Align Technology Inc. (NASDAQ:ALGN)

The period under review demonstrates fluctuating economic profit performance. Net operating profit after taxes (NOPAT) exhibited initial growth followed by significant volatility, while the cost of capital remained relatively stable. Invested capital consistently increased throughout the period, contributing to shifts in economic profit.

NOPAT Trend

NOPAT increased from US$520.148 million in 2018 to US$629.227 million in 2019, representing a substantial gain. However, 2020 saw a decline to US$531.854 million. A significant recovery occurred in 2021, with NOPAT reaching US$1,236.388 million, the highest value in the observed period. This was followed by a considerable decrease in 2022, falling to US$536.671 million.

Cost of Capital

The cost of capital remained remarkably consistent across the five years, fluctuating within a narrow range between 24.31% and 24.40%. This stability suggests a consistent risk profile and financing structure during the period.

Invested Capital Trend

Invested capital showed a consistent upward trend, increasing from US$1,516.250 million in 2018 to US$3,344.477 million in 2022. The largest increase occurred between 2019 and 2020, and again between 2020 and 2021, indicating substantial capital deployment during those years.

Economic Profit Analysis

Economic profit mirrored the volatility observed in NOPAT. Positive economic profit was recorded in 2018 (US$151.533 million) and 2019 (US$257.827 million), peaking in 2021 at US$507.625 million. However, negative economic profit was experienced in 2020 (US$ -68.086 million) and 2022 (US$ -276.671 million). The negative economic profit in 2020 and 2022 suggests that the returns generated were insufficient to cover the cost of capital employed, despite the increasing invested capital.

The substantial increase in invested capital, coupled with the fluctuations in NOPAT, significantly impacted economic profit. While the cost of capital remained stable, the company’s ability to generate returns exceeding this cost varied considerably year-to-year.

Net Income

Net income exhibited significant fluctuations over the analyzed period. Starting at 400,235 thousand USD in 2018, it increased moderately to 442,776 thousand USD in 2019. A substantial rise occurred in 2020, reaching a peak of 1,775,888 thousand USD. However, this peak was followed by a sharp decline in 2021 to 772,020 thousand USD, and the downward trend continued in 2022, with net income lowering further to 361,573 thousand USD. This pattern indicates a peak in profitability in 2020, followed by notable reductions in subsequent years.

Net Operating Profit After Taxes (NOPAT)

NOPAT shows a generally variable pattern with less extreme fluctuations compared to net income. It started at 520,148 thousand USD in 2018, growing to 629,227 thousand USD in 2019. Subsequently, it declined to 531,854 thousand USD in 2020 but then experienced a marked increase in 2021, reaching 1,236,388 thousand USD. In 2022, NOPAT decreased significantly to 536,671 thousand USD, approximating earlier levels. This suggests the company experienced variations in operational efficiency and profitability, with a notable peak in 2021 before retreating the following year.

Overall Observations

Both net income and NOPAT peaked at different points within the timeframe, with net income reaching its highest in 2020 and NOPAT peaking in 2021. The trends highlight a period of exceptional profitability followed by sharp declines that suggest potential challenges in maintaining earnings growth or operational efficiency in recent years. The divergence in peak timings between net income and NOPAT may indicate differences in non-operating factors affecting profitability versus core operating performance.

The financial data reveals notable fluctuations in the provision for income taxes and cash operating taxes over the five-year period ending in 2022. A detailed examination of these figures uncovers several trends and significant changes.

Provision for (benefit from) Income Taxes

The provision demonstrates high volatility across the analyzed years. It started at approximately $57.7 million in 2018 and showed a significant increase to $112.3 million in 2019, indicating a rising tax expense or provision for that year.

In 2020, there is a dramatic decrease resulting in a benefit recorded at about -$1.4 billion. This negative figure suggests the presence of substantial tax benefits or credits, which significantly reduced the company's tax expense for that year.

Following this, the provision reverted to positive figures in 2021 and 2022, at $240.4 million and $237.5 million respectively, stabilizing around these levels but still significantly higher than the initial years.

Cash Operating Taxes

Cash operating taxes showed a generally increasing trend throughout the period. Beginning at $66.3 million in 2018, there was a modest rise to $111.9 million in 2019.

In 2020, despite the large benefit observed in the provision for income taxes, cash operating taxes decreased to $93.7 million, which could reflect timing differences, tax deferrals, or other operational tax management strategies.

From 2020 onward, cash operating taxes increased substantially to $228.6 million in 2021 and further to $279.0 million in 2022, indicating an increasing cash outflow related to income taxes consistent with the return to positive provisions.

In summary, the provision for income taxes shows significant year-to-year volatility with a major tax benefit recorded in 2020, whereas cash operating taxes have increased steadily over the latter part of the period. The divergence in 2020 between the provision and cash taxes suggests the influence of non-cash tax benefits or deferred tax assets impacting the provision without corresponding immediate cash tax relief.

