Align Technology, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; unaudited. Align designs, manufactures and sells Invisalign clear aligners and iTero intra-oral scanners and related services.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $189.9 million | $164.5 million | $563.1 million | $481.9 million |
| Gross profit / margin | $145.1 million / 76.4% | $125.1 million / 76.0% | $427.8 million / 76.0% | $361.6 million / 75.0% |
| Operating income | $51.5 million | $41.5 million | $142.1 million | $41.3 million |
| Net income | $38.2 million | $34.5 million | $106.3 million | $21.9 million |
| Diluted EPS | $0.47 | $0.42 | $1.29 | $0.26 |
- Q3 revenue grew 15.4% year over year; nine-month revenue grew 16.8%. Q3 Invisalign case volume increased 11.9% to 119,600; international volume rose 27.6%.
- Clear Aligner revenue was $178.1 million in Q3, up 16.0%; Scanner revenue was $11.7 million, up 6.4%. Clear Aligner generated $141.1 million of Q3 gross profit; Scanner generated $3.9 million.
- Q3 operating expenses were $93.5 million, versus $83.6 million. Sales and marketing and R&D spending increased, while G&A was relatively stable. Q3 interest and other expense was $2.0 million, primarily reflecting foreign-exchange losses.
- Nine-month net income improvement largely reflects the absence of the 2013 scanner-related goodwill and long-lived asset impairments totaling $67.0 million. No such impairment was recorded in 2014.
- Nine-month operating cash flow was $155.3 million, compared with $118.9 million. Investing cash outflow was $171.4 million and financing cash outflow was $46.9 million; cash declined $62.3 million to $180.7 million.
Balance sheet and liquidity
- At September 30, cash and cash equivalents were $180.7 million and marketable securities totaled $380.8 million, for combined liquidity of $561.5 million.
- Current assets were $615.7 million and current liabilities were $198.6 million. Deferred revenue was $87.4 million. Total liabilities were $225.8 million.
- No borrowings were outstanding on the $50 million revolving credit facility; Align reported compliance with its requirements. Management said current liquidity and operating cash flow should fund operations and planned repurchases for at least 12 months.
- Nine-month share repurchases totaled $77.4 million. The April 2014 authorization permits up to $300 million over three years; $222.6 million remained at quarter-end.
Changes, outlook and notable items
- Revenue growth was led by Invisalign, particularly international markets. Management cited case-volume growth, product mix and, internationally, higher average selling prices; APAC distributor acquisition effects also contributed to nine-month international pricing and revenue comparisons.
- Total doctor utilization was 4.4 cases per doctor versus 4.3 a year earlier. North American orthodontist and international utilization improved; North American GP utilization declined to 2.8 from 2.9.
- Management expected Q4 2014 Invisalign volume to be slightly above Q3, with North American orthodontists seasonally softer and international doctors and North American GPs expected to improve sequentially. This is commentary, not full-year earnings guidance.
- Align expected 2014 capital expenditures of $37–$42 million, mainly for manufacturing capacity and infrastructure. It planned to spend an additional $20–$25 million during the remainder of 2014.
- The IRS informed Align that aligners are not subject to the medical device excise tax; scanners remain subject. Align received a $1.2 million 2014 refund and is seeking a $6.8 million refund for 2013, which it has not recognized because IRS review and approval are uncertain.
- Costa Rica tax incentives reduced nine-month 2014 income taxes by $22.8 million, or $0.28 per diluted share. Eligibility depends on meeting employment and investment conditions. The nine-month effective tax rate was 24.4% versus 45.9% in 2013, when the nondeductible impairment affected the comparison.
- A securities class action was dismissed without leave to amend, but the plaintiff appealed. A related derivative case remains stayed pending the appeal. Align could not estimate potential loss; it said other proceedings were not expected to materially affect its financial position or results.
- Key risks include dependence on Invisalign, competition and pricing pressure in scanners, foreign-exchange exposure, international operating and geopolitical risks, manufacturing capacity and single-source suppliers, regulatory requirements, and litigation. The filing reports no material off-balance-sheet arrangements and no material change in market-risk exposure.
Important facts for investors to verify
- Whether international Invisalign growth and doctor utilization remain strong, especially given weaker North American GP utilization.
- Whether Clear Aligner margins and Scanner profitability sustain improvement amid scanner price competition and product investment.
- Whether the $6.8 million MDET refund is approved and how future tax incentives and unrecognized tax benefits affect earnings.
- Progress and potential financial impact of the securities-action appeal and stayed derivative litigation.
- Execution of capacity investments and repurchases, and the effect of foreign-exchange movements on reported revenue and earnings.