Align Technology, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports unaudited fourth-quarter results. Align designs, manufactures and sells Invisalign clear aligner systems; it operates as one reportable segment.
Financial performance
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $387.1 million | $312.3 million |
| Gross profit / gross margin | $303.4 million / 78.4% | $233.5 million / 74.8% |
| Operating income (loss) | $102.7 million | $(34.0) million |
| Net income (loss) | $74.3 million | $(31.3) million |
| Diluted earnings (loss) per share | $0.95 | $(0.45) |
| Cash provided by operations | $129.5 million | $74.2 million |
- Revenue increased 24.0%; Invisalign case shipments rose 18.3% to 260,900. International Invisalign revenue increased 25.1%, and North American Invisalign revenue increased 17.6%.
- Gross margin improved as higher case volume lifted cost absorption; the $14.3 million Teen replacement-aligner revenue release also benefited 2010 gross profit.
- Cash and cash equivalents were $294.7 million; short- and long-term investments totaled $17.7 million. Working capital was $295.6 million.
- No credit-facility borrowings were outstanding at year-end. The revolving facility provides up to $30 million through December 31, 2012. Total liabilities were $99.2 million; the filing reports $6.2 million of long-term liabilities.
- Capital spending on property and equipment was $18.0 million. Investing cash flow was negative $15.9 million; financing cash flow was positive $14.7 million.
Fourth-quarter results and changes
Q4 2010 revenue was $92.9 million versus $86.6 million in Q4 2009. Operating income was $14.8 million versus $14.6 million, while net income was $9.9 million versus $11.5 million. Revenue declined sequentially from $108.2 million in Q3, which included the $14.3 million deferred-revenue release. Management cited seasonal effects and lower sequential utilization in North American orthodontist and GP channels.
FY2010 returned to profitability after the FY2009 operating loss, which was driven principally by a $69.7 million Ormco litigation charge. FY2010 operating results also included an $8.7 million insurance recovery related to OrthoClear litigation and a $4.5 million charge for the proposed Leiszler settlement. The $14.3 million Teen revenue release was a nonrecurring estimate change; reported 2010 Teen revenue growth was 103.9%, or approximately 48.6% excluding that release.
Outlook, risks and contingencies
- Management expected first-quarter 2011 operating expenses to increase, reflecting marketing, Invisalign G3 commercialization, international expansion and Cadent development costs.
- Align planned higher 2011 capital expenditures, additional Juarez capacity and a new aligner fabrication site outside North America by year-end 2011. Delays or demand above capacity could disrupt timely fulfillment.
- The company expected commercial availability in China in the second half of 2011, but not meaningful China revenue for several years. International G3 rollout was planned for Q2 2011. No specific full-year revenue or earnings guidance is provided in the filing.
- Management said existing cash and borrowing capacity should fund operations for at least 12 months. The filing notes potential exposure to currency movements and reports no current financial hedging transactions.
- Regulatory exposure is material: following a 2010 FDA inspection and Form 483 observations concerning complaint reporting and management, Align received an FDA Warning Letter and was working to close the matter. Further sanctions could adversely affect operations or product clearances.
- The proposed Leiszler class settlement had preliminary court approval, with final approval hearing scheduled for April 2011; about $8.0 million was deposited into escrow in January 2011. A securities class action remained pending, and Weber’s dismissal of Align could still be appealed.
- Other key risks include reliance on Invisalign for most revenue, competition and pricing pressure, seasonality, dependence on sole-source materials and equipment, manufacturing operations in Costa Rica and Mexico, and customer adoption of new products.
- The filing states that a 2.3% U.S. medical-device excise tax was scheduled to begin in 2013. Costa Rica tax incentives reduced 2010 income taxes by $12.7 million and depend on meeting employment and investment conditions.
Important facts for investors to verify
- Separate recurring operating performance from the Teen deferred-revenue release, insurance recovery and Leiszler settlement charge.
- Track case shipments, utilization, product mix and average selling prices, particularly after termination of the Proficiency Program.
- Confirm FDA resolution of the Warning Letter and final court approval and cash cost of the Leiszler settlement.
- Monitor execution, cost and timing of planned manufacturing expansion and whether capacity keeps pace with demand.
- Review the complete financial statements and notes for deferred-tax-asset realizability, unrecognized tax benefits, cash-flow quality and the terms of the credit facility.