STAAR Surgical Company — Form 10-Q Summary
Reporting period: Three months ended April 4, 2014, compared with the three months ended March 29, 2013. The request metadata identifies “2013 Q1,” but the filing is for the first quarter of 2014.
Business Context and Reporting Period
STAAR designs, manufactures and sells implantable lenses and delivery systems for ophthalmic surgery. Its principal products are implantable Collamer lenses (ICLs) for refractive surgery and intraocular lenses (IOLs) for cataract surgery. The company sells in more than 60 countries and operates as one ophthalmic surgical products segment.
Management was consolidating manufacturing into its Monrovia, California facility, with substantial completion targeted by mid-2014. The initiative is intended to reduce manufacturing, administrative and tax costs.
Financial Results and Key Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $20.2 million | $18.0 million | +12% |
| Gross profit | $13.9 million | $12.7 million | +10% |
| Gross margin | 68.8% | 70.3% | Down 150 bps |
| Operating income (loss) | $(1.3) million | $1.1 million | Turned to loss |
| Net income (loss) | $(1.4) million | $0.5 million | Turned to loss |
| Diluted loss per share | $(0.04) | $0.01 | Unfavorable change |
| Net cash used in operations | $(2.6) million | $(0.4) million | Higher use of cash |
ICL sales increased 15% to $12.2 million, driven by growth in EMEA and Asia Pacific, partly offset by a 14% decline in North America. IOL sales increased 4% to $6.6 million, despite approximately $0.5 million of backorders from an acrylic IOL supplier and a $0.5 million foreign-currency impact. Other surgical product sales rose 29% to $1.3 million.
Operating expenses increased materially: general and administrative expense rose 36% to $5.4 million, marketing and selling expense rose 16% to $6.1 million, and research and development expense rose 155% to $3.5 million. R&D included $1.4 million related to preparation for and attendance at the FDA advisory panel meeting and costs associated with V5 ICL development.
At April 4, 2014, cash and cash equivalents were $21.1 million, compared with $23.0 million at January 3, 2014 and $19.2 million at March 29, 2013. Total assets were $64.3 million and stockholders’ equity was $41.3 million. Inventory increased to $13.8 million from $12.5 million at year-end, including approximately 26,500 finished ICLs versus approximately 17,100 at the end of the prior quarter.
The company had $4.8 million outstanding under its Japanese line of credit, which was fully drawn, and no borrowings under its $1.1 million Swiss line, which remained available. Capital lease obligations totaled $0.4 million. Management stated that it believed current cash and operating cash flow would satisfy foreseeable working-capital needs and reported compliance with debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue increased 12%, led by 15% ICL growth and 29% growth in other surgical products.
- Gross margin declined from 70.3% to 68.8% because of U.S. manufacturing inefficiencies, Swiss overhead absorption during the production transfer, higher low-margin injector-part sales and unfavorable IOL mix.
- The company moved from operating income of $1.1 million to an operating loss of $1.3 million.
- Higher compensation, recruiting, promotional, U.S. sales-team expansion and FDA-related R&D spending increased operating expenses.
- Operating cash use increased to $2.6 million, principally due to the net loss and working-capital investment, including higher inventory and prepaids.
- Financing cash flow improved to $2.1 million from a $0.2 million use of cash, primarily because of $2.2 million in proceeds from stock-option exercises.
- Foreign-currency effects were less adverse: the company recorded a $66,000 transaction gain versus a $341,000 loss in the prior-year quarter, while currency translation produced a $0.6 million unfavorable impact on current-quarter sales.
Guidance, Outlook, Risks and Unusual Items
Management’s 2014 objectives were 8%–10% revenue growth, 20% ICL sales growth, a 72.7% gross margin, GAAP profitability for the full year and completion of manufacturing consolidation by mid-2014. First-quarter performance was ahead of the revenue objective on a quarterly growth basis but below the full-year ICL growth and margin objectives, and the company reported a GAAP net loss.
Management expected approximately $0.1 million of additional consolidation costs during the remainder of 2014. Approximately $6.1 million had been incurred since inception of the manufacturing and tax initiatives, with a $0.8 million termination-benefit accrual at quarter-end. After completion, management targeted gross margins near 80% for manufactured products and an effective tax rate of approximately 10%; these are targets, not guarantees.
On March 14, 2014, an FDA advisory panel voted favorably on questions concerning the safety, effectiveness and benefit-risk profile of the Toric ICL. STAAR stated that it could not predict whether or when FDA approval would be granted. The company believed U.S. ICL sales could double in the first full year after a potential TICL launch, but this expectation depends on regulatory approval and market adoption.
Other risks include dependence on international markets and foreign exchange, regulatory approvals, supplier backorders and concentration, reimbursement changes, manufacturing-transfer execution, product-liability claims and customer concentration. One customer represented 13% of first-quarter sales. The Japanese credit facility of approximately $4.8 million was due to expire July 4, 2014, although management expected renewal.
On March 3, 2014, Japan approved the Visian ICL with CentraFLOW technology. On April 11, 2014, STAAR extended its supply agreement with Nidek through December 31, 2016. The company reported no material off-balance-sheet arrangements and no material changes in market risk.
Important Facts for Investors to Verify
- Whether manufacturing consolidation was completed on schedule and produced the expected cost savings and margin improvement.
- Whether FDA approval was obtained for the Toric ICL and whether U.S. sales matched management’s potential launch assumptions.
- Progress toward full-year revenue, ICL growth, 72.7% gross-margin and GAAP-profitability objectives.
- Inventory levels, product availability and the resolution of IOL supplier backorders.
- Liquidity after operating cash use, capital expenditures and repayment or renewal of the fully drawn Japanese credit facility.
- The effect of foreign-exchange movements, customer concentration and international regulatory or reimbursement changes.
- The ultimate cost of manufacturing consolidation, termination benefits and related tax benefits.