Align Technology, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited results compared with Q1 2017. Align sells Invisalign clear aligners and iTero intraoral scanners and services.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $436.9 million | $310.3 million | +40.8% |
| Gross profit / margin | $327.4 million / 74.9% | $235.6 million / 75.9% | Margin down 1.0 percentage point |
| Operating income / margin | $98.2 million / 22.5% | $61.7 million / 19.9% | Margin up 2.6 points |
| Net income | $95.9 million | $69.4 million | +38.1% |
| Diluted EPS | $1.17 | $0.85 | +37.6% |
| Operating cash flow | $77.3 million | $47.6 million | +$29.7 million |
- Revenue by segment: Clear Aligner revenue was $385.5 million, up 36.5%; Scanner revenue was $51.4 million, up 84.2%. Case volume rose 33.5% to 282,100. Management attributed growth primarily to case volume across regions and increased non-case revenue.
- Regional performance: Clear Aligner Americas revenue increased 26.6%; International increased 53.4%. Scanner growth reflected more scanners recognized and higher CAD/CAM services, partly offset by lower scanner average selling prices.
- Margins and expenses: Clear Aligner gross margin declined to 77.0% from 77.9%, chiefly from manufacturing expansion costs. Scanner gross margin improved to 59.2% from 56.1%. SG&A rose $48.5 million, mainly from compensation, advertising and marketing, and equipment and maintenance; R&D rose $6.8 million.
- Cash flow and investment: Investing activities provided $109.3 million, including $136.4 million from securities maturities and sales and repayment of a $30.0 million SDC loan; capital expenditures were $57.6 million. Financing used $139.8 million, including $100.0 million of share repurchases and $47.8 million of employee tax withholding on vested RSUs. Operating cash flow less property and equipment purchases was approximately $19.8 million, versus negative $11.9 million in Q1 2017.
- Liquidity and debt: Cash and cash equivalents were $498.0 million; marketable securities totaled $175.0 million; combined liquidity was $673.0 million, down from $761.5 million at year-end 2017. Current assets were $1.169 billion and current liabilities $518.0 million. No borrowings were outstanding under the $200 million revolving credit facility; the filing reports no interest-bearing liabilities.
- Taxes: The effective tax rate was 2.9%, versus a tax benefit rate of 11.4% in Q1 2017. Q1 2018 included $23.3 million of excess tax benefits from stock-based compensation. The company recorded an additional provisional $2.4 million TCJA-related tax charge in the quarter.
Material changes and management outlook
- Management reported total Invisalign utilization of 5.8 cases per doctor, versus 5.4 a year earlier; North American orthodontist utilization reached 15.3 versus 12.6. International Invisalign case volume grew 43.5%.
- Management expected 2018 operating expenses to increase, citing international expansion, manufacturing capacity, legal and intellectual-property costs, sales and marketing, and product development. It expected an additional $140 million to $170 million of capital expenditures during the remainder of 2018, primarily for manufacturing capacity supporting international expansion.
- Management expected International revenue to grow faster than Americas revenue for the foreseeable future, while cautioning that product adoption and utilization can fluctuate. The filing provides no specific full-year revenue or earnings guidance.
- New Invisalign portfolio offerings and Invisalign First were announced in April 2018, with stated availability beginning July 1, 2018 in specified markets. New iTero Element 2 and Element Flex scanners were also announced in April; iTero Element received China market approval. These are post-quarter developments, not Q1 results.
- ASC 606 revenue recognition was adopted using the full retrospective method; management said adoption did not materially affect historical statements of operations, comprehensive income, or cash flows. The company expected adoption of the new lease standard in 2019 to materially increase balance-sheet assets and liabilities.
Risks, contingencies, and unusual items
- SDC dispute: SDC entities initiated proceedings on April 5, 2018 seeking, among other relief, to stop Align’s Invisalign store pilot and repurchase Align’s SDC membership interests. Align disputes the allegations. The company could not estimate the likelihood or amount of any loss. The SDC supply agreement, including minimum volume commitments, remained in place through 2019.
- Patent litigation: Align’s lawsuits and ITC complaints against 3Shape allege infringement of Align patents by 3Shape’s Trios scanner and software. Outcomes and financial effects were not stated.
- Competition and execution: Align highlighted key patent expirations beginning in 2017, potential price and share pressure, dependence on Invisalign, manufacturing capacity and single-source supply risks, and reliance on international operations. A 10% currency-rate change could materially affect results and financial position, although the company began using short-term currency forwards in March.
- Other exposures: Risks include customer and patient data security (the filing says breaches had occurred in the past), regulatory compliance, foreign tax uncertainty, and the potential impairment of strategic investments, including SDC. The company reported $50.3 million of gross unrecognized tax benefits at March 31, 2018 and an ongoing IRS examination for tax year 2015.
- Management said current cash, cash equivalents, short-term securities, and borrowing capacity should fund operations for at least 12 months. It reported no material off-balance-sheet arrangements. Operating lease payments totaled $66.5 million over future periods.
Investor facts to verify
- Whether revenue and case-volume growth, particularly International and scanner growth, continued after Q1, and how pricing, promotions, product mix, and currency affected average selling prices and margins.
- Whether planned manufacturing investment and higher operating expenses translated into capacity, revenue growth, and sustained operating margins.
- Developments and potential financial or strategic consequences of the SDC dispute, Invisalign store pilot, and ongoing SDC commercial relationship.
- Progress and outcomes in the 3Shape patent proceedings, and how competition following patent expirations affected market share and pricing.
- Cash deployment, remaining share-repurchase authorization, capital expenditure spending, and the effect of tax-law adjustments and audits on the effective tax rate.