Over the five-year period ending December 31, 2022, several notable trends can be observed in the financial metrics analyzed.

Total reported debt & leases

This metric exhibited some volatility during the period. Initially, there was a significant decrease from approximately 106.7 million in 2018 to 59.2 million in 2019. However, starting from 2020, the debt levels began to rise again, reaching approximately 86.2 million, then increasing substantially to around 125.4 million by 2021, and stabilizing close to this level at approximately 126.9 million in 2022. This pattern indicates a strategic increase in leveraging after 2019, potentially to finance growth or investments.

Stockholders’ equity

There was a consistent and strong upward trend in stockholders’ equity throughout the period, with values growing steadily each year. The value increased from approximately 1.25 billion in 2018 to roughly 1.35 billion in 2019, then surged considerably to about 3.23 billion in 2020. The growth continued, albeit at a slower pace, reaching around 3.62 billion in 2021 and slightly declining to near 3.60 billion in 2022. This indicates significant capital accumulation and possibly successful retained earnings or equity financing activities over the period, with a minor contraction in the last year.

Invested capital

Invested capital showed a steady and marked increase over the five-year timeframe. Starting at about 1.52 billion in both 2018 and 2019, invested capital rose sharply to approximately 2.46 billion in 2020. The upward trend persisted, with invested capital reaching approximately 2.99 billion in 2021 and continuing to climb to around 3.34 billion in 2022. This increase suggests ongoing investments into the company’s assets, operations, or growth initiatives, reflecting expansion or scaling efforts.

The economic spread ratio exhibited considerable fluctuation between 2018 and 2022. Initial values indicated a positive spread, which subsequently declined, turned negative, and then experienced another period of substantial positive movement before declining again. This suggests inconsistency in the company’s ability to generate returns exceeding its cost of capital over the analyzed period.

Economic Spread Ratio Trend

In 2018, the economic spread ratio was 9.99%. This increased significantly to 16.91% in 2019, indicating improved profitability relative to invested capital. However, a substantial decline occurred in 2020, resulting in a negative ratio of -2.77%. The ratio rebounded strongly in 2021 to 16.97%, representing a peak in performance. Finally, the ratio decreased to -8.27% in 2022, signifying a return to underperformance relative to the cost of capital.

The economic spread ratio’s volatility correlates with fluctuations in economic profit. Positive economic profit values in 2018 and 2019 align with positive spread ratios, while negative economic profit in 2020 and 2022 correspond with negative spread ratios. The substantial economic profit in 2021 drove the high spread ratio observed in that year.

Invested Capital

Invested capital consistently increased throughout the period, rising from US$1,516,250 thousand in 2018 to US$3,344,477 thousand in 2022. This growth in invested capital did not consistently translate into improved economic spread, as evidenced by the negative ratios in 2020 and 2022. The increasing invested capital base may have contributed to the difficulty in maintaining a positive economic spread, particularly in years with lower economic profit.

The observed pattern suggests that while the company has been expanding its invested capital, its ability to generate returns above the cost of that capital has been inconsistent. Further investigation into the drivers of economic profit, alongside the increasing invested capital, would be necessary to understand the underlying causes of these fluctuations.

The economic profit margin exhibited considerable fluctuation between 2018 and 2022. Initial years showed positive and increasing margins, followed by periods of negative economic profit margins. A detailed examination of the trends is presented below.

Economic Profit Margin Trend

In 2018, the economic profit margin stood at 7.20%. This margin increased to 9.93% in 2019, indicating improved profitability relative to capital employed. However, 2020 witnessed a significant decline, resulting in a negative economic profit margin of -2.51%. A substantial recovery occurred in 2021, with the margin reaching a peak of 11.53%. This positive trend was not sustained, as the economic profit margin decreased sharply to -7.01% in 2022.

Relationship between Economic Profit and Margin

The economic profit margin closely mirrors the trend in economic profit. The positive margins in 2018 and 2019 correspond with positive economic profit values of US$151,533 thousand and US$257,827 thousand, respectively. Conversely, the negative margins in 2020 and 2022 align with negative economic profit figures of -US$68,086 thousand and -US$276,671 thousand. The peak margin in 2021 is associated with the highest economic profit of US$507,625 thousand.

Revenue Impact

Adjusted net revenues generally increased from 2018 to 2021, moving from US$2,104,380 thousand to US$4,401,700 thousand. However, revenues decreased in 2022 to US$3,949,386 thousand. While revenue growth contributed to the positive economic profit margin in 2021, the decline in revenue in 2022, coupled with negative economic profit, suggests that revenue alone does not fully explain the margin fluctuations. Other factors impacting cost of capital and operational efficiency likely play a significant role.

Overall, the economic profit margin demonstrates a volatile pattern over the observed period. The shift from positive to negative margins, particularly in 2020 and 2022, warrants further investigation into the underlying drivers of economic profit and the factors influencing the cost of capital.