STAAR Surgical Company — Form 10-Q Summary
Reporting period: Three and six months ended July 1, 2011, compared with July 2, 2010. Although the request metadata identifies “2010 Q2,” the filing is a 2011 second-quarter Form 10-Q, filed August 4, 2011. Financial statements are unaudited and presented under U.S. GAAP.
Business Context and Reporting Period
STAAR designs, manufactures and sells implantable ophthalmic lenses, principally Visian implantable Collamer lenses (ICLs) for refractive surgery and intraocular lenses (IOLs) for cataract surgery. The company sells in more than 50 countries and manufactures in the United States, Switzerland and Japan. Approximately 77% of second-quarter sales were generated outside the United States.
The company operates as one reporting segment: ophthalmic surgical products. The 2010 comparative period includes income from continuing operations after the March 2010 divestiture of Domilens GmbH; Domilens results are presented as discontinued operations.
Financial Performance and Liquidity
| Metric | Q2 2011 | Q2 2010 | Six Months 2011 | Six Months 2010 |
|---|---|---|---|---|
| Net sales | $16.269 million | $13.639 million | $31.118 million | $27.417 million |
| Gross profit | $10.861 million | $8.679 million | $20.490 million | $17.508 million |
| Gross margin | 66.8% | 63.6% | 65.8% | 63.9% |
| Operating income (loss) | $1.170 million | $(0.799) million | $1.378 million | $(0.723) million |
| Income from continuing operations | $0.861 million | $(1.628) million | $1.161 million | $(2.264) million |
| Net income (loss) | $0.861 million | $(1.628) million | $1.161 million | $1.902 million |
| Diluted earnings per share | $0.02 | $(0.05) | $0.03 | $0.05 |
Q2 sales increased 19.3% year over year, while six-month sales increased 13.5%. ICL sales rose 41.4% in the quarter and 29.6% for the first six months, reaching $8.3 million and $15.2 million, respectively. IOL sales increased 1.0% in the quarter and 2.3% year to date, reaching $7.1 million and $14.2 million.
Operating income improved from losses in the prior-year periods to $1.2 million in Q2 and $1.4 million for the first six months. General and administrative expense increased primarily because of bonus accruals and professional fees related to manufacturing and tax strategies. Marketing and selling expense increased modestly, while research and development expense was broadly stable.
Other income, net, was $0.2 million in Q2 and $0.6 million for the six months, compared with other expense in the prior-year periods. The improvement reflected foreign-exchange gains, lower interest expense, favorable warrant fair-value changes and the absence of the 2010 loss on early extinguishment of the Broadwood note.
Net cash provided by operating activities was $2.911 million for the six months ended July 1, 2011, compared with $5.099 million used in operations in the prior-year period. Investing activities used $0.134 million, primarily for capital expenditures, compared with $18.778 million provided in 2010 from the Domilens sale and release of restricted cash. Financing activities provided $0.988 million, principally from stock-option exercises, compared with $12.205 million used in 2010 for debt repayment, preferred-stock redemption and capital-lease payments.
Cash and cash equivalents were $13.000 million at July 1, 2011, compared with $9.376 million at December 31, 2010. Cash plus restricted cash totaled approximately $13.1 million. Total current assets were $32.775 million versus current liabilities of $12.388 million. Total debt-like obligations included a $2.480 million Japanese line-of-credit balance and $1.734 million of capital-lease obligations. The company was in compliance with its credit covenants.
Material Changes Versus the Prior Comparable Period
- Sales growth was led by ICLs, which became the largest product category in Q2 and represented approximately 51% of quarterly sales.
- Gross margin expanded 320 basis points in Q2 and 190 basis points for the first six months, primarily from product mix, cost savings and greater ICL sales.
- The company returned to profitability from continuing operations in both comparative 2011 periods; management stated that Q1 2011 was the first profitable quarter from continuing operations since 1999.
- Prior-year six-month net income included $4.166 million of income from discontinued operations related to Domilens; the 2011 period did not.
- U.S. ICL sales grew 10% in Q2 but only 0.2% for the first six months, reflecting weak military-facility sales in the first quarter and stronger private-sector sales in Q2.
- Japan operations were not materially disrupted by the March 2011 earthquake and tsunami; Japanese revenue increased 21% in Q2 and 17% for the first six months.
Guidance, Outlook, Risks and Unusual Items
Management reported that all four 2011 operating targets were met in Q2: double-digit revenue growth, 25% ICL/TICL growth, quarterly gross-margin expansion and profitability. Based on first-half results, management increased its targets to 30% ICL/TICL growth, a 66.5% full-year gross margin and profitability in all four quarters with sequentially higher profits. These are management targets, not guarantees.
STAAR expects to spend approximately $6 million over three years on manufacturing consolidation and global tax-strategy initiatives, including approximately $0.5 million spent in the first half of 2011 and approximately $1 million of additional capital expenditures expected for manufacturing consolidation. Management estimates potential savings of $100 million during 2014–2021 and possible profit margins in the 70% range, but cautions that the benefits may not be achieved.
Key risks include elective-procedure demand and economic conditions, reimbursement changes affecting IOLs, competition, foreign-currency movements, regulatory approvals, manufacturing-transfer delays, supply interruptions, ICL order backlogs, and potential effects of the Japanese disaster on infrastructure, power, supply chains and consumer demand.
The FDA had not approved the Visian Toric ICL in the United States. The application remained under review following additional agency questions, and management could not predict whether or when approval would be granted. A Japan TICL application was also pending, with an audit scheduled for August 2011.
Unusual or notable items include the prior-year $0.7 million executive termination-benefit charge, approximately $0.259 million of accrued unpaid severance at July 1, 2011, $0.807 million of stock-based compensation expense for the first six months, and restricted cash of $0.145 million related to potential pre-2010 Domilens taxes. The restricted escrow balance was expected to be distributed no later than December 31, 2011, after resolution of applicable taxes.
Management stated that current cash balances and operating cash flow should satisfy working-capital requirements for the foreseeable future, but noted that financing may not be available on acceptable terms if additional funding is needed. The company reported no material off-balance-sheet arrangements and concluded that disclosure controls were effective.
Investor Verification Checklist
- Verify the filing period and comparative-period treatment of Domilens discontinued operations.
- Assess whether ICL growth and product mix can sustain the 66.5% full-year gross-margin target.
- Monitor progress toward manufacturing consolidation, associated costs, regulatory approvals and any supply interruptions.
- Review the status of U.S. and Japanese TICL approvals and the potential commercial effect of delays.
- Evaluate U.S. ICL demand, particularly military versus private-sector sales, and the sensitivity of elective procedures to economic conditions.
- Confirm liquidity, renewal of the Japanese credit facility before April 2, 2012, capital-lease payments and compliance with covenants.
- Track ICL backlog levels and production capacity as demand increases.
- Consider foreign-exchange exposure, international regulatory and political risks, and the continuing effects of the Japan earthquake and tsunami.