Embrex Reports Third Quarter 2005 Financial Results

RESEARCH TRIANGLE PARK, N.C., Nov. 1 /PRNewswire-FirstCall/ -- Embrex(R), Inc., The In Ovo Company(R), today announced financial results for the third quarter ended September 30, 2005.

Highlights - Third-quarter 2005 total revenues up 4% over third-quarter 2004 - Device revenues for third-quarter 2005 up 4% over the same period of 2004 - Device revenues up 6% for first nine months of 2005 compared to first nine months of 2004 - Product sales up 3% for third-quarter 2005 compared to same period in 2004 - Product sales increased 38% for first nine months of 2005 compared to first nine months of 2004 - USDA required field trials of Inovocox(TM) were initiated in August Financial Summary Table Embrex, Inc. Condensed Consolidated Statements of Operations (Unaudited) (In thousands except per share amounts) Three Months Nine Months Ended September 30 Ended September 30 2005 2004 2005 2004 Revenues $13,328 $12,765 $39,109 $36,448 Cost of revenues 5,631 5,132 16,611 14,742 Gross profit 7,697 7,633 22,498 21,706 Operating expenses 6,638 6,112 19,101 17,052 Other income 91 18 307 148 Income before taxes 1,150 1,539 3,704 4,802 Income tax expense 490 769 1,188 2,113 Net income $660 $770 $2,516 $2,689 Net income per share of Common Stock: Basic $0.08 $0.10 $0.32 $0.34 Diluted $0.08 $0.09 $0.30 $0.32 No. of shares used in per share calculation: Basic 8,010 7,919 7,970 7,969 Diluted 8,340 8,290 8,294 8,313 Results for Third Quarter 2005

For the quarter ended September 30, 2005, consolidated revenues were $13.3 million, a 4% increase compared to consolidated revenues of $12.8 million for the third quarter of 2004.

Product sales increased 3% to $721 thousand in the third quarter of 2005 compared to $703 thousand for the same period in 2004. For third quarter 2005, device lease fees, a component of device revenues, rose 4% or $0.5 million compared to the same period the prior year. These recurring fees generally contribute more than 90% of device revenues. Device sales are also a component of device revenues and tend to be sporadic in nature. Device sales decreased $37 thousand to $319 thousand in the third quarter 2005 compared to $356 thousand in the third quarter 2004. Overall, device revenues totaled $12.4 million for the third quarter of 2005 compared to $11.9 million for the same period in 2004, representing a 4% increase year over year.

Third quarter 2005 gross profit was $7.7 million, up $64 thousand compared to the same period a year ago. This was primarily due to changes in the Company's regional mix, which included additional recurring device lease fees, particularly in Latin America. However, as a consequence of the change in regional mix and material costs, gross margin decreased to 58% from 60% for the same period in 2004.

Operating expenses were up 9% to $6.6 million in the third quarter of 2005 compared to $6.1 million during the same period in 2004 primarily due to increases in general and administrative ("G&A") expenses, as well as sales and marketing expenses.

G&A expenses were $2.9 million for the third quarter of 2005, compared to $2.6 million for the same period of 2004. The increase in G&A expenses from 2004 is primarily due to increases in staff-related and third-party expenses to support business growth in Latin America, restricted stock grant expense, accounting fees related to Sarbanes-Oxley Act compliance, state franchise taxes, and additional property taxes related to Embrex Poultry Health.

Third-quarter 2005 Sales & Marketing expenses increased to $1.0 million from $0.7 million for the same period in 2004 due to growth of the Marketing group to assist with pre-launch activities of Inovocox(TM), growth in Latin America, and the continued support of existing products. Additionally, sales and marketing expenses that were previously allocated to cost of revenues in 2004 are now in sales and marketing expenses in 2005 due to the fact that certain sales and marketing expenses are now related to the support rather than the sale of the Company's products.

Research and development ("R&D") expenses were down 3% to $2.7 million for third quarter 2005 compared to $2.8 million in the same period in 2004. This decrease is primarily due to lower contract R&D expense, as well as the Company's previously announced decision at the beginning of the third quarter of 2005 to scale back the Gender Sort project.

Income taxes totaled $0.5 million for third-quarter 2005, compared to $0.8 million for the same period in 2004. The reported tax rate for 2005 third quarter was 43% compared to the 50% reported tax rate of third quarter 2004. The income tax expense decreased in 2005 due primarily to the lower estimated income tax rate for 2005 because of the extraterritorial income exclusion, but also because of the decrease in pre-tax net income as compared to the same period in 2004.

Total net income for the third quarter of 2005 was $0.7 million, compared to net income of $0.8 million for the same quarter in 2004. The decrease in third quarter 2005 net income as compared to the same period in 2004 was primarily due to increases in operating expenses as explained above. This was partially offset by a 36% decrease in income tax expense.

