Align Technology, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparative period is Q1 2020. Align sells Invisalign clear aligners and related products, iTero scanners, and digital dentistry software and services, including exocad. Financial statements are unaudited.
Financial results and operating metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $894.8 million | $551.0 million |
| Gross profit / gross margin | $677.1 million / 75.7% | $394.4 million / 71.6% |
| Operating income / margin | $225.4 million / 25.2% | $69.9 million / 12.7% |
| Net income | $200.4 million | $1,518.1 million |
| Diluted EPS | $2.51 | $19.21 |
| Operating cash flow | $227.2 million | $9.8 million |
| Capital expenditures | $43.4 million | $46.1 million |
- Revenue increased 62.4% year over year. Clear Aligner revenue rose 56.4% to $753.3 million; Systems and Services revenue rose 104.0% to $141.5 million, including exocad revenue.
- Clear Aligner case volume increased 65.8% to 595,800 cases. Management cited higher case volume and more scanners recognized across regions as principal revenue drivers. Gross-margin improvement reflected manufacturing efficiencies and, for Systems and Services, product mix; Clear Aligner margin was partly offset by lower average selling prices.
- Revenue by geography: United States $383.0 million; Switzerland $315.5 million; China $61.2 million; other international $135.1 million.
- Cash and cash equivalents were $1.132 billion at quarter-end, versus $960.8 million at December 31, 2020. Operating, investing, and financing cash flows were $227.2 million, $4.6 million, and negative $53.4 million, respectively.
- Current assets were $2.116 billion and current liabilities $1.394 billion. The company had no borrowings on its $300 million unsecured revolving credit facility and reported compliance with its requirements.
- Deferred revenue was $862.9 million current and $74.2 million long-term. Unfulfilled performance obligations, including deferred revenue and backlog, totaled $963.5 million and are expected to be recognized over one to five years.
Material changes and unusual items
- Net income and EPS were substantially lower than in Q1 2020 despite much higher operating income. The prior-year period included a one-time $1.4935 billion tax benefit from transferring certain intellectual property and fixed assets to the Swiss entity. Q1 2021’s effective tax rate was 23.4%, compared with a reported benefit-driven rate of negative 2,745.3% in Q1 2020.
- Q1 2021 other income included a $43.4 million gain from the SDC arbitration award, paid in March, plus interest. The gain increased reported earnings but is not an indication of recurring operating performance.
- SG&A increased $114.2 million, including higher compensation and $29.6 million of additional advertising and marketing expense. R&D increased $13.0 million. Management attributed increases in part to higher staffing and investment.
- Cash from operations benefited from a $106.0 million increase in deferred revenue, alongside higher accounts receivable and prepaid expenses. These working-capital movements affect cash conversion.
Outlook, commentary, and risks
- Management expects 2021 capital expenditures to exceed $300 million, mainly for facilities and manufacturing capacity, including a planned facility in Wroclaw, Poland. It also expects significant continued investment in sales, marketing, and innovation. No specific revenue or earnings guidance is provided in the supplied filing text.
- Management said dental practices had largely reopened but many continued below pre-pandemic capacity. It cited increased demand for digital dentistry, while cautioning that pandemic developments, consumer spending shifts, and recent growth may make future performance and comparisons uncertain.
- Management believes cash and available credit are sufficient for at least the next 12 months. Approximately $447.3 million of cash was held by foreign subsidiaries, with international earnings intended to remain permanently reinvested.
- Key risks include COVID-19 and demand uncertainty; competition and pricing pressure; reliance on Invisalign and iTero; international, currency, and regulatory exposure; capacity and hiring needs; dependence on certain single-source suppliers; cybersecurity and patient-data risks; and pending litigation.
- Material legal matters include securities and shareholder derivative suits, patent and antitrust disputes involving 3Shape, and ongoing SDC supply-agreement arbitration. The company said it could not estimate potential losses for these matters. It reported that it does not believe the matters, individually or collectively, will materially affect its financial position, results, or cash flows, but litigation could involve costs and management distraction.
- After quarter-end, Align entered an accelerated stock repurchase agreement for $100 million on April 30 and paid the amount on May 3, 2021. It received an initial delivery of approximately 0.1 million shares; the final share count depends on the agreement’s pricing formula. No repurchases occurred during Q1.
Important facts for investors to verify
- Whether strong case-volume and revenue growth persists as pandemic-related restrictions ease, and how demand, utilization, and promotional discounts affect average selling prices.
- Whether margin gains and operating leverage continue as Align increases hiring, marketing, R&D, and manufacturing investment.
- How much operating cash flow reflects sustainable earnings versus timing-related deferred revenue and other working-capital changes.
- Progress and costs of the planned capital program, including the Poland facility, and the company’s ability to add capacity without disrupting fulfillment or margins.
- Updates on the SDC supply-agreement arbitration and other litigation, and any changes in potential exposure or financial contingencies.
- Changes in tax assumptions, deferred-tax-asset recoverability, and unrecognized tax benefits; Q1 2020’s tax-driven earnings comparison is not representative of recurring profitability.