STAAR Surgical Company — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2023, compared with the quarter and six months ended July 1, 2022. The filing date was August 2, 2023. The supplied metadata identifies “2022 Q2,” but the filing itself is for 2023 Q2.
Business Context
STAAR designs, manufactures and sells implantable lenses and delivery systems for refractive and cataract surgery. The company operates as one ophthalmic surgical products segment. Implantable Collamer lenses (ICLs) generated virtually all revenue during the period; the company is winding down its lower-margin cataract IOL and related delivery-system business.
Key Financial Metrics
| Metric | Three months ended June 30, 2023 | Year-over-year change | Six months ended June 30, 2023 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $92.3 million | 13.8% | $165.8 million | 14.9% |
| Gross profit | $70.7 million | 10.7% | $128.3 million | 13.4% |
| Gross margin | 76.6% | Down from 78.8% | 77.4% | Down from 78.4% |
| Operating income | $8.6 million | Down from $17.0 million | $11.4 million | Down from $29.1 million |
| Net income | $6.1 million | Down from $13.0 million | $8.8 million | Down from $22.6 million |
| Diluted earnings per share | $0.12 | Down from $0.26 | $0.18 | Down from $0.46 |
- Margins: Operating margin was 9.3% for the quarter and 6.9% year to date, compared with 21.0% and 20.2% in the prior-year periods. Net margin was 6.6% for the quarter and 5.3% year to date, compared with 16.1% and 15.7%.
- Revenue mix: ICL sales increased 19.5% to $93.1 million in the quarter and 19.9% to $163.7 million year to date. Other product sales were negative $0.8 million in the quarter and $2.1 million year to date, reflecting reserves and the wind-down of the cataract business.
- Operating expenses: Year-to-date general and administrative expense rose 39.6%, selling and marketing expense rose 41.3%, and research and development expense rose 33.1%.
- Cash flow: Operating activities used $11.4 million in the first six months, compared with $8.6 million provided in the prior-year period. Working-capital changes used $39.5 million, including a $32.3 million increase in accounts receivable.
- Liquidity: Cash and cash equivalents were $94.7 million and available-for-sale investments were $114.8 million at June 30, 2023, for combined liquidity of $209.5 million, down from $225.5 million at year-end 2022. Working capital was $273.8 million.
- Debt and lease obligations: The filing does not disclose conventional borrowings. Finance lease liabilities totaled $0.3 million and operating lease liabilities totaled $32.2 million.
- Balance sheet: Total assets were $440.7 million and total stockholders’ equity was $353.7 million. Net accounts receivable increased to $94.4 million from $62.4 million at year-end, while inventory reserves increased to $4.2 million from $1.7 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by ICL demand, particularly in China and other Asia-Pacific markets, but profitability declined because expenses grew substantially faster than sales and product reserves reduced gross margin.
- Second-quarter ICL sales increased 19%, with Asia-Pacific up 26%, North America up 10%, and EMEA down 9%. China ICL sales increased 33%.
- Year-to-date interest income improved materially because the company invested cash in higher-yielding securities. This helped produce $1.8 million of other income year to date, compared with $2.1 million of other expense in the prior-year period.
- Foreign-currency effects reduced sales by approximately $0.4 million in the quarter and $2.4 million year to date.
- Stock-based compensation increased to $14.5 million year to date from $9.6 million, and the company’s equity plan was expanded by 2.17 million shares to 20.205 million total authorized shares.
- The company recorded a $154,000 impairment of Japan cataract-related patents and licenses.
Guidance, Outlook, Risks and Unusual Items
- Guidance: Management reduced fiscal 2023 ICL sales guidance to approximately $320 million to $325 million because of a more conservative global environment and slower-than-expected U.S. growth.
- Strategic focus: Management expects initiatives to accelerate EVO ICL adoption in the U.S. as 2023 ends and beyond, while adjusting the timing of certain marketing investments.
- Cataract business wind-down: STAAR will no longer manufacture cataract IOLs and related products, but expects to support them through the end of 2023 as supplies permit.
- Product safety matter: In March 2023, STAAR issued a Field Safety Notice for affected acrylic cataract IOL customers in parts of Europe and Japan. Testing had not identified a root cause as of the filing. The company recorded a $0.7 million sales-return reserve, a $1.2 million acrylic-IOL inventory reserve and a $1.6 million silicone-IOL inventory reserve.
- Additional costs: The company recognized $1.4 million of one-time Japan employee benefits year to date and expects approximately $1.4 million more through the end of 2023.
- Concentration risk: One Chinese distributor represented 66% of quarterly sales, 58% of year-to-date sales and 74% of trade receivables at June 30, 2023.
- Other risks: The filing highlights exposure to COVID-19 resurgence, macroeconomic and geopolitical conditions, foreign exchange, regulatory approvals, product liability, supply-chain constraints, customer concentration and potential litigation. Management believes known legal matters are not likely to have a material adverse effect, but unexpected outcomes could cause significant harm.
- Liquidity outlook: Management believes cash, investments and anticipated operating cash flow will cover working capital, capital expenditures and contractual obligations for at least 12 months from the financial statement issuance date. Operating cash flow was nevertheless negative during the first six months.
Investor Verification Checklist
- Verify the updated fiscal 2023 ICL sales outlook of $320 million to $325 million and the assumptions for U.S. EVO adoption.
- Assess whether the elevated accounts receivable balance and customer concentration in China create collection or demand risks.
- Track gross-margin recovery after cataract IOL reserves and the Other Products wind-down.
- Monitor operating cash flow, inventory levels and the effect of working-capital investment on liquidity.
- Review the resolution and financial impact of the acrylic IOL Field Safety Notice and related customer returns.
- Separate recurring operating performance from one-time Japan employee benefits, inventory and sales-return reserves, impairment charges and elevated stock-based compensation.
- Confirm the absence of conventional debt and evaluate total lease obligations and future contractual commitments.