Results of First Nine Months of 2005

Revenues totaled $39.1 million for the first nine months of 2005, representing an increase of 7% over the first nine months revenues of $36.4 million in 2004. Device revenues amounted to $36.5 million for the first nine months of 2005, an increase of 6% over $34.5 million reported for the same period in 2004. Most of the device revenue increase was attributable to an 8% increase in recurring device lease fees, which was partially offset by a $0.5 million decrease in device sales. A $0.6 million, or 38%, increase in product sales revenue resulted from increased Bursaplex(R) sales.

The increase in device fee revenues contributed to a 4% increase in first nine months 2005 gross profit of $22.5 million from $21.7 million for the same period in 2004. Gross margin decreased to 58% from 60% for the same period in 2004, which is primarily due to changes in the Company's revenue mix and regional mix, which includes higher product sales, additional recurring device lease fees, particularly in Latin America, lower device sales and higher material costs.

Total operating expenses amounted to $19.1 million for the first nine months of 2005 versus $17.1 million for the first nine months of 2004. G&A expenses for the first nine months of 2005 increased 10% over the same period in 2004 to $8.2 million due primarily to additional staff-related expenses supporting business growth in Latin America, restricted stock grant expense, and accounting fees for internal controls in compliance with the Sarbanes- Oxley Act. Furthermore, state franchise taxes as well as additional property taxes related to the Embrex Poultry Health manufacturing facility contributed to the increase in G&A expenses. Sales & Marketing expenses increased from $2.0 million in the first nine months of 2004 to $3.2 million for the same period in 2005. The expense increase was due to growth of the Marketing group to assist with expansion in Latin American operations, pre-launch activities of Inovocox(TM), as well as the continued support of existing products. Additionally, sales and marketing expenses that were previously allocated to cost of revenues in 2004 are now in sales and marketing expenses in 2005 due to the fact that certain sales and marketing expenses are now related to the support rather than the sale of the Company's products. Research and development expenses increased 2% to $7.7 million in the first nine months of 2005 compared to $7.5 million for the same period of 2004 due to increased staff-related expenses and Gender Sort development work. Most of the Gender Sort expenses occurred in the first half of the year before the project was scaled back at the beginning of the third quarter 2005.

Income taxes totaled $1.2 million for the first nine months of 2005, compared to $2.1 million for the same period in 2004. The reported tax rate for the first nine months of 2005 was 32% compared to the 44% reported tax rate for the first nine months of 2004. Income tax expenses were lower due to the tax benefit recorded from the filing of amended tax returns, as well as the decrease in pre-tax net income compared to the same period in 2004. The returns were amended to reflect the Company's claim for the extraterritorial income exclusion in 2001 and 2002.

Embrex uses earnings before interest, taxes, depreciation and amortization (EBITDA) as an additional performance measure. Embrex believes that EBITDA, which is a non-GAAP financial measure, provides investors with supplemental information about its financial performance. In compliance with the Securities and Exchange Commission's Regulation G, the Company has provided a reconciliation of EBITDA to GAAP net income, following the financial statements below.

EBITDA decreased $0.6 million to $8.5 million for the first nine months of 2005 from $9.1 million during the same period of 2004. At September 30, 2005, cash and cash equivalents totaling $2.3 million were $2.2 million lower than the $4.5 million on hand at December 31, 2004. This was principally due to expenditures of $11.8 million for devices and other capital expenditures, primarily Embrex Poultry Health, and investments in patents and other non- current assets, as well as a $1.1 million reduction in non-debt current liabilities. This was partially offset by approximately $10.0 million provided by net income and non-cash items, such as depreciation and amortization, and a reduction in accounts receivable and other current assets.

"We continued to make solid progress in the third quarter and year to date," said Randall Marcuson, President and Chief Executive Officer of Embrex. "Our USDA-required Inovocox(TM) field trials are well underway and we remain on track for trial results submission to the USDA in the fourth quarter. As we said before, while we are hopeful for a timely review, it is up to the USDA to determine the review schedule."

Added Marcuson: "Revenues for the first nine months of 2005 continued to increase and we're pleased that recurring fees and product sales were up 8% and 38% respectively. Our progress internationally also continues with 37% of year-to-date revenues coming from outside the United States compared to 33% for the same period in 2004. Said another way, 83% of year-to-date growth is from outside the United States. This also means that even with a U.S. penetration rate in excess of 85%, we are continuing to grow slightly in the United States as well. That said, we remain comfortable with our projection of full-year revenues of $52.5 million."

Embrex's management, led by Mr. Marcuson, will discuss third-quarter financial results in a conference call on November 2 at 11:00 AM EST. To join the conference call, dial (877) 866-3175 (domestic and Canada), or (706) 679-7358 (international), identify Randall Marcuson as the conference leader.

The live conference call will be publicly available online at www.embrex.com. Click the Investor Info button and then on the Live Webcast icon. A telephone replay will be available from 2 p.m. EST November 2 to midnight EST November 16, by dialing 800-642-1687 (domestic and Canada), or (706) 645-9291 (international), conference ID 1699584. A replay of the call can also be accessed via the company's website using the same instructions as above for the live webcast.

