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UVIC > SEC Filings for UVIC > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for UNILENS VISION INC

Form 10-Q for UNILENS VISION INC


14-Nov-2012

Quarterly Report


Item 2 - Management's Discussion & Analysis of Financial Condition and Results of Operations

The following management discussion and analysis ("MDA") provides information on the activities of Unilens Vision Inc. and should be read in conjunction with our quarterly condensed consolidated financial statements and notes thereto for the three months ended September 30, 2012 (the "Financial Statements"), as well as our Annual Report on Form 10-K for the fiscal year June 30, 2012, filed with the Securities and Exchange Commission. The Financial Statements have been prepared in United States dollars and in conformity with United States generally accepted accounting principles ("US GAAP"). Unless otherwise indicated, all dollar amounts disclosed in this MDA are expressed in United States Dollars.

Operating results are not necessarily indicative of results that may occur in future periods. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in the forward-looking statements as a result of many factors including, but not limited to, those set forth under "Cautionary Statement About Forward-Looking Statements" and "Risk Factors" in Item 1A. included in our Annual Report on Form 10-K. All forward-looking statements included in this document are based on the information available to us on the date of this document and we assume no obligation to update any forward-looking statements contained in this Quarterly Report on Form 10-Q.

Overview

We license, manufacture, distribute and market specialty optical lens products using our proprietary design and manufacturing technology. Our products are sold primarily in the United States solely to eye care professionals through in house sales representatives and a network of distributors. Our lens products are marketed as a family of specialty vision correction products that can serve the majority of the population's vision correction needs. Our specialty optical lens business is divided into four categories: (i) disposable lenses; (ii) custom soft lenses; (iii) gas permeable lenses; and (iv) replacement and other lenses. During the three months ended September 30, 2012 the Company's C-Vue disposable products accounted for approximately 54% of sales.

Sales of our specialty optical lens products accounted for the largest percentage of our total revenues, constituting approximately 74% while royalty income derived from our exclusive license of our patented multifocal design to Bausch + Lomb was approximately 26% during the three months ended September 30, 2012.

Economic conditions in the United States have restrained our growth. We are however optimistic about the long-term outlook for the contact lens market and the specialty contact lens market, in particular.

Market demographics indicate that speciality contact lenses will continue to be the fastest growing segment of the contact lens market. Specialty contact lenses include toric, toric multifocal, and cosmetic lenses. We believe that our custom soft speciality lenses including our C-Vue multifocal lens for presbyopia, our C-Vue custom toric lens for correcting astigmatism and the C-Vue Advanced toric multifocal lens, will grow over time due to market demographics favoring specialty lenses and our patented multifocal technology.

We believe market demographics favoring specialty contact lenses will continue to drive our revenue and earnings. In January 2011, we launched our new C-VUE Advanced® HydraVUE™ line of silicone hydrogel custom contact lenses for monthly replacement. They are completely customizable, and feature a risk-free trial program, and sales have grown steadily during the 2012 fiscal year and into the first quarter of the 2013 fiscal year.

A significant portion of our net income is derived from our exclusive license with Bausch + Lomb and such royalty income is a major component of our profitability. However, there can be no assurance, that such royalty income from Bausch + Lomb will grow or that Bausch + Lomb will continue to sell products in the future utilizing our technology.

The contact lens market is highly competitive. We compete with industry leaders, such as Vistakon, Inc. a unit of Johnson and Johnson Vision Care, Inc., Bausch + Lomb, Alcon Laboratories, Inc., a division of Novartis AG, and Cooper Vision, Inc., a unit of Cooper Vision Companies, Inc. Our ability to compete successfully is dependent in part on eye care professionals' perceptions of product quality, product development, technical innovation, and price.

We have a supply agreement with one supplier for the manufacture of our molded C-Vue multifocal lens, which currently accounts for approximately 46% of our quarterly sales. The agreement is renewable from year to year and is terminable pursuant to customary termination clauses. Although to date the supplier has met our requirements, there can be no assurances that it will continue to do so.


