Align Technology, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; quarterly figures below compare Q4 2019 with Q4 2018. Align designs, manufactures and markets Invisalign clear aligners and iTero intraoral scanners and services. Clear Aligner generated approximately 84% of FY2019 revenue; Scanners and Services generated 16%.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net revenue | $2,406.8 million | $1,966.5 million | +22.4% |
| Gross profit / margin | $1,743.9 million / 72.5% | $1,447.9 million / 73.6% | Margin down 1.1 percentage points |
| Operating income / margin | $542.5 million / 22.5% | $466.6 million / 23.7% | Income +16.3%; margin down 1.2 points |
| Net income | $442.8 million | $400.2 million | +10.6% |
| Diluted EPS | $5.53 | $4.92 | +12.4% |
| Operating cash flow | $747.3 million | $554.7 million | +34.7% |
- Clear Aligner revenue was $2,025.8 million, up 19.8%; case volume increased 20.0% to 1.54 million shipments. International Clear Aligner revenue grew 28.8%, versus 13.2% in the Americas.
- Scanner revenue increased 38.5% to $381.0 million, supported by scanner volume and CAD/CAM service growth.
- Clear Aligner gross margin fell to 74.0% from 75.7%, primarily because of more additional aligners per case. Scanner gross margin improved to 64.1% from 60.9%, reflecting higher selling prices and manufacturing efficiencies.
- SG&A rose to $1,072.1 million from $852.4 million, reflecting higher headcount, marketing, legal and service costs. R&D increased to $157.4 million from $128.9 million.
- Q4 2019: Revenue was $649.8 million versus $534.0 million (+21.7%); gross profit was $472.0 million; operating income was $151.2 million; net income was $121.3 million; diluted EPS was $1.53.
Liquidity, cash flow and capital
- Cash, cash equivalents and marketable securities totaled $868.6 million at year-end, compared with $744.5 million in 2018. Working capital was $662.4 million.
- Operating cash flow was $747.3 million. Investing cash outflow was $350.4 million, including $149.7 million of capital expenditures; financing cash outflow was $485.5 million, including $400.0 million of repurchases.
- No borrowings were outstanding on the $200 million revolving credit facility, which matures February 2021. Management said available liquidity and borrowing capacity should fund operations for at least 12 months.
- FY2019 contractual cash obligations totaled $588.1 million, including $523.7 million of unconditional purchase obligations. The company expected 2020 capital expenditures of $180–$200 million.
Changes, outlook and notable items
- Revenue growth was driven by higher case and scanner volumes. International Invisalign case volume increased 34.0%, while Americas volume rose 11.1%. Total doctor utilization increased slightly to 15.9 cases per doctor from 15.7.
- Management expected international revenue to grow faster than Americas over the foreseeable future, while noting uncertainty around adoption and regional growth. It expected 2020 expenses to rise due to investment in manufacturing capacity, international expansion, sales, marketing, customer support and product development; these investments may pressure near-term results.
- Management identified slower growth in China from Q2 2019 amid trade-related economic uncertainty and competition, and slower North American adult cases from orthodontists beginning Q2 2019. It warned that the coronavirus outbreak in China was expected to disrupt sales and operations for an indeterminate period; no quantified impact was provided.
- A $51.0 million Straumann litigation settlement gain benefited FY2019 results. The company also recorded $23.0 million of net impairment and other charges, including store-related asset impairments partly offset by lease termination gains. These items affect comparability.
- FY2019 effective tax rate was 20.0%, versus 12.4% in 2018. Following the January 2020 transfer of certain intellectual property to Switzerland, management expected a one-time deferred tax benefit of up to $1.6 billion in Q1 2020, subject to realizability assessments and ongoing discussions with Swiss tax authorities.
- The SDC supply agreement expired December 31, 2019. Align closed its Invisalign stores following an arbitration decision, recognized a $15.8 million gain on its SDC investment exchange, and continued to dispute the investment repayment calculation and face a separate SDC arbitration.
- Other key risks include increasing clear-aligner competition and patent expirations, reliance on single-source materials and equipment suppliers, international operating and currency exposure, data security and privacy, regulatory approvals, and ongoing litigation. The auditor issued an unqualified opinion and identified clear-aligner revenue allocation and usage-rate estimates as a critical audit matter; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether case-volume growth can continue despite competitive pressure, slower China demand and the end of the SDC supply agreement.
- Whether gross-margin pressure from additional aligners, promotional discounts, product mix and international expansion persists.
- The operational and financial effect of the coronavirus disruption and the pace of recovery in China.
- The timing, realizability and tax-authority treatment of the potential Swiss deferred tax asset and one-time tax benefit of up to $1.6 billion.
- Outcomes and potential exposure from SDC-related proceedings, securities and derivative actions, and patent and antitrust litigation; several exposures were not estimable in the filing.
- Supplier capacity and commitments, planned $180–$200 million 2020 capital spending, and the company’s continued repurchases and liquidity position.