Align Technology, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Financial statements are unaudited. Align sells Invisalign clear aligners and related products, iTero scanners, and CAD/CAM software and services.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1,002.2 million | $969.6 million | $1,945.3 million | $1,942.8 million |
| Gross profit / margin | $713.6 million / 71.2% | $687.6 million / 70.9% | $1,374.3 million / 70.6% | $1,396.9 million / 71.9% |
| Operating income / margin | $171.9 million / 17.2% | $188.2 million / 19.4% | $305.4 million / 15.7% | $386.3 million / 19.9% |
| Net income | $111.8 million | $112.8 million | $199.6 million | $247.1 million |
| Diluted EPS | $1.46 | $1.44 | $2.60 | $3.13 |
| Operating cash flow | $251.8 million | Not stated for quarter | $451.7 million | $157.5 million |
Q2 revenue increased 3.4% year over year, while operating income declined 8.6%. Higher clear-aligner average selling prices and non-case revenue supported growth; foreign exchange and lower scanner volumes partly offset it. Q2 diluted EPS increased despite slightly lower net income, alongside a lower weighted-average share count. For the first half, revenue was nearly flat, while net income fell about 19% and operating income about 21% year over year.
At June 30, cash and cash equivalents were $952.0 million and marketable securities totaled $81.8 million, for combined cash and securities of $1,033.8 million. Current assets were $2,465.5 million and current liabilities $2,107.1 million. Align had no borrowings under its $300 million unsecured revolving credit facility, which matures in December 2027, and reported compliance with its covenants. Management said available cash and borrowing capacity should fund operations for at least 12 months. No material off-balance-sheet arrangements were reported.
Six-month investing cash outflow was $178.3 million, including $122.7 million of property and equipment purchases and a $75 million investment in Heartland Dental. Financing cash outflow was $259.9 million, including $292.4 million of repurchases and related accelerated-repurchase payments, partly offset by employee stock issuance proceeds. The company repurchased no shares during Q2; $1 billion remained available under its January 2023 authorization. Total liabilities were $2,506.2 million; the filing reports no outstanding credit-facility debt.
Business trends and comparison with prior periods
- Q2 Clear Aligner revenue rose 4.3% to $832.7 million; Systems and Services revenue declined 1.0% to $169.5 million. First-half Clear Aligner revenue increased 0.9%, while Systems and Services revenue fell 3.5%.
- Q2 clear-aligner case volume increased 0.9% year over year to 604,400; first-half volume declined 1.5% to 1.18 million. Q2 Americas Clear Aligner revenue fell 2.6%, while International revenue rose 9.3%.
- Q2 revenue benefited from higher Clear Aligner average selling prices and non-case revenue, including Vivera retainers and the Doctor Subscription program. Promotional discounts, lower-priced product mix and currency effects pressured realized prices in certain markets. Scanner sales volumes declined; service and certified pre-owned scanner revenue partly offset the weakness.
- Q2 total gross margin improved 0.3 percentage points, but first-half gross margin declined 1.3 points. Clear Aligner margin weakened, which management attributed primarily to higher manufacturing spend; Systems and Services margin improved on lower costs and a higher service mix.
- SG&A rose to $453.2 million in Q2, and R&D rose to $88.5 million. Management cited higher salaries, benefits, stock-based and incentive compensation; R&D spending reflects continued investment in innovation. Corporate expenses also increased.
- Q2 total Invisalign utilization declined to 7.2 cases per doctor from 7.3 a year earlier. Digital submissions increased in both the Americas and internationally. Employee count was 22,910, down 4.6% year over year.
Outlook, risks and unusual items
- The filing provides no specific quarterly or full-year revenue or earnings guidance. Align expected 2023 capital expenditures to exceed $200 million, principally for facilities and manufacturing capacity. Management’s stated growth priorities include international expansion, GP adoption, patient demand and conversion, and orthodontic utilization.
- Management identified inflation, interest rates, currency movements, consumer demand, supply-chain and labor constraints, geopolitical events, and lingering pandemic-related uncertainty as factors that could affect costs and demand. It noted that price increases may not fully offset inflationary costs.
- Align invested $75 million for a less-than-5% equity interest in Heartland Dental, accounted for under the measurement alternative; the carrying value was $75 million at quarter-end.
- The SmileDirectClub arbitration concluded with an award finding that Align did not breach the supply agreement and that SDC breached it. SDC sought to vacate the award; Align sought confirmation. The filing says recognition depends on the amount ultimately realizable following confirmation. The outcome could affect reported results.
- Antitrust class actions remain pending, with jury trials scheduled for June 2024 and January 2025. Align says it intends to defend the claims; it cannot predict the outcome or estimate a possible loss range. The shareholder derivative suits are stayed.
- Six-month effective tax rate was 34.8%, versus 31.6% in the prior-year period. Gross unrecognized tax benefits were $148.2 million at June 30, 2023. A restructuring plan begun in late 2022 was completed in the first half of 2023.
- Available-for-sale securities had $2.2 million of gross unrealized losses, primarily from interest-rate and credit-spread changes. The company also cited foreign-exchange exposure; it uses short-term forward contracts but says a 10% aggregate currency move could materially affect results and financial position.
Important facts for investors to verify
- Whether clear-aligner case volume, doctor utilization and scanner demand improve, particularly in the Americas and Systems and Services segment.
- Whether pricing, discounting, product mix, manufacturing costs and foreign exchange continue to support or pressure gross and operating margins.
- The confirmation or vacatur of the SmileDirectClub award, the timing and amount of any potential recovery, and developments in antitrust litigation.
- Execution of the more-than-$200-million 2023 capital expenditure plan and the impact of the Heartland Dental investment.
- Cash generation, working-capital movements, the use of the remaining repurchase authorization, and the company’s assumptions supporting its 12-month liquidity assessment.
- Changes in tax exposures, including the unrecognized tax benefits, and the effect of currency, inflation, geopolitical and supply-chain risks.