STAAR Surgical Company — Form 10-K Summary
Business context and reporting period
STAAR designs, manufactures and sells foldable implantable lenses for cataract and refractive surgery, principally IOLs and Visian ICLs. The company operates as one ophthalmic surgical products segment, sells in approximately 60 countries, and generated 78% of fiscal 2011 sales outside the United States.
The filing covers the 52-week fiscal year ended December 30, 2011, with quarterly data for the fourth quarter ended December 30, 2011. The filing was signed March 8, 2012. The requested “2010 Q4” period does not match the filing’s reporting period; the comparable fourth quarter is the quarter ended December 31, 2010.
Key financial metrics
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Net sales | $62.765 million | $54.958 million | +14.2% |
| Gross profit | $42.369 million | $35.076 million | +20.8% |
| Gross margin | 67.5% | 63.8% | +3.7 percentage points |
| Operating income (loss) | $2.783 million | $(2.602) million | Turned profitable |
| Income (loss) from continuing operations | $1.348 million | $(4.113) million | Turned profitable |
| Net income (loss) | $1.348 million | $0.053 million | Improved |
| Basic and diluted EPS | $0.04 | $(0.00) | Improved |
| Cash flow from operations | $5.346 million | $(4.417) million | Improved by $9.763 million |
Fourth-quarter 2011 sales were $16.381 million versus $14.389 million in fourth-quarter 2010, while gross profit was $11.429 million versus $9.308 million. Fourth-quarter 2011 net income was $109,000, compared with a $691,000 net loss in the comparable quarter.
ICL sales increased 32% to $32.1 million and represented 51.1% of total sales, compared with 44.2% in 2010. IOL sales were essentially flat at $27.5 million, while other surgical product sales were $3.1 million and represented 5.0% of sales. Core products accounted for 95.0% of 2011 sales.
At December 30, 2011, cash and cash equivalents were $16.582 million, working capital was approximately $24.7 million, and total assets were $49.006 million. Current liabilities were $14.016 million. Debt included approximately $2.580 million outstanding under STAAR Japan’s line of credit and $1.721 million of capital lease obligations, net of interest. No U.S. credit line was maintained.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by international ICL demand, especially in the top ten refractive markets.
- Gross margin improved from 63.8% to 67.5%, primarily because of a higher ICL mix, improved IOL pricing, cost improvements and geographic mix.
- STAAR achieved profitability in all four quarters of 2011 after more than ten years of losses from continuing operations.
- Operating expenses increased in absolute dollars but declined as a percentage of sales: general and administrative expense was 23.8% of sales versus 26.9%, marketing and selling was 28.2% versus 31.3%, and research and development was 9.3% versus 10.4%.
- STAAR generated positive operating cash flow in 2011, compared with a significant operating cash use in 2010. The 2010 cash flow was affected by legal settlement payments and other discontinued-operation items.
- STAAR Japan revenue increased 7% despite the March 2011 earthquake and tsunami; its facilities sustained minor damage and resumed operations on March 16, 2011.
- The company exited the lower-margin surgical pack business during 2011 and continued emphasizing higher-value ICL and IOL products.
Guidance, outlook, risks and unusual items
- Management expected 2012 research and development spending of approximately 9%–10% of sales and planned to add approximately 16 employees to support ICL growth and marketing, increasing sales and marketing costs by approximately $2 million.
- Management expected the effective tax rate to improve from approximately 50% in 2011 to 40%–45% in 2012.
- STAAR plans to consolidate manufacturing in Monrovia, California by the end of 2013. The initiative is expected to cost approximately $6 million in expenses over the program period, including $1.1 million incurred in 2011, plus approximately $2.4 million of capital expenditures.
- Expected benefits from manufacturing consolidation and tax strategies are not assured. Transfers could cause regulatory delays, supply interruptions, higher costs or lost market share.
- The FDA’s review of the U.S. Toric ICL application remained unresolved. The FDA issued a further deficiency letter in November 2011 questioning clinical data, lens design and power-calculation software. STAAR could not predict whether or when approval would be granted.
- Visian ICL V4c with CentraFLOW technology launched in CE Mark markets in September 2011. Approximately 25% of European Visian volume had transitioned to V4c by year-end, and management expected the simplified procedure to support 2012 growth.
- Key risks include competition from substantially larger ophthalmic companies, elective-procedure demand sensitivity, foreign exchange exposure, regulatory and product-liability risks, reliance on distributors and single-source materials, manufacturing-consolidation execution, patent expirations beginning in 2012–2016, and potential product recalls.
- The company had approximately $121.1 million of U.S. federal net operating loss carryforwards, but maintained a full valuation allowance because of its history of U.S. losses and uncertainty regarding future utilization.
- Defined-benefit pension plans were underfunded by approximately $2.8 million at year-end 2011. Contractual obligations totaled approximately $17.1 million, including $2.6 million of line-of-credit obligations, $1.9 million of capital leases, $9.0 million of operating leases and $2.0 million of pension obligations.
- BDO USA, LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective.
Investor verification checklist
- Verify the sustainability of newly achieved profitability and positive operating cash flow.
- Track ICL growth, U.S. refractive demand, V4c adoption and the effect of product mix on gross margin.
- Monitor FDA developments concerning approval of the U.S. Toric ICL and the company’s ongoing quality-system compliance.
- Assess execution, total cost and potential supply disruption from the manufacturing consolidation program.
- Review foreign exchange sensitivity, particularly to the Japanese yen, euro and Swiss franc, because the company does not hedge these exposures.
- Evaluate liquidity after required lease, pension, capital expenditure and consolidation-program payments, including renewal of STAAR Japan’s credit facility.
- Consider customer concentration: Woo Jeon Medical generated 13.0% of 2011 revenue, and one foreign customer represented approximately 19% of year-end trade receivables.