Advanced Medical Optics (EYE)

Operating Income. Operating income as a percentage of net sales, or operating margin, was 59.6% and 25.1% in the three and nine months ended September 29, 2006, respectively. Operating income of $154.2 million in the three months ended September 29, 2006 includes a net gain on legal contingencies of $102.9 million offset by charges of $4.0 million for business repositioning costs and $4.5 million in stock-based compensation expense under SFAS 123R. The net impact from these items improved operating margin by 36.5% in the three months ended September 29, 2006.  Operating income of $188.9 million in the nine months ended September 29, 2006 includes a net gain on legal contingencies of $96.9 million, offset by charges of $61.5 million for business repositioning costs,  $3.3 million of charges primarily associated with assets acquired in the termination of a distributor agreement in India and acquisition and integration-related charges and $14.8 million in stock-based compensation expense under SFAS 123R. The net impact from these items improved operating margin by 2.3% in the nine months ended September 29, 2006.  The operating loss of $14.9 million in the three months ended September 30, 2005, included an IPR&D charge of $39.3 million from the VISX acquisition, a charge of $8.6 million associated with the termination of a distributor agreement in India, acquisition and integration-related expenses of $8.0 million and expenses of $1.6 million for accelerated manufacturing productivity improvements.  The operating loss of $412.3 million in the nine months ended September 30, 2005 included an IPR&D charge of $490.8 million primarily from the VISX acquisition, a charge of $8.6 million associated with the termination of a distributor agreement in India, acquisition and integration-related expenses of $12.7 million and expenses of $1.6 million for accelerated manufacturing productivity improvements. 

Operating income from our Cataract/Implant business increased by $10.0 million and $31.1 million in the three and nine months ended September 29, 2006, respectively, due to the increase in net sales and favorable mix of higher margin products discussed above, along with the favorable impact of cost containment measures taken in connection with our business repositioning plan. Operating income from our LVC business increased by $6.0 million and $76.0 million in the three and nine months ended September 29, 2006, respectively, due to sales of products acquired from VISX in May 2005. Operating income from our Eye Care business increased by $14.9 million and $8.4 million in the three and nine months ended September 29, 2006, respectively, primarily due to strong sales of multi-purpose products in the Americas and the favorable impact of cost containment measures taken in connection with our business repositioning plan, partially offset by the unfavorable impact from continued softness in the market for hydrogen peroxide based products.

Operating Income. Operating income as a percentage of net sales, or operating margin, was 9.7% and 7.0% in the three and six months ended June 30, 2006, respectively. Operating income of $25.0 million in the three months ended June 30, 2006 includes $25.1 million of business repositioning charges, $7.0 million primarily for a contractual obligation described above and $5.2 million in stock-based compensation expense under SFAS 123R. These charges reduced operating margin by 14.5% in the three months ended June 30, 2006.  Operating income of $34.7 million in the six months ended June 30, 2006 includes $57.5 million of business repositioning charges, $7.0 million primarily for a contractual obligation described above, $2.3 million of asset write-offs described above and $10.3 million in stock-based compensation expense under SFAS 123R. These charges reduced operating margin by 15.6% in the six months ended June 30, 2006.  Operating losses of $423.4 million and $397.5 million in the three and six months ended June 24, 2005 were primarily due to the IPR&D charge of $451.5 million from the VISX acquisition described above.

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Operating income from our Cataract/Implant business increased by $14.5 million and $21.2 million in the three and six months ended June 30, 2006, respectively, due to the increase in net sales and favorable mix of higher margin products discussed above, along with the favorable impact of cost containment measures taken in connection with our business repositioning plan. Operating income from our LVC business increased by $29.0 million and $70.0 million in the three and six months ended June 30, 2006, respectively, due to sales of products acquired from VISX in May 2005. Operating income from our Eye Care business decreased by $0.7 million and $6.5 million in the three and six months ended June 30, 2006, respectively, primarily due to the unfavorable impact from continued softness in the market for hydrogen peroxide based products, partially offset by strong sales of multi-purpose products in the Americas.