STAAR Surgical Company — Form 10-K Summary
Reporting period: Fiscal year ended January 3, 2020, a 53-week year. The request references 2018 Q4, but the filing is the fiscal 2019 Form 10-K and includes unaudited fourth-quarter data for the quarter ended January 3, 2020.
Business context
STAAR designs, manufactures and sells implantable ophthalmic lenses and delivery systems. The company operates as one ophthalmic surgical products segment. Its principal products are implantable Collamer lenses (ICLs) for refractive surgery and intraocular lenses (IOLs) for cataract surgery. Products are sold in more than 75 countries, and approximately 95% of fiscal 2019 sales were generated outside the United States.
ICLs represented 86.1% of fiscal 2019 sales, up from 81.5% in fiscal 2018. One China distributor, Shanghai Langsheng, accounted for 43.2% of fiscal 2019 sales, compared with 37.2% in 2018.
Financial performance
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Net sales | $150.2 million | $124.0 million | +21% |
| Gross profit | $112.0 million | $91.5 million | +22.3% |
| Gross margin | 74.5% | 73.8% | +70 basis points |
| Operating income | $11.9 million | $6.6 million | +79.8% |
| Net income | $14.0 million | $5.0 million | +182.8% |
| Diluted EPS | $0.30 | $0.11 | Increase |
| Operating cash flow | $25.8 million | $12.8 million | +102% |
| Capital expenditures and other investing outflows | $10.2 million | $2.2 million | Increase |
ICL sales increased 28% to $129.3 million, with unit growth of 33.4%. APAC ICL sales grew 40%, including China growth of 41% and Japan growth of 67%. Other product sales declined 8.8% to $20.9 million, primarily due to lower IOL and preloaded-injector-part sales.
Operating expenses increased to $100.1 million from $84.9 million. General and administrative expense rose 20.7%, marketing and selling expense rose 17.9%, and research and development expense rose 14.8%. Expense ratios nevertheless declined because of faster revenue growth.
Fourth-quarter information
| Metric | Q4 fiscal 2019 | Q4 fiscal 2018 |
|---|---|---|
| Net sales | $38.9 million | $31.2 million |
| Gross profit | $28.8 million | $23.0 million |
| Net income | $6.4 million | $1.1 million |
| Diluted EPS | $0.14 | $0.02 |
The filing does not provide a clear fourth-quarter operating cash flow, debt, or liquidity value.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $120.0 million at January 3, 2020, versus $103.9 million at December 28, 2018.
- Working capital was $140.2 million, compared with $123.9 million in the prior year.
- Total liabilities were $47.0 million and stockholders’ equity was $159.9 million.
- Approximately $1.8 million was outstanding under the Japanese line of credit; approximately $2.8 million remained available. The $1.0 million Swiss credit facility was fully available and undrawn.
- Finance and operating lease liabilities totaled approximately $7.7 million at year-end.
- The company stated that cash balances and operating cash flow should be adequate for operational and business needs for at least the next 12 months.
- Defined-benefit pension plans were underfunded by approximately $7.8 million.
Material changes versus the prior comparable period
- Revenue growth accelerated the shift toward higher-margin ICL products, increasing gross margin from 73.8% to 74.5%.
- Operating income improved from $6.6 million to $11.9 million, while net income increased to $14.0 million.
- Operating cash flow more than doubled, while capital investment increased substantially to expand manufacturing capacity.
- Cash increased by $16.1 million, compared with a $72.2 million equity-offering contribution to cash in fiscal 2018.
- The company adopted lease accounting under ASC 842 in fiscal 2019, recording right-of-use assets and lease liabilities.
- A $3.4 million U.S. and state deferred-tax valuation-allowance release contributed to the fiscal 2019 tax benefit of $1.0 million.
- During the fourth quarter, management decided to phase out the nanoFLEX IOL.
Guidance, outlook and unusual items
- Management targeted 2020 ICL unit growth of 30% or more relative to 2019 ICL unit growth.
- Fiscal 2020 revenue growth was targeted at 16% to 20%, despite an expected approximately $3.0 million decline in other product sales.
- GAAP net income was expected to be similar to fiscal 2019, excluding the 2019 tax benefit of approximately $0.07 per share.
- Management expected positive full-year cash flow and an increase in cash balances.
- China customers experienced a mandated pause in procedures in February 2020. Management estimated a potential $5 million to $7 million delay in sales orders and maintained its full-year outlook excluding any potential full-year coronavirus impact.
- The first U.S. patient was implanted in the EVO ICL clinical study on January 31, 2020. U.S. regulatory approval and commercialization remain uncertain.
- DEKRA approved expanded European labeling for EVO/EVO+ products in December 2019, including use in pseudophakic eyes. The company also continued development of an EDOF lens for presbyopia.
Principal risks and contingencies
- High customer concentration: Shanghai Langsheng represented 43.2% of fiscal 2019 sales and 43% of trade receivables.
- Dependence on elective refractive procedures, which are generally paid out-of-pocket and may be sensitive to economic conditions and consumer confidence.
- Regulatory approval, clinical-trial, product-liability, recall and quality-system risks, including requirements under the evolving European Medical Device Regulation.
- Manufacturing concentration in Monrovia, California and reliance on certain single-source suppliers, including internally produced Collamer raw material.
- Foreign-exchange, tariff, geopolitical, distributor, credit and international operating risks; the company does not actively hedge foreign-currency exposure.
- Coronavirus-related disruption to Chinese procedures and possible effects on 2020 sales and supply chains.
- Approximately $13.5 million of open purchase orders, $27.6 million of total disclosed contractual obligations, and $7.8 million of underfunded pension obligations at year-end.
- U.S. federal net operating-loss carryforwards of approximately $129.0 million remain subject to limitations, expiration periods and potential ownership-change restrictions.
- The company reported no material unresolved legal proceedings, but ordinary-course product-liability and other claims remain possible.
Facts investors should verify
- Whether ICL unit and revenue growth can meet the 2020 targets after China-related procedure disruptions.
- The sustainability of the 74.5% gross margin as ICL mix expands and lower-margin products are reduced.
- The extent and timing of FDA approval and commercialization for the EVO ICL family and progress of the EDOF presbyopia program.
- Shanghai Langsheng’s ongoing purchasing levels, receivable exposure and distributor concentration.
- Manufacturing-capacity expansion in Monrovia and Switzerland, including regulatory approval and execution timing.
- Whether the 2019 tax benefit is nonrecurring and how valuation allowances and tax-loss carryforwards affect future effective tax rates.
- Future cash requirements for capital expenditures, leases, pensions and open purchase orders.