Hologic profits skyrocket in 3Q on modest rise in revenues

Flat to slightly higher revenues loom next quarter

Hologic continued to plug away in its fiscal third quarter, achieving respectable gains in revenue and more than respectable profits, thanks in large part to cost cutting. Overall, the company achieved a 9% increase in revenues during the quarter ended June 28, compared with the previous year's period. Third quarter revenues totaled $52.4 million compared with $48 million in the year-earlier period. Net income rose to $1 million, or 5¢ per diluted share, compared with net income of $492,000, or 2¢ per diluted share, over the same period last year.

Double-digit growth was achieved in each of Hologic's main product segments: mammography, osteoporosis, and digital imaging. These three divisions accounted for $43.7 million in revenue, about 84% of the company total.

Remarkably, net profits jumped by 118% over the corresponding period in 2002, achieving an earnings increase of some $650,000 on a $4 million revenue increase. Bolstering the bottom line was a $400,000 decrease in operating expenses, due primarily to reductions in R&D and general and administrative expense items.

"The reduction in expenses is the result of a company-wide initiative to lower overall costs, including personnel costs and other expenses," said CFO Glenn Muir.

The only exception was a rise in direct sales expenses, which was attributed to the company's addition of staff dedicated to mammography. Following the merger of equipment distributor Diagnostic Imaging with Health Care Products to form SourceOne, Hologic began developing a direct sales force to handle its mammography products (SCAN 2/19/03). At the end of 3Q 2003, the sales organization included 16 sales staff, 123 field service associates, and 61 team associates in field and customer support.

This transition to direct sales dovetailed with commercialization of the company's full-field digital mammography system Selenia. In Q3, Hologic shipped 18 Selenia systems; 16 of these were recognized in revenue during the quarter. At third quarter's end the company's backlog for orders of Selenia had increased to 50 systems, which put the firm on track to meet its goal of shipping 50 of these units in fiscal 2003. The sales split for these systems is now running about 58% to customers in the U.S. and 42% to European buyers.

Shipments of full-field digital mammography systems should double to 100 in the next fiscal year, according to company executives. Direct sales efforts for Selenia will be bolstered by Hologic's supply of units to Agfa for private labeling.

"We have high expectations for the year ahead," said Jack W. Cumming, president and CEO. "Doubling is more than feasible and I will be disappointed if we don't exceed that number."

The company also expects to begin delivering mammography detectors next year to Siemens for inclusion in that company's full-field digital units.

Gross margins on product sales during the third quarter of 2003 remained constant at 46%, but a decrease in service-related margins caused a slight drop in the overall percentage from 36% in Q1 and Q2 of this year to just under 36% in Q3. Service was squeezed as costs increased by $1 million, more than the increase in service revenues. Rising costs resulted in part from hiring 30 new service staff for territories previously covered by the distributor Diagnostic Imaging.

Current assets exceed liabilities by $99 million, and the company has virtually no debt. Its cash balance rose since March by $6 million to just under $40 million, due principally to a $6 million dollar tax refund in April, a decrease in accounts receivable, and increased earnings.

Aided by Selenia shipments, the company's mammography revenues increased 13% to $21.8 million in the third quarter. Operating income for this business segment decreased, however, to $926,000 from $1.3 million in the third quarter of fiscal 2002, due primarily to the higher costs associated with the increase in the current quarter of field service personnel, including related travel and training expenses, as the company transitioned to a direct sales and service organization covering about half the U.S. market.

Revenues from bone densitometers increased 11% to $17.8 million for the third quarter of fiscal 2003, from nearly $16 million in the same period of fiscal 2002. Operating income for this business segment in the third quarter of fiscal 2003 increased to $2.6 million from $984,000 in the third quarter of fiscal 2002. The improved operating income was due primarily to improved gross profits from an increase in product revenue and, to a lesser extent, higher service revenues with lower costs, resulting in an overall increase in service-related gross profits.

Revenues from digital imaging, composed of the digital radiography systems group and detectors made by Hologic's Direct Radiography Corp., increased 14% to $7.2 million in the third quarter from $6.4 million in the corresponding period a year earlier. The operating loss for this business segment increased to $3.4 million in the current quarter from $2.6 million. Additional manufacturing costs associated with the rollout of the digital mammography detector and increased operating expenses were cited as prime reasons.

"A portion of the increased loss also relates to the increased number of detectors that are used internally for mammography," Muir said. "These are transferred internally at cost to the mammography business segment."

Mini-C-arm revenues decreased 13% to $4.2 million for the third quarter of fiscal 2003 from $4.8 million for the same period in fiscal 2002. Operating income for this business segment in the third quarter decreased to $604,000 from $976,000. This decrease resulted mostly from higher field service expenses and lower gross profits from the decrease in product revenues.

General radiography revenues decreased 10% in 3Q to $1.4 million compared with revenues of $1.6 million for the same period in fiscal 2002. Operating income for this business segment was $327,000, compared with $334,000 in 3Q 2002. Income is entirely derived from business, Muir said.

Looking ahead to the fourth quarter of 2003, Muir expects flat to slightly higher sales across all product segments. Selenia shipments should reach 20, an increase of four over 3Q.

For the year ahead, Muir said the company will strive for a 10% top line growth over fiscal 2003, returning 5% on sales to the bottom line pretax. This will require a 5% increase in revenues across all product segments except digital mammography, where the number of systems shipped is expected to double.