Table of Contents

First Quarter Highlights

† Sales for the first quarter of fiscal 2013 were $1.5 million or 4.2% less than the first quarter of fiscal 2012.

† Custom soft lens sales increased 15.6% while the disposable lens category declined 8.8%.

† Royalty income for 2013 declined 16.2% compared to the first quarter of 2012, resulting in a decline in total revenue of 7.7% to $2.0 million.

† Operating expenses increased 1.5% compared to the first quarter of fiscal 2012.

† Interest expense was 56% less when compared to the first quarter of fiscal 2012, due to lower debt levels and the Hancock bank refinancing in May, 2012.

† Net income decreased 21.2% compared to the first quarter of fiscal 2012.

† Earnings per share were $0.11 compared to $0.14 in the first quarter of fiscal 2012.

† Paid our 24th consecutive quarterly dividend, at $0.045 per share in August 2012. On November 1, 2012 we declared our 25th consecutive quarterly dividend, at an annual rate of $0.18 per share or $0.045 per share quarterly, a dividend yield of 5.5% based on the October month end closing price of $3.27.

Results of Operations

The following table sets forth, for the periods indicated, certain data derived
from our Condensed Consolidated Statements of Income and Changes in Accumulated
Deficit and certain of such data expressed as a percentage of total revenues:



                                                          Three Months Ended September 30
                                                         2012                        2011
                                                    $      % of Revenues        $      % of Revenues
Revenues                                        2,038,611      100.0        2,207,730      100.0
Operating costs and expenses                    1,627,403       79.8        1,655,530       75.0
Operating income                                  411,208       20.2          552,200       25.0
Other non-operating items                         (29,427)      (1.4)         (69,764)      (3.2)
Income before income tax expense                  381,781       18.8          482,436       21.8

The following table sets forth, for the periods indicated, certain data derived from our Condensed Consolidated Statements of Income and Changes in Accumulated Deficit and certain of such data expressed as a percentage of sales:

                                       Three Months Ended September 30
                                         2012                   2011
                                     $     % of Sales       $     % of Sales
        Sales                    1,509,654   100.0      1,576,530   100.0
        Cost of sales              890,766     59.0       930,065     59.0
        Sales and marketing        370,955     24.6       361,222    22.9
        Administration             345,668     22.9       343,285    21.8
        Research and development    20,014      1.3        20,958      1.3

First Quarter

During the three months ended September 30, 2012 (the "Current Quarter") we earned income before tax of $381,781 compared to income before tax of $482,436 for the three months ended September 30, 2011 (the "Prior Quarter"). The decrease in income before tax during the Current Quarter of $100,655 was primarily from the decrease in royalty income from Bausch + Lomb of $102,243 to $528,957 in the Current Quarter as compared to $631,200 in the Prior Quarter,
(ii) an decrease in gross margin of $27,577 from lower sales (iii) excluding cost of sales, a increase in expenses of $11,172 as described below, and (iv) a decrease in other items primarily interest expense, and other income of $40,337. After recording income tax expense of $126,777, we had net income of $255,004 or $0.11 per diluted share, for the Current Quarter. In comparison, in the Prior Quarter we had net income of $323,454 or $0.14 per diluted share after recording income tax expense of $158,982.

Sales during the Current Quarter were $1,509,654, a decrease of $66,876 (4.2%), as compared to sales of $1,576,530 during the Prior Quarter. The disposable lens category decreased by 8.8% as sales of our C-Vue disposable multifocal lenses continue to be affected by competition from competitor product offerings and promotional programs. Our custom soft lens category increased by 15.6%, primarily due to increased demand of our new C-Vue Advanced® HydraVUE™ line of silicone hydrogel custom contact lenses for monthly replacement, launched over a year ago in January of 2011. Our gas permeable lens category decreased 16.8% primarily due to the continued overall decline in gas permeable fits in the contact lens industry. The replacement and other lens category decreased as expected by 20.5% due to the expected decline in product lines that are nearing the end of their life cycle, offset some by sales increases for Unilens replacement products due to the discontinuation of replacement lens products from several of our competitors.


