Align Technology, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report; selected fourth-quarter results are noted separately.
Business context
Align designs, manufactures and sells Invisalign clear aligners and iTero intra-oral scanners and related services. Clear Aligner generated about 95% of 2015 revenue; Scanner generated about 5%. Invisalign case volume grew across regions, while scanner revenue declined.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Revenue | $845.5 million | $761.7 million | +11.0% |
| Gross profit / margin | $640.1 million / 75.7% | $578.4 million / 75.9% | Margin down 0.2 percentage points |
| Operating income / margin | $188.6 million / 22.3% | $193.6 million / 25.4% | Income down 2.6% |
| Net income | $144.0 million | $145.8 million | Down 1.2% |
| Diluted EPS | $1.77 | $1.77 | Flat |
| Operating cash flow | $238.0 million | $226.9 million | Up $11.1 million |
- Fourth-quarter revenue was $230.3 million versus $198.6 million a year earlier; operating income was $59.3 million versus $51.5 million, and diluted EPS was $0.60 versus $0.48.
- Cash, cash equivalents and short- and long-term investments totaled $678.7 million at year-end, up from $602.6 million. Working capital was $460.3 million.
- No borrowings were outstanding under the $50 million revolving credit facility at year-end. The facility was scheduled to mature March 22, 2016. The filing reports no interest-bearing liabilities at year-end.
- Capital expenditures were $53.5 million. Operating cash flow less capital expenditures was approximately $184.5 million. Financing cash outflow was $100.8 million, principally reflecting $101.8 million of share repurchases.
- Total liabilities were $310.7 million; long-term liabilities were $39.0 million. Contractual cash obligations were $94.3 million, including $74.6 million of unconditional purchase obligations.
Material changes versus prior year
- Invisalign case volume increased 22.0% to 583.2 million reported case-volume units: North America up 17.7% and international up 32.5%. Clear Aligner revenue rose 12.3% to $800.2 million.
- International Clear Aligner revenue increased 13.8% to $250.1 million, but foreign exchange reduced revenue by approximately $34.5 million. North American Clear Aligner revenue rose 11.7%.
- Scanner revenue fell 7.7% to $45.3 million. Lower scanner volume and pricing on the prior-generation product outweighed increased services revenue; gross margin declined from 31.7% to 26.3%.
- SG&A rose $58.1 million to $390.2 million, primarily from increased compensation and headcount and ERP consulting costs. R&D increased $8.4 million to $61.2 million.
- Operating income and net income declined despite revenue growth, reflecting higher operating expenses and lower Scanner segment results. The prior-year net income included a $1.8 million out-of-period tax adjustment; there were no goodwill or long-lived-asset impairment charges in 2015 or 2014.
Outlook, management commentary and risks
- The July 2015 “Additional Aligners at No Charge” policy increased revenue deferrals and is expected to reduce Clear Aligner revenue by approximately $7–8 million in Q1 2016 and $25–30 million in FY 2016. Management expects lower revenue recognition on grandfathered open cases for at least two years, while anticipating improved customer satisfaction and longer-term utilization.
- Management expects 2016 operating expenses to increase, citing international expansion, sales and customer support, and product and technology development. Planned 2016 capital expenditures are $55–65 million, mainly for manufacturing capacity, regional order-acquisition and treatment-planning facilities, and ERP implementation.
- Management expects international revenue to grow faster than North American revenue for the foreseeable future, while noting currency exposure and the need for continued investment. It also expects gradual long-term improvement in Invisalign utilization, but utilization may fluctuate.
- Key risks include dependence on Invisalign for most revenue; pricing, discounts and revenue deferrals; intense competition and expiration of certain patents beginning in 2017; production ramp and capacity execution; reliance on single-source suppliers; foreign exchange; international operating and geopolitical risks; regulatory requirements; and cybersecurity, patient-data and ERP implementation risks.
- The company reported two unresolved shareholder matters: a securities class action on appeal and a stayed derivative action. It could not predict outcomes or estimate potential losses. It said other proceedings were not expected to materially affect financial position, results or cash flows.
- Cash generation benefits from Costa Rica tax incentives, which reduced 2015 income taxes by $32.7 million ($0.40 per diluted share); incentives begin expiring in various years from 2017. Approximately $359.8 million of foreign earnings were designated indefinitely reinvested. The company also disclosed $39.4 million of gross unrecognized tax benefits and ongoing Israel and California tax audits.
Most important facts for investors to verify
- Whether Invisalign case growth and doctor utilization can offset lower average selling prices, foreign exchange effects and the no-charge additional-aligner policy.
- Whether the 2016 revenue impact from the policy and the two-year-or-longer deferral effect on grandfathered cases track management’s estimates.
- Whether iTero Element production scales as planned and whether Scanner revenue and margins recover.
- Whether operating expenses, capital spending and ERP implementation remain within plan, and whether cash generation sustains buybacks and expansion.
- Developments in the shareholder lawsuits, tax audits and Costa Rica tax incentives, as well as the status and terms of the revolving credit facility after its scheduled March 2016 maturity.