Align Technology, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Align designs, manufactures and markets Invisalign clear aligners and iTero scanners and services. Clear Aligner generated approximately 89% of revenue; Scanners and Services generated 11%.
Financial performance and liquidity
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $1,079.9 million | $845.5 million | +27.7% |
| Gross profit / margin | $815.3 million / 75.5% | $640.1 million / 75.7% | Margin down 0.2 percentage points |
| Operating income / margin | $248.9 million / 23.1% | $188.6 million / 22.3% | Income +32.0% |
| Net income | $189.7 million | $144.0 million | +31.7% |
| Diluted EPS | $2.33 | $1.77 | +31.6% |
| Operating cash flow | $247.7 million | $238.0 million | +$9.7 million |
Fourth-quarter revenue was $293.2 million, operating income $68.4 million, net income $47.6 million and diluted EPS $0.59. Revenue rose from $230.3 million in fourth-quarter 2015.
Clear Aligner revenue increased 19.8% to $958.3 million; shipped case volume increased 21.6% to 709.2 million, as reported in the filing. Scanner revenue rose 168.2% to $121.5 million, primarily reflecting iTero Element shipments. Scanner gross margin improved to 55.8% from 26.3%; Clear Aligner gross margin decreased to 78.0% from 78.5%.
At year-end, cash and cash equivalents plus short- and long-term marketable securities totaled $700.0 million, and working capital was $598.6 million. Total liabilities were $400.8 million; the company had no borrowings under its $50 million revolving credit facility. Operating cash flow was supported by net income and higher deferred revenue, partly offset by a $94.4 million increase in accounts receivable. Capital expenditures were $70.6 million.
Material changes and notable items
- Total revenue growth was driven by greater aligner case volume across regions and increased scanner sales. International Clear Aligner revenue rose 30.6%; North American Clear Aligner revenue rose 14.0%.
- Aligner average selling prices were pressured by promotional discounts, foreign-exchange effects internationally, and revenue deferrals related to the additional-aligners-at-no-charge policy. Price increases on comprehensive products partly offset those pressures.
- Operating expenses increased, including SG&A to $490.7 million from $390.2 million and R&D to $75.7 million from $61.2 million. SG&A rose with headcount, marketing and other costs; R&D investment supported product and technology development.
- The effective tax rate decreased to 21.1% from 22.6%. The 2016 rate reflected a new international corporate structure and a $31.4 million tax benefit from releasing the valuation allowance on Israeli loss carryforwards; the filing also reports $34.3 million of tax expense associated with taxable income generated in certain jurisdictions following the restructuring.
- Align acquired a 17% interest in SmileDirectClub (SDC) for $46.7 million and began supplying its doctor-directed at-home aligners in October. It also provided SDC access to a revolving loan facility of up to $15 million; no advances were outstanding at year-end.
- Align repurchased $96.2 million of common stock in 2016. At year-end, $300 million remained authorized under the April 2016 repurchase plan.
Outlook, risks and contingencies
- Management expected 2017 operating expenses to increase, citing international expansion, manufacturing capacity, sales and customer support, legal costs, headquarters costs, and product development. It expected international Invisalign revenue to grow faster than North America over the foreseeable future and stated that the SDC agreement was expected to add to 2017 revenue growth.
- Management forecast 2017 capital expenditures of $220 million to $250 million, primarily for the San Jose headquarters purchase, a Singapore order-acquisition facility, and manufacturing and capacity expansion. The headquarters purchase closed in January 2017 for $44.1 million.
- Key business risks include increased competition as certain U.S. patents begin expiring in 2017 and foreign patents in 2018; pricing and utilization pressures; dependence on single-source suppliers; international operating, currency and geopolitical risks; regulatory and data-protection requirements; and capacity, hiring and ERP implementation risks.
- The company disclosed securities class-action and derivative litigation related to prior-period goodwill and forecasts. Outcomes and potential losses could not be estimated. It did not believe other pending matters would materially affect financial position, results or cash flows.
- Approximately $438 million of foreign earnings were designated indefinitely reinvested; repatriation could result in additional taxes. The Israel tax audit covered 2006–2013, and Costa Rica tax incentives begin expiring in 2017.
- The $50 million credit facility matures in March 2018; it was amended in February 2017 to extend maturity. Contractual obligations included $53.9 million of operating leases and $163.7 million of unconditional purchase obligations.
Important facts for investors to verify
- Whether aligner case growth and doctor utilization can continue to offset discounting, revenue deferrals and potential competition after patent expirations.
- Whether the iTero Element sales surge and improved Scanner margins are sustainable as the scanner business scales.
- The impact of the SDC supply relationship and investment, including customer response, loan-facility usage and the expected 2017 revenue contribution.
- Whether projected 2017 spending and capital investment deliver growth without materially weakening margins or cash generation.
- The continuing effects of the international tax restructuring, expiring Costa Rica incentives, foreign earnings and unresolved tax matters on the effective tax rate and cash taxes.