STAAR Surgical Company — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2011, compared with October 1, 2010. The request metadata identifies “2010 Q3,” but the supplied filing is the September 30, 2011 Form 10-Q.
Business Context and Reporting Period
STAAR designs, manufactures and sells ophthalmic surgical products, primarily implantable Collamer lenses used in refractive surgery and intraocular lenses used in cataract surgery. The company operates as one ophthalmic surgical products segment and sells in more than 50 countries. Approximately 79% of third-quarter sales were generated outside the United States.
The company had 35.9 million common shares outstanding at September 30, 2011. The financial statements are unaudited and use 13-week reporting periods ending on the Friday nearest the quarter-end date.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $15.3 million | $13.2 million | $46.4 million | $40.6 million |
| Gross profit | $10.5 million | $8.3 million | $30.9 million | $25.8 million |
| Gross margin | 68.5% | 62.8% | 66.7% | 63.5% |
| Operating income (loss) | $0.7 million | ($1.2 million) | $2.1 million | ($1.9 million) |
| Income from continuing operations | $0.1 million | ($1.2 million) | $1.2 million | ($3.4 million) |
| Net income (loss) | $0.1 million | ($1.2 million) | $1.2 million | $0.7 million |
| Diluted EPS from continuing operations | $0.00 | ($0.03) | $0.03 | ($0.10) |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $5.4 million | ($4.6 million) |
Revenue mix: Q3 ICL revenue was $7.9 million, up 31%; IOL revenue was $6.6 million, essentially flat; and other surgical products contributed $0.8 million. For the nine months, ICL revenue was $23.1 million, up 30%, while IOL revenue was $20.8 million, up 1.6%.
Balance sheet and liquidity: Cash and cash equivalents were $16.8 million at September 30, 2011, compared with $9.4 million at December 31, 2010. Including restricted cash, total cash was approximately $16.9 million. Total assets were $45.9 million and total liabilities were $17.5 million. The company had $2.6 million outstanding under its Japanese line of credit, $1.6 million of capital lease obligations, and no borrowings under its Swiss credit facility. Management stated that available cash and operating cash flow should fund working capital and the estimated manufacturing-consolidation costs for the foreseeable future.
Material Changes Versus the Prior Comparable Period
- Revenue increased 16.1% in Q3 and 14.3% for the nine-month period, primarily due to higher ICL sales and favorable currency effects.
- Gross margin expanded 570 basis points in Q3 and 320 basis points for the nine months, mainly from a higher mix of ICL products and improved IOL margins.
- The company returned to operating profitability: Q3 operating income was $0.7 million versus a $1.2 million loss, and nine-month operating income was $2.1 million versus a $1.9 million loss.
- Q3 net income improved to $0.1 million from a $1.2 million loss. Nine-month net income was $1.2 million versus $0.7 million in the prior year; the 2010 amount included $4.2 million of income from discontinued Domilens operations.
- Operating cash flow improved to $5.4 million from $4.6 million used in the prior-year period. The prior year included substantial discontinued-operation effects and working-capital outflows.
- General and administrative expense increased 6.4% in Q3 and 11.7% for the nine months, partly due to bonuses and professional fees related to manufacturing and tax strategies. Marketing expense declined in Q3 but increased for the nine-month period.
- Other income and expense shifted from $0.4 million of income in Q3 2010 to $0.4 million of expense in Q3 2011, primarily because of foreign-exchange losses and warrant fair-value adjustments.
Guidance, Outlook, Commentary and Risks
Management’s 2011 operating targets were double-digit total revenue growth, 30% growth in Visian ICL and TICL sales, a 66.5% full-year gross margin, and profitability in all four quarters. Management reported that all four targets were met in the third quarter. These targets are company objectives rather than guaranteed guidance.
STAAR launched the Visian V4c with CentraFLOW technology in CE Mark territories in September 2011 and expected an effect on sales beginning in the fourth quarter. The company also launched the nanoFLEX IOL in CE Mark territories. Management cautioned that the commercial impact of these products remained uncertain.
The company plans to consolidate global manufacturing at its Monrovia, California site by the end of 2013. It estimated approximately $6 million of total project and tax-strategy costs over three years, including approximately $0.5 million incurred through September 30, 2011, approximately $0.15 million expected in the fourth quarter, and approximately $1 million of additional capital expenditures. Management projected potential savings of $100 million during 2014–2020 and possible margins in the 75% range, but emphasized that these benefits are not assured.
- ICL demand may create inventory backlogs, delayed shipments or lost sales, particularly because of the large number of product configurations.
- Refractive surgery is elective and sensitive to economic conditions, consumer confidence and competition from LASIK and other procedures. U.S. ICL sales declined 7% in Q3 and 2% for the nine months.
- Regulatory approval remains pending for the TICL in the United States and Japan. The company could not predict the timing or likelihood of U.S. FDA approval.
- Product launches, manufacturing transfers and regulatory submissions may be delayed or may cause supply interruptions.
- International operations expose STAAR to foreign-exchange, political, regulatory, tariff and fund-transfer risks. Foreign-exchange movements favorably affected reported revenue by approximately $0.4 million in Q3 and $1.4 million for the nine months.
- The Japanese earthquake caused minor facility damage, but operations resumed and Japan revenue increased 32% in Q3 and 21% for the nine months.
- The company had approximately $104,000 of accrued unpaid executive severance at quarter-end; the final amount payable could differ from the estimate.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The company reported no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Confirm the applicable period: the supplied filing is for Q3 2011, despite the request metadata stating 2010 Q3.
- Assess whether ICL growth and the V4c launch can offset flat IOL sales and continued weakness in U.S. elective refractive procedures.
- Monitor whether the company sustains profitability and achieves its 66.5% full-year gross-margin objective.
- Verify the timing, cost and execution risks of the manufacturing-consolidation and tax-strategy initiatives.
- Track U.S. FDA and Japanese regulatory progress for the TICL and other products.
- Evaluate liquidity after planned project spending, capital expenditures, capital-lease payments and the April 2012 expiration of the Japanese credit-line term.
- Consider the effects of foreign-exchange volatility, international regulation, competition, reimbursement changes and potential ICL order backlogs.