Align Technology, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; financial statements are unaudited. Align designs, manufactures and sells Invisalign clear aligners and related products and services.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net revenue | $104.9 million | $90.1 million | +16.4% |
| Gross profit / margin | $82.2 million / 78.4% | $69.7 million / 77.4% | Margin +1.0 percentage point |
| Operating expenses | $61.2 million | $49.0 million | +24.9% |
| Operating profit / margin | $21.0 million / 20.0% | $20.7 million / 23.0% | Profit +1.6% |
| Net profit / diluted EPS | $15.8 million / $0.20 | $14.9 million / $0.19 | Profit +6.1% |
| Cash provided by operations | $17.2 million | $18.6 million | Down $1.4 million |
- Invisalign revenue was $99.4 million, up 16.4%; non-case revenue was $5.4 million, up 14.9%. Case shipments increased 12.3% to 71,400.
- Revenue growth reflected higher case volumes across channels, especially North American orthodontists and international markets. International revenue also benefited from favorable Euro exchange rates.
- Gross margin improved with higher production volumes and because Q1 2010 included $0.8 million of final Ormco royalty amortization and $0.5 million of training costs classified in cost of revenue.
- Operating expenses rose to 58.4% of revenue from 54.4%. General and administrative expense included approximately $1.5 million of Cadent acquisition transaction costs; research and development included a $2.0 million payment to Cadent under a joint development agreement.
- Cash and cash equivalents were $308.6 million at March 31, versus $294.7 million at year-end. Short- and long-term marketable securities totaled $13.9 million; approximately $8.0 million was held in restricted escrow and is not freely available.
- Total assets were $497.0 million and total liabilities $94.9 million at quarter-end. The company had no borrowings under its $30 million revolving credit facility and reported compliance with its covenants.
Material changes, outlook and risks
- Align adopted ASU 2009-13 for qualifying new or materially modified arrangements from January 1, 2011. It changed revenue timing for Invisalign Assist progress-tracking plans, with revenue recognized as batches ship; the company reported no material overall financial-statement impact.
- On April 29, 2011, after quarter-end, Align completed its acquisition of Cadent for approximately $190 million in cash, subject to adjustments. Cadent provides 3D digital scanning solutions. Purchase-price allocation was still preliminary. Align cited expected strategic benefits but cautioned that integration, adoption, competition and execution could limit them.
- Management expects 2011 capital expenditures to increase to expand Juarez manufacturing capacity and plans an additional aligner fabrication site there by year-end. Delays or unexpectedly strong demand could constrain timely order fulfillment.
- Management expected Q2 operating expenses to rise from remaining Cadent transaction costs, seasonal media spending and international Invisalign G3 commercialization. The international G3 launch was expected to begin in May; China’s commercial launch was expected before the end of Q2, though meaningful China revenue was not expected for several years.
- Align trained approximately 957 new doctors worldwide in Q1, including 165 internationally. It expected to train about 600 fewer international doctors in 2011 than in 2010. North American orthodontist utilization reached 6.5 cases per doctor; management expects long-term improvement but notes quarterly fluctuations.
- Management said cash and existing borrowing capacity should fund operations for at least 12 months, including its stated liquidity assessment. No specific revenue or earnings guidance was provided in the filing text.
- Key risks include reliance on Invisalign and consumer demand, competition and pricing pressure, seasonality and foreign exchange movements, manufacturing capacity and international operations, and risks integrating Cadent. The company also disclosed an FDA Warning Letter received in November 2010 concerning corrective-action documentation and said it was working with the FDA to resolve the matter.
- The Leiszler class settlement received final court approval April 8, 2011 and was expected to become effective in mid-May; Align had placed approximately $8.0 million in escrow and had recorded a $4.5 million settlement charge in 2010. A securities class action remained pending; Align said it intended to defend the case and did not believe a loss was reasonably possible at quarter-end.
Investor verification priorities
- Verify subsequent-period results against Q1’s 16.4% revenue growth, 12.3% case-volume growth and lower operating margin.
- Assess Cadent’s final purchase accounting, total transaction costs, cash impact and progress toward expected scanner interoperability and strategic benefits.
- Track Juarez capacity expansion, capital spending and whether manufacturing can meet demand without delivery delays.
- Monitor the FDA Warning Letter response and the effective implementation and final costs of the Leiszler settlement; review developments in the securities litigation.
- Check the timing and economics of the international G3 rollout and China launch, including doctor training, utilization and revenue contribution.