STAAR SURGICAL CO annual report, FY2017

STAAR Surgical Company — Form 10-K Summary

Reporting period: Fiscal year ended December 29, 2017, with comparative fiscal years ended December 30, 2016 and January 1, 2016. The request references 2016 Q4, but the supplied filing is the FY2017 Form 10-K and includes unaudited fourth-quarter data for 2017 and 2016.

Business Context

STAAR designs, manufactures and sells implantable ophthalmic lenses and delivery systems. Its principal products are implantable Collamer lenses, or ICLs, for refractive surgery, and intraocular lenses, or IOLs, for cataract surgery. The company operates as one ophthalmic surgical products segment and sells in more than 75 countries.

Approximately 91% of fiscal 2017 sales were generated outside the United States.
ICLs represented 75.4% of fiscal 2017 sales, compared with 71.7% in 2016.
IOLs represented 19.0% of sales, compared with 23.9% in 2016.
Shanghai Langsheng, the company’s China distributor, represented approximately 26.4% of fiscal 2017 net sales, or $23.9 million.

Financial Performance

Metric	2017	2016	Change
Net sales	$90.6 million	$82.4 million	+9.9%
Gross profit	$64.3 million	$58.4 million	+10.1%
Gross margin	70.9%	70.8%	+0.1 percentage points
Operating loss	$3.6 million	$12.7 million	Improved by $9.0 million
Net loss	$2.1 million	$12.1 million	Improved by $10.0 million
Net loss per share	$0.05	$0.30	Improved
Operating cash flow	$2.9 million	$1.0 million	Improved by $1.8 million

Product and Geographic Trends

ICL sales increased 15.6% to $68.3 million, driven primarily by Asia-Pacific growth, including China and Japan.
IOL sales decreased 12.4% to $17.3 million, primarily due to the discontinuation of the U.S. silicone IOL line and production issues affecting Japanese silicone IOL preloaded injectors.
Other surgical product sales increased 39.1% to $5.0 million, primarily from higher injector-part sales to a third-party manufacturer.
Operating expenses declined as the company did not repeat the $6.9 million non-cash accelerated stock-compensation charge recorded in 2016 after a change-in-control provision was triggered.
Research and development expense declined to $19.1 million from $20.3 million, largely because FDA remediation spending decreased to approximately $0.2 million from $1.9 million.

Liquidity, Debt and Cash Flow

Cash and cash equivalents were $18.5 million at year-end 2017, compared with $14.0 million at year-end 2016.
Working capital increased to $34.8 million from $28.5 million.
Current assets were $53.9 million and current liabilities were $19.1 million.
Net cash used in investing activities was $1.0 million, primarily for property and equipment, versus $3.2 million in 2016.
Net cash provided by financing activities was $2.4 million, including $4.0 million of proceeds from stock-option exercises and $1.3 million of capital-lease repayments.
STAAR Japan had approximately $4.4 million outstanding under an unsecured yen-denominated line of credit, with no remaining availability at year-end. The facility was renewed through May 21, 2018 after year-end.
Capital-lease obligations totaled approximately $1.8 million, and total disclosed contractual obligations were $18.1 million, including leases, pension payments and open purchase orders.
The company stated that existing cash and expected operating cash flow should be sufficient for foreseeable working-capital needs, but noted dependence on continued positive operating cash flow.

Fourth-Quarter Data

Metric	Q4 2017	Q4 2016
Net sales	$24.9 million	$22.1 million
Gross profit	$17.4 million	$15.9 million
Net income (loss)	$(0.1) million	$(0.2) million
Net income (loss) per share	Approximately $(0.00)	Approximately $(0.00)

Guidance, Outlook and Management Commentary

Management expected fiscal 2018 revenue above $100 million, representing double-digit growth. It also expected ICL sales and unit growth in the mid-teens or higher, positive operating cash flow, improved cash balances, improved earnings per share, higher gross-margin dollars and flat or slightly lower gross-margin percentages.

Fiscal 2018 spending was expected to increase by low double digits to support commercial infrastructure, clinical studies, regulatory compliance and consumer outreach.
The outlook assumed strong sales growth in China and Korea and U.S. approval of the Toric ICL, or TICL, by year-end 2018.
Planned development included presbyopia-correcting lenses, preloaded injector systems and next-generation ophthalmic lenses and materials.
In October 2017, European regulators expanded the EVO Visian ICL indicated age range from 21–45 to 21–60. In January 2018, the minimum anterior chamber depth was lowered from 3.0 mm to 2.8 mm in applicable CE Mark markets.
The EVO+ received marketing approval in India and Canada in December 2017. STAAR planned a European clinical trial for an EVO+ presbyopia-correcting, extended-depth-of-focus optic.

Material Risks, Contingencies and Unusual Items

FDA remediation and TICL approval: The FDA’s 2014 Warning Letter and 2015 inspection observations remained material risks. STAAR reported completing remediation and notifying the FDA in early 2017, but the TICL PMA supplement remained pending and approval timing was uncertain.
Customer concentration: Shanghai Langsheng accounted for more than one-quarter of consolidated sales, creating distributor and credit exposure.
Product and market concentration: Refractive products are elective and generally paid out-of-pocket. Economic conditions, consumer confidence and negative publicity regarding refractive surgery could reduce demand.
Manufacturing concentration: The Monrovia, California facility is the company’s primary manufacturing site for ICLs and IOLs. A major disruption or regulatory failure could materially affect production and sales.
Supply chain: Certain materials and components are single-sourced, including internally manufactured Collamer raw material and externally sourced silicone, injector polymers and acrylic lenses.
Foreign exchange: The company has substantial international operations and does not actively hedge currency exposure. A stronger U.S. dollar could reduce reported revenue and profitability.
Tax reform: The 2017 Tax Cuts and Jobs Act resulted in provisional accounting for foreign earnings repatriation and deferred-tax remeasurement. The company recorded a $0.5 million AMT-credit benefit and was still completing its analysis.
Pension obligations: Swiss and Japanese defined-benefit plans were underfunded by approximately $4.7 million at year-end 2017.
Litigation: A shareholder securities class-action settlement of $7.0 million was funded entirely by insurance proceeds and received final court approval in October 2017. A related derivative action remained on appeal, with no loss accrued because the amount and likelihood of loss were not estimable.
Unusual 2016 comparison: Fiscal 2016 expenses included a $6.9 million non-cash charge for accelerated vesting of equity awards following a change-in-control event; this charge did not recur in 2017.

Investor Verification Checklist

Verify the status and timing of FDA action on the TICL PMA supplement and the company’s remediation under the 2014 Warning Letter.
Assess sustainability of ICL growth, particularly in China, Japan and Korea, and the effect of lower average selling prices.
Monitor dependence on Shanghai Langsheng and the concentration of sales through distributors.
Evaluate whether IOL declines, production issues and product discontinuations have stabilized.
Reconcile cash generation with the company’s projected 2018 growth investments and contractual obligations.
Review the final accounting effects of the 2017 Tax Act and the usability of approximately $132.5 million of U.S. federal net operating loss carryforwards.
Track pension funding requirements, foreign-exchange exposure and the renewal or refinancing of the Japanese credit facility.
Confirm that regulatory, quality-system and manufacturing-site compliance remains effective across major jurisdictions.