STAAR Surgical Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022, compared with the quarter and nine months ended October 1, 2021. The request metadata identifies “2021 Q3,” but the filing itself is the 2022 third-quarter Form 10-Q.
Business Context and Reporting Period
STAAR designs, manufactures and sells implantable ophthalmic lenses and delivery systems, primarily implantable Collamer lenses (ICLs) used in refractive surgery. The company also sells cataract intraocular lenses and other surgical products. It operates as one ophthalmic surgical products segment and sells in more than 75 countries, with manufacturing in the United States.
ICLs represented 94.6% of sales in both the quarter and nine-month period, compared with 92.8% and 93.2%, respectively, in the comparable 2021 periods.
Financial Performance and Key Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $76.0 million | $58.4 million | $220.3 million | $171.5 million |
| Gross profit | $60.5 million | $45.3 million | $173.6 million | $133.6 million |
| Gross margin | 79.5% | 77.6% | 78.8% | 77.9% |
| Operating income | $13.7 million | $7.8 million | $42.8 million | $26.0 million |
| Operating margin | 18.0% | 13.4% | 19.4% | 15.1% |
| Net income | $10.3 million | $6.0 million | $32.9 million | $19.6 million |
| Diluted EPS | $0.21 | $0.12 | $0.67 | $0.40 |
Q3 ICL sales increased 32.9% to $72.0 million, with unit growth of 40%. Nine-month ICL sales increased 30.4% to $208.6 million, with unit growth of 38%. Other product sales declined 2.5% in Q3 and increased 1.9% for the nine-month period.
Q3 selling, general and administrative expenses increased 24.8% to $46.8 million, while nine-month expenses increased 21.4% to $130.8 million. Stock-based compensation expense increased to $5.7 million in Q3 and $15.4 million for the nine-month period, compared with $3.7 million and $11.0 million, respectively.
Foreign exchange losses were $2.1 million in Q3 and $4.9 million for the nine-month period. Interest income partly offset these losses. Effective tax rates were 18.4% in Q3 and 16.9% for the nine-month period.
Cash Flow, Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $129.2 million at September 30, 2022, compared with $199.7 million at December 31, 2021.
- Available-for-sale investments totaled $95.5 million, bringing cash and investments to $224.7 million, up $25.0 million from year-end 2021.
- Working capital was $251.6 million, compared with $222.6 million at December 31, 2021.
- Operating cash flow was $32.7 million for the nine-month period, compared with $35.5 million in the prior-year period.
- Investing cash outflows were $109.7 million, including $95.6 million of investments in marketable securities and $14.1 million of property and equipment purchases.
- Financing cash inflows were $8.1 million, primarily from stock-option exercises.
- The filing does not report conventional borrowings or funded debt. Finance lease liabilities were $0.4 million, and operating lease liabilities were $29.5 million at September 30, 2022.
- Management stated 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
- Net sales increased 30.3% in Q3 and 28.5% for the nine-month period, driven primarily by ICL growth.
- Gross margin expanded 190 basis points in Q3 and 90 basis points for the nine-month period, mainly due to product and geographic mix.
- Operating margin improved 460 basis points in Q3 and 430 basis points for the nine-month period.
- Net income increased 70.5% in Q3 and 68.0% for the nine-month period.
- North America and Asia-Pacific produced strong ICL growth, while Europe, the Middle East, Africa and Latin America faced weaker sales and currency pressure.
- Foreign currency movements reduced Q3 sales by approximately $4.0 million and nine-month sales by approximately $9.0 million.
- Accounts receivable increased to $55.4 million from $43.5 million, and inventories increased to $19.9 million from $17.3 million.
- The company shifted approximately $95.6 million of cash into available-for-sale investments and increased capital spending, primarily for manufacturing facilities.
Guidance, Outlook, Risks and Unusual Items
- Management reduced fiscal 2022 total sales expectations to approximately $285 million, including approximately $272 million of ICL sales and $13 million of Other Products sales.
- The revised outlook reflects tighter COVID-19 restrictions in China, delayed expected fourth-quarter demand, European macroeconomic headwinds, weakness in the Japanese yen and euro, and lower Other Products sales.
- For fiscal 2023, management expects approximately 30% ICL sales growth and total company sales of approximately $355 million, with limited Other Products sales.
- Due to third-party materials and supply-chain challenges, the company expects to stop supporting the Other Products business as historically operated after supporting customers through the end of 2023. Management does not expect meaningful Other Products revenue thereafter.
- COVID-19 variants and public-health restrictions may continue to affect elective surgeries, sales and operations.
- China represented 56% of Q3 sales and 53% of nine-month sales. The Chinese distributor represented 57% of trade receivables at September 30, 2022, creating significant customer and geographic concentration.
- Legal proceedings, product-liability claims and other matters arise in the ordinary course. Management does not believe known claims are likely to have a material adverse effect, but unexpected outcomes could cause significant harm.
- Gross margin included inventory reserves related to discontinuance of the older-generation Visian ICL in the United States and increased manufacturing-project costs.
- Unrealized losses on available-for-sale investments were recorded in accumulated other comprehensive loss; the company reported no impairment for the period.
- Disclosure controls and procedures were assessed as effective, and no material changes to internal control over financial reporting were reported.
Important Facts for Investors to Verify
- Whether China’s COVID-related restrictions and the high concentration in one Chinese distributor affect fourth-quarter revenue, collections or inventory.
- Execution of the transition away from Other Products and the resulting impact on revenue mix and gross margins after 2023.
- Progress of EVO ICL commercialization in the United States and the expected launch or adoption of EVO Viva.
- Foreign exchange sensitivity, particularly exposure to the euro and Japanese yen.
- Whether the approximately $355 million fiscal 2023 sales outlook is achievable given the planned 30% ICL growth assumption.
- Capital spending requirements, manufacturing capacity expansion and future operating cash generation.
- Changes in available-for-sale investment values, interest income and liquidity as market interest rates change.
- Potential effects of product liability, regulatory, supply-chain and litigation matters described in the filing and the prior-year Form 10-K.