Align Technology, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013; filed November 1, 2013. Align develops and sells Invisalign clear aligners and intra-oral scanning and CAD/CAM products and services.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net revenues | $164.5 million | $136.5 million | $481.9 million | $417.2 million |
| Gross profit / margin | $125.1 million / 76.0% | $100.4 million / 73.5% | $361.6 million / 75.0% | $309.9 million / 74.3% |
| Operating income | $41.5 million | $4.5 million | $41.3 million | $68.5 million |
| Net income (loss) | $34.5 million | $(0.3) million | $21.9 million | $49.1 million |
| Diluted earnings per share | $0.42 | $(0.00) | $0.26 | $0.59 |
- Revenue and volume: Q3 revenue increased 20.5% year over year. Invisalign case volume rose 15.6%; Clear Aligner revenue increased 21.2% to $153.5 million. SCCS revenue rose 12.2% to $11.0 million in the quarter, but was flat at $33.5 million for the nine-month period.
- Profitability: Q3 gross margin improved to 76.0%, supported by higher average selling prices, volume-related fixed-cost absorption and lower warranty costs, partly offset by SmartTrack material costs. Nine-month operating income fell year over year, chiefly reflecting first-quarter impairment charges.
- Cash flow: Nine-month operating cash flow was $118.9 million, versus $83.0 million. Investing activities used $200.0 million, including $214.0 million of marketable-security purchases; financing activities used $48.9 million, including $95.1 million of share repurchases. Cash and cash equivalents decreased $130.5 million to $175.8 million.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $400.4 million at September 30, up from $356.1 million at December 31, 2012. Current assets were $482.3 million and current liabilities $163.3 million. No borrowings were outstanding under the $50 million revolving credit facility; Align reported compliance with its requirements. The facility requires at least $50 million of unrestricted cash.
Material changes versus the comparable period
- Q3 revenue growth reflected higher Invisalign case volume across regions and most products, as well as increased non-case revenue. International Clear Aligner revenue grew 31.0% in the quarter; the company attributed part of the increase to higher recognized selling prices after taking over its APAC distributor’s business.
- Q3 net income improved from a small loss to $34.5 million. Q3 2012 results included a $24.7 million goodwill impairment; Q3 2013 had no impairment charge.
- For the first nine months of 2013, Align recorded $40.7 million of SCCS goodwill impairment and $26.3 million of long-lived-asset impairment. Management linked these charges to revised growth and profitability expectations after competitors announced lower-priced scanners.
- Sales and marketing expense increased to $45.2 million in Q3, primarily from higher headcount, commissions, stock-based compensation and advertising. Nine-month general and administrative expense included $5.3 million of medical-device excise tax.
- During the first nine months, Align repurchased about 2.7 million shares for $95.1 million; the repurchase program was completed by September 30.
Outlook, commentary and risks
- Management expected Q4 2013 Invisalign volume to be up slightly from Q3. It expected North American orthodontist volume to decline sequentially, offset by growth from international and North American GP doctors; product mix was expected to shift toward lower-priced Express and away from Teen. SCCS revenue was expected to be flat sequentially.
- Align expected to train approximately 7,220 new Invisalign doctors in 2013; 5,445 had been trained through the first three quarters. Management said 2013 operating expenses were expected to increase versus 2012, including from expanded sales coverage, APAC direct operations and the medical-device excise tax.
- SmartTrack became the standard aligner material in North America and Europe in January 2013, with higher material costs. The June 2013 mid-course-correction policy change included up to three free correction orders for certain products. Align recorded $2.8 million of additional revenue deferral and a $1.7 million reduction in warranty reserves in Q3; the stated net gross-profit impact was a decrease of approximately $1.1 million.
- Key risks include reliance on Invisalign for most revenue; competition and possible price pressure, particularly in scanners; economic and seasonal demand variability; foreign-exchange and international operating exposure; manufacturing capacity and single-source suppliers; regulatory and product-liability risks; and risks to the expected benefits of acquisitions. Align also cited uncertainty in the outcome and potential loss from securities and shareholder derivative litigation, neither of which it could estimate.
- Align said existing cash, short-term securities and borrowing capacity were expected to fund operations for at least 12 months. Approximately $194.2 million of cash and investments was held by foreign subsidiaries; management intended to permanently reinvest foreign earnings. Costa Rica tax incentives reduced nine-month income-tax expense by $18.0 million, subject to maintaining specified employment and investment conditions.
Important facts for investors to verify
- Whether Invisalign case-volume growth and utilization can continue, and how rebates, product mix and pricing affect average selling prices and margins.
- Whether the SCCS business can stabilize amid lower-priced competition, and whether further impairments are possible.
- How the APAC direct-sales transition affects revenue, selling prices, costs and profitability over time.
- The sustainability of operating cash flow and the allocation of liquidity among investments, repurchases and operating needs; also note the credit facility’s minimum-cash covenant.
- Developments in the securities and derivative lawsuits, Israel and Germany tax audits, and the conditions underlying Costa Rica tax incentives.