STAAR Surgical Company — Form 10-K Summary
Reporting period: Fiscal year ended January 1, 2021. The request metadata references “2019 Q4,” but the provided filing is the fiscal 2020 Form 10-K, with fiscal 2019 as the comparable period. Fiscal 2020 comprised 52 weeks; fiscal 2019 comprised 53 weeks.
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 products segment and sells in more than 75 countries.
- ICLs represented 86.5% of fiscal 2020 sales, compared with 86.1% in fiscal 2019.
- IOLs represented 8.3% of sales, down from 10.5% in fiscal 2019.
- Approximately 96% of sales were generated outside the United States.
- Shanghai Lansheng, the company’s China distributor, represented 43.9% of fiscal 2020 consolidated sales and 46% of trade receivables at year-end.
Financial Metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $163.5 million | $150.2 million | Up 9% |
| Gross profit | $118.4 million | $112.0 million | Up 5.7% |
| Gross margin | 72.4% | 74.5% | Down 210 basis points |
| Operating income | $6.8 million | $11.9 million | Down 42.9% |
| Net income | $5.9 million | $14.0 million | Down 57.9% |
| Diluted EPS | $0.12 | $0.30 | Down $0.18 |
| Cash flow from operations | $21.0 million | $25.8 million | Down $4.8 million |
| Capital expenditures | $8.4 million | $10.1 million | Down $1.7 million |
| Cash and cash equivalents | $152.5 million | $120.0 million | Up $32.5 million |
| Working capital | $175.2 million | $140.2 million | Up $35.0 million |
ICL sales increased 9% to $141.4 million, with units up 11%. Growth was led by Asia-Pacific, including Japan, other Asia-Pacific distributors, Korea and China. Europe, the Middle East, Africa and Latin America declined 3%, while North America declined 14%, primarily because of COVID-19-related disruption.
Gross margin declined because of geographic and product mix, approximately $1.2 million of costs related to the COVID-19 manufacturing pause, manufacturing expansion costs and increased lower-margin injector-part sales. General and administrative expense increased 15.7% to $33.9 million, research and development increased 26.2% to $31.9 million, and selling and marketing expense increased 0.6% to $45.8 million.
The company had approximately $1.4 million outstanding under its Japanese line of credit and no borrowings under its Swiss facility. Total contractual obligations were $31.9 million, including operating leases, pension obligations, open purchase orders and debt-related obligations.
Material Changes Versus Fiscal 2019
- Sales growth slowed from 21% in fiscal 2019 to 9% in fiscal 2020.
- ICL sales continued to grow, but IOL sales declined 13% to $13.6 million; the company continued rationalizing lower-margin IOL products.
- Operating income and net income declined materially despite higher revenue, reflecting lower gross margin, higher administrative and research spending, and a $2.4 million tax provision versus a $1.0 million tax benefit in fiscal 2019.
- Operating cash flow declined as working capital absorbed cash, although cash balances increased due partly to $20.6 million of proceeds from stock-option exercises.
- The company expanded manufacturing capacity and continued preparing Swiss facilities and the Lake Forest facility for additional ICL and EVO Viva production.
- The company completed enrollment of 300 subjects in the primary analysis cohort of its U.S. EVO clinical trial in November 2020.
- The company received the CE Mark for EVO Viva in July 2020 and began a limited launch in Spain, Belgium and Germany.
Guidance, Outlook and Management Commentary
Management did not provide specific fiscal 2021 revenue, earnings or margin guidance in the provided filing. Strategic priorities include expanding global market share, positioning the EVO ICL platform, increasing direct-to-consumer marketing and patient education, developing next-generation Collamer-based lenses, investing in manufacturing capacity and maintaining quality and regulatory compliance.
Management stated that cash, cash equivalents and expected operating cash flow should meet anticipated needs, including working capital, capital expenditures and contractual obligations, for at least 12 months from issuance of the financial statements. The company did not apply for or require CARES Act financing.
COVID-19 caused a substantial slowdown in sales beginning in March 2020. Most production was suspended from March 17 through April 27, 2020, and elective procedure restrictions affected multiple markets. Management expects uneven recovery and continued uncertainty in 2021, including risks from new variants, customer operations, supply availability, clinical trials and regulatory processes.
Risks, Contingencies and Unusual Items
- Customer concentration: Shanghai Lansheng accounted for approximately 44% of fiscal 2020 sales, creating significant distributor and China-market concentration.
- Elective procedure exposure: ICL procedures are generally paid out-of-pocket and may be deferred during economic weakness or reduced consumer confidence.
- International exposure: Foreign operations, currencies, tariffs, trade restrictions and geopolitical conditions affect sales and profitability; the company does not actively hedge foreign currency exposure.
- Regulatory and clinical risk: ICLs and IOLs are Class III devices in the United States. The EVO U.S. clinical trial may not result in FDA approval, and European MDR compliance may increase costs and uncertainty.
- Supply and manufacturing concentration: Most products are manufactured at the Monrovia, California facility, and some materials are single-sourced. Disasters, equipment failures or regulatory interruptions could materially disrupt production.
- Pension obligations: Swiss and Japanese defined-benefit plans were underfunded by approximately $11.9 million at year-end.
- Litigation: A consolidated federal securities class action was voluntarily dismissed in January 2021, with dismissal without prejudice as to absent putative class members. A stockholder derivative action filed in December 2020 remained pending; management stated that the allegations were without merit.
- Tax assets: The company reported approximately $152.9 million of U.S. federal net operating loss carryforwards and retained substantial valuation allowances against deferred tax assets.
- Capital structure: The company does not pay dividends and maintains a universal shelf registration for up to approximately $200 million of equity or debt securities.
Investor Verification Items
- Confirm the filing period, because the supplied filing is fiscal 2020 rather than 2019 Q4.
- Assess whether China and Shanghai Lansheng concentration remains elevated and whether distributor performance or credit quality has changed.
- Track U.S. FDA progress and results for the EVO/EVO+ clinical program and the timing of any potential approvals.
- Evaluate the pace and cost of manufacturing expansion in Monrovia, Switzerland and Lake Forest, including regulatory validation.
- Monitor COVID-19 effects on elective procedures, regional recovery, supply chains and customer collections.
- Review gross-margin recovery, operating-expense growth and the company’s ability to convert revenue growth into operating profit and cash flow.
- Review the status and potential exposure of the derivative action and any additional securities litigation.
- Assess utilization of tax loss carryforwards, valuation allowances and future cash tax requirements.