STAAR Surgical Company — Form 10-Q Summary
Reporting period: Quarter and six months ended June 28, 2013, compared with June 29, 2012. The request metadata identifies “2012 Q2,” but the filing itself is for the second quarter of 2013. STAAR designs, manufactures, and sells implantable lenses and injector systems for refractive and cataract surgery. The company operates as one ophthalmic surgical products segment and sells in more than 60 countries.
Financial Performance and Position
| Metric | Three months ended June 28, 2013 | Year-over-year change | Six months ended June 28, 2013 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $18.2 million | 13.9% increase | $36.2 million | 15.0% increase |
| Gross profit | $12.6 million | 14.3% increase | $25.3 million | 15.2% increase |
| Gross margin | 69.5% | Up from 69.3% | 69.9% | Up from 69.8% |
| Operating income | $0.7 million | Improved from $0.2 million loss | $1.8 million | Improved from $0.1 million |
| Net income | $0.3 million | Improved from $0.5 million loss | $0.7 million | Improved from $0.3 million loss |
| Diluted earnings per share | $0.01 | Improved from $(0.01) | $0.02 | Improved from $(0.01) |
| Operating cash flow | Not separately provided | — | $0.4 million | Down from $1.2 million |
- ICL sales increased 30.9% in the quarter and 27.2% year to date, reaching $11.3 million and $21.9 million, respectively. ICLs represented 62.0% of quarterly sales and 60.5% of year-to-date sales.
- IOL sales declined 13.4% in the quarter and 7.0% year to date, primarily due to foreign exchange effects and supply constraints affecting preloaded acrylic products.
- Other surgical product sales increased 85.1% in the quarter and 86.1% year to date, primarily from higher injector sales to a third-party supplier.
- Foreign exchange reduced sales by approximately $1.0 million in the quarter and $1.8 million year to date.
- As of June 28, 2013, cash and cash equivalents were $19.7 million, compared with $21.7 million at December 28, 2012. Current assets were $43.8 million and current liabilities were $15.4 million.
- The company had $5.1 million outstanding under its Japanese line of credit, with no remaining availability under that facility. Its Swiss facility provided approximately $1.1 million of available borrowing capacity, with no borrowings outstanding.
- Total liabilities were $20.0 million and stockholders’ equity was $34.7 million at quarter-end. Capital lease obligations totaled $0.8 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by ICLs, particularly in China, Spain, Europe, the Middle East, and Africa. ICL revenue increased 77% in China and 127% in Spain during the quarter.
- Profitability improved substantially, with quarterly operating income of $0.7 million versus an operating loss of $0.2 million and net income of $0.3 million versus a net loss of $0.5 million.
- Gross margin improved only modestly because low-margin injector system sales to a third-party IOL supplier reduced margins by approximately 150 basis points.
- Operating cash flow declined despite the return to profitability, primarily because of working-capital uses, including a $2.2 million increase in accounts receivable and a $1.1 million decrease in accounts payable.
- Capital expenditures increased to $2.0 million from $0.8 million in the prior-year period.
- Stock-based compensation expense increased to $2.0 million year to date from $1.5 million.
Guidance, Outlook, Risks, and Unusual Items
- Management raised its full-year 2013 revenue-growth target from 8%–10% to 12%–14% on July 31, 2013.
- The company continued to target profitability in each quarter of 2013 and a 250-basis-point full-year gross-margin improvement, although reported margins were constrained by low-margin injector sales.
- Manufacturing consolidation is expected to move substantially to Monrovia, California. Completion of the Swiss facility closure was extended to mid-2014 because of higher-than-anticipated ICL demand. Total project costs are expected to be approximately $6.2 million, of which $5.2 million had been incurred by June 28, 2013. Management expected approximately $2.5 million of costs in 2013, with $1.5 million incurred through the first half.
- European backorders for preloaded acrylic IOLs were approximately $1.2 million at quarter-end because a third-party supplier could not meet demand. Management expected the constraint to limit IOL sales for the remainder of 2013 and was evaluating alternative suppliers.
- Regulatory approvals were received for the CentraFLOW ICL in Korea and Argentina. Management anticipated approval in India during the third quarter and China during the first half of 2014, but these dates were not assured.
- The FDA was reviewing the company’s TICL submission and indicated that it intended to take the submission to an Advisory Panel. No date had been established, and the company could not predict whether or when U.S. approval would be granted.
- Reported quarterly income-tax expense was $0.6 million, producing a 68% effective tax rate. Management attributed the elevated rate partly to delayed realization of anticipated tax benefits from the manufacturing consolidation.
- Key risks include foreign exchange volatility, international regulatory requirements, dependence on third-party suppliers, product backorders, manufacturing-transition execution, product liability claims, and uncertainty regarding regulatory approvals. Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Facts Investors Should Verify
- Whether the revised 12%–14% full-year revenue-growth target was achieved and whether quarterly profitability was sustained.
- Progress, total remaining cost, and operational impact of the manufacturing consolidation and Swiss facility closure.
- Resolution of the third-party acrylic IOL supply constraint and the effect of approximately $1.2 million in European backorders on subsequent revenue.
- Regulatory status and timing for TICL, CentraFLOW ICL, and the V5 preloaded ICL.
- Whether working-capital pressure, foreign exchange losses, and reduced operating cash flow affected liquidity.
- Future gross-margin effects from low-margin injector sales and the product mix shift toward ICLs.
- Renewal of the Japanese line of credit and continued compliance with credit-facility covenants.