STAAR Surgical Company — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended September 27, 2013, compared with September 28, 2012. The request metadata identifies “2012 Q3,” but the filing is for the third quarter of 2013. Results are unaudited and fiscal periods generally comprise 13 weeks.
Business Context
STAAR designs, manufactures and sells ophthalmic surgical products, principally implantable Collamer lenses (ICLs) for refractive surgery and intraocular lenses (IOLs) for cataract surgery. The company operates as one ophthalmic surgical products segment and sells in more than 60 countries.
Financial Performance and Position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $17.1 million | $15.9 million | $53.3 million | $47.3 million |
| Gross profit | $12.1 million | $11.2 million | $37.3 million | $33.1 million |
| Gross margin | 70.5% | 70.4% | 70.1% | 70.0% |
| Operating income | $0.2 million | $(0.1) million | $2.0 million | $0.02 million |
| Net income (loss) | $0.5 million | $(0.1) million | $1.3 million | $(0.3) million |
| Diluted EPS | $0.01 | $(0.00) | $0.03 | $(0.01) |
| Cash flow from operations | Not separately provided | Not separately provided | $3.4 million | $3.7 million |
Revenue mix: Q3 ICL sales increased 17.7% to $10.7 million, while IOL sales declined 12.1% to $5.3 million. Other surgical product sales increased 50.8% to $1.1 million, primarily from injector part sales. For the first nine months, ICL sales rose 23.9% to $32.6 million, IOL sales fell 8.6% to $17.5 million, and other product sales rose 72.5% to $3.1 million.
Cash and liquidity: Cash and cash equivalents were $23.4 million at September 27, 2013, compared with $21.7 million at December 28, 2012. Total current assets were $47.9 million versus current liabilities of $16.5 million. The company reported a $5.1 million Japanese line of credit outstanding with no availability under that facility, and a fully available Swiss line of approximately $1.1 million. Capital lease obligations totaled $0.6 million. Management believes existing cash and operating cash flow will fund working capital and planned consolidation costs for the foreseeable future.
Cash flow and investment: Nine-month operating cash flow was $3.4 million. Investing cash outflow was $3.0 million, primarily for property and equipment associated with the manufacturing consolidation and facility expansion. Financing cash inflow was $2.0 million, including $2.7 million from stock-option exercises, partially offset by $0.7 million of capital lease repayments.
Other financial items: Stock-based compensation expense was $2.9 million for the first nine months, compared with $2.3 million in the prior-year period. The company recorded a $0.4 million tax benefit from releasing STAAR Japan’s deferred tax valuation allowance. Accumulated deficit was $131.2 million at quarter-end.
Material Changes Versus Prior Comparable Period
- Q3 revenue increased 7.8%; nine-month revenue increased 12.6%.
- ICLs became a larger portion of sales, representing 62.7% of Q3 revenue versus 57.4% in the prior-year quarter.
- IOL sales declined because of foreign-exchange pressure, supply constraints and product mix; IOL sales in Japan experienced a 16% average selling price decline primarily due to the weaker yen.
- Operating results improved from a Q3 2012 loss to Q3 2013 operating income and from a nine-month operating income of approximately $0.02 million to $2.0 million.
- General and administrative expense increased 20.0% in Q3, driven by higher bonus accruals and costs associated with the expanded Monrovia facility.
- Cash increased by $1.7 million from year-end despite higher capital spending and unfavorable foreign-currency effects.
- Foreign exchange reduced sales by approximately $1.0 million in Q3 and $2.7 million for the first nine months, while also pressuring gross margins.
Guidance, Outlook, Risks and Unusual Items
- Management’s 2013 operating metrics called for revenue growth of 12% to 14%, a 250-basis-point full-year gross-margin improvement, profitability in each quarter, and continued manufacturing consolidation without material customer-supply or quality disruption. Nine-month revenue growth was 12.6%, but the filing does not establish whether the full-year targets will be achieved.
- The company expects total manufacturing consolidation costs of approximately $6.2 million over three and a half years; approximately $5.7 million had been incurred by September 27, 2013. The company expects the Swiss manufacturing transfer to be completed by mid-2014.
- Approximately $800,000 of European preloaded acrylic IOL orders were backlogged at quarter-end because a third-party supplier could not meet demand. Management could not predict whether alternative sourcing would resolve the issue.
- The company held approximately 11,400 ICLs in inventory in Europe and the United States to support supply and quality during the consolidation project.
- Regulatory approvals for CentraFLOW products in China and Japan were anticipated during the first half of 2014, while U.S. approval of the Toric ICL remained uncertain and subject to FDA review and a potential advisory panel.
- International operations expose the company to foreign-exchange volatility, political and economic conditions, regulatory requirements, tariffs and restrictions on fund transfers.
- The company depends on regulatory approvals, third-party suppliers, customer collections and successful execution of the manufacturing transition. Product liability, employment, contractual and other ordinary-course claims may also create financial exposure, although management did not expect known claims to be materially adverse.
- The company reported no material off-balance-sheet arrangements and stated that disclosure controls were effective as of September 27, 2013.
Important Facts for Investors to Verify
- Whether full-year 2013 revenue growth of 12% to 14% and the 250-basis-point gross-margin target remained achievable.
- Progress, costs, savings and supply-chain effects from completing the Swiss-to-U.S. manufacturing transfer.
- Resolution of the approximately $800,000 European IOL backlog and the reliability of the third-party lens supplier.
- FDA timing and outcome for the Toric ICL and regulatory approval timing for CentraFLOW and V5 products.
- The sustainability of ICL growth given the decline in IOL sales and continued foreign-exchange pressure.
- Future cash requirements, availability and renewal terms for the Japanese credit facility, and remaining capital lease and consolidation obligations.
- The effect of the STAAR Japan tax valuation-allowance release and other tax assumptions on future effective tax rates.