Align Technology, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports unaudited fourth-quarter results. Amounts below are in U.S. dollars.
Business context
Align designs, manufactures and sells Invisalign clear aligners and iTero intra-oral scanners and related services. Clear Aligner generated about 94% of FY 2014 revenue; Scanners and Services generated about 6%. Invisalign revenue is the company’s primary business.
Financial results and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $761.7 million | $660.2 million |
| Gross profit / margin | $578.4 million / 75.9% | $498.1 million / 75.4% |
| Operating income | $193.6 million | $94.2 million |
| Net income | $145.8 million | $64.3 million |
| Diluted EPS | $1.77 | $0.78 |
| Cash from operations | $226.9 million | $186.0 million |
Revenue grew 15.4%. Clear Aligner revenue rose to $712.5 million from $614.6 million; Scanner and Services revenue increased to $49.1 million from $45.6 million. Invisalign case volume increased 13.2% to 478,000 cases, with international volume up 28.6%. Operating income and net income benefited substantially from the absence of FY 2013 goodwill and long-lived asset impairment charges totaling $67.0 million; FY 2014 recorded no such charges.
Fourth-quarter 2014 revenue was $198.6 million, gross profit $150.7 million, operating income $51.5 million, and net income $39.5 million. Diluted EPS was $0.48. Invisalign utilization was 4.4 cases per doctor, flat year over year and sequentially.
At year-end, cash and cash equivalents were $199.9 million, with short- and long-term investments of $402.7 million, or $602.6 million combined. Working capital was $455.3 million. The company had no borrowings under its $50 million revolving credit facility, which matures in March 2016; it reported no interest-bearing debt. Operating cash flow was $226.9 million; investing cash flow was negative $201.6 million and financing cash flow negative $66.4 million, including $98.2 million of share repurchases. Total liabilities were $235.2 million.
Material changes and notable items
- Revenue growth reflected higher Invisalign case volume across regions, higher international average selling prices, and increased non-case revenue. International Clear Aligner revenue rose 35.9%; North American Clear Aligner revenue rose 9.4%.
- Gross margin increased 0.5 percentage points to 75.9%. Clear Aligner margin was nearly stable at 79.0%; Scanner margin improved to 31.7%, partly from higher production-volume absorption and lower inventory reserves.
- Sales and marketing expense rose $37.3 million to $217.3 million, and research and development expense rose $8.7 million to $52.8 million. Management attributed increases chiefly to headcount, marketing, and product development.
- The IRS informed Align that aligners were not subject to the medical device excise tax, while scanners remained subject to it. FY 2014 expense was about $0.3 million versus $7.1 million in FY 2013. A $6.8 million refund claim for 2013 payments remained subject to IRS review and was not recorded as a receivable.
- The Costa Rica tax incentives reduced FY 2014 income taxes by $32.5 million, or $0.40 per diluted share. Approximately $260.9 million of foreign earnings were designated indefinitely reinvested abroad.
- Align repurchased approximately $98.2 million of stock in 2014. At year-end, $201.8 million remained under the $300 million authorization; in January 2015, the Board authorized an additional $100 million of repurchases.
Outlook, risks and contingencies
- Management expects international revenue to grow faster than North American revenue over the foreseeable future, while noting adoption rates and utilization may fluctuate.
- Management expected operating expenses to increase in 2015, including from expanded sales coverage, infrastructure and ERP-system investment, and development of products for mild-to-moderate obstructive sleep apnea. Planned 2015 capital expenditures were $70–$80 million.
- A $50, or approximately 3%, price increase for Invisalign Full and Teen in North America was scheduled for April 1, 2015; prices for Assist and Express products were unchanged.
- Invisalign G6 was planned for limited commercialization in Q1 2015, with broader international rollout during 2015 and North American rollout in early 2016. ClinCheck Pro expansion to additional markets was also planned for Q1 2015.
- Key risks include dependence on Invisalign, intense competition and potential pricing pressure, single-source suppliers, overseas manufacturing and geopolitical exposure, foreign-exchange movements, regulatory and patient-data compliance, and execution risks associated with ERP implementation.
- A securities class action was dismissed without leave to amend, but the plaintiff appealed. A related derivative action remained stayed pending the appeal. Align could not estimate the likelihood or amount of loss for either matter. The company said other proceedings were not expected to materially affect its financial position or results.
- Align cited foreign-currency losses and revenue effects in the second half of 2014, primarily from a weaker euro and other currencies. It does not currently use financial hedges. Management stated existing cash, investments and operating cash flows should fund operations for at least 12 months.
Investor verification priorities
- Assess how much of FY 2014 earnings growth reflects operating progress versus the non-recurrence of the $67.0 million of prior-year impairment charges.
- Verify the timing, approval and financial effect of the $6.8 million MDET refund claim and the continuing tax treatment of scanners.
- Track Invisalign case volume, doctor utilization, average selling prices, discounts and international growth as new products and the North American sales-force expansion take effect.
- Monitor Scanner and Services competitiveness, margins and adoption, given prior impairments and lower-priced competing products.
- Review planned capital spending, ERP execution, foreign-exchange exposure, supply concentration, and the status of the securities-action appeal and derivative litigation.