Align Technology, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are year over year unless noted. Align sells Invisalign clear aligners and related products, iTero scanners, and CAD/CAM services.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net revenue | $973.2 million | $894.8 million | +8.8% |
| Gross profit / margin | $709.3 million / 72.9% | $677.1 million / 75.7% | Margin down 2.8 percentage points |
| Operating income / margin | $198.1 million / 20.4% | $225.4 million / 25.2% | Income down 12.1% |
| Net income | $134.3 million | $200.4 million | Down 33.0% |
| Diluted EPS | $1.70 | $2.51 | Down 32.3% |
| Operating cash flow | $30.5 million | $227.2 million | Down $196.7 million |
| Capital expenditures | $87.3 million | $43.4 million | Up $43.9 million |
- Revenue by segment: Clear Aligner revenue was $809.7 million, up 7.5%; Systems and Services revenue was $163.5 million, up 15.6%. Clear Aligner case volume increased 0.5% to 598,800.
- Balance sheet and liquidity: Cash and cash equivalents were $926.1 million and marketable securities totaled $194.4 million, for combined cash and securities of $1.12 billion, versus $1.30 billion at year-end 2021. Current assets were $2.48 billion and current liabilities $1.86 billion.
- Debt: No borrowings were outstanding under the $300 million unsecured revolving credit facility; Align reported compliance with its requirements. Management said available cash and borrowing capacity should fund the business for at least 12 months.
- Other balance-sheet items: Deferred revenue, current and long-term, totaled approximately $1.36 billion. Unfulfilled performance obligations, including backlog, were $1.385 billion and expected to be fulfilled over six months to five years.
Material changes and drivers
- Revenue growth was attributed to higher Clear Aligner average selling prices, increased non-case revenue (notably Vivera retainers), and higher Systems and Services revenue, including services from a larger scanner install base.
- Gross margin declined as higher aligner mix, freight costs, manufacturing spending, and Systems and Services manufacturing inefficiencies outweighed some pricing and service-revenue benefits.
- SG&A rose to $439.5 million from $397.1 million, reflecting increased compensation and advertising and marketing costs. R&D increased to $71.8 million from $54.5 million, principally due to higher compensation and headcount.
- Net income was also affected by other expense of $11.3 million, compared with other income of $34.5 million in Q1 2021. The prior-year result included a $43.4 million gain related to the SDC arbitration award.
- Operating cash flow fell substantially, with working-capital uses including payments of 2021 bonuses and other accrued liabilities, higher accounts receivable, inventory and prepaid expenses. Inventory increased to $275.7 million from $230.2 million at year-end.
- The effective tax rate rose to 28.4% from 23.4%; the company cited foreign income mix, lower excess stock-compensation tax benefits, and the 2022 requirement to capitalize and amortize certain R&D expenses.
Outlook, risks, and contingencies
- Align did not provide specific revenue or earnings guidance in the supplied filing text. It expected 2022 capital expenditures to exceed $300 million, primarily for facilities and manufacturing capacity, including a Poland aligner facility expected to begin serving doctors in Q2 2022.
- Management described ongoing uncertainty from COVID-19, including China lockdowns and fluctuations in patient and doctor activity; inflation, supply-chain constraints, labor availability, freight costs, and slowing economic growth; and the Russia-Ukraine conflict and related sanctions. Align suspended commercial activity in Russia after its shipping provider stopped deliveries there; the company described Russia operations as immaterial to consolidated results.
- Management said it was managing cost pressures through pricing actions and cost savings, maintaining higher inventory to mitigate supply risks, and adjusting purchase commitments. Higher costs may not be fully offset by price increases.
- Key exposures include intensifying clear-aligner competition, changes in elective-treatment demand and utilization, international currency and geopolitical risks, reliance on single-source suppliers and freight carriers, manufacturing capacity and execution, and cybersecurity, privacy, and product-quality risks.
- Legal matters: A $16 million settlement of the 2018 securities class action received final court approval on April 28, 2022; the filing says it is funded by insurance. Derivative suits previously stayed pending that resolution may proceed. Antitrust class actions remain pending, with trials scheduled for January 2024; Align says it cannot estimate potential loss. The 2020 securities class-action appeal was under submission after March oral argument. The 3Shape litigation was settled in February 2022 on confidential terms without material effect on ongoing operations or results.
- Capital returns: Align repurchased $75.0 million of stock in February, with $649.9 million remaining under its May 2021 authorization at quarter-end. On April 29, 2022, it entered into a $200 million accelerated share repurchase agreement, a subsequent-quarter event.
Important facts for investors to verify
- Whether revenue and case-volume growth can persist while gross and operating margins recover from Q1 declines.
- Whether working-capital outflows and planned capital expenditures affect cash generation, and how management deploys the announced repurchase authorization.
- How China COVID-related restrictions, inflation, freight and supply constraints, and currency movements affect demand, costs, and margins.
- Progress and cost of the Poland facility and other capacity investments, as well as the ability to match staffing and production to demand.
- Developments in antitrust, derivative, securities, SDC, and tax matters, including outcomes or potential exposures not quantifiable in the filing.