STAAR Surgical Company 10-Q Summary
Reporting period: Quarter and nine months ended October 2, 2015, compared with October 3, 2014. The request metadata identifies “2014 Q3,” but the filing is for the third quarter of 2015. Amounts are in thousands except per-share data.
Business Context
STAAR designs, manufactures and sells implantable lenses and delivery systems, principally implantable Collamer lenses (ICLs) for refractive surgery and intraocular lenses (IOLs) for cataract surgery. The company sells in more than 60 countries and operates as one ophthalmic surgical products segment. Approximately 85% of sales were generated outside the United States during the first nine months of 2015.
Financial Performance
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $18.750 million | $18.188 million | $56.264 million | $58.414 million |
| Gross profit | $12.799 million | $11.869 million | $38.058 million | $39.419 million |
| Gross margin | 68.3% | 65.3% | 67.6% | 67.5% |
| Operating loss | $(2.022) million | $(1.553) million | $(5.274) million | $(4.286) million |
| Net loss | $(1.752) million | $(2.706) million | $(5.690) million | $(5.854) million |
| Basic and diluted loss per share | $(0.04) | $(0.07) | $(0.14) | $(0.15) |
- Third-quarter sales increased 3%; nine-month sales declined 4%, primarily reflecting unfavorable foreign exchange.
- ICL sales increased 21% in the quarter and 7% year to date, while IOL sales declined 24% and 20%, respectively. Other surgical product sales declined 19% and 14%.
- Quarterly gross margin expanded by 300 basis points, driven by higher-margin ICL mix, higher average selling prices and lower unit costs. Nine-month gross margin was broadly stable.
- Operating losses widened because general and administrative and research and development costs increased, including costs associated with FDA remediation and validation activities.
- Marketing and selling expense declined 11% in the quarter and 12% year to date, reflecting lower North American and Japanese promotional costs, partly offset by expanded direct-selling operations in Germany and Spain.
Cash Flow, Liquidity and Capitalization
- Cash and cash equivalents were $16.081 million at October 2, 2015, compared with $13.013 million at January 2, 2015.
- Operating cash flow was an outflow of $0.317 million for the first nine months, improved from an outflow of $4.428 million in the prior-year period.
- Investing cash flow was an outflow of $1.281 million, primarily for property, plant and equipment, compared with $2.449 million in the prior-year period.
- Financing cash flow was $4.643 million, including $2.8 million from exercise of warrants and $2.1 million from stock-option exercises, partly offset by $0.3 million of capital-lease repayments.
- The Japanese subsidiary had approximately $4.2 million outstanding under a fully drawn line of credit at approximately 1.475% interest. The line expires September 30, 2016 and had no remaining availability.
- The Swiss subsidiary had no borrowings outstanding. Its approximately $1.0 million credit facility was reduced by a $0.436 million Bankinter guarantee, leaving approximately $0.578 million available.
- Total liabilities were $22.371 million and stockholders’ equity was $39.539 million at October 2, 2015. The company reported compliance with its credit-facility covenants.
- Management stated that cash balances and expected operating cash flow should fund foreseeable working-capital needs, including approximately $4 million of 2015 quality-system remediation costs, of which $3.4 million had been incurred through nine months.
Material Changes, Outlook and Unusual Items
- Management increased product prices globally by approximately 5% to 7%, with most increases effective around October 1, 2015.
- The company expected to introduce the expanded-optic Visian ICL and TICL with CentraFLOW technology in Europe during the first quarter of 2016.
- Management projected an estimated annual effective tax rate of 67%, subject to changes in jurisdictional earnings mix, deferred-tax valuation allowances and tax-law developments.
- The FDA issued a 2015 Form 483 containing ten observations related principally to design changes, design transfer, validation, documentation and environmental monitoring at the Monrovia facility. Remediation was expected to take more than one year.
- FDA approval of the Toric ICL in the United States remained uncertain and was not expected until the company resolved or made sufficient progress on the FDA warning-letter and Form 483 issues.
- A putative securities class-action lawsuit concerning alleged disclosures about regulatory violations remained pending. The company filed a motion to dismiss and recorded no accrual because any loss was not estimable.
- Nidek, a supplier and customer, asserted damages related to allegedly defective injectors. The company was investigating and had recorded no accrual because the likelihood and amount of loss were not estimable.
- Foreign-exchange exposure remained significant: currency movements reduced sales by approximately $1.8 million in the quarter and $5.2 million year to date.
- One distributor represented 16% of quarterly and year-to-date sales, and one customer represented 16% of trade receivables at October 2, 2015.
Important Facts to Verify
- Confirm the filing period, because the supplied metadata says 2014 Q3 while the filing covers October 2, 2015.
- Monitor FDA remediation progress, potential additional regulatory actions and the timing of U.S. TICL approval.
- Assess whether price increases offset foreign-exchange pressure and continued weakness in IOL sales.
- Evaluate the company’s ability to generate positive operating cash flow while funding remediation and research and development.
- Review the fully drawn Japanese credit facility, limited Swiss availability and refinancing requirements in 2016.
- Track the securities litigation and Nidek injector claim, for which potential losses were not estimated or accrued.