About Embrex

Celebrating its 20th anniversary, Embrex, Inc., The In Ovo Company(R), headquartered in Research Triangle Park, NC, is an international biotechnology company engaged in the development of innovative in ovo (in the egg) solutions that meet the needs of today's global poultry industry. The company's unique integration of several scientific and engineering disciplines enables it to be the leading provider of in ovo, value-added solutions with its automated injection and detection devices as well as its select vaccines. For additional information, visit the company web site at www.embrex.com.

The tables attached to this release are an integral part of this release. This release contains forward-looking statements, including statements with respect to future financial results, products, services, and markets. These statements involve risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements we make are as of the date made, and we have no duty to update them if our views later change. Risks include without limitation the degree of growth in the poultry industry in the United States and globally, competition arising in the United States and elsewhere, possible decreases in production by our customers, avian disease outbreaks in Embrex's markets, market acceptance and cost of expansion in new geographic markets and with new products, including the Company's ability to penetrate new markets and the degree of market acceptance of new products, the ability of Embrex's contract manufacturers to support our products, the complete commercial development of potential future products on a cost effective basis, including Inovocox(TM), and the ability to obtain regulatory approval of products. Such approval is dependent upon a number of factors, such as results of trials, the discretion of regulatory officials, and potential changes in regulations. Additional information on these risks and other factors, which could affect the Company's financial results, is included in the Company's Forms 10-K, 10-Q and other filings with the Securities and Exchange Commission.

Embrex(R), Bursaplex(R), Newplex(TM), Inovoject(R), Inovocox(TM), Egg Remover(R), Vaccine Saver(R), and The In Ovo Company(R) are trademarks of Embrex, Inc.

Please see Embrex's Form 10-Q filed with the SEC for detailed GAAP financial statements.

Consolidated Statement of Operations (In thousands except per share amounts) Three Months Nine Months Ended September 30, Ended September 30, (unaudited) (unaudited) 2005 2004 2005 2004 Revenues Device revenues $12,415 $11,944 $36,509 $34,496 Product sales 721 703 2,144 1,556 Other revenue 192 118 456 396 Total revenues 13,328 12,765 39,109 36,448 Cost of device revenues and product sales 5,631 5,132 16,611 14,742 Gross profit 7,697 7,633 22,498 $21,706 Operating expenses General & administrative 2,941 2,631 8,209 7,484 Sales & marketing 1,020 713 3,215 2,046 Research & development 2,677 2,768 7,677 7,522 Total operating expenses 6,638 6,112 19,101 17,052 Operating income 1,059 1,521 3,397 4,654 Other income (expense) Interest income 44 23 108 65 Interest expense (3) (10) (28) (26) Foreign currency gain 50 5 227 109 Total other income 91 18 307 148 Income before income tax expense 1,150 1,539 3,704 4,802 Income tax expense 490 769 1,188 2,113 Net income $660 $770 $2,516 $2,689 Net income per share of Common Stock: Basic $0.08 $0.10 $0.32 $0.34 Diluted $0.08 $0.09 $0.30 $0.32 No. of shares used in per share calculation: Basic 8,010 7,919 7,970 7,969 Diluted 8,340 8,290 8,294 8,313 EBITDA $2,761 $3,019 $8,457 $9,119 GAAP Reconciliation of Net Income to EBITDA (In thousands) Three Months Nine Months Ended September 30 Ended September 30 (unaudited) (unaudited) 2005 2004 2005 2004 Net income $660 $770 $2,516 $2,689 Add back: Depreciation and amortization 1,608 1,470 4,725 4,291 Interest expense 3 10 28 26 Tax expense 490 769 1,188 2,113 EBITDA $2,761 $3,019 $8,457 $9,119 Condensed Consolidated Balance Sheets (In thousands) September 30, December 31, 2005 2004 (unaudited) ASSETS Current assets $16,366 $19,507 Non-current assets 49,264 43,073 Total assets $65,630 $62,580 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities $5,946 $7,040 Non-current liabilities 8,222 8,518 Shareholders' equity $51,462 $47,022 Total liabilities and shareholders' equity $65,630 $62,580 Condensed Consolidated Statements of Cash Flows (in thousands) Nine Months Ended September 30 (unaudited) 2005 2004 Net cash provided by operating activities $8,609 $7,519 Net cash used in investing activities (11,805) (9,978) Net cash provided by (used in) financing activities 565 (1,418) Decrease in cash and cash equivalents (2,631) (3,877) Currency translation adjustments 483 27 Cash and cash equivalents at beginning of period 4,469 9,629 Cash and cash equivalents at end of period $2,321 $5,779 CONTACT: Ellen Corliss Vice President, Investor Relations & Corporate Communications (919) 314-2561

Embrex, Inc.

CONTACT: Ellen Corliss, Vice President, Investor Relations & CorporateCommunications of Embrex, Inc., +1-919-314-2561

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