Align Technology, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2022. Align operates through its Clear Aligner and Systems and Services segments, selling Invisalign aligners, iTero scanners, and related software and services.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $969.6 million | $1,010.8 million | $1,942.8 million | $1,905.6 million |
| Gross profit / margin | $687.6 million / 70.9% | $758.5 million / 75.0% | $1,396.9 million / 71.9% | $1,435.6 million / 75.3% |
| Operating income / margin | $188.2 million / 19.4% | $268.9 million / 26.6% | $386.3 million / 19.9% | $494.3 million / 25.9% |
| Net income | $112.8 million | $199.7 million | $247.1 million | $400.1 million |
| Diluted EPS | $1.44 | $2.51 | $3.13 | $5.02 |
- Q2 revenue fell 4.1% year over year; Clear Aligner revenue declined 5.1% to $798.4 million, while Systems and Services revenue rose 0.8% to $171.2 million. First-half revenue increased 2.0%.
- Q2 Clear Aligner case volume declined 10.0%; first-half volume declined 5.0%. International Clear Aligner revenue fell 11.2% in Q2, partly reflecting unfavorable currency movements and lower volume.
- Q2 operating cash flow was $127.0 million, per management’s overview. For the first half, operating cash flow was $157.5 million versus $544.7 million a year earlier. First-half capital expenditures were $163.3 million; cash and cash equivalents declined by $222.0 million to $878.2 million, including restricted cash in the cash-flow measure.
- At June 30, cash, cash equivalents, and marketable securities totaled $977.2 million, down from $1,296.7 million at year-end 2021. Current assets were $2,376.8 million and current liabilities $1,804.4 million.
- No borrowings were outstanding on the $300 million revolving credit facility. Total liabilities were $2,211.0 million; the filing reports no other debt balance.
- Align repurchased $275.0 million of shares in the first half, including a $200 million accelerated repurchase. $449.9 million remained available under the May 2021 authorization.
Material changes and management commentary
- Lower aligner case volume and weaker gross margins drove much of the decline in Q2 profitability. Clear Aligner gross margin fell to 73.3% from 76.9%, with management citing a higher mix of additional aligners, freight expense, and manufacturing spending. Systems and Services margin fell to 59.8% from 65.9%, reflecting lower scanner ASP, production inefficiencies, and higher component costs.
- Operating expenses increased 2.0% in Q2; research and development expense rose 26.5% to $73.0 million. Management attributed the increase mainly to higher compensation and headcount. The effective tax rate rose to 35.0% from 25.7%, partly due to 2022 tax-law changes requiring capitalization and amortization of R&D costs.
- Other expense was $14.8 million in Q2, primarily reflecting larger foreign-exchange losses. First-half other expense of $26.1 million compares with $34.0 million of other income in 2021, which included a $43.4 million SDC-related arbitration award gain.
- Management expects 2022 capital expenditures to exceed $300 million, primarily for facilities and manufacturing capacity. The Poland aligner facility began serving doctors in Q2. Management believes cash and available credit are sufficient for at least the next 12 months; the filing provides no specific revenue or earnings guidance.
Risks, contingencies, and unusual items
- Management cites uncertain consumer demand, inflation, higher freight and input costs, foreign-exchange volatility, COVID-19 disruptions, and the Russia-Ukraine conflict. Commercial operations in Russia were suspended after shipping ceased; Align continues to support employees there and notes that access to Russian cash could be affected.
- Supply concentration, manufacturing capacity and staffing, competitive pressure, cybersecurity and patient-data protection, and dependence on international operations are identified risks. Management warns that costs may not be fully offset by price increases.
- Pending matters include antitrust class actions with trials scheduled for June 2024, SDC-related arbitrations, shareholder derivative cases, and a securities class action. The Ninth Circuit affirmed dismissal of the securities class action on July 8, 2022; a rehearing petition was pending. Align says it cannot estimate possible losses for the cited proceedings and believes the claims are without merit.
- The Israeli subsidiary is under tax audit for 2016–2019; the company appealed a tax assessment concerning a 2016 transaction. Gross unrecognized tax benefits were $73.2 million at June 30, 2022.
Investor verification priorities
- Check whether aligner case volumes, doctor utilization, and international demand stabilize, and whether currency movements continue to weigh on reported revenue.
- Track gross-margin recovery against freight, manufacturing, product-mix, scanner pricing, and component-cost pressures.
- Reconcile operating cash generation with working-capital movements, planned capital spending above $300 million, and the pace of share repurchases.
- Monitor effective tax rate impacts from R&D capitalization and the Israeli tax audit, as well as developments in antitrust and SDC proceedings.
- Assess execution and utilization of new manufacturing capacity, including the Poland facility, amid supply-chain and geopolitical risks.