Align Technology, Inc. — FY 2011 Form 10-K and Q4 results
Business context and reporting period. The filing covers the fiscal year ended December 31, 2011; quarterly figures below are for the three months ended December 31, 2011. Align sells Invisalign clear aligners and, following its April 29 acquisition of Cadent, iTero and iOC intra-oral scanners and CAD/CAM services. Invisalign remained the core business, accounting for about 94% of annual revenue.
Financial performance
| Metric | FY 2011 | FY 2010 | Q4 2011 | Q4 2010 |
|---|---|---|---|---|
| Revenue | $479.7 million | $387.1 million | $128.9 million | $92.9 million |
| Gross profit / margin | $361.3 million / 75.3% | $303.4 million / 78.4% | $95.6 million / 74.1% | $71.8 million / 77.2% |
| Operating income | $90.4 million | $102.7 million | $26.4 million | $14.8 million |
| Net income | $66.7 million | $74.3 million | $20.4 million | $9.9 million |
| Diluted EPS | $0.83 | $0.95 | $0.25 | $0.13 |
- FY revenue rose 23.9%; Invisalign case volume increased 18.6% to 309,400 cases. North American revenue rose 29.3% and international revenue 28.3%.
- Annual operating income and net income declined despite higher sales, with increased operating expenses following Cadent’s acquisition and integration. FY 2011 included $10.0 million of acquisition and integration costs, $3.2 million of acquired-intangible amortization, and $1.1 million of exit costs.
- Clear Aligner generated $451.7 million revenue and $354.7 million gross profit (78.5% margin). Scanners and CAD/CAM generated $28.0 million revenue and $6.6 million gross profit (23.5% margin); results include only the post-acquisition period.
- Operating cash flow was $130.5 million, versus $129.5 million in 2010. Investing cash outflow was $211.6 million, primarily reflecting $187.6 million paid for Cadent and $30.4 million in property and equipment purchases.
- Year-end cash, cash equivalents and marketable securities totaled $248.1 million, down from $312.4 million. Working capital was $236.7 million. No borrowings were outstanding on the $30 million revolving credit facility; total long-term liabilities were $10.4 million.
Material changes and unusual items
- Cadent acquisition added scanner and CAD/CAM operations, $134.9 million of goodwill and $53.2 million of acquired identifiable intangible assets. The purchase-price allocation was preliminary. Cadent contributed about $28.0 million of revenue and $6.5 million of gross profit from acquisition through year-end.
- FY 2010 earnings included a $14.3 million release of previously deferred Invisalign Teen revenue. This makes reported year-over-year comparisons less directly comparable.
- FY 2011 effective tax rate was 25.8%; Costa Rica tax incentives reduced income taxes by $15.4 million. The incentives depend on meeting employment and investment conditions.
- In Q4, revenue was $128.9 million and net income was $20.4 million. Revenue increased about 38.8% and net income about 106.5% versus Q4 2010, when reported results included the prior-year comparison period’s different business mix and timing of the Teen revenue release.
Outlook, management commentary and risks
- Management expected international revenue to grow in absolute terms and as a share of sales, while noting China was not expected to contribute meaningful revenue for several years. It expected to train approximately 6,000 Invisalign doctors in 2012.
- Management expected gradual adoption of product innovations, including Invisalign G4 and scanner integration, and acknowledged that adoption rates may vary by region and customer channel. Q4 Invisalign utilization was 4.1 cases per doctor; management expected utilization comparisons to fluctuate.
- The New Jersey operations consolidation was expected to finish by Q3 2012, with approximately $2.0 million in severance costs and about $4.0 million in annualized net savings after completion. The transition and new Juarez facility ramp carried execution and capacity risks.
- Key risks include dependence on Invisalign, competition and pricing pressure, economic and discretionary-spending weakness, reliance on single-source suppliers and a scanner contract manufacturer, foreign-exchange exposure, international operational and geopolitical disruption, and the ability to integrate Cadent and realize expected benefits.
- The company had a securities class-action lawsuit alleging misstatements relating to 2007 disclosures. The court dismissed the latest complaint on February 3, 2012, with leave to amend; the company said it would defend the case and reported no sufficient evidence of a loss incurred at year-end.
- The FDA closed its 2010 Warning Letter matters in February 2012. The filing also identified a medical-device excise tax of 2.3% beginning in 2013 as a potential industry cost.
- Management stated that existing cash and borrowing capacity were sufficient to fund operations for at least 12 months. The filing provides no numerical revenue or earnings guidance.
Important facts for investors to verify
- Whether the scanner and CAD/CAM segment can grow while improving from its reported 23.5% gross margin, and whether Cadent integration delivers the anticipated strategic and financial benefits.
- Whether Align completes the Juarez capacity transition and New Jersey consolidation on schedule, achieves the stated savings, and avoids customer-service or delivery disruption.
- How much FY 2010’s $14.3 million Teen revenue release affected comparisons, and how recurring operating expenses and acquisition-related costs affect normalized profitability.
- Whether reported cash generation remains robust after acquisition spending and capital investment; also monitor the $30 million credit facility’s December 2012 maturity and covenant requirements.
- Progress and potential exposure from the securities litigation, Costa Rica tax-incentive conditions, and the planned 2013 medical-device tax.