STAAR Surgical Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 29, 2023, compared with September 30, 2022. Although the request metadata references 2022 Q3, the supplied filing is the 2023 third-quarter Form 10-Q, filed November 6, 2023.
Business Context
STAAR designs, manufactures and sells implantable ophthalmic lenses and delivery systems. The company operates as one ophthalmic surgical products segment, with ICLs used for refractive surgery as its primary product. Products are sold in more than 75 countries, and manufacturing is conducted in the United States.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net sales | $80.3 million | $76.0 million | $246.1 million | $220.3 million |
| Gross profit | $63.6 million | $60.5 million | $191.9 million | $173.6 million |
| Gross margin | 79.2% | 79.5% | 78.0% | 78.8% |
| Operating income | $6.3 million | $13.7 million | $17.7 million | $42.8 million |
| Operating margin | 7.8% | 18.0% | 7.2% | 19.4% |
| Net income | $4.8 million | $10.3 million | $13.6 million | $32.9 million |
| Diluted EPS | $0.10 | $0.21 | $0.27 | $0.67 |
Q3 ICL sales were $81.1 million, up 12.7%, while nine-month ICL sales were $244.8 million, up 17.4%. ICL sales represented approximately 101% of reported Q3 sales and 99.5% of nine-month sales because other product sales included negative adjustments and returns.
Operating expenses increased materially. Q3 general and administrative expense rose 37.5% to $19.3 million, selling and marketing expense rose 15.0% to $26.6 million, and research and development expense rose 19.3% to $11.5 million. Nine-month increases were 38.9%, 31.9% and 28.0%, respectively.
Net cash used in operating activities was $17.4 million for the first nine months of 2023, compared with $32.7 million of operating cash flow in the prior-year period. The principal working-capital uses were increases in accounts receivable of $50.4 million and inventories of $10.0 million.
Investing activities provided $51.9 million, primarily from $119.4 million of investment maturities or sales, partially offset by $52.3 million of investment purchases and $15.1 million of capital expenditures. Financing activities provided $7.0 million, including $9.3 million from stock-option exercises.
Liquidity, Capital Structure and Balance Sheet
- Cash and cash equivalents were $127.4 million at September 29, 2023, compared with $86.5 million at December 30, 2022.
- Available-for-sale investments were $74.3 million, down from $139.1 million at year-end; total cash and investments were $201.7 million versus $225.5 million.
- Working capital was $290.3 million, compared with $260.0 million at December 30, 2022.
- The filing does not report conventional funded debt. Finance lease liabilities totaled $0.2 million, and operating lease liabilities totaled $35.6 million.
- Management expects cash, investments and future operating cash flow to fund anticipated needs for at least 12 months from issuance of the financial statements.
Material Changes Versus the Prior Comparable Period
- Revenue increased 5.6% in Q3 and 11.7% for the first nine months, driven by ICL growth.
- China sales increased 14% for ICLs in Q3 and 24% for the first nine months. Q3 ICL sales increased 13% in APAC, 14% in EMEA and 5% in the Americas.
- Other product sales declined to negative $0.8 million in Q3 from $4.1 million, and to $1.3 million for the nine months from $11.8 million, primarily reflecting reduced cataract IOL activity, delivery-device changes and increased sales-return reserves.
- STAAR decided to stop manufacturing cataract IOLs because of third-party materials and supply-chain challenges, while continuing support through the end of 2023 as supplies permit.
- Profitability declined despite revenue growth because selling, marketing, general and administrative, and research and development costs grew faster than sales. Higher stock-based compensation, advertising, personnel costs, clinical expenses and Japan employee benefits were cited contributors.
- The company recorded a $154,000 impairment of Japan cataract-IOL patents and licenses during the first nine months.
- Financial statements were revised for an immaterial prior-period tax-accounting misstatement. The correction increased December 30, 2022 deferred tax assets and stockholders’ equity by $3.9 million and reduced previously reported income tax expense.
Guidance, Outlook, Risks and Unusual Items
- Management reaffirmed fiscal 2023 ICL sales guidance of $320 million to $325 million, while cautioning that revenue could be at the lower end because of macroeconomic weakness and other disruptions.
- On October 25, 2023, the company began a voluntary recall of approximately 300 EVO/EVO+ lenses with labeled power deviations of plus or minus 0.5 diopters. Management stated that the issue had been identified and fixed and did not expect material operational costs.
- Customer concentration is significant: one Chinese distributor represented 60% of Q3 sales, 59% of nine-month sales and 78% of trade receivables at September 29, 2023.
- Foreign-exchange losses were $1.4 million in Q3 and $3.2 million for the first nine months, although these amounts improved from the prior year. Foreign currency reduced nine-month sales by approximately $2.3 million.
- COVID-19 restrictions had eased, but management continues to monitor potential resurgences and their effects on elective surgeries, operations and financial performance.
- Known litigation and claims arise in the ordinary course, including potential product-liability and employment matters. Management does not believe known claims are likely to have a material adverse effect, but unexpected outcomes could cause significant harm.
- Approximately $48.6 million of unrecognized stock-based compensation remained at September 29, 2023, expected to be recognized over approximately two years.
- Controls and procedures were assessed as effective, and no material changes to internal control over financial reporting were reported.
Investor Verification Checklist
- Verify whether ICL sales and total revenue met the reaffirmed $320 million to $325 million fiscal 2023 ICL outlook.
- Assess whether operating expense growth and stock-based compensation moderate enough to restore operating-margin expansion.
- Monitor the voluntary EVO/EVO+ recall for additional costs, product-liability exposure or regulatory consequences.
- Evaluate dependence on the Chinese distributor, including customer concentration, receivables collection and China market conditions.
- Review the cash-conversion impact of elevated receivables and inventories and the sustainability of operating cash flow.
- Track the wind-down of cataract IOL manufacturing, related sales-return reserves and any effects on gross margin.
- Review the prior-period tax correction and the company’s future effective tax rate, which increased to 31.9% for the first nine months from 16.9% in the comparable period.