STAAR Surgical Company — Form 10-Q Summary
Reporting period: Three and nine months ended September 28, 2012, compared with September 30, 2011. The request metadata identifies “2011 Q3,” but the filing itself is for the 2012 third quarter. Results are unaudited and reported under U.S. GAAP.
Business Context
STAAR designs, manufactures and sells implantable lenses and delivery devices for refractive and cataract surgery. Its principal products are Visian implantable Collamer lenses (ICLs) and intraocular lenses (IOLs). The company sells in approximately 60 countries and operates as one ophthalmic surgical products segment.
Financial Performance and Position
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $15.9 million | $15.3 million | $47.3 million | $46.4 million |
| Gross profit | $11.2 million | $10.5 million | $33.1 million | $30.9 million |
| Gross margin | 70.4% | 68.5% | 70.0% | 66.7% |
| Operating income (loss) | $(0.1) million | $0.7 million | $0.02 million | $2.1 million |
| Net income (loss) | $(0.1) million | $0.1 million | $(0.3) million | $1.2 million |
| Net income (loss) per diluted share | $(0.00) | $0.00 | $(0.01) | $0.03 |
Gross margin expansion reflected a higher ICL sales mix and improved ICL manufacturing costs. IOL gross margin was approximately 60% in both 2012 periods, versus 59% in Q3 2011 and 58% for the first nine months of 2011.
Marketing and selling expense increased 24.1% in Q3 and 18.6% for the first nine months, primarily from higher headcount, stock-based compensation and the transition to direct distribution in Spain. Research and development expense increased 8.8% in Q3 and 8.4% year to date. Manufacturing consolidation costs included in other general and administrative expense were $0.7 million in Q3 and $2.0 million year to date.
Revenue Mix and Material Changes
- ICL sales: $9.1 million in Q3, up 15.3%, and $26.3 million year to date, up 14.0%. ICLs represented 57% of Q3 sales and 56% of year-to-date sales, compared with 52% and 50% in the prior-year periods.
- IOL sales: $6.1 million in Q3, down 7.9%, and $19.2 million year to date, down 7.6%. Management attributed the decline to weaker global cataract procedure volumes and delays in launching certain products.
- Other surgical products: $0.7 million in Q3, down 11.3%, and $1.8 million year to date, down 28.4%, consistent with the company’s decision to deemphasize lower-margin products.
- Geography: Q3 ICL growth was led by Japan, China and India, while Korea declined. Total Q3 sales increased in China and Japan but declined in the United States, Korea and certain other markets.
Cash Flow, Debt and Liquidity
| Metric | September 28, 2012 | December 30, 2011 |
|---|---|---|
| Cash and cash equivalents | $19.8 million | $16.6 million |
| Total current assets | $41.5 million | $38.7 million |
| Total liabilities | $19.2 million | $19.5 million |
| Stockholders’ equity | $32.6 million | $29.5 million |
| Line of credit outstanding | $2.6 million | $2.6 million |
| Capital lease obligations | $1.5 million | $1.7 million |
- Operating cash flow was $3.7 million for the first nine months, compared with $5.4 million in the prior-year period.
- Investing cash flow was $(1.0) million, primarily reflecting $1.2 million of property and equipment purchases.
- Financing cash flow was $0.5 million, including $1.1 million from stock-option exercises and $0.6 million of capital-lease repayments.
- Cash increased $3.2 million from the beginning of the year. Management stated that cash and operating cash flow should fund working capital and the estimated $6.0 million manufacturing-consolidation program for the foreseeable future.
- STAAR Japan had approximately $2.6 million outstanding on a $3.9 million facility. The Swiss subsidiary had a $1.0 million facility with no borrowings outstanding. The company reported compliance with credit covenants.
Guidance, Outlook and Unusual Items
- Management expects fourth-quarter year-over-year revenue growth to exceed Q3 growth, but no longer expects high-single-digit full-year revenue growth.
- Management expects strong Q4 ICL growth but stated that its 20% full-year ICL growth goal is unlikely without a rebound in Asia-Pacific markets.
- The company expects to achieve approximately 71% gross margin for Q4 and the full year.
- Management expects profitability in Q4 and in three quarters of 2012, although Q3 was unprofitable.
- The manufacturing consolidation is targeted for completion by the end of 2014. Total expected costs are approximately $6.0 million, including approximately $2.5 million of capital expenditures; $3.0 million of total costs had been incurred by the filing date.
- Termination benefits accrued for the consolidation project were $0.6 million, with total severance expected to be approximately $1.4 million and paid by the first quarter of 2014. The company also expected approximately $0.7 million of tenant improvements in Q4 2012.
- STAAR incurred approximately $0.4 million of selling expense related to its Spain distribution transition and expected related expenses through February 2013.
- The FDA rejected STAAR’s proposed response concerning follow-up visit timing for the TICL submission. The company planned to respond by November 16, 2012, but could not predict whether or when U.S. approval would be granted.
- The company submitted a 180-day PMA supplement for the V4c Visian ICL on October 9, 2012 and had not received an FDA response as of the filing.
Key Risks and Contingencies
- Dependence on international markets exposes STAAR to foreign-exchange fluctuations, regulatory restrictions, tariffs, political instability and regional economic weakness.
- Product launches and regulatory approvals, including the TICL and V4c ICL, may be delayed or denied.
- The manufacturing-consolidation program involves execution, supply-continuity, cost and timing risks.
- Cataract product demand may be affected by procedure volumes, reimbursement policies and selling-price pressure.
- The company is exposed to product-liability, employment and contractual claims, although management did not believe known claims were likely to have a material adverse effect.
- Stock-based compensation was $2.3 million for the first nine months, compared with $1.3 million in the prior-year period.
Investor Verification Items
- Verify the filing period, because the supplied metadata says 2011 Q3 while the Form 10-Q covers September 28, 2012.
- Assess whether ICL growth and the expected Q4 product launches can offset continuing IOL and other-product declines.
- Track gross-margin performance and whether manufacturing consolidation produces the anticipated savings without disrupting supply.
- Reconcile management’s profitability outlook with higher selling, research and development, stock-compensation and consolidation expenses.
- Monitor FDA actions and the timing of TICL and V4c ICL approvals.
- Verify cash needs, capital expenditures, severance payments and remaining costs under the consolidation plan.