STAAR Surgical Company — Form 10-Q Summary
Reporting period: The provided filing is for the quarter ended September 28, 2018, with comparisons to September 29, 2017. The request metadata identifies “2017 Q3,” but the filing itself is the third-quarter 2018 Form 10-Q. Results are unaudited and presented under U.S. GAAP.
Business Context
STAAR designs, manufactures and sells implantable ophthalmic lenses and delivery systems, principally implantable Collamer lenses (ICLs) for refractive surgery and intraocular lenses (IOLs) for cataract surgery. The company operates as one reportable segment and sells in more than 75 countries, with substantially all manufacturing in the United States.
Financial Results and Liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $31.8 million | $23.5 million | $92.8 million | $65.8 million |
| Gross profit | $23.9 million | $16.8 million | $68.5 million | $46.9 million |
| Gross margin | 75.1% | 71.8% | 73.9% | 71.3% |
| Operating income (loss) | $1.6 million | $1.0 million | $5.4 million | $(2.4) million |
| Net income (loss) | $1.5 million | $1.2 million | $3.9 million | $(2.0) million |
| Diluted EPS | $0.03 | $0.03 | $0.09 | $(0.05) |
- Revenue mix: Q3 ICL sales increased 45.9% to $26.4 million, with unit growth of 56%; ICLs represented 83.2% of sales. Nine-month ICL sales increased 50.6% to $74.9 million. Other product sales were approximately $5.4 million in Q3 and $17.9 million year to date.
- Geography: Q3 sales in China were $13.3 million and Japan sales were $6.0 million. Foreign sales represented approximately 94.7% of Q3 sales and 94.3% of nine-month sales.
- Expenses: Q3 general and administrative expense was $6.1 million, marketing and selling expense was $10.6 million, and research and development expense was $5.6 million. Total selling, general and administrative expense was $22.3 million, or 70.1% of sales.
- Cash flow: Nine-month operating cash flow was $10.4 million, compared with $1.7 million in the prior-year period. Capital expenditures were $1.7 million, producing investing cash use of $1.7 million.
- Cash and liquidity: Cash and cash equivalents were $102.2 million at September 28, 2018, compared with $18.5 million at December 29, 2017. Cash, cash equivalents and restricted cash totaled $102.3 million.
- Financing: The company raised $72.2 million of net proceeds from an August 2018 offering of 1,999,850 common shares. Total liabilities were $34.1 million, including a $4.2 million Japanese line of credit and $2.0 million of capital lease obligations. The company reported compliance with credit-facility covenants.
Material Changes Versus the Prior Comparable Period
- Net sales increased 35.3% in Q3 and 41.1% for the first nine months, driven principally by ICL demand and growth in the Asia-Pacific region.
- Gross margin expanded by 330 basis points in Q3 and 260 basis points year to date. Management attributed the improvement primarily to higher production volumes and overhead absorption, favorable product and country mix, and lower freight and inventory provisions, partly offset by lower average selling prices.
- Nine-month operating results improved from a $2.4 million loss to $5.4 million of operating income, and net results improved from a $2.0 million loss to $3.9 million of net income.
- Marketing and selling expense rose 63.5% in Q3, reflecting increased digital, consumer and strategic marketing investments, commercial infrastructure spending and the timing of the ESCRS industry event.
- Stock-based compensation increased to $4.9 million for the first nine months from $2.2 million in the prior-year period.
- Other income declined because of foreign-exchange losses for the nine-month period, compared with foreign-exchange gains in the prior year.
- The company adopted ASC Topic 606 using the modified retrospective method. Management reported no material cumulative-effect adjustment or material change to revenue recognition.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2018 sales growth to exceed 30% over 2017, based on current market conditions, and expects gross margin and profitability to improve year over year.
- Management expects fourth-quarter operating expenses to exceed the prior-year quarter because of continued investment, while still expecting positive GAAP net income for full-year 2018 and increased operating cash flow.
- The FDA approved a PMA supplement for the Visian Toric ICL in September 2018; a staged rollout was underway. A European multi-site EVO ICL trial with an EDOF optic remained ongoing, with no assurance regarding timing or achievement of endpoints.
- Customer concentration is significant: one Chinese distributor represented 42% of Q3 net sales, 38% of nine-month net sales and 36% of trade receivables at September 28, 2018.
- Results are exposed to foreign-exchange volatility, particularly involving the euro, as well as international market, regulatory and reimbursement conditions.
- The company is subject to normal-course litigation, including potential product-liability and employment matters. Management does not expect known claims to have a material adverse effect, but unexpected outcomes could be financially harmful.
- The Japanese credit line of approximately $4.2 million was scheduled to mature on November 21, 2018; management expected renewal on similar terms. A Swiss facility of approximately $1.0 million was fully available and undrawn.
- The company expected to adopt the new lease standard at the beginning of fiscal 2019 and did not expect a material adjustment to beginning retained earnings, although disclosure effects were still under evaluation.
Important Facts for Investors to Verify
- Confirm that the applicable filing period is Q3 2018 rather than Q3 2017, as the supplied metadata and filing period differ.
- Assess the sustainability of ICL growth, particularly the concentration of sales growth in China, Japan and other international markets.
- Monitor the Chinese distributor’s purchase activity, receivable concentration and payment performance.
- Reconcile reported margin expansion with production-volume benefits, product mix, pricing and inventory provisions.
- Track the effect of rising marketing, research and development, cybersecurity and stock-based compensation costs on future operating leverage.
- Evaluate progress, regulatory approvals and commercialization costs for Toric ICL and the EVO EDOF clinical program.
- Review foreign-exchange sensitivity, credit-line renewals, capital-lease obligations and the eventual effects of lease-accounting adoption.