Align Technology, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Fourth-quarter figures are for the three months ended December 31, 2013. Unless noted, amounts are in U.S. dollars.
Business context
Align designs, manufactures and sells Invisalign clear aligners and iTero intra-oral scanners and CAD/CAM services. Clear Aligner generated approximately 93% of FY 2013 revenue; Scanners and CAD/CAM Services (SCCS) generated 7%. Growth priorities include expanding international and adult/teen markets, increasing provider utilization, and strengthening the Invisalign and iTero brands.
Financial performance
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $660.2 million | $560.0 million | +17.9% |
| Gross profit / margin | $498.1 million / 75.4% | $416.4 million / 74.3% | Margin +1.1 pts |
| Operating income / margin | $94.2 million / 14.3% | $85.6 million / 15.3% | Income +10.1% |
| Net income | $64.3 million | $58.7 million | +9.5% |
| Diluted EPS | $0.78 | $0.71 | +9.9% |
| Operating cash flow | $186.0 million | $133.8 million | +$52.2 million |
FY 2013 revenue growth reflected Invisalign case-volume growth and higher non-case revenue. Total Invisalign case volume rose 16.2% to 422,400. Clear Aligner revenue increased 19.0% to $614.6 million; SCCS revenue rose 5.1% to $45.6 million. SCCS gross margin improved to 29.1% from 24.1%, while Clear Aligner gross margin increased to 78.9% from 78.6%.
Fourth quarter: Revenue was $178.3 million versus $142.8 million in Q4 2012. Gross profit was $136.5 million, a 76.5% margin; operating income was $52.9 million; net income was $42.4 million; and diluted EPS was $0.51. Compared with Q4 2012, net income was $9.6 million and diluted EPS was $0.12.
Cash, liquidity and debt: Cash and cash equivalents were $243.0 million; short- and long-term marketable securities totaled $229.0 million, for combined cash and investments of $472.0 million. Working capital was $369.3 million. The company reported no borrowings under its $50 million revolving credit facility at year-end and stated that cash, investments and operating cash flows should fund operations for at least 12 months. Capital expenditures were $19.4 million. Financing cash outflow included $95.1 million of share repurchases.
Material changes and unusual items
- Revenue increased 17.9%, but operating margin declined to 14.3% from 15.3%, reflecting higher operating expenses and impairment charges.
- Align recorded $40.7 million of SCCS goodwill impairment and $26.3 million of long-lived asset impairment in 2013, following $36.6 million of SCCS goodwill impairment in 2012. The 2013 charges followed lower growth and profitability expectations amid new, lower-priced scanner competition.
- Revenue and average selling price trends varied by region: the acquisition of its Asia-Pacific distributor shifted sales to a direct model and lifted international ASP; North American ASP was affected by lower-priced product mix and included mid-course corrections in certain product prices from June 2013.
- The U.S. medical-device excise tax took effect for Align in 2013; expense was $7.1 million. Costa Rica tax incentives reduced the 2013 tax provision by $27.7 million, subject to employment and investment conditions.
- Align reported a $1.9 million increase to FY 2013 net income from an out-of-period correction, which management said was not material to FY 2013 or prior-year statements.
- Align repurchased 2.7 million shares for $95.1 million in 2013 and completed its $150 million repurchase authorization by year-end.
Outlook, risks and contingencies
Management gave no quantified revenue or earnings guidance in the filing. It expected long-term Invisalign utilization to improve gradually, while noting that period-to-period utilization may fluctuate. Management anticipated that worldwide ASP could trend upward as international markets—typically higher ASP markets—grow, and planned continued investment in international coverage, marketing, training and product development. Invisalign G5 and ClinCheck Pro launched in February 2014; adoption and financial effects were uncertain. Management did not expect the planned transition of a small number of EMEA distributor markets to direct sales to materially affect results in the next several years.
- Key business risks include reliance on Invisalign for most revenue, consumer and provider adoption, price and product-mix pressure, competition in scanners, and seasonality.
- Manufacturing depends on international facilities and several single-source suppliers, including aligner resin and critical scanner components; disruption could delay output or raise costs.
- Other material exposures include foreign currency movements, cybersecurity and patient-data privacy, medical-device regulation, intellectual-property disputes, and executive transitions.
- A securities class action and a shareholder derivative lawsuit related to allegations concerning the timing of Cadent goodwill impairment remained pending. Align said it could not determine the likelihood or range of loss. Management did not believe other proceedings were likely to materially affect financial position, results or cash flows.
Important facts for investors to verify
- Whether Invisalign case-volume growth and utilization continued, and whether growth translated into sustainable revenue and margins.
- Whether scanner competition, SCCS revenue and profitability support the carrying value of remaining assets and goodwill.
- How the mid-course correction policy, product mix, rebates and international direct-sales expansion affect revenue recognition and ASP.
- Whether Costa Rica tax-incentive conditions remain satisfied and how tax audits, uncertain tax positions and foreign earnings affect cash taxes.
- Developments in the securities and derivative lawsuits, including any change in the company’s ability to estimate potential loss.
- Cash and investment accessibility: approximately $210.1 million of cash and investments was held by foreign subsidiaries, and $186.4 million of foreign earnings was designated permanently reinvested; repatriation could incur additional taxes.