Align Technology, Inc. — Q1 2012 Form 10-Q
Period: Three months ended March 31, 2012; unaudited. Align sells Invisalign clear aligners and, following its April 2011 Cadent acquisition, intra-oral scanners and CAD/CAM services.
Financial results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net revenue | $135.1 million | $104.9 million | +28.8% |
| Gross profit / margin | $100.8 million / 74.6% | $82.2 million / 78.4% | Margin down 3.8 percentage points |
| Operating profit | $28.0 million | $21.0 million | +33.2% |
| Net profit | $21.0 million | $15.8 million | +32.5% |
| Diluted EPS | $0.26 | $0.20 | Up $0.06 |
| Operating cash flow | $15.4 million | $17.2 million | Down $1.8 million |
- Clear Aligner revenue was $123.3 million, up 17.6%; Invisalign case volume rose 19.5% to 85,300. Higher volume was partly offset by lower average selling prices from increased discounts and promotions; international revenue also faced unfavorable euro exchange rates.
- Scanner and CAD/CAM Services contributed $11.8 million of revenue and $3.4 million of gross profit. There is no comparable Q1 2011 segment period because Cadent was acquired in April 2011. Its scanner/services gross margin was 28.7%, versus 79.0% for Clear Aligner.
- Operating expenses were $72.8 million, including $0.9 million of acquired-intangible amortization. Sales and marketing, general and administrative, and research and development expenses all increased in dollars, partly reflecting Cadent and additional personnel.
Liquidity, cash flow and capital
- At March 31, cash and cash equivalents were $224.4 million; short- and long-term marketable securities totaled $32.8 million. Combined cash and securities were $257.2 million, up from $248.1 million at year-end. Cash alone declined $16.3 million during the quarter.
- Investing cash outflow was $38.0 million, including $28.2 million of marketable-security purchases and $12.6 million of property and equipment purchases. Financing cash inflow was $6.2 million.
- Total liabilities were $147.4 million and stockholders’ equity was $523.0 million. No borrowings were outstanding on the $30 million revolving credit facility; Align reported compliance with its covenants.
- Align repurchased 102,258 shares for approximately $2.5 million at an average $24.68 per share; approximately $139.7 million remained under the $150 million authorization.
Changes, outlook and key risks
- Revenue growth reflected Clear Aligner volume gains and the newly acquired scanner/CAD/CAM business. Total gross margin declined, largely reflecting the lower-margin acquired segment; Clear Aligner margin improved to 79.0% from 78.4%.
- Management expected to train approximately 6,000 orthodontists and general practitioners in 2012, approximately matching 2011. It expected annualized net savings of about $4 million after completing the New Jersey operations consolidation, targeted for Q3 2012.
- Align was transitioning aligner production to a new Juarez facility and planned to move scanner R&D and manufacturing to a larger Israel facility in the second half of 2012. Delays, cost overruns, or capacity constraints could impede fulfillment.
- Management reported recently lower customer-service and technical-support levels in the scanner/CAD/CAM business during integration and consolidation, and said persistent problems could affect results.
- Other material risks include Invisalign dependence, competition and pricing pressure, uncertain adoption and utilization, foreign-exchange exposure, supplier concentration, international operating and geopolitical risks, regulatory requirements, and potential impairment of Cadent goodwill or intangibles. Management said cash and existing borrowing capacity should fund operations for at least 12 months.
- The 2009 securities class action was dismissed with prejudice in March 2012; Align said it had no evidence of an incurred loss at quarter-end. The filing also notes an Align-filed International Trade Commission complaint against ClearCorrect in March 2012; the provided text does not state its status or outcome.
- Gross unrecognized tax benefits were $16.7 million at quarter-end. Management reported effective disclosure controls; integration of Cadent’s internal-control structure was still in progress, with completion expected during 2012.
Important facts for investors to verify
- How much of revenue and case-volume growth is sustainable organic growth, versus the effect of Cadent and discounting?
- Whether scanner/CAD/CAM margins and customer-service levels improve as integration and the New Jersey transition proceed.
- Whether new facilities open on schedule and provide adequate capacity without material cost overruns or fulfillment disruption.
- How cash generation, capital spending, foreign-exchange losses, and repurchases develop; no formal revenue or earnings guidance is provided in the filing.
- Whether tax exposures, the ClearCorrect proceeding, or any goodwill/intangible impairment create material future charges.