During the 2nd quarter, the company's revenues increased by 16 percent in dollars to $76.1 million, with a 9 percent increase in local currencies. While US sales rose by 4 percent, sales in the rest of the world increased by 35 percent in dollars, with gains of nearly 30 percent in Europe and 29 percent in Japan, where Ocular Science took over the distribution of its contact lenses from Seiko one year ago. In local currencies, total foreign sales increased by 13 percent.
Net income declined to $4.2 million from $9.1 million in the same period a year ago, but the results included $3.8 million in extraordinary expenses related to a program to consolidated production on fewer plants using a cheaper Generation II manufacturing process. As part of this program, OC's remaining production of toric lenses in the UK will be phased out in the 3rd quarter - a bit later than originally planned - and transferred to the company's facilities in Puerto Rico, where all toric lenses will be in full production by the middle of 2004, with much higher capacity. Over 50 percent of OC's high-volume production will be based on Generation II technology by the end of this year. Savings in manufacturing costs of $20 million are expected in 2004, doubling in 2005 after total reorganization costs of $50 million.
The 2nd quarter results were better than in the 1st quarter and better than expected, especially on the sales side, leading the management to predict a rise in revenues of between 7 and 9 percent for the 12 months, with the 2nd half unlikely to show the previously expected sales improvement in the USA. The gross margin will be in a range of 53-55 percent for the year. The net profit should decline slightly as a percentage of total sales and should reach $36.0-37.5 million before total reorganization charges of about $14 million.
In the 2nd quarter, the gross margin fell to 52.3 percent because of excessive inventory changes and the strong sales growth outside the USA, where margins tend to be lower than domestically. However, European profits were better than expected thanks to higher sales levels and a slightly increase in prices of daily disposable contact lenses. OC has managed to reduce its production costs sharply in this product category. The balance of the reorganization process underway will allow the company to achieve much higher profits abroad through incremental sales.
European sales growth was driven mainly by a broader range of toric lenses being offered to customers and by good sales of monthly replacement products. In the USA, OC doubled its sales of disposable torics to about $6.1 million, contributing to a rise in its market share to 13 percent in this category, where it ranks as the highest-priced supplier for 2-week disposable products. While the US market for disposable spheric lenses rose slightly in the period, the market for disposable torics jumped by 30 percent.
OC remains a major supplier of multi-focal contact lenses in Europe, occupying the leading position in France, but it still has no plans to introduce this line in the USA. On the other hand, it plans to introduce a new generation of spheric lenses at the beginning of 2004.