1 million, or 6.2 percent of sales, compared to $18.5 million, or 7.5 percent of sales in the same period last year.  R&D expense in 2005’s third quarter included approximately $2 million in expenses that were subsequently eliminated as part of the integration of VISX.

·                  SG&A expense was $96.3 million, or 37.2 percent of sales.  In the third quarter of 2005, the company reported SG&A expense of $117.8 million, or 47.5 percent of sales, including $16.4 million in charges associated primarily with the termination of a distributor agreement, and acquisitions and integrations.

·                  Operating income was $154.2 million, including 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.  This compares to an operating loss of $14.9 million in the year-ago quarter due primarily to charges related to acquisitions.

·                  Non-operating expense was $12.0 million, including $3.9 million in charges and write-offs associated with the note repurchases, and a $2.3 million unrealized gain on currency derivatives.  In the year-ago quarter, non-operating expense was $10.6 million, including a $3.8 million write-off associated with repayment of the company’s Term B loan during the quarter and a $0.2 million unrealized gain on currency derivatives.

·                  At the end of the quarter, the company’s cash and equivalents were $38.8 million, compared to $40.8 million at the end of 2005.  Total debt at the end of the quarter was $883 million, compared to $560 million at the end of 2005.  Year to date cash flow from operations was approximately $188 million, including $111 million related to settlement of legal matters.  This compares to cash flow from operations of $45 million for the first half of 2006.

Below are additional highlights of the second-quarter 2006 results.

·                  Gross profit rose 17.9 percent to $164.7 million, including $7.3 million in inventory provisions and other manufacturing and distribution charges related to discontinued products. The gross margin for the second quarter was 64.1 percent. The gross profit and gross margin in the year-ago period were $139.6 million and 61.5 percent, respectively.

·                  Research and development (R&D) expense was $16.6 million, or 6.4 percent of sales, compared to $13.9 million, or 6.1 percent of sales in the same period last year. The rise reflects primarily the addition of R&D for the LVC business.

·                  SG&A expense was $105.4 million, or 41.0 percent of sales, including $7.0 million in charges. In the second quarter of 2005, the company reported SG&A expense of $97.6 million, or 43.0 percent of sales.

·                  Operating income was $25.0 million, including charges of $32.0 million related primarily to product rationalization and repositioning initiatives. This compares to an operating loss of $423.4 million in the year-ago quarter due primarily to charges related to acquisitions.

·                  Non-operating expense was $26.8 million, including $18.2 million in charges and write-offs associated with the note repurchases, and a $2.5 million unrealized loss on currency derivatives. In the year-ago quarter, non-operating expense was $7.6 million, including $2.0 million in costs associated with debt restructuring charges net of a gain on currency derivatives.

·                  Pre-tax loss was $1.8 million, compared to a pre-tax loss of $431.0 million in the same period one year ago.  The company reported a provision for income taxes of $0.9 million because the charges associated with the note repurchases were not fully deductible for income tax purposes.

Below are additional highlights of the first-quarter 2006 results.

•                  Gross profit was $151.4 million, including $3.2 million in inventory provisions and other manufacturing charges related to discontinued products, resulting in a gross profit margin of 63.5 percent. The gross profit and gross margin in the year-ago period were $122.1 million and 63.4 percent, respectively.

•                  Research and development (R&D) expense was $17.0 million, or 7.1 percent of sales, compared to $12.4 million, or 6.4 percent of sales in the same period last year. The rise reflected primarily the addition of R&D for the LVC business.

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Below are additional highlights of the fourth quarter and full year 2005 results.

•             For 2005, gross profit rose 30.1 percent to $567.3 million, compared to $435.9 million in 2004. The improvement reflected primarily the positive mix shift in the company’s sales and the addition of the LVC business. Gross profit for the fourth quarter increased 10.5 percent to $144.9 million, compared to $131.1 million in the year-ago quarter.

•             Research and development expense for 2005 was $61.6 million, an increase of 35.1 percent over 2004. AMO’s R&D expense in the fourth quarter was $16.8 million, up 15.5 percent from $14.6 million in the same period last year. The increases in the fourth quarter and full year 2005 largely reflect the impact of VISX R&D operations. AMO’s R&D expense represented 6.7 percent of sales for both the fourth quarter and the full year of 2005.

•             SG&A expense for 2005 stood at $396.6 million and included $23.2 million in charges related to recent acquisitions and integrations and the termination of a distributor agreement. This compared to 2004 SG&A expense of $329.2 million, which included $2.3 million in charges mostly for termination of a distributor agreement. For the fourth quarter, SG&A expense was $97.4 million, or 38.5 percent of sales, including $4.0 million in charges related to recent acquisitions and integrations, compared to $92.6 million, or 41.2 percent of sales, in the same period last year.

•             For 2005, the company had an operating loss of $411.3 million, including charges of $559.9 million, due primarily to the VISX acquisition and the company’s rationalization and repositioning initiatives. In 2004, the company reported $33.0 million in operating income including charges of $58.6 million from the Pfizer transaction. Fourth-quarter operating income of $1.0 million, including charges of $46.3 million due primarily to product rationalization and repositioning initiatives, compared to $23.9 million, including $14.1 million from the Pfizer transaction, in the year-ago quarter.

•             Non-operating expense for 2005 was $29.0 million, including net charges of $5.1 million for debt repayment and exchange of convertible debt, offset by an unrealized gain on currency derivatives, compared to $154.2 million in 2004 which included charges of $134.0 million for debt prepayment, exchange of convertible debt and an unrealized loss on currency derivatives. For the fourth quarter, non-operating expense was $5.8 million, including a $1.3 million charge associated with the exchange of 3.5 percent convertible senior subordinated notes and a $1.4 million unrealized gain on currency derivatives. In the year-ago quarter, non-operating expense was $7.8 million, including $1.3 million associated with write-off of debt issue costs and a $1.2 million unrealized loss on currency derivatives.

Financial Highlights

Below are additional highlights of the third-quarter results. Unless otherwise noted, comparisons are to the third quarter of 2004.