Align Technology, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise noted. Align designs and sells Invisalign clear aligners and iTero intra-oral scanners and related services.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $180.6 million | $153.6 million | +17.6% |
| Gross profit / margin | $137.3 million / 76.0% | $112.8 million / 73.5% | Margin +2.5 percentage points |
| Operating income (loss) | $41.8 million | $(38.1) million | Turned profitable |
| Net income (loss) | $32.4 million | $(42.0) million | Turned profitable |
| Diluted EPS | $0.39 | $(0.52) | Turned positive |
| Cash from operations | $18.0 million | $10.4 million | +$7.6 million |
| Capital expenditures | $5.0 million | $5.6 million | $(0.6) million |
Revenue growth was led by Clear Aligner: $168.2 million, up 18.8%. Scanner and Services revenue was $12.4 million, up 3.3%. Invisalign case shipments increased 14.3% to 112,200. Total utilization was 4.3 cases per doctor, flat year over year; North American orthodontist utilization rose to 8.1 from 8.0, and international utilization to 4.3 from 4.0.
Clear Aligner gross margin increased to 79.1% from 77.2%, reflecting higher average selling prices, lower inventory reserves and reduced warranty costs. Scanner margin rose to 33.6% from 29.3%. Sales and marketing expense increased to $52.9 million from $42.3 million, mainly on higher headcount and advertising; R&D increased to $13.4 million from $11.3 million. General and administrative expense declined to $29.2 million from $30.3 million.
Balance sheet, cash and debt
At March 31, 2014, cash and cash equivalents were $182.8 million; short- and long-term marketable securities totaled $322.6 million. Combined cash, equivalents and securities were $505.4 million, up from $472.0 million at year-end 2013. Current assets were $552.2 million and current liabilities $170.9 million. Total assets were $885.6 million; total liabilities $188.9 million; stockholders’ equity $696.8 million.
Operating cash flow was $18.0 million. Investing activities used $99.3 million, principally reflecting purchases of marketable securities; financing activities provided $21.1 million. Cash and cash equivalents decreased $60.2 million, largely as funds were shifted into securities. Align had no borrowings under its $50 million revolving credit facility and was in compliance with its covenants. Management said available liquidity and operating cash flow should fund operations for at least 12 months. Approximately $238.7 million of cash and securities was held by foreign subsidiaries, and repatriation could incur material costs.
Material changes and outlook
- Q1 2013 results included $40.7 million of goodwill impairment and $26.3 million of long-lived-asset impairment related to the Scanner reporting unit; neither charge recurred in Q1 2014. This is the principal reason the company moved from a reported loss to profit.
- International Clear Aligner revenue rose 56.6%, reflecting case growth, higher ASPs, the acquired Asia-Pacific distributor’s transition to direct sales, prior price increases and favorable foreign exchange. North American Clear Aligner revenue rose 11.1%.
- Align reported that the IRS informed it in March that its aligners are not subject to the medical device excise tax. The change reduced Q1 G&A expense by about $0.5 million; management expected approximately $1.8 million less expense per quarter going forward at then-current revenue levels. Align was seeking an $8.0 million refund for taxes paid in 2013 and 2014, but recorded no receivable because IRS review and approval were uncertain.
- Management expected 2014 capital expenditures of $40–$50 million, primarily for manufacturing capacity and infrastructure. No specific revenue or earnings guidance was provided in the filing. Management expected utilization to improve over the long term but cautioned that quarterly comparisons may fluctuate.
- In February 2014, Align launched Invisalign G5 and ClinCheck Pro in North America; ClinCheck Pro was expected to launch in other country markets in Q1 2015. The company also emphasized international expansion, doctor training and product innovation as growth priorities.
- After quarter-end, the board authorized repurchases of up to $300 million over three years, including up to $100 million in the next 12 months. Align entered a $70 million accelerated share repurchase agreement, expected to complete by July 29, 2014, funded with cash on hand.
Risks, contingencies and unusual items
Key risks include reliance on Invisalign for most revenue; competition and pricing pressure, particularly in scanners; variable customer utilization and consumer demand; foreign exchange and international operating exposure; dependence on certain single-source suppliers and a third-party scanner manufacturer; manufacturing capacity and execution risks; regulatory and product-liability exposure; and cybersecurity, privacy and intellectual-property risks. The company’s scanner business previously incurred substantial impairment after lower-priced competitive products changed its growth and profitability outlook.
A securities class action and a shareholder derivative action concerning alleged delayed goodwill impairment and forecasts remained unresolved. Align said it could not predict outcomes or estimate potential losses and intended to defend itself. It stated that other claims and proceedings were not expected to materially affect its financial position, results or cash flows. The Costa Rica tax incentives reduced Q1 taxes by $7.6 million, or $0.09 per diluted share; continued benefits depend on meeting employment and investment conditions. The Q1 effective tax rate was 23.5%, compared with (7.5)% in Q1 2013, which reflected the nondeductible impairment charge.
Important facts for investors to verify
- Whether Clear Aligner case growth and improved international ASPs persist, and whether reported growth is affected by the Asia-Pacific direct-sales transition and foreign exchange.
- Whether Scanner revenue and margins improve amid price competition and lower scanner ASPs, and whether further impairment indicators arise.
- Whether the IRS approves the requested $8.0 million excise-tax refund and whether the expected quarterly expense reduction is realized.
- How the $70 million accelerated repurchase and broader authorization affect cash, share count and capital allocation.
- Developments in the securities and derivative lawsuits, tax examinations and other contingencies.
- Whether planned manufacturing investment supports growth without creating excess capacity, and whether foreign-held liquidity remains available without costly repatriation.