Align Technology, Inc. — Q2 2010 Form 10-Q
Business and period: Align designs, manufactures and sells Invisalign clear-aligner systems and related products to orthodontists and general-practice dentists. This unaudited filing covers the quarter and six months ended June 30, 2010; comparisons are with the corresponding 2009 periods. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $108.2 | $76.3 | $198.3 | $146.4 |
| Gross profit / margin | $87.0 / 80.4% | $58.0 / 75.9% | $156.7 / 79.0% | $110.7 / 75.6% |
| Operating income | $45.3 | $6.3 | $66.0 | $11.5 |
| Net income | $32.6 | $4.5 | $47.5 | $7.2 |
| Diluted EPS | $0.42 | $0.07 | $0.61 | $0.11 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $61.2 | $29.1 |
- Q2 revenue increased 41.8% year over year; six-month revenue increased 35.5%. Invisalign case shipments rose 27.4% in Q2 and 27.2% for the six months.
- Revenue growth reflected broad case-volume growth, plus a $14.3 million release of previously deferred Invisalign Teen replacement-aligner revenue. The release contributed to reported revenue and gross-margin improvement.
- Q2 operating expenses included an $8.7 million insurance-settlement credit related to OrthoClear litigation. It offset reported expenses; the filing does not present operating income excluding this credit.
- Six-month operating cash flow improved to $61.2 million. Cash generation included noncash adjustments, while higher receivables and prepaids and lower accrued liabilities and deferred revenue were offsets.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $235.8 million and short-term marketable securities were $9.0 million, totaling $244.8 million, versus $186.5 million at December 31, 2009.
- Current assets were $331.1 million and current liabilities $73.8 million. Total liabilities were $74.7 million; stockholders’ equity was $334.0 million.
- No borrowings were outstanding under the $25 million revolving credit facility. The facility matures December 31, 2010, has a $10 million minimum unrestricted-cash covenant and a quick-ratio covenant; the company reported compliance.
- Capital expenditures were $8.8 million in the first half. Management said existing cash and borrowing capacity should fund operations for at least 12 months.
Changes, outlook and risks
- Revenue growth spanned North America and international markets. Q2 North American Invisalign revenue rose 24.8%; international Invisalign revenue rose 21.5%. Management attributed higher gross margin mainly to production-volume cost absorption and the Teen revenue release, partly offset by volume-based discounts.
- Align removed the annual minimum case-start requirement from its North American proficiency program but retained the requirement for 10 annual continuing-education hours. Management expected customer activity and utilization measures to fluctuate as providers adjusted; it anticipated fewer new and reactivated North American doctors trained in 2010 than in 2009.
- Management expected a favorable revenue effect from the Teen revenue-recognition change to continue from Q2 into Q3. It also expected North American GP cases to decline sequentially in Q3 and operating expenses to increase due to advertising, consumer-demand programs and product and technology investment. No specific revenue or earnings guidance was stated.
- Management planned a fall 2010 launch of product, functionality and customer-system innovations. The filing cautions that seasonality, economic conditions, foreign exchange, pricing and product mix, competition, provider utilization, manufacturing capacity and international operations may affect results.
- Unrecognized tax benefits were $7.7 million at June 30; the filing says recognition would affect the effective tax rate. The six-month effective tax rate was 27.6%, versus 41.3% in 2009.
- Legal matters included the Weber class action, from which Align had been dismissed subject to a request for immediate appeal; a new provider-related class action in which Align moved to dismiss; and securities litigation with a dismissal motion awaiting a court ruling. Management said it intended to defend the latter matters and did not consider loss reasonably possible as of June 30.
Important facts for investors to verify
- How much of reported revenue and profit growth reflects the $14.3 million Teen deferred-revenue release and the $8.7 million insurance-settlement credit, and how these items affect comparability.
- Whether case volumes, provider utilization and revenue growth remain durable after changes to proficiency requirements and seasonal effects.
- Q3 operating-expense growth, expected product-launch timing and execution, and the effect of discounts, product mix and foreign exchange on margins.
- Cash conversion and working-capital trends, capital spending, and the status or renewal of the credit facility maturing in December 2010.
- Developments in the disclosed litigation and tax exposures, including the $7.7 million of unrecognized tax benefits.