STAAR Surgical Company Form 10-Q Summary
Reporting period: Three months ended March 30, 2018. The supplied metadata states “2017 Q1,” but the filing is the first quarter of fiscal 2018 and compares results with the three months ended March 31, 2017. The filing is unaudited.
Business Context
STAAR designs, manufactures, and sells implantable ophthalmic lenses and delivery systems. Its principal products are implantable Collamer lenses (ICLs) for refractive surgery and intraocular lenses (IOLs) for cataract surgery. The company reports one ophthalmic surgical products segment and sells in more than 75 countries.
Financial Performance and Liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $27.1 million | $20.4 million | +33.1% |
| Gross profit | $19.4 million | $14.6 million | +33.3% |
| Gross margin | 71.7% | 71.6% | +0.1 percentage point |
| Operating income (loss) | $0.8 million | $(2.1) million | Improved |
| Net income (loss) | $0.6 million | $(2.2) million | Improved |
| Diluted earnings (loss) per share | $0.01 | $(0.05) | Improved |
| Operating cash flow | $2.5 million | $(0.7) million | Improved |
| Capital expenditures | $1.0 million | $0.2 million | Increased |
- ICL sales increased 38.6% to $21.2 million, with unit growth of 41%. ICLs represented 78.1% of net sales versus 75.0% in the prior-year quarter.
- Other product sales increased 16.9% to $5.9 million. IOL sales declined 11.9%, partly offset by higher injector-part sales.
- International growth was led by the Asia-Pacific region, where sales increased 53%; China, Japan, and Korea each reported sales and unit growth of more than 50%.
- Operating expenses increased to $18.6 million from $16.7 million, but declined to 68.8% of sales from 81.9%. Stock-based compensation increased to $1.3 million from $0.5 million.
- Cash, cash equivalents, and restricted cash totaled $20.9 million at March 30, 2018, compared with $18.6 million at December 29, 2017. Restricted cash was approximately $0.1 million.
- Total liabilities were $32.4 million and stockholders’ equity was $45.9 million at quarter-end. The company had $4.7 million outstanding under an unsecured Japanese line of credit and no borrowings under its Swiss facility.
- Capital lease obligations totaled approximately $3.0 million, including approximately $1.5 million under a new equipment lease schedule.
- Management stated that current cash balances and operating cash flow should be sufficient for foreseeable working-capital requirements, while noting dependence on continued positive operating cash flow.
Material Changes Versus the Prior Comparable Period
- Revenue growth and higher-margin ICL mix drove a return to operating and net profitability.
- Gross margin was broadly stable despite temporary higher unit costs and increased lower-margin injector-part sales.
- General and administrative expense rose 15.9% because of higher headcount; marketing and selling expense rose 13.0% because of digital, consumer-marketing, and commercial-infrastructure investments.
- Research and development expense increased 5.4%, primarily from clinical work on a next-generation ICL with an extended-depth-of-focus optic and other development projects. Quality-remediation costs declined.
- Operating cash flow improved by $3.2 million year over year, although working capital was a use of cash, including increased accounts receivable.
- The company adopted ASC Topic 606 using the modified retrospective method at the beginning of fiscal 2018. Management reported no cumulative-effect adjustment and no material impact on revenue recognition, although sales-return amounts were reclassified on the balance sheet.
Guidance, Outlook, Risks, and Unusual Items
- Management raised its fiscal 2018 revenue-growth target from low double-digit growth to close to 20% over 2017.
- Management expects improved profitability and higher operating cash flow for the full year. It stated that sustained first-quarter ICL growth could support higher gross margins.
- The FDA began a re-inspection of the company’s Monrovia facility on April 30, 2018. The filing references prior FDA warning-letter and inspection matters as risks but does not provide an outcome for the re-inspection.
- A shareholder derivative lawsuit alleging fiduciary-duty and oversight failures was dismissed by the district court; the plaintiff appealed, with a Ninth Circuit hearing scheduled for June 8, 2018. No loss was accrued because the likelihood and amount were not estimable.
- One Chinese distributor represented 29% of quarterly net sales and 31% of trade receivables at quarter-end, creating customer and geographic concentration risk.
- The Japanese credit line, with approximately $4.7 million outstanding, was scheduled to mature on May 21, 2018; management expected renewal for an additional three months on similar terms. The company reported compliance with its credit-facility covenants.
- Foreign-currency movements affected results and comprehensive income, including a $0.7 million foreign-currency translation gain before tax effects.
- On May 1, 2018, the company entered a five-year lease for approximately 20,000 square feet in Lake Forest, California, with two five-year extension options. The filing text does not provide the lease payment amounts.
Investor Verification Checklist
- Verify that the approximately 20% fiscal 2018 revenue-growth target remains achievable and assess the sensitivity of results to ICL demand in China, Japan, and Korea.
- Monitor FDA re-inspection results and any continuing costs or operational effects from quality-system remediation.
- Evaluate customer concentration, particularly the Chinese distributor’s share of sales and receivables and related collection risk.
- Assess whether gross-margin improvement is sustainable as product mix, injector-part volumes, unit costs, and foreign exchange change.
- Review operating cash-flow conversion, accounts-receivable growth, inventory reserves, and the company’s dependence on positive operating cash flow.
- Track renewal and terms of the Japanese credit facility, capital-lease obligations, and any effects from the forthcoming lease-accounting standard.
- Follow the shareholder derivative litigation and other product-liability, regulatory, and commercial claims; the filing states that potential losses for described proceedings are generally not estimable.