STAAR Surgical Company — Form 10-Q Summary
Business Context and Reporting Period
STAAR designs, manufactures and sells implantable ophthalmic lenses and delivery systems, primarily implantable Collamer lenses (ICLs) for refractive surgery and intraocular lenses (IOLs) for cataract surgery. The filing covers the three months ended March 29, 2019, compared with the three months ended March 30, 2018. Although the request metadata states “2018 Q1,” the filing is for first-quarter 2019.
The company operates as one ophthalmic surgical products segment and sells in more than 75 countries. Foreign sales represented approximately 94% of total revenue.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $32.6 million | $27.1 million | +20.3% |
| Gross profit | $24.2 million | $19.4 million | +24.4% |
| Gross margin | 74.2% | 71.7% | +250 bps |
| Operating income | $1.6 million | $0.8 million | +96.1% |
| Net income | $1.4 million | $0.6 million | +134.5% |
| Diluted earnings per share | $0.03 | $0.01 | Increased |
| Net cash from operating activities | $0.7 million | $2.5 million | Decreased |
ICL sales increased 31.3% to $27.8 million and represented 85.3% of total sales. ICL units increased 39% globally. Other product sales declined 19.2% to $4.8 million, principally due to lower preloaded injector part sales.
Operating expenses increased 21.4% to $22.6 million. Marketing and selling expense rose 36.1% to $10.1 million, general and administrative expense rose 18.5% to $6.8 million, and research and development expense rose 4.2% to $5.6 million. Stock-based compensation expense increased to $2.6 million from $1.3 million.
At March 29, 2019, cash and cash equivalents were $102.1 million, working capital was $124.5 million, and total assets were $177.2 million. The company had $3.3 million outstanding under its Japanese line of credit and no borrowings under its Swiss facility. Total lease liabilities were approximately $8.6 million, including $6.8 million of operating lease liabilities and $1.8 million of finance lease liabilities.
Investing activities used $2.2 million, primarily for property and equipment. Financing activities used $0.2 million, including $0.5 million of line-of-credit repayment and $0.4 million of finance lease repayments, partially offset by $0.6 million of stock-option exercise proceeds. Cash, cash equivalents and restricted cash declined by $1.8 million during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by ICL demand, particularly in Asia-Pacific. ICL sales increased 49% in China, 94% in Japan and 50% in Korea.
- Gross margin improved because of favorable product mix, higher ICL production volumes and lower unit costs, partly offset by lower average selling prices.
- Operating profitability improved despite increased commercial, administrative and stock-based compensation costs.
- Operating cash flow declined because of working-capital uses, including increases in prepayments and reductions in other current liabilities and accounts payable.
- The company adopted ASC 842 lease accounting, recognizing operating right-of-use assets and liabilities. It also adopted ASU 2018-07, resulting in a $315,000 cumulative adjustment that decreased accumulated deficit.
- Property and equipment spending increased to $2.2 million from $1.0 million, reflecting manufacturing and quality-system improvement investments.
Guidance, Outlook, Risks and Unusual Items
Management expects the decline in other product sales to moderate sequentially during the second and third quarters and continues to anticipate an approximately $3.6 million full-year decline in other products compared with the prior year. Management expects manufacturing capacity for myopia lenses at its Monrovia facility to double beginning in the second half of 2019. Construction of clean rooms and equipment installation for an EVO Visian ICL with an extended-depth-of-focus optic are underway at the Lake Forest facility.
Management believes cash balances and operating cash flows will be sufficient to fund operating and business needs for at least the next 12 months. The Japanese credit line, with approximately $1.2 million available at quarter-end, was scheduled to mature May 21, 2019; the company expected to renew it for an additional three months on similar terms.
Key risks include reliance on international sales and foreign currency movements, regulatory approvals and product commercialization, dependence on the Chinese distributor, manufacturing capacity expansion, quality-system remediation, product liability and other litigation, and uncertainty regarding the realization of U.S. deferred tax assets. One Chinese distributor represented 36% of quarterly net sales and 37% of trade receivables at March 29, 2019.
The company maintained a full valuation allowance on U.S. deferred tax assets, except for a $273,000 refundable alternative minimum tax credit. The valuation allowance was approximately $45.1 million. Changes in the valuation allowance could materially affect future earnings. The company reported $2.1 million of GILTI, fully offset by net operating loss carryforwards.
The filing reports ordinary-course legal proceedings and potential product liability claims, but management does not believe currently known matters are likely to have a material adverse effect. The company stated that it had no material off-balance-sheet arrangements, was in compliance with credit-facility covenants, and had effective disclosure controls.
Important Facts for Investors to Verify
- Whether ICL unit and revenue growth remains strong as manufacturing capacity expands.
- The degree to which the decline in other product sales offsets ICL growth during the remainder of 2019.
- Cash conversion and working-capital trends, given the decline in quarterly operating cash flow.
- Concentration risk from the Chinese distributor and exposure to foreign exchange movements.
- Timing, cost and regulatory status of the EVO ICL and manufacturing-capacity projects.
- Future changes to the U.S. deferred-tax valuation allowance and related earnings effects.
- Renewal and availability of the Japanese line of credit and the company’s lease and pension obligations.