STAAR Surgical Company — Form 10-Q Summary
Reporting period: Quarter and six months ended June 29, 2012, compared with July 1, 2011. The supplied metadata identifies “2011 Q2,” but the filing is clearly a 2012 second-quarter Form 10-Q, filed August 7, 2012. Results are unaudited and reported in thousands except per-share amounts.
Business Context
STAAR designs, manufactures and sells implantable ophthalmic lenses, principally implantable Collamer lenses (ICLs) for refractive surgery and intraocular lenses (IOLs) for cataract surgery. Approximately 80% of quarterly sales were generated outside the United States, across approximately 60 countries. The company operates as one ophthalmic surgical products segment.
Financial Performance and Position
| Metric | Three Months Ended June 29, 2012 | Prior Year | Six Months Ended June 29, 2012 | Prior Year |
|---|---|---|---|---|
| Net sales | $15.9 million | $16.3 million | $31.5 million | $31.1 million |
| Gross profit | $11.0 million | $10.9 million | $21.9 million | $20.5 million |
| Gross margin | 69.3% | 66.8% | 69.8% | 65.8% |
| Operating income (loss) | $(0.2) million | $1.2 million | $0.1 million | $1.4 million |
| Net income (loss) | $(0.5) million | $0.9 million | $(0.3) million | $1.2 million |
| Diluted EPS | $(0.01) | $0.02 | $(0.01) | $0.03 |
- Product mix: ICL sales increased 3.8% in the quarter to $8.6 million and 13.3% year to date to $17.2 million. IOL sales decreased 4.3% in the quarter to $6.8 million and 7.5% year to date to $13.1 million. Other surgical product sales declined 37.7% in the quarter and 36.1% year to date as the company continued to deemphasize lower-margin products.
- Expense trends: Quarterly marketing and selling expense increased 27.7% to $5.4 million, while research and development expense increased 8.6% to $1.5 million. Manufacturing consolidation expenses contributed to other general and administrative expense of $0.7 million in the quarter.
- Cash flow: Six-month operating cash flow was $1.2 million, down from $2.9 million in the prior year. Investing cash flow was $(0.7) million, primarily reflecting $0.8 million of capital expenditures. Financing cash flow was $0.5 million, including $0.9 million of stock-option proceeds and $0.4 million of capital-lease repayments.
- Liquidity: Cash and cash equivalents were $17.5 million at June 29, 2012, versus $16.6 million at December 30, 2011. Total current assets were $39.5 million and current liabilities were $13.2 million. Management stated that existing cash and operating cash flow should fund working capital and the estimated $6 million manufacturing-consolidation cost.
- Debt and commitments: The company had a $2.5 million Japanese line-of-credit balance, with approximately $1.3 million available, and no borrowings under its approximately $1.0 million Swiss facility. Capital-lease obligations totaled $1.6 million, including $0.9 million current. The company reported compliance with credit-facility covenants.
Material Changes Versus Prior Comparable Period
- Quarterly revenue declined 2.0%, while six-month revenue increased 1.1%.
- The company reported its first quarterly net loss in the prior six quarters, primarily due to increased sales and marketing investment, manufacturing-consolidation costs, the Spain distribution transition, and weaker-than-expected sales in Korea and China.
- Gross margin improved substantially, supported by higher ICL mix, higher average selling prices, and manufacturing-cost improvements.
- Marketing and selling expense rose materially because of 13 new hires, increased promotion, stock-based compensation and trade-show timing.
- Net cash provided by operations declined by approximately $1.7 million year over year, despite cash ending the period $1.0 million above year-end 2011.
Guidance, Outlook, Risks and Unusual Items
- Revised 2012 objectives: After quarter-end, management revised its full-year revenue-growth target from 15% to high-single-digit growth. The ICL growth objective was revised from at least 32% to nearly 20% for fiscal 2012, with a 25% target for the second half. Management continued to target a 71% full-year gross margin and profitability in each quarter.
- Profitability outlook: Management expected a return to profitability in the third and fourth quarters, based on the Spain direct-sales transition, new sales personnel and anticipated recovery in Asia Pacific. The filing cautions that this outlook remains vulnerable to competition and other disclosed risks.
- Manufacturing consolidation: STAAR plans to consolidate manufacturing into Monrovia by the end of 2013. Estimated total initiative costs are approximately $6.0 million, including approximately $2.4 million of capital expenditures; $2.3 million had been incurred through the quarter. The company had accrued $0.4 million of termination benefits and estimated total severance of approximately $1.5 million.
- Tax strategy: Management expected the global tax strategy to reduce the approximate 50% current tax rate to approximately 10% in fiscal 2014 and intended to utilize approximately $121.1 million of U.S. net operating losses. These benefits depend on execution and applicable tax law.
- Key commercial risks: Elective ICL procedures are sensitive to economic conditions and generally are not reimbursed. China was affected by negative LASIK publicity, Korea by lower distributor inventory purchases, and Spain by the transition from distributor to direct sales. IOL demand may be affected by reimbursement changes and price competition.
- Regulatory contingency: The FDA continued to question clinical-data timing and other matters related to STAAR’s U.S. Toric ICL application. STAAR could not predict when, or if, approval would be granted.
- Other unusual items: Stock-based compensation expense was $1.5 million for the six months, compared with $0.8 million in the prior year. The company reported a $0.2 million six-month foreign-currency loss, compared with a $0.4 million gain in the prior year.
Investor Verification Checklist
- Verify the filing period and comparable dates, given the supplied metadata discrepancy.
- Verify whether revised full-year revenue and ICL targets were achieved and whether quarterly profitability returned as projected.
- Track ICL demand in China, Korea and Spain, including the economic effect of the Spain direct-sales transition.
- Confirm progress, total spending, supply continuity and savings from the Monrovia manufacturing-consolidation project.
- Review FDA correspondence and the eventual status of U.S. Toric ICL approval.
- Monitor gross-margin improvement, IOL price competition and the sustainability of cost reductions.
- Reconcile cash generation with the company’s planned consolidation costs, capital expenditures, lease obligations and credit-line availability.