Align Technology, Inc. — Q1 2013 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2013, compared with Q1 2012. Align sells Invisalign clear aligners and iTero scanners/CAD/CAM services through its Clear Aligner and Scanner and CAD/CAM Services (SCCS) segments.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net revenue | $153.6 million | $135.1 million |
| Gross profit / margin | $112.8 million / 73.5% | $100.8 million / 74.6% |
| Operating income (loss) | $(38.1) million | $28.0 million |
| Net income (loss) | $(42.0) million | $21.0 million |
| Diluted EPS | $(0.52) | $0.26 |
| Operating cash flow | $10.4 million | $7.4 million, revised |
- Revenue increased 13.7%. Clear Aligner revenue rose 14.8% to $141.6 million; SCCS revenue rose 1.7% to $12.0 million. Invisalign case volume increased 15.1% to 98,200 cases.
- Clear Aligner gross margin declined to 77.2% from 79.0%; SCCS gross margin increased to 29.3% from 28.7%.
- Q1 results included $40.7 million of goodwill impairment and $26.3 million of long-lived asset impairment, both related to SCCS. The charges drove the operating and net losses.
- Cash and cash equivalents were $328.7 million; marketable securities totaled $48.7 million. Total cash, cash equivalents and marketable securities were $377.4 million. Current assets were $527.3 million versus current liabilities of $143.9 million.
- No borrowings were outstanding on the new $50 million revolving credit facility. The facility matures March 22, 2016 and requires at least $50 million of unrestricted cash. Total liabilities were $165.1 million; the filing reports no material off-balance-sheet arrangements.
Material changes and notable items
- Increased Invisalign volume drove revenue growth, partially offset by lower average selling prices from product mix, discounts and deferred revenue. North American orthodontist utilization rose to 8.0 cases per doctor from 7.2; overall utilization was 4.3 versus 4.1.
- Q1 Clear Aligner non-case revenue benefited by approximately $4.4 million from consolidating North American Vivera shipments into one annual shipment. Align also deferred $2.7 million of revenue for future free mid-course corrections on eligible open cases.
- Competitive announcements of lower-priced scanners led Align to reduce SCCS growth and profitability expectations, impairing all remaining SCCS goodwill and $26.3 million of long-lived assets. The long-lived asset charge comprised $19.3 million of intangibles and $7.0 million of property and equipment.
- General and administrative expense rose $6.8 million, including higher payroll, legal fees and medical-device excise tax. The effective tax rate was negative 7.5%, with $5.8 million of tax expense associated with the impairments.
- Q1 2012 cash-flow presentation was revised to reclassify $8.0 million of excess share-based tax benefits from operating to financing activities; the revision did not change the net decrease in cash or Q1 2012 results of operations.
Outlook, management commentary and risks
- Align expected to train approximately 7,220 new Invisalign doctors in 2013; it trained 1,660 in Q1. The filing provides no specific full-year revenue or earnings guidance.
- SmartTrack became the standard aligner material in North America and Europe during Q1. Management expected higher material costs to pressure Clear Aligner gross margin in 2013, while anticipating that product innovation could support adoption; the pace of adoption remains uncertain.
- Align transitioned Australia, New Zealand, Hong Kong and Singapore from distribution to direct sales beginning May 1, 2013, after the distributor agreement expired. The distributor represented approximately 3% of 2012 worldwide revenue; management expected direct-sales costs to offset the near-term average-selling-price benefit and cautioned that anticipated financial benefits may not be achieved.
- Beginning June 15, 2013, up to three mid-course corrections per eligible Invisalign Full and Teen case would be included at no charge. Align anticipated approximately $0.7 million less revenue per quarter from no longer billing for these orders.
- Management expected operating expenses to increase in 2013 due to sales-force expansion, Asia-Pacific direct-sales operations and the medical-device excise tax. It stated existing cash and borrowing capacity should fund operations for at least 12 months.
- Material risks include scanner competition and potential further impairment, dependence on Invisalign, pricing and rebate pressure, economic and foreign-exchange exposure, international manufacturing and supply-chain concentration, regulatory compliance, and risks to adoption of new products.
- Two shareholder lawsuits allege, among other things, delayed Cadent goodwill impairment and inaccurate statements; Align intends to defend them but cannot estimate the likelihood or range of loss. Other legal matters were not believed by management to be material individually or in aggregate.
- On April 30, 2013, Align acquired ICA Holdings for approximately $7.0 million, including $3.0 million cash consideration; the purchase price remained preliminary. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether Invisalign case growth and utilization can offset lower average selling prices, rebates and product-mix effects.
- Whether scanner competition continues to weigh on SCCS revenue and profitability, and whether additional impairment charges arise.
- The realized costs and revenue effects of the Asia-Pacific direct-sales transition and the mid-course-correction policy.
- Developments in the securities and derivative lawsuits, tax audits and $22.1 million of unrecognized tax benefits.
- Whether operating cash generation and liquidity remain adequate as Align expands sales coverage and absorbs higher operating costs.