Align Technology, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also reports unaudited fourth-quarter results. Align designs, manufactures and sells Invisalign clear aligners and iTero scanners and services. Clear Aligner represented approximately 86% of FY revenue and Scanner 14%.
Financial performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $1.966 billion | $1.473 billion | +33.5% |
| Gross profit / margin | $1.448 billion / 73.6% | $1.117 billion / 75.8% | Margin down 2.2 percentage points |
| Operating income / margin | $466.6 million / 23.7% | $353.6 million / 24.0% | Income +32.0%; margin down 0.3 points |
| Net income | $400.2 million | $231.4 million | +72.9% |
| Diluted EPS | $4.92 | $2.83 | +73.9% |
| Operating cash flow | $554.7 million | $438.5 million | +26.5% |
- Fourth quarter: Revenue was $534.0 million versus $421.3 million in Q4 2017. Operating income was $120.5 million versus $109.6 million, and net income was $97.4 million versus $10.3 million. Diluted EPS was $1.20 versus $0.13.
- Revenue drivers: Clear Aligner revenue rose 29.2% to $1.692 billion; Scanner revenue rose 67.6% to $275.0 million. Clear Aligner case shipments increased 31.2% to 1.281 million. International Clear Aligner revenue grew 44.5%; Scanner growth reflected higher scanner volumes and services.
- Margins and costs: Clear Aligner gross margin fell to 75.7%, mainly from expansion-related manufacturing costs and more aligners per case. Scanner gross margin improved to 60.9% on manufacturing efficiencies. SG&A increased 28.0% to $852.4 million, while R&D increased to $128.9 million.
- Tax: The effective tax rate fell to 12.4% from 35.7%. The comparison reflects, among other items, nonrecurring 2017 Tax Cuts and Jobs Act charges; 2018 also benefited from stock-based compensation tax benefits and expiration of a statute of limitations. The company recorded $26.5 million of excess stock-compensation tax benefits in 2018.
Liquidity, cash flow and obligations
- At year-end, cash and cash equivalents were $636.9 million and marketable securities totaled $107.6 million, for combined liquidity of $744.5 million, down from $761.5 million a year earlier.
- Working capital was $610.4 million. Current assets were $1.302 billion and current liabilities were $692.1 million.
- Operating cash flow was $554.7 million; capital expenditures were $223.3 million. Financing cash outflow was $369.4 million, including $300.0 million of share repurchases and $86.1 million of employee tax withholding on vested stock awards.
- No borrowings were outstanding under the $200 million revolving credit facility at year-end. Total contractual obligations were $583.6 million, including $476.9 million of unconditional purchase obligations and $106.7 million of operating leases.
Material changes, outlook and risks
- Management expects international revenue to grow faster than Americas revenue over the foreseeable future, citing expansion opportunities and relatively low penetration. Total Invisalign utilization increased to 15.7 cases per doctor from 14.5; international utilization was 13.9 and North American orthodontist utilization was 56.7.
- No specific 2019 revenue or earnings guidance is provided. Management expects 2019 expenses to increase with international expansion, sales-force growth, manufacturing capacity, marketing, product development, legal costs and a planned corporate restructuring. It expects $250–$260 million of 2019 capital expenditures.
- Align began fabricating aligners at its new Ziyang, China facility in Q4 2018; management expects several quarters to ramp capacity, with underutilization costs during the transition. The company also reported adding approximately 100 Americas sales personnel and planned 50 additional EMEA representatives in Q1 2019.
- Key risks include intensifying competition as patents expire, pricing and promotional pressure, reliance on Invisalign, foreign-exchange exposure, international operating and regulatory risks, dependence on single-source suppliers and a contract scanner-component manufacturer, and cybersecurity/privacy threats. Management warns that new regional facilities and capacity expansion could pressure gross margin.
- Legal matters include securities and shareholder derivative actions, patent and antitrust disputes with 3Shape, and SDC arbitration concerning Align’s Invisalign Experience locations and its investment. Outcomes and potential losses were not estimable. The court denied SDC’s preliminary-injunction request; the arbitration decision was due by March 4, 2019. The SDC aligner supply agreement runs through December 31, 2019, and Align said it did not intend to renew.
- Management and the auditor reported effective internal control over financial reporting as of December 31, 2018. The auditor issued an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Whether revenue and case-volume growth can continue, particularly in international markets and Scanner, and whether promotional discounts or mix shifts will constrain average selling prices.
- Whether Clear Aligner margins recover as manufacturing expansion and the China facility ramp, given lower 2018 gross margin and higher planned investment.
- The sustainability of 2018 earnings and the unusually low effective tax rate; separate operating growth from tax benefits and prior-year tax charges.
- Cash conversion, working-capital demands, planned capital spending, share repurchases and the sizable purchase commitments, including the aligner-material supply contract.
- Developments in SDC arbitration and investment valuation, the 3Shape litigation, and securities and derivative lawsuits; the filing does not provide a clear estimate of potential losses.