Medical Device Daily
LCA-Vision (Cincinnati), a provider of laser vision correction services under the LasikPlus brand, reported it will restate financial results for 2004 through 2006 to reflect a change in revenue recognition for the company's separately priced extended warranties.
The change is expected to reduce 2006 revenues and net income by about $18 million and $10 million, respectively, the company said. This reflects a reduction in revenues of roughly 7% for the year.
The proposed accounting also is expected to reduce shareholders' equity as of December 31, 2006 by about $30 million, of which nearly $9 million relates to periods prior to 2004. The proposed adjustment in revenue recognition is expected to increase revenues and earnings in future periods as deferred revenues are amortized back into income. LCA-Vision also noted that there will be no change to cash provided by operating activities or to cash and cash equivalents on the balance sheet for any period affected. The company said its management is analyzing the restatement adjustments and the estimated changes are preliminary and are subject to further review and audit.
Steven Straus, LCA-Vision's CEO, told investors during a Wednesday morning conference call that the restatement resulted from analysis performed following the company's receipt of a comment letter from the Securities and Exchange Commission according to their review of LCA-Vision's 2006 10-K. The single issue raised in the letter addressed the company's revenue recognition policy. LCA-Vision's historical policy has been to defer revenues for separately priced extended warranties for those patients expected to receive treatment under the warranty. Historical data indicates that only 7% of patients elected to receive treatment under the warranty.
Because LCA-Vision has offered separately priced extended warranties, it is subject to FASB Technical Bulletin 90-1 (FTB 90-1), under which 100% of revenues from extended warranties are to be deferred and these deferred revenues are to be amortized back into income on a straight-line basis unless the company has sufficient experience to indicate that the costs to provide the service will be incurred other than on a straight-line basis. The company said it believes it has sufficient experience to show that future enhancements are not expected to be performed on a straight-line basis and should be amortized over seven years.
"We have provided the SEC with a response to its comment letter and we look forward to resolving this issue as soon as is practical," Straus said. "Since we started offering separately priced extended vision acuity plans, we have consistently applied our interpretation of the relevant accounting rules and deferred a portion of the revenue from acuity plans consistent with the percentage of patients who return to LasikPlus vision centers for enhancement procedures.
Straus said the company also plans to limit or eliminate the use of separately priced extended warranties in the future.
"Therefore, we expect the impact of the restated financial statements will be to increase revenues and pretax income in future periods as the deferred revenue is amortized back into income. At present, we are comfortable with our 2007 revenue guidance growth of 20% to 25% compared with 2006, and our 2007 earnings per share guidance of $2.05 to $2.15," Straus said.
During Wednesday's conference call Allen Buckey, the company's CFO and executive VP of finance, emphasized that there would be no change in cash flow as a result of the change and that "this is just a timing difference on when this revenue is recognized."
"The key is how we price and market warranties going forward," Buckey said. "We intend to bundle the pricing of warranties with the laser option so that the accounting for that falls under FAS5 accounting for warranties rather than the FTB 90-1 accounting for separately priced warranties, so the accounting is significantly different whether you have separately priced warranties vs. bundle priced warranties."
Asked to explain the difference between the bundle warranties and separately priced warranties from a marketing standpoint, Buckey used a car analogy.
"A Buick doesn't have to have the same warranty that a Chevrolet does but all Buicks are going to have the same warranty. So if it's a Bausch & Lomb traditional treatment that may be one warranty, a Bausch & Lomb custom may have a different warranty . . . but there aren't going to be different warranty options, most likely — or only on a very limited basis — within the same laser platform," Buckey said. "And we've got a multitude of choices right now but the truth is only a very small percentage of people [9%] choose anything other than a lifetime warranty, so we really think the impact is minimal, because people are already choosing to have the lifetime coverage."
The company said its decision to restate prior-period financial statements was made by its management with the concurrence of the audit committee of its board of directors and its independent auditors, Ernst & Young.
In light of the restatement, LCA-Vision told investors they should rely on restated financial statements and other financial information rather than the previously filed financial statements; and LCA-Vision said it would file its Form 10-Q for the 1Q07 with finalized first quarter 2007 financial results as well as its restated financial statements in amendments to prior reports with the SEC "as soon as it is practical". The final changes to deferred revenues, net income, and earnings per share will be available in these filings, the company noted.
LCA-Vision owns and operates 63 LasikPlus fixed-site laser vision correction centers in the U.S. and participates in a joint venture in Canada.