STAAR Surgical Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 29, 2017. The request metadata identifies “2016 Q3,” but the supplied filing is the 2017 third-quarter Form 10-Q, filed November 8, 2017. Financial statements are unaudited and presented in thousands except per-share data.
Business Context and Reporting Period
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 sells in more than 60 countries and operates as one reporting segment.
International sales represented approximately 92% of third-quarter revenue. China, Japan, and the United States were the largest individual geographic markets. A Chinese distributor represented 31% of quarterly sales, 27% of nine-month sales, and 26% of trade receivables at September 29, 2017.
Financial Performance and Liquidity
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $23.5 million | $20.1 million | $65.8 million | $60.3 million |
| Gross profit | $16.8 million | $14.9 million | $46.9 million | $42.5 million |
| Gross margin | 71.8% | 74.2% | 71.3% | 70.5% |
| Operating income (loss) | $1.0 million | $(1.7) million | $(2.4) million | $(13.9) million |
| Net income (loss) | $1.2 million | $(1.8) million | $(2.0) million | $(12.0) million |
| Diluted EPS | $0.03 | $(0.04) | $(0.05) | $(0.30) |
- ICL sales increased 22% in the quarter to $18.1 million and 15% for the nine months to $49.7 million. ICL units increased 18% quarterly and 16% year to date.
- IOL sales declined 16% in the quarter and 13% year to date, primarily because of the discontinued U.S. silicone IOL business and production issues involving silicone IOL preloaded injectors.
- Other product sales increased 144% quarterly and 50% year to date, driven by higher injector-part sales.
- Quarterly operating results improved to profitability. The nine-month operating loss remained $2.4 million, although it improved substantially from the prior-year loss.
- Quarterly gross margin declined because of increased low-margin injector-part sales, higher ICL unit costs, and inventory provisions. Nine-month gross margin improved because of product mix, lower inventory provisions, and the absence of significant 2016 stock-compensation charges.
- Operating expenses were $15.8 million in the quarter and $49.3 million for nine months, down from $16.6 million and $56.4 million, respectively, in the comparable periods.
- Net cash provided by operating activities was $1.7 million for the nine months, compared with $0.9 million in the prior-year period. Capital expenditures were $1.0 million.
- Cash, cash equivalents, and restricted cash totaled $16.3 million at September 29, 2017, compared with $14.1 million at December 30, 2016. Cash and cash equivalents alone were $16.1 million.
- Debt and financing obligations included a $4.4 million Japanese line of credit, $2.1 million of capital-lease obligations, and no borrowings under the Swiss credit facility. The Japanese facility had no remaining availability and was scheduled to expire on November 21, 2017.
- Current assets were $57.6 million versus current liabilities of $25.7 million. The balance sheet included a $7.0 million insurance receivable and corresponding litigation settlement obligation.
Material Changes, Outlook, and Unusual Items
- Management continued to expect double-digit ICL unit growth in 2017, full-year gross margin above 2016, and full-year operating expenses below 2016 levels.
- Management expected fourth-quarter IOL sales to decline year over year because of the discontinued U.S. silicone IOL business and injector-material issues, while injector-part sales were expected to increase.
- Management expected higher fourth-quarter marketing and selling expense because the ESCRS industry meeting would occur in the fourth quarter rather than the third quarter.
- In September, the European Union Notified Body approved an expanded EVO Visian ICL myopia age range, from ages 21–45 to ages 21–60. The company reported positive results from its first-in-human trial of a next-generation ICL with extended depth of focus.
- The company’s 2017 priorities included completing its quality-system remediation, expanding the ICL market, increasing global market share, supporting clinical and regulatory activities, and developing premium Collamer lenses and delivery systems.
- A $7.0 million stockholder securities litigation settlement was funded by insurance. The company recorded both the settlement liability and insurance receivable at September 29, 2017, with no income-statement or cash-flow impact. Following final court approval on October 23, 2017, both amounts were removed from the balance sheet.
- The company continued to face risks related to regulatory remediation, FDA matters, product approvals, quality systems, product liability, foreign exchange, international concentration, dependence on a major Chinese distributor, and the IOL production issues.
- The company stated that current cash and expected operating cash flow should satisfy working-capital requirements for the foreseeable future, but also noted substantial dependence on operating cash flow.
- Management concluded that disclosure controls and procedures were effective as of September 29, 2017, and reported no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Confirm the intended period: the supplied filing covers Q3 2017, not Q3 2016.
- Assess whether ICL growth can offset continuing IOL declines and the expected fourth-quarter IOL weakness.
- Monitor quarterly gross-margin pressure from injector-part mix, ICL unit costs, inventory provisions, and product pricing.
- Evaluate concentration risk from the Chinese distributor, which accounted for 31% of Q3 sales and 26% of trade receivables.
- Verify renewal or repayment status of the $4.4 million Japanese credit line, which had no remaining availability.
- Track completion and costs of FDA-related quality-system remediation and the timing of regulatory approvals and product launches.
- Review the effect of the litigation settlement’s final approval and insurance funding, as well as any remaining legal exposure from derivative litigation.
- Reconcile management’s profitability outlook with the nine-month operating loss, foreign-currency gains, and the company’s reliance on operating cash flow.