Lens Company Eyes Tax Break

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Over the past decade, Staar Surgical Co. racked up more than $120 million in losses – which is precisely why the company, rather than fleeing California for a lower-cost locale, is expanding operations here. 

How’s that? By closing manufacturing plants abroad and moving all production to its headquarters in Monrovia, the company can use its backlog of losses to cut its tax burden now that it’s turning a profit.

But Staar’s expansion in Monrovia could be short-lived. Executives said the tax benefit of their net operating losses was a key reason for the move, but noted that they’ll re-examine their options and possibly look for a lower-tax location as the company uses up its tax breaks.

“If not for the net operating losses, we would have been somewhere else,” said Barry Caldwell, Staar’s chief executive. “The challenge is going to be seven, eight, nine years from now when those expire. What’s the business environment going to be like?”

The company is a leading maker of implantable contact lenses used to correct poor vision – an alternative to Lasik surgery – and to replace natural lenses damaged by cataracts.

From 2000 through 2009, Starr racked up more than $120 million in losses. Under a tax provision, commonly called net operating loss carry forwards, losses in past years can offset profits in future years; a $100 net loss in the past can mean $100 in tax-free net income now and for a few years in the future.

Since Staar has huge future tax benefits for profits made in the United States, it needed to make a big move to capture them. Staar announced last year it would close manufacturing plants in Japan, Switzerland and Orange County and move those operations to Monrovia.

In August, the company leased a 26,000-square-foot building next to its existing headquarters and has already moved some lens production from Japan. Starr should be finished with the rest of the consolidation by the end of next year. By then, it will have about 180 workers in Monrovia, up from the current 130.

Although bringing manufacturing operations under one roof will mean savings from more efficient operations, executives said the tax breaks are the biggest driver of the expansion in Monrovia. They estimated that the move will cut Staar’s tax rate from 50 percent to 10 percent. (The effective tax rate is high because of foreign taxes.)

It’s unusual for a company to expand in the United States because of tax benefits. More often, companies set up shop in Ireland, for example, to take advantage of low- or no-tax policies. Raymond Myers, who follows Staar as an analyst at Benchmark Co. in Philadelphia, said the company’s expansion here is a case study in how businesses change their behavior based on tax policy, despite claims by academics to the contrary.

“There’s a lot of talk about how people don’t really act differently for tax purposes, and here, yes, they really do,” Myers said. “For anyone thinking taxes don’t affect people’s actions, they may want to think again.”

Seeing profits

Staar, founded in 1982, was one of the first companies to make implantable lenses for patients with cataracts. Staar’s lenses are foldable, which lets surgeons insert them through a tiny incision during an outpatient procedure.

The company was profitable in the 1990s, mostly selling lenses for cataracts, but it lost money through the past decade due to competition, patent lawsuits and warnings from the Food and Drug Administration over quality control.

But over the past several years, those challenges have been resolved. Also, the company has trimmed its product line, won approval from the FDA for lenses that correct near- and far-sightedness and increased sales in Asia, especially in South Korea.

After 10 years in the red, it turned a modest profit – $53,000 – in 2010. That year, expecting profits to grow, executives started discussing a move or consolidation. Consultants looked at 10 options for manufacturing sites, including Singapore, Costa Rica, Ireland and North Carolina.

The company already has a manufacturing plant in Monrovia, which executives said was one reason they opted to stay put.

Deborah Andrews, Staar’s chief financial officer, said the tax benefits of staying in the United States were ultimately too good to pass up.

“It’s largely a tax-driven decision,” Andrews said. “It essentially gives us a tax holiday in the United States.”

Matt Jackson, managing director for business consulting in the Washington, D.C., office of Jones Lange LaSalle Inc., who advised Staar on relocation and consolidation options, said low taxes are especially important to a company like Staar.

The company has innovative high-margin products and now is the best time for Staar to make big bucks before competitors enter the market, Jackson said. Staar estimates it controls 75 percent of the market for implantable lenses to correct poor vision, a market not yet penetrated by big players such as Bausch & Lomb Inc. of Rochester, N.Y.

“When you’re bringing something new to the market, you can generate a lot of margin,” he said. “The opportunity … is most significant early on in that maturity phase. So the tax number is hugely important to an organization dealing with an innovative product.”

Benchmark’s Myers said generating more profit now means Staar will have more cash to invest in expansion. That’s vital for the relatively small company, which likely can’t get the same low-interest loans larger companies might be able to get.

“Small companies don’t have access to that type of financing, so they rely on profit or new investment,” he said. “New investment is not a good option – highly dilutive. Profits are really the engine of growth.”

Limited time

Caldwell estimated that Staar’s $120 million in net losses will keep the company’s tax bill low for between seven and nine years, depending on how well the company performs.

Myers said he thinks that the benefits will be used up in just six.

The company is set to take a small loss this year because of one-time charges and the cost of consolidating operations, estimated at $6 million over three years. Staar stock last week traded at $5.51, down from a 52-week high of $11.79.

However long it takes for the company to exhaust its tax benefits, Caldwell said executives will eventually begin looking at other locations.

“Two years prior to when we think they’ll expire, we’ll have a team in place to do the same evaluation we just went through,” he said. “We’ll be looking at it very seriously.”

It’s already clear the company is keeping its options open: The lease Staar signed this summer for additional manufacturing space is for eight years.

For Staar to stay in California, Caldwell said the tax climate in the state and country would have to improve. While he’s optimistic that can happen, he also acknowledged that he’ll have good reason to leave if the climate stays the same and Staar runs out of tax breaks.

“Without the net operating losses, there really isn’t anything attractive to being in California, except that we have a facility here that already has key regulatory approvals,” he said. “Singapore would have given us a 10-year tax holiday.”

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