Table of Contents

Gross margin was flat at 41.0% in the Current Quarter compared to the same 41.0% in the Prior Quarter, due primarily to manufacturing improvements implemented during the Current Quarter offset by lower margins.

During the Current Quarter, as compared to the Prior Quarter, expenses increased 1.5% or $11,172. Administrative expenses increased $2,383 primarily due to increases in payroll and related expenses offset by decreases in corporate governance expenses. Sales and marketing expenses increased $9,733 primarily due to advertising costs associated with a new corporate logo and future new product launches while research and development expenses decreased $944 during the Current Quarter, as compared to the Prior Quarter.

We record income tax and income taxes payable at the statutory rates. During the Current Quarter and the Prior Quarter we recorded income tax expense of $126,777 and $158,982, respectively. The effective tax rate for the Current Quarter and Prior Quarter was 33.2% and 33.0%, respectively

Liquidity and Capital Resources



Cash and cash equivalents were $539,061 at September 30, 2012 compared to $
374,977 at June 30, 2012.  The following is a summary of the change in our cash
and cash equivalents:



                                                         September 30,
                                                      2012          2011
         Net cash provided by operating activities $   544,871   $   718,324
         Net cash used in investing activities        (17,725)     (350,193)
         Net cash used in financing activities       (363,062)     (270,907)
         Net decrease in cash and cash equivalents $   164,084   $    97,224

As of September 30, 2012, we had working capital of $845,787 representing a decrease of $8,898 from our working capital at June 30, 2012. The decrease in working capital was due to an increase in cash, and the payoff of the line of credit, offset by decreases in accounts receivable, royalty and other receivables, and an increase in accounts payable.

During the three months ended September 30, 2012, we generated $544,871 positive cash from operations representing a decrease of $173,453 from $718,324 generated during the Prior Quarter. The decrease was due primarily to the reduction of royalty and other receivables in the Current Quarter, compared to the Prior Quarter which included the payment of the one-time price correction recorded in the fourth quarter of fiscal year 2011, offset by increases in accounts payable and accrued expenses.

Investing activities for the Current Quarter were for the purchase of capital additions. Cash used for these capital additions were $17,725 a decrease of $332,468 from $350,193 in the Prior Quarter, which was primarily for the purchase of manufacturing equipment.

Financing activities during the Current Quarter consisted primarily of principal repayments of $175,000 on the term loan facility and the payoff of the outstanding balance of $81,441 on the line of credit, compared to term loan repayments of $164,286 in the Prior Year. In addition financing activities in both the Current and Prior Quarters included the payment of $106,621 of dividends to our shareholders. The slightly higher term loan principal repayments are from the May 23, 2012, Hancock Bank refinancing of our term loan and line of credit facilities with a new five-year term loan and line of credit, which increased our term loan principal payments to $58,333 per month from $54,762, while at the same time extending the term of the loan and reducing the interest rate to a floating rate of 30-day LIBOR plus 3.00%. Cash income taxes paid during the Current Quarter were $45,000 compared to no required cash income tax payments paid in the Prior Quarter.

Critical Accounting Policies & Estimates

This Management's Discussion and Analysis is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make certain estimates and apply judgment. We base our estimates and judgments on historical experience, current trends and other factors that management believes to be important at the time the consolidated financial statements are prepared. On a regular basis, we review our accounting policies and how they are applied and disclosed in our consolidated financial statements. While we believe the historical experience, current trends and other factors considered, support the preparation of our consolidated financial statements in conformity with generally accepted accounting principles, actual results could differ from our estimates, and such differences could be material.

There have been no changes to our critical accounting policies during the first three months of fiscal 2013.

For a further discussion of the judgments we make in applying our accounting policies, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our 2012 Form 10-K.

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