Align Technology, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter ended September 30, 2022; comparisons are with the quarter ended September 30, 2021 unless noted. Align sells Invisalign clear aligners and iTero scanners, along with related services and CAD/CAM software.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Net revenue | $890.3 million | $1,015.9 million | Down 12.4% |
| Gross profit / margin | $619.2 million / 69.5% | $755.2 million / 74.3% | Margin down 4.8 percentage points |
| Operating income / margin | $143.7 million / 16.1% | $261.2 million / 25.7% | Margin down 9.6 percentage points |
| Net income | $72.7 million | $181.0 million | Down 59.8% |
| Diluted EPS | $0.93 | $2.28 | Down 59.2% |
- Revenue by segment: Clear Aligner revenue was $732.8 million, down 12.5%; Systems and Services revenue was $157.5 million, down 11.7%.
- Demand indicators: Clear Aligner case volume fell 11.9% to 577,200 cases. Total doctor utilization declined to 6.8 cases per doctor from 7.7.
- Margins and costs: Clear Aligner gross margin was 70.9%, versus 76.2%; Systems and Services gross margin was 63.3%, versus 65.6%. Management cited Poland facility ramp-up costs, freight expense, product mix and lower selling prices among the pressures. R&D expense increased to $77.0 million from $65.6 million; SG&A declined to $398.5 million from $428.4 million.
- Other income and taxes: Other expense, net was $22.7 million, primarily reflecting foreign-exchange losses. The effective tax rate rose to 40.7% from 30.9%, with management citing income mix, R&D capitalization rules and lower stock-compensation tax benefits.
- Cash flow, nine months: Operating cash flow was $424.0 million, down from $899.7 million. Capital expenditures were $238.7 million; investing cash outflow was $157.5 million and financing cash outflow was $301.5 million, including $275.0 million of share repurchases. Cash, cash equivalents and restricted cash decreased by $55.4 million over the period.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $1.141 billion at September 30, compared with $1.297 billion at December 31, 2021. The company had no borrowings under its $300 million revolving credit facility and reported covenant compliance. Current assets were $2.501 billion and current liabilities $1.809 billion.
- Balance sheet changes: Inventory increased to $320.9 million from $230.2 million at year-end; current deferred revenue rose to $1.287 billion from $1.153 billion. Total liabilities were $2.218 billion and stockholders’ equity was $3.695 billion.
Changes versus comparable periods
- For the first nine months of 2022, revenue was $2.833 billion, down 3.0%; operating income was $529.9 million, down from $755.5 million; net income was $319.8 million, down from $581.1 million; and diluted EPS was $4.07, versus $7.29.
- Quarterly revenue weakness reflected lower aligner case volumes, unfavorable foreign exchange and fewer scanner sales. International Clear Aligner revenue declined 16.7%; Americas Clear Aligner revenue declined 13.8%. Non-case Clear Aligner revenue increased 27.0%, mainly from retention products.
- For the nine months, Systems and Services revenue edged up 0.5% as higher service revenue largely offset fewer scanner sales. Foreign exchange losses and the absence of a $43.4 million arbitration-related gain recognized in Q1 2021 contributed to the year-over-year decline in nine-month other income.
Outlook, risks and unusual items
- Management did not provide specific revenue or earnings guidance in this filing. It expected 2022 capital expenditures to exceed $300 million, mainly for facilities and manufacturing capacity, and stated available liquidity and borrowing capacity should fund operations for at least 12 months.
- Management cited inflation, higher interest rates, supply-chain and labor challenges, currency weakness, recession concerns, and evolving consumer demand as ongoing uncertainties. China lockdowns continued to affect activity in Q3. Russia’s partial military mobilization created staffing and operational challenges; Russia commercial operations were described as immaterial to consolidated results.
- Management said it was managing costs through pricing actions, cost savings and slower hiring, while adjusting purchasing and inventory levels. It continued investments in innovation and international capacity, including the Poland aligner facility.
- On October 27, 2022, after quarter-end, an arbitrator issued an interim award finding that SmileDirectClub breached its supply agreement and Align did not. The award may be material when confirmed, but the final amount depends on the second counterclaim; Align said it expects to recognize amounts ultimately realizable after confirmation of a final award. The second-counterclaim hearing was scheduled for February 2023.
- On October 28, 2022, Align entered a $200 million accelerated share repurchase agreement and received approximately 0.8 million initial shares. The final share count remains subject to the agreement’s pricing formula. The Inflation Reduction Act’s 1% stock-repurchase excise tax applies after December 31, 2022.
- Material matters to monitor include antitrust class actions with jury trials scheduled for June 2024, an Israeli subsidiary tax audit, foreign-exchange exposure, and risks involving competition, cybersecurity, suppliers and manufacturing capacity. The filing says outcomes of the antitrust matters and tax audit cannot be reliably estimated.
Important facts for investors to verify
- Whether case volume, doctor utilization and scanner demand stabilize, and whether revenue trends improve across regions and segments.
- Whether gross margins recover as the Poland facility ramps and freight, production and product-mix pressures change.
- How foreign-exchange movements and the elevated effective tax rate affect subsequent earnings and cash generation.
- The final confirmed SmileDirectClub arbitration award and any effect of the pending counterclaim.
- Execution of the capital expenditure plan, inventory management and the October 2022 share repurchase, including the resulting cash and share-count impact.
- Developments in antitrust litigation, the Israeli tax audit and macroeconomic, geopolitical and supply-chain risks.