STAAR Surgical Company — Form 10-Q Summary
Reporting period: Quarter and six months ended June 28, 2019, compared with June 29, 2018. The request metadata identifies “2018 Q2,” but the filing is the 2019 second-quarter Form 10-Q.
Business Context
STAAR designs, manufactures, and sells implantable ophthalmic lenses and delivery systems. Its principal products are implantable Collamer lenses (ICLs) for refractive surgery and intraocular lenses (IOLs) for cataract surgery. The company operates as one ophthalmic surgical products segment, sells in more than 75 countries, and manufactures in the United States. Foreign sales represented approximately 94.7% of six-month revenue.
Financial Performance and Liquidity
| Metric | Three Months Ended June 28, 2019 | Three Months Ended June 29, 2018 | Six Months Ended June 28, 2019 | Six Months Ended June 29, 2018 |
|---|---|---|---|---|
| Net sales | $39.7 million | $33.9 million | $72.2 million | $61.0 million |
| Gross profit | $29.9 million | $25.2 million | $54.1 million | $44.7 million |
| Gross margin | 75.4% | 74.4% | 74.9% | 73.2% |
| Operating income | $4.6 million | $3.0 million | $6.2 million | $3.8 million |
| Operating margin | 11.6% | 8.9% | 8.5% | 6.3% |
| Net income | $3.9 million | $1.8 million | $5.3 million | $2.4 million |
| Diluted EPS | $0.08 | $0.04 | $0.11 | $0.06 |
- ICL revenue increased 26.2% in the quarter and 28.4% year to date; ICL unit growth was 34% and 36%, respectively.
- Other product sales declined 20.9% in the quarter and 20.1% year to date, primarily because of lower preloaded injector-part sales to a third-party manufacturer.
- Six-month net cash provided by operating activities was $4.2 million versus $2.3 million in the prior-year period. Capital expenditures were $4.6 million, primarily for manufacturing and quality-system improvements.
- Cash and cash equivalents were $103.3 million at June 28, 2019, compared with $103.9 million at December 28, 2018. Working capital was $130.2 million.
- Outstanding debt included a $2.9 million Japanese line of credit and $1.5 million of finance lease liabilities. The company reported $1.8 million of remaining availability under the Japanese facility and $1.0 million of availability under a Swiss facility. The company was in compliance with applicable covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by ICL demand, particularly in Asia-Pacific. Quarterly ICL sales increased 40% in China, 36% in Korea, 30% in Japan, and 23% in India.
- China accounted for 49% of quarterly revenue and 43% of six-month revenue. One Chinese distributor represented 48% of trade receivables at June 28, 2019, creating significant customer and geographic concentration.
- Gross margin improved because of the favorable mix toward ICLs and away from lower-margin injector parts, partly offset by lower average selling prices.
- General and administrative expense increased 21.2% in the quarter and 19.9% year to date. Marketing and selling expense increased 9.6% and 20.5%, respectively, while research and development expense increased 14.1% and 9.1%.
- Stock-based compensation increased to $5.2 million for the six months, compared with $2.9 million in the prior-year period, and was a significant noncash expense.
- The company adopted the new lease accounting standard, recognizing $7.2 million of operating lease right-of-use assets and $7.3 million of operating lease liabilities at quarter-end.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that results through the first two quarters put the company on track to achieve or exceed its fiscal 2019 targets of 20% annual top-line revenue growth and 30% ICL unit growth.
- Management submitted clinical-trial data for its EDOF ICL for presbyopia to its European Notified Body and delivered a revised FDA submission for a least-burdensome pathway toward approval of its EVO family of lenses in the United States. Approval and commercialization timing remain uncertain.
- The company expects the decline in injector-part sales to moderate in the second half of 2019.
- Foreign currency, primarily the euro, reduced reported revenue by approximately $0.6 million in the quarter and $1.3 million year to date.
- The U.S. maintains a full valuation allowance against net deferred tax assets, approximately $37.7 million at June 28, 2019, because realization remains uncertain. A future change in the valuation allowance could materially affect earnings.
- Legal matters arise in the ordinary course, including potential product-liability, contractual, and employment claims. Management does not currently expect known claims to have a material adverse effect, but unexpected outcomes could cause significant harm.
- The company entered into a Swiss real-property lease with an initial term through May 31, 2024. It reported no material off-balance-sheet arrangements.
- Management concluded that disclosure controls and procedures were effective and reported no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether ICL unit and revenue growth, particularly in China and the broader Asia-Pacific region, remains sustainable.
- The concentration risk associated with the Chinese distributor, including its contribution to revenue and accounts receivable.
- The timing and probability of regulatory approval for the EVO family in the United States and the EDOF ICL internationally.
- Whether the decline in injector-part sales moderates as management expects and how product mix affects gross margin.
- The impact of foreign-exchange movements, lower average selling prices, and increased operating expenses on future margins.
- Whether the company can continue generating sufficient operating cash flow while funding manufacturing, quality-system, research, and commercial investments.
- Potential future earnings effects from changes to the U.S. deferred-tax-asset valuation allowance.