Align Technology, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; unaudited results compared with the same 2015 periods. Align sells Invisalign clear aligners and iTero intraoral scanners and services.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $269.4 million | $209.5 million | $508.1 million | $407.6 million |
| Gross profit / margin | $205.2 million / 76.2% | $158.6 million / 75.7% | $385.8 million / 75.9% | $309.7 million / 76.0% |
| Operating income | $65.1 million | $42.3 million | $118.5 million | $91.2 million |
| Net income | $50.1 million | $31.4 million | $90.7 million | $67.5 million |
| Diluted EPS | $0.62 | $0.39 | $1.11 | $0.83 |
- Q2 revenue grew 28.6%; first-half revenue grew 24.7%. Growth reflected higher Invisalign case volume and scanner sales.
- Q2 Invisalign case shipments rose 22.4% to 177,000; international volume increased 38.3%. Doctor utilization also improved year over year: 5.1 total cases per doctor versus 4.6.
- Q2 Clear Aligner revenue was $243.4 million, up 21.2%; Scanner revenue was $25.9 million, up 199.0%. Scanner gross margin rose to 53.6% from 15.0%, attributed to iTero Element mix, higher average selling price and lower unit costs.
- Operating expenses increased, including SG&A of $121.5 million versus $100.6 million and R&D of $18.6 million versus $15.7 million in Q2. Management attributed the increases mainly to headcount, compensation and marketing, alongside product development investment.
- Six-month operating cash flow was $106.8 million, versus $98.6 million. Capital expenditures were $39.0 million; investing cash outflow was $51.5 million and financing cash outflow was $55.5 million.
Financial position and liquidity
- At June 30, 2016, cash and cash equivalents were $167.7 million and marketable securities totaled $517.3 million; combined cash and securities were $685.0 million, up from $678.7 million at year-end 2015.
- Current assets were $825.4 million and current liabilities $299.0 million. Total liabilities were $341.4 million; stockholders’ equity was $909.9 million.
- No borrowings were outstanding under the $50 million revolving credit facility. It matures March 22, 2017 and requires at least $50 million of unrestricted cash; Align reported compliance with its requirements. The filing reports no interest-bearing liabilities.
- Approximately $503.6 million of cash and investments was held by foreign subsidiaries. Align said it intends to permanently reinvest foreign earnings and does not plan to repatriate them.
Changes, outlook and notable items
- Revenue growth was partly offset by lower average selling prices. The “Additional Aligners at No Charge” policy increased revenue deferrals; promotional discounts and product mix also weighed on ASP. Full-product price increases partly offset these factors.
- Management expected operating expenses to increase in 2016, citing international expansion, added sales and support resources, product and technology investment, and potential equity-method income or loss from SmileDirectClub. No specific full-year revenue or EPS guidance is provided in the filing text.
- Management estimated 2016 capital expenditures of $80–$85 million, including manufacturing capacity, infrastructure and an ERP system. It expected available liquidity and operating cash flow to fund operations and repurchases for at least 12 months.
- On July 1, Align implemented a new international corporate structure intended to lower its worldwide effective tax rate over time. The company said a reassessment of deferred-tax valuation allowances could produce a potentially material tax benefit within 12 months; the outcome was not certain.
- On July 25, Align agreed to supply SmileDirectClub (SDC) with aligners beginning October 2016, acquired a 17% SDC interest for $46.7 million, and committed to a secured loan facility of up to $15 million at 7% interest. Align expected the transaction to add to revenue growth and earnings in 2017. Future results will include supply revenue and Align’s share of SDC earnings or losses.
- Align authorized an additional $300 million stock repurchase program, bringing announced authorization to $600 million. A $50 million accelerated repurchase began in May; final share delivery was scheduled for October 2016.
- Legal matters include a securities class action appeal and a stayed shareholder derivative suit concerning historical goodwill impairment and forecasts. Align could not estimate possible loss or predict outcomes; it said other proceedings were not expected to materially affect its financial position, results or cash flows.
Risks and contingencies
- Align remains heavily dependent on Invisalign and is exposed to lower ASPs, changing demand, competition and product adoption. It also identified possible pressure from patent expirations beginning in 2017 in the U.S. and 2018 in some foreign markets.
- Production capacity, scanner yields and reliance on single-source suppliers and a third-party scanner component manufacturer could constrain fulfillment or increase costs. International operations, currency movements, and natural or geopolitical disruptions also pose risks.
- Foreign-exchange movements could materially affect results; a 10% aggregate currency move relative to the U.S. dollar could have a material impact. A 10% interest-rate change was not expected to materially affect operating results or cash flows.
- Tax uncertainties include foreign and California tax audits, $42.6 million of gross unrecognized tax benefits, and conditions attached to Costa Rica tax incentives. The company also warned that its new tax structure could be challenged.
- The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Invisalign case growth and utilization persist, and how revenue deferrals, discounts and product mix affect ASP and margins.
- Whether iTero Element production can meet demand and whether scanner margin improvement is sustainable.
- The realized tax impact and durability of the international restructure, including valuation-allowance changes and foreign earnings repatriation constraints.
- SDC’s performance, the terms and collectability of the loan, and the accounting and commercial effects of the supply and equity arrangements.
- Capital spending, repurchase execution and remaining liquidity, including the status of foreign-held cash and the revolving facility’s 2017 maturity.
- Developments in the securities appeal, derivative suit, tax audits, and risks related to patent expirations and key suppliers.