STAAR Surgical Company — Form 10-K Summary
Reporting period: Fiscal year ended January 3, 2014, including the 13-week fourth quarter. The request metadata identifies “2012 Q4,” but the supplied filing is the fiscal 2013 Form 10-K; the comparable prior year ended December 28, 2012. All amounts are consolidated and, unless stated otherwise, in millions.
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 operates as one ophthalmic surgical product segment and sells in more than 60 countries, with 82% of fiscal 2013 sales generated outside the United States.
- ICL sales were $44.1 million, or 61.2% of revenue.
- IOL sales were $24.2 million, or 33.4% of revenue.
- Other surgical products generated $3.9 million, or 5.4% of revenue.
- A Korean distributor, WooJeon Medical, represented 10.7% of fiscal 2013 revenue.
Financial performance
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $72.2 million | $63.8 million | +13.2% |
| Gross profit | $50.3 million | $44.3 million | +13.6% |
| Gross margin | 69.7% | 69.4% | +30 bps |
| Operating income (loss) | $0.7 million | $(1.2) million | Improved |
| Income (loss) before taxes | $1.1 million | $(0.5) million | Improved |
| Net income (loss) | $0.4 million | $(1.8) million | Returned to profitability |
| Diluted EPS | $0.01 | $(0.05) | Improved |
| Operating cash flow | $3.4 million | $3.2 million | +4.3% |
Revenue growth was driven primarily by a 26% increase in ICL sales, while IOL sales declined 7%, partly because foreign exchange reduced IOL revenue by approximately $3.2 million. Foreign currency movements reduced total sales by approximately $3.8 million. Gross margin benefited from the higher ICL mix but was reduced by approximately 140 basis points from increased injector-part sales and 120 basis points from higher Japan costs for U.S.-dollar-sourced products.
Operating expenses included $23.9 million of marketing and selling expense, $16.6 million of general and administrative expense, $6.7 million of research and development expense, $0.2 million of medical device excise tax and $2.2 million of manufacturing-consolidation costs. Stock-based compensation was $4.5 million.
Fourth-quarter results
| Metric | Q4 FY2013 | Q4 FY2012 |
|---|---|---|
| Net sales | $18.9 million | $16.5 million |
| Gross profit | $13.0 million | $11.2 million |
| Net income (loss) | $(0.9) million | $(1.4) million |
| Basic and diluted EPS | $(0.02) | $(0.04) |
Although fourth-quarter revenue and gross profit increased year over year, the Company reported a quarterly loss. Management therefore did not achieve its stated goal of profitability in every quarter of 2013; it was profitable in the first three quarters.
Cash flow, liquidity and debt
- Cash and cash equivalents increased to $23.0 million from $21.7 million.
- Working capital increased to $31.7 million from $26.1 million.
- Current assets were $50.1 million versus current liabilities of $18.4 million.
- Operating cash flow was $3.4 million; capital expenditures were $3.4 million, primarily for manufacturing consolidation and Monrovia facility expansion.
- Accounts receivable increased to $10.7 million; DSO rose to 55 days from 49 days.
- Inventory increased to $12.5 million; days inventory on hand rose to 159 days from 145 days, reflecting planned safety stock.
- STAAR Japan had approximately $4.8 million outstanding under a yen-denominated line of credit, with no remaining availability. The facility was scheduled to expire April 4, 2014, subject to renewal.
- The Swiss subsidiary had an undrawn $1.1 million credit facility.
- Total contractual obligations were $17.5 million, including $8.0 million of operating leases, $4.8 million of line-of-credit debt and $2.7 million of capital lease obligations.
Management stated that existing cash and expected operating cash flow should fund working capital, operations and the remaining manufacturing-consolidation costs for the foreseeable future, but also noted dependence on continued positive product revenue and limited access to financing.
Material changes versus the prior comparable period
- Revenue growth accelerated materially, from 1.6% in fiscal 2012 to 13.2% in fiscal 2013.
- ICLs increased from 55.0% to 61.2% of sales, while IOLs declined from 40.7% to 33.4%.
- The Company moved from a $1.8 million net loss to $0.4 million of net income, although the fourth quarter remained loss-making.
- Operating results improved from a $1.2 million operating loss to $0.7 million of operating income.
- Operating cash flow remained positive but increased only modestly, while capital spending rose to $3.4 million from $2.3 million.
- Japan manufacturing was transferred to the United States; all IOL production was in the United States by year-end. Swiss ICL manufacturing remained in transition.
- Accounts receivable and inventory increased, partly reflecting higher sales and consolidation-related safety stock.
- Foreign currency translation loss increased to $1.3 million from $0.7 million, and the stronger U.S. dollar negatively affected reported sales.
Guidance, outlook and unusual items
- Management expected to complete the Swiss manufacturing transfer by the middle of 2014, with consolidation costs expected to fall below $0.5 million in 2014. Remaining estimated consolidation costs were approximately $0.3 million.
- Management expected research and development spending of approximately 9%–10% of sales in 2014.
- The Company expected to commercially launch its preloaded ICL product by the second quarter of 2014.
- The FDA scheduled an advisory panel meeting for March 14, 2014, to review STAAR’s long-pending Toric ICL application. Approval timing and outcome remained uncertain.
- A third-party acrylic-lens supplier’s capacity constraints caused continuing backlogs for certain preloaded IOL products. STAAR had not validated an alternative supplier.
- The Company released approximately $0.4 million of STAAR Japan valuation allowance in 2013, producing a tax benefit and contributing to reported profitability.
- U.S. federal net operating loss carryforwards were approximately $121.7 million, but were fully offset by a valuation allowance; their use depends on future U.S. profitability and may be limited by ownership changes.
- Defined-benefit pension plans were underfunded by approximately $2.6 million at year-end.
Principal risks and contingencies
- FDA quality-system compliance, product approvals and potential enforcement actions, recalls or manufacturing restrictions.
- Uncertainty surrounding U.S. approval of the Toric ICL and additional regulatory requirements for product or manufacturing-site changes.
- Manufacturing consolidation risks, including supply interruptions, unexpected costs and increased dependence on the Monrovia facility.
- Single-source and constrained supplies, including collagen-based raw material and third-party acrylic lenses.
- Foreign exchange exposure to the yen, euro and Swiss franc; the Company does not hedge these exposures.
- Intense competition from larger ophthalmic companies and alternative refractive procedures such as LASIK.
- Reliance on elective, generally unreimbursed ICL procedures and reimbursement pressure on IOL procedures.
- Product liability, recalls, healthcare fraud and abuse compliance, intellectual property expiration and distributor concentration.
- Accumulated deficit of $132.1 million and limited working capital and financing flexibility despite positive operating cash flow.
Investor verification checklist
- Verify the applicable period: the filing is fiscal 2013, not a fiscal 2012 fourth-quarter filing.
- Reconcile the annual return to profitability with the $0.9 million fourth-quarter loss.
- Track ICL growth, IOL declines, product mix and the effect of currency translation.
- Monitor completion, cost savings and supply continuity from the Swiss-to-U.S. manufacturing transfer.
- Confirm the status and commercial impact of FDA approval for the Toric ICL and CentraFLOW products.
- Assess resolution of acrylic IOL supplier constraints and related backlog.
- Review cash conversion, rising receivables and inventory levels, debt renewal and contractual obligations.
- Evaluate the realizability of tax attributes, pension funding needs and exposure to regulatory, product-liability and foreign-exchange risks.