STAAR Surgical Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 27, 2019, compared with September 28, 2018. The request metadata identifies “2018 Q3,” but the filing is the 2019 third-quarter Form 10-Q.
Business Context
STAAR designs, manufactures, and sells implantable ophthalmic lenses and delivery systems in more than 75 countries. 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 and manufactures in the United States.
Financial Highlights
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $39.1 million | $31.8 million | $111.3 million | $92.8 million |
| Gross profit | $29.1 million | $23.9 million | $83.1 million | $68.5 million |
| Gross margin | 74.4% | 75.1% | 74.7% | 73.9% |
| Operating income | $3.3 million | $1.6 million | $9.5 million | $5.4 million |
| Net income | $2.4 million | $1.5 million | $7.7 million | $3.9 million |
| Diluted EPS | $0.05 | $0.03 | $0.16 | $0.09 |
| Operating cash flow | Not separately provided | Not separately provided | $16.0 million | $10.4 million |
Q3 operating margin was approximately 8.5%, versus 5.0% in the prior-year quarter; nine-month operating margin was 8.5%, versus 5.8%. Q3 net margin was approximately 6.1%, versus 4.6%; nine-month net margin was 6.9%, versus 4.1%.
- Sales mix: ICL sales increased 28.0% in Q3 and 28.3% for nine months. ICL units increased 35% and 36%, respectively. Other product sales declined 2.1% in Q3 and 14.7% for nine months.
- Geography: China represented $18.4 million, or 47%, of Q3 sales and $49.5 million, or 44%, of nine-month sales. Japan represented $7.3 million and $19.1 million, respectively.
- Customer concentration: One Chinese distributor accounted for 47% of Q3 sales, 44% of nine-month sales, and 40% of trade receivables at quarter-end.
- Liquidity: Cash and cash equivalents were $112.3 million at September 27, 2019, compared with $103.9 million at December 28, 2018. Working capital was $135.0 million.
- Debt and leases: The company had $2.3 million outstanding under its Japanese line of credit, $1.2 million of finance lease liabilities, and $6.8 million of operating lease liabilities. It reported compliance with credit-facility covenants.
- Capital spending: Nine-month investing cash outflows were $7.2 million, primarily for property, plant, and equipment related to manufacturing facilities.
Material Changes Versus Prior Comparable Period
- Net sales grew 22.9% in Q3 and 20.0% for nine months, driven primarily by ICL growth, particularly in the Asia-Pacific region.
- Gross profit increased 21.8% in Q3 and 21.3% for nine months. Q3 gross margin declined modestly because of costs associated with construction of new manufacturing facilities, while the nine-month margin improved due to favorable product mix.
- Operating income increased 110.6% in Q3 and 76.0% for nine months, benefiting from revenue growth and operating expense leverage.
- Marketing and selling expense increased 17.4% in Q3 and 19.3% for nine months due to continued digital, strategic, and consumer marketing investments, as well as higher headcount and related costs.
- Research and development expense increased 10.5% in Q3 and 9.6% for nine months, primarily due to clinical-trial activities and personnel costs.
- Stock-based compensation expense increased to $7.8 million for nine months from $4.9 million in the prior-year period.
- Operating cash flow increased by $5.6 million year over year, while financing cash flow changed from $75.1 million of inflows in 2018, which included a $72.2 million stock offering, to $0.7 million of outflows in 2019.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that results through the first three quarters supported its fiscal 2019 targets of 20% annual revenue growth, 30% ICL unit growth, positive cash flow, and higher GAAP net income than in 2018.
- After quarter-end, the FDA approved a supplement related to the clinical trial for the EVO family of lenses in the United States, subject to additional study-design recommendations. Management expected no timeline impact while incorporating the recommendations.
- Management expects cash balances and operating cash flow to cover operational and business needs for at least the next 12 months.
- The Japanese credit line, with approximately $2.3 million outstanding and $2.3 million available at quarter-end, was expected to be renewed in November 2019 on similar terms. A $1.0 million Swiss facility was fully available.
- The company maintains a full U.S. valuation allowance against deferred tax assets, except for a $0.3 million refundable alternative minimum tax credit. Changes in the valuation allowance could materially affect earnings.
- Foreign exchange, particularly the euro, reduced nine-month sales by approximately $1.3 million and contributed to Q3 foreign-currency losses.
- Legal matters arise in the ordinary course, including potential product-liability claims. Management did not believe known claims were likely to materially affect results, but adverse developments could cause significant harm.
- Operations are exposed to substantial geographic and customer concentration, particularly China and the primary Chinese distributor. One vendor represented 13% of accounts payable at quarter-end.
- The company adopted lease accounting under ASC 842 and recognized operating lease right-of-use assets and liabilities. The adoption increased accumulated deficit by $0.1 million.
Investor Verification Points
- Verify the sustainability of ICL growth and the company’s reliance on China and its primary distributor.
- Assess whether manufacturing-facility investments increase capacity as planned without further pressure on gross margins or cash flow.
- Monitor FDA clinical-trial progress and regulatory timing for the EVO lens family.
- Review the effect of foreign exchange, average selling prices, and product mix on future margins.
- Evaluate the potential earnings effect of changes to the U.S. deferred-tax-asset valuation allowance.
- Track stock-based compensation, dilution, lease obligations, pension liabilities, and the renewal of the Japanese credit facility.