Align Technology, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative figures are for Q1 2018. Unaudited consolidated financial statements.
Business context
Align sells Invisalign clear aligners and iTero intraoral scanners. It reports Clear Aligner and Scanner segments. Q1 growth reflected higher case volumes and scanner sales, with international markets growing faster than the Americas.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $549.0 million | $436.9 million | Up 25.6% |
| Gross profit / margin | $402.1 million / 73.2% | $327.4 million / 74.9% | Margin down 1.7 percentage points |
| Operating income / margin | $87.7 million / 16.0% | $98.2 million / 22.5% | Income down $10.5 million |
| Net income | $71.8 million | $95.9 million | Down 25.1% |
| Diluted EPS | $0.89 | $1.17 | Down 23.9% |
| Operating cash flow | $117.2 million | $77.3 million | Up $39.9 million |
Revenue increased in both segments: Clear Aligner revenue was $469.2 million, up 21.7%; Scanner revenue was $79.8 million, up 55.1%. Clear Aligner case volume rose 27.4% to 359,500 cases. Revenue growth was partly offset by lower average selling prices, including promotional discounts and foreign-exchange effects. Clear Aligner gross margin fell to 74.9% from 77.0%, while Scanner gross margin improved to 63.6% from 59.2%.
Operating expenses included $29.8 million of impairments and other charges related to closing Invisalign stores. SG&A increased $47.5 million, mainly from compensation and headcount, legal and outside-service costs, and depreciation and amortization. The effective tax rate increased to 10.4% from 2.9%, primarily due to lower excess tax benefits from stock-based compensation. Other expense was $5.7 million, including a $4.0 million impairment of a privately held investment.
Financial position and liquidity
At March 31, 2019, cash and cash equivalents were $588.0 million and marketable securities were $144.5 million, totaling $732.5 million. Total assets were $2.23 billion; current assets were $1.44 billion and current liabilities were $804.9 million. The company had no borrowings under its $200 million revolving credit facility, which matures in February 2021, and stated it was in compliance with facility requirements.
Lease liabilities recognized under the newly adopted lease standard included $74.9 million of operating lease liabilities and $56.1 million of finance lease liabilities. The finance lease balance related to a building purchase that closed after quarter-end. Operating cash flow was $117.2 million; investing cash flow was negative $74.4 million and financing cash flow was negative $92.8 million. Cash, cash equivalents and restricted cash declined $48.9 million during the quarter. Share repurchases were $50.0 million, with $450.0 million remaining under the May 2018 program.
Material changes, outlook and notable items
- SmileDirectClub (SDC): An arbitration decision required Align to close its Invisalign stores, restrict certain physical retail activities through August 18, 2022, and tender its SDC interest. Align recorded $29.8 million of store-closure impairments and related charges. The interest was tendered after quarter-end; Align expected to record an approximately $16 million gain in Q2, while disputing the stated capital-account value and anticipating possible further litigation.
- Straumann settlement: Straumann paid $35 million in March to settle patent disputes. Because contingencies made the payment refundable at quarter-end, it was recorded as a deferred gain; Align expected to recognize most of it in Q2. A non-binding distribution agreement was under discussion; if not completed by July 2, 2019 or an agreed extension, Straumann would pay an additional $16 million.
- Investment and capacity: Align expected $200–$220 million of additional 2019 capital expenditures, primarily for buildings in North Carolina and Israel and manufacturing capacity. It expected expenses to increase in 2019 for international expansion, sales-force growth, product development, legal costs and a corporate reorganization, with near-term pressure on results. The European headquarters relocation to Switzerland was expected to be completed in early 2020.
- Management outlook: Management expected international revenue to grow faster than Americas revenue for the foreseeable future and anticipated gradual long-term improvement in Invisalign utilization. It cautioned that adoption rates vary and results may fluctuate. The filing does not provide a clear numerical revenue or earnings forecast.
- Other risks and contingencies: Risks include competition and pricing pressure, foreign-exchange exposure, reliance on international operations and key suppliers, manufacturing capacity, regulatory requirements, cybersecurity and data privacy, and litigation. Securities and shareholder derivative suits and disputes with 3Shape remained unresolved; Align could not estimate potential losses. Management said it believed available liquidity and borrowing capacity would fund operations for at least 12 months.
Most important facts for investors to verify
- Whether volume growth can continue while promotional discounts, foreign exchange and product mix pressure Clear Aligner average selling prices and margins.
- Q2 recognition and final terms of the $35 million Straumann settlement, any additional $16 million payment, and progress on the proposed distribution agreement.
- Final proceeds and accounting gain from the SDC interest tender, and any further litigation or operational effects of the arbitration restrictions.
- Execution and cost of planned capital spending, international capacity expansion and the Switzerland headquarters relocation.
- Developments in securities, derivative and 3Shape litigation, as well as changes in tax examinations and unrecognized tax benefits.