Align Technology, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Align designs, manufactures, and sells Invisalign clear aligners and iTero scanners and services. Clear Aligner generated approximately 89% of annual revenue; Scanners and Services generated 11%.
Financial performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $1,473.4 million | $1,079.9 million | +36.5% |
| Gross profit / margin | $1,116.9 million / 75.8% | $815.3 million / 75.5% | Margin +0.3 percentage points |
| Operating income / margin | $353.6 million / 24.0% | $248.9 million / 23.1% | +42.1% |
| Net income | $231.4 million | $189.7 million | +22.0% |
| Diluted EPS | $2.83 | $2.33 | +21.5% |
| Operating cash flow | $438.5 million | $247.7 million | +$190.9 million |
- Clear Aligner revenue was $1,309.3 million, up 36.6%; Scanner revenue was $164.2 million, up 35.1%. Clear Aligner case volume grew 37.7% to 976.4 million, with international volume up 44.9%.
- Annual operating cash flow was $438.5 million. Investing activities used $248.3 million, including $195.7 million of property and equipment purchases; financing activities used $135.5 million, including $103.8 million of stock repurchases and $46.2 million of employee tax payments on vested equity awards.
- Cash, cash equivalents, and marketable securities totaled $761.5 million at year-end, including approximately $490.1 million held by foreign subsidiaries. Working capital was $659.2 million. No borrowings were outstanding under the then-existing credit facility; the company reported no interest-bearing liabilities at year-end.
- Accounts receivable was $322.8 million, deferred revenue $266.8 million, and total liabilities $627.5 million. The company reported $744.8 million of contractual cash obligations, principally purchase obligations.
Material changes and unusual items
- Fourth-quarter revenue was $421.3 million, versus $293.2 million in Q4 2016. Q4 operating income was $109.6 million, while net income was $10.3 million, compared with $47.6 million a year earlier. The sharp Q4 earnings decline primarily reflected an $84.3 million provisional tax expense from the U.S. Tax Cuts and Jobs Act.
- The tax expense comprised a $73.9 million provisional transition tax on foreign earnings and $10.4 million to remeasure deferred tax balances. The company said the calculation remained provisional and that further adjustments could be recorded in 2018. The FY effective tax rate rose to 35.7% from 21.1%.
- North American Clear Aligner revenue grew 30.9%; volume growth was partly offset by lower average selling prices, including product mix toward lower-priced products and higher promotional discounts. International Clear Aligner revenue grew 47.9%, reflecting strong volume growth and a modest ASP increase.
- Management attributed growth to higher doctor utilization, international expansion, product improvements, and scanner growth. Total Invisalign utilization reached 5.7 cases per doctor in Q4, versus 5.2 a year earlier; 16,500 new doctors were trained during 2017.
- SG&A increased 35.7% to $665.8 million, driven by headcount, advertising and marketing, equipment, and outside services. R&D rose to $97.6 million from $75.7 million.
Outlook, risks, and contingencies
- Management expects 2018 operating expenses to increase, citing international expansion, manufacturing investment, legal costs related to intellectual property, sales and customer support, and product development. It forecast $200–$230 million in 2018 capital expenditures. The filing provides no numerical 2018 revenue or EPS guidance.
- Management expects international Invisalign revenue to grow faster than North America over the foreseeable future, while cautioning that adoption rates and utilization may fluctuate. It expects current cash and operating cash flow to fund operations and repurchases for at least 12 months.
- Align holds a 19% fully diluted equity interest in SmileDirectClub (SDC) and supplies aligners to it. In February 2018, SDC-related entities alleged that Align’s Invisalign store pilot breached non-compete and confidentiality provisions, sought a repurchase of Align’s membership interests, and demanded the stores close. Align disputes the allegations; arbitration may follow if negotiations fail. Financial impact was still under evaluation.
- Align filed patent infringement actions against 3Shape in November 2017, seeking damages and injunctive and import-exclusion relief. The company said it did not believe its legal matters would materially affect its financial position or results, but litigation costs and outcomes remain uncertain.
- Key risks include expiration of patents and increased competition, dependence on Invisalign and pricing, single-source materials and equipment, reliance on a contract manufacturer for scanner components, international operating and currency exposure, manufacturing capacity, regulatory approval, and patient-data security. GDPR was scheduled to take effect in May 2018.
- Other notable commitments include a minimum $305.2 million purchase of aligner materials over four years, a $46 million minimum investment in China over five years, and a $50 million software subscription over three years. The SDC loan balance of $30 million was repaid and the loan terminated in February 2018.
Important facts for investors to verify
- How much the provisional $84.3 million tax charge changes after completion of the company’s TCJA analysis, and the resulting ongoing tax rate.
- Whether strong case-volume growth can continue while managing ASP, discounting, product mix, and gross-margin pressures.
- The outcome and financial consequences of the SDC dispute, including any effect on Align’s equity investment, supply agreement, and store pilot.
- Whether international expansion and new manufacturing capacity meet cost, timing, and demand assumptions, alongside the company’s substantial purchase and capital commitments.
- How patent expirations and competitive responses affect market share, pricing, and profitability, and whether the 3Shape proceedings materially change that competitive position.