STAAR Surgical Company — Form 10-Q Summary
Reporting period: Three months ended March 31, 2023, compared with April 1, 2022. The request metadata identifies “2022 Q1,” but the filing is for the first quarter of fiscal 2023. STAAR designs, manufactures and sells implantable lenses and delivery systems, principally implantable Collamer lenses (ICLs) for refractive surgery and intraocular lenses (IOLs) for cataract surgery. The company operates as one ophthalmic surgical products segment and sells in more than 75 countries.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $73.5 million | $63.2 million | +16.3% |
| Gross profit | $57.6 million | $49.3 million | +16.8% |
| Gross margin | 78.3% | 77.9% | +0.4 percentage points |
| Operating income | $2.8 million | $12.1 million | Down $9.3 million |
| Operating margin | 3.8% | 19.1% | Down 15.3 percentage points |
| Net income | $2.7 million | $9.6 million | Down 71.8% |
| Diluted earnings per share | $0.05 | $0.19 | Down $0.14 |
| Cash flow from operations | $(5.1) million | $(4.6) million | Greater use of cash |
- Revenue mix: ICL sales increased 20.4% to $70.6 million and represented 96.1% of sales. Other product sales declined 35.8% to $2.9 million, including a 49.1% decline in cataract IOL sales.
- Geography: China sales were $35.1 million, Japan sales were $10.9 million and domestic sales were $4.6 million. The China distributor accounted for 48% of quarterly net sales and 55% of trade receivables at March 31, 2023.
- Expenses: General and administrative expense rose 51.6% to $18.1 million; selling and marketing rose 52.6% to $26.4 million; and research and development rose 29.8% to $10.3 million. Increases reflected growth investments, higher stock-based compensation, advertising, promotional activity, commissions, trade shows, payroll-related costs and clinical expenses.
- Other income: Other income was $1.9 million compared with other expense of $0.6 million in the prior-year quarter, primarily due to increased interest income and favorable foreign exchange results.
- Taxes: The effective tax rate increased to 42.6% from 16.7%, primarily reflecting the geographic mix of taxable income.
- Cash and investments: Cash and cash equivalents were $90.0 million and available-for-sale investments were $127.3 million at March 31, 2023, for total cash and investments of $217.3 million. Working capital was $265.8 million.
- Cash flow and capital spending: Investing activities provided $9.9 million, including $40.3 million of investment maturities or sales, offset by $27.4 million of investment purchases and $2.9 million of capital expenditures. Financing activities used $1.4 million, primarily for employee tax-withholding share repurchases.
- Debt and obligations: The filing does not report conventional debt borrowings. Finance lease liabilities were $0.3 million, and operating lease liabilities were $31.6 million. Management states that cash, investments and expected operating cash flow should meet anticipated needs for at least 12 months from issuance of the financial statements.
Material changes versus the prior comparable period
- Strong ICL growth drove a $10.3 million increase in total sales despite a $2.0 million unfavorable foreign-currency impact.
- ICL unit growth was approximately 20% overall, with unit growth of 19% in APAC, 18% in EMEA and 78% in the U.S. China procedure volumes reached a record level, according to management.
- Gross margin improved modestly, but operating margin and net margin contracted sharply because operating expenses grew substantially faster than revenue.
- Stock-based compensation increased to $6.1 million from $3.9 million and included approximately $1.2 million of expense related to one-time employee benefits in Japan. The company expects approximately $1.5 million of additional related benefits through the end of 2023.
- Operating cash flow remained negative, primarily because of working-capital investment in inventories, prepayments and other current assets.
- Total cash and investments declined by $8.2 million from December 30, 2022, although cash and cash equivalents increased by $3.5 million.
Guidance, outlook, risks and unusual items
- Management raised fiscal 2023 net sales guidance from $340 million to approximately $348 million, including approximately $3 million of first-quarter other product sales. The updated outlook represents approximately 28% year-over-year global ICL sales growth.
- Management expects fiscal 2023 operating margin of approximately 10%, citing growth investments and higher stock-based compensation, and expects sales momentum to accelerate during the year.
- STAAR issued a Field Safety Notice for its KS-SP preloaded acrylic IOL in Japan, France, Germany, Poland and Italy. Customers were asked to stop using the product pending investigation; management stated this is not considered a product recall. KS-SP inventory was approximately $1.2 million at March 31, 2023.
- Because of third-party materials and supply-chain challenges, STAAR will no longer manufacture cataract IOLs but expects to support those products through the end of 2023 as supplies permit.
- Key risks include dependence on the China distributor, foreign-exchange exposure, COVID-19 resurgence and elective-surgery disruptions, supply-chain constraints, product safety or liability claims, regulatory approvals, clinical-trial execution, competition and execution of international growth plans.
- The company is involved in ordinary-course legal matters, including potential contractual, employment and product-liability claims. Management does not currently expect known claims to have a material adverse effect, but unexpected outcomes could cause significant harm.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2023, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the projected approximately 28% ICL sales growth and approximately 10% full-year operating margin remain achievable as investment spending continues.
- The sustainability of the China market and distributor relationship, given the distributor’s 48% share of quarterly sales and 55% share of receivables.
- The root cause, resolution and potential financial impact of the KS-SP Field Safety Notice and the planned exit from cataract IOL manufacturing.
- Whether negative operating cash flow reverses as inventory, prepayments and other working-capital balances normalize.
- The effect of higher stock-based compensation, Japan severance costs, foreign exchange and the 42.6% effective tax rate on future earnings.
- Potential impacts from COVID-19 developments, regulatory or clinical matters, product liability and ordinary-course litigation.