STAAR Surgical Company — Form 10-Q Summary
Reporting period: Three months ended March 29, 2013, compared with March 30, 2012. The filing text identifies this as the first quarter of 2013, although the request metadata states “2012 Q1.” Financial statements are unaudited and generally cover 13 weeks.
Business Context
STAAR designs, manufactures and sells implantable lenses and injector devices for refractive and cataract surgery. The company operates as one ophthalmic surgical products segment, with sales in more than 60 countries. Principal products are implantable Collamer lenses (ICLs) and intraocular lenses (IOLs).
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $18.001 million | $15.509 million | +16.1% |
| Gross profit | $12.654 million | $10.902 million | +16.1% |
| Gross margin | 70.3% | 70.3% | Flat |
| Operating income | $1.084 million | $0.278 million | Improved |
| Operating margin | 6.0% | 1.8% | Improved |
| Net income | $0.471 million | $0.232 million | Improved |
| Net margin | 2.6% | 1.5% | Improved |
| Diluted earnings per share | $0.01 | $0.01 | Unchanged |
| Net cash used in operating activities | $0.432 million | $0.437 million | Comparable use |
Product sales: ICL sales increased 23.5% to $10.631 million, reflecting an 18% volume increase and a 5% increase in average selling price. IOL sales were essentially flat at $6.347 million, while other surgical product sales increased 87.4% to $1.023 million.
Cash and liquidity: Cash and cash equivalents were $19.243 million at March 29, 2013, down from $21.675 million at December 28, 2012. Current assets were $41.604 million and current liabilities were $15.179 million. The company had $5.300 million drawn on its Japanese line of credit, with no availability remaining under that facility, and an undrawn Swiss line of approximately $1.1 million. Management stated that existing cash and operating cash flows should fund working capital and the manufacturing consolidation plan for the foreseeable future.
Debt and obligations: Total liabilities were $20.009 million. Capital lease obligations totaled $1.047 million, including $0.701 million current. The company reported no material off-balance-sheet arrangements and stated that it was in compliance with credit facility covenants.
Material Changes Versus the Prior Comparable Period
- Revenue increased 16.1%, led by 23.5% growth in ICL sales. ICLs represented 59.1% of sales versus 55.5% in the prior-year quarter.
- Operating income increased to $1.084 million from $0.278 million despite higher marketing and selling costs and consolidation expenses.
- Research and development expense declined 11.6% to $1.366 million, primarily from transferring activities from Japan to the United States.
- Stock-based compensation increased to $1.034 million from $0.687 million.
- Other general and administrative expenses increased 62.3% to $0.901 million, primarily due to manufacturing consolidation costs.
- Foreign currency movements reduced first-quarter sales by approximately $0.750 million and produced a $0.341 million foreign currency loss, compared with a $0.067 million gain in the prior-year quarter.
- Comprehensive loss was $0.204 million, compared with a $0.298 million comprehensive loss in the prior-year quarter, due primarily to foreign currency translation losses.
- Cash declined by $2.432 million during the quarter, primarily reflecting $1.218 million of capital expenditures, operating working-capital usage and foreign exchange effects.
Guidance, Outlook, Risks and Unusual Items
- Management’s 2013 operating targets were 8%–10% revenue growth, a 250-basis-point full-year gross-margin improvement, profitability in every quarter, and no material disruption from manufacturing consolidation. First-quarter revenue growth exceeded the stated annual target range, but gross margin remained flat year over year.
- The company expects to substantially complete consolidation of manufacturing and product development at its Monrovia, California facility by the end of 2013. Total initiative costs are expected to be approximately $6.0 million over three years; $4.6 million had been incurred through March 29, 2013, with approximately $2.5 million expected during 2013.
- Management expects its effective tax rate to decline from approximately 50% in 2012 to 40% in 2013, subject to execution of its tax and manufacturing strategy.
- Approximately $900,000 of European IOL backorders resulted from a third-party acrylic lens supplier’s inability to meet demand. Management expects supply constraints to limit IOL sales for the full year and is evaluating alternative suppliers.
- The company incurred approximately $422,000 of payments related to transitioning Spain to a direct distribution model; these payments ended in the first quarter.
- FDA approval of the Toric ICL for U.S. sale remains uncertain. STAAR continues discussions with the FDA regarding its PMA Supplement and cannot predict the timing or likelihood of approval. A separate V4c ICL submission was also pending FDA response.
- International operations expose the company to foreign exchange, regulatory, transfer-of-funds, tariff, political and reimbursement risks. The company also faces product-supply, regulatory, product-liability and manufacturing execution risks.
- An April 11, 2013 FDA inspection of the Aliso Viejo facility reportedly resulted in no Form 483 findings and an anticipated “no action indicated” report.
- The company recorded $59,000 of medical device excise tax expense and reported $1.034 million of stock-based compensation expense in the quarter.
Investor Verification Items
- Verify the request-period designation against the filing’s stated period ended March 29, 2013.
- Monitor ICL growth, particularly volume, pricing and geographic performance, and assess whether currency headwinds persist.
- Track the acrylic IOL supplier constraint, the approximately $900,000 backlog and the availability of alternative suppliers.
- Assess whether manufacturing consolidation is completed on schedule, within the projected $6.0 million total cost, and without supply or quality disruption.
- Reconcile the company’s 2013 revenue, margin and quarterly profitability targets with subsequent reported results.
- Follow FDA actions on the Toric ICL and V4c ICL submissions, including timing and approval prospects.
- Review cash consumption, capital expenditures, Japanese line-of-credit utilization and the company’s ability to fund remaining consolidation costs.
- Evaluate the effect of foreign exchange movements, stock-based compensation and other unusual expenses on reported earnings and cash generation.