Align Technology, Inc. — Q3 2021 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2021, compared with the same periods in 2020. Align sells Invisalign clear aligners and related products, iTero scanners, and CAD/CAM services. Management’s growth priorities include international expansion, broader general-practitioner adoption, patient demand and conversion, and orthodontist utilization.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Change |
|---|---|---|---|
| Net revenue | $1.016 billion | $734.1 million | +38.4% |
| Gross profit / margin | $755.2 million / 74.3% | $534.1 million / 72.7% | Margin +1.6 percentage points |
| Operating income / margin | $261.2 million / 25.7% | $177.1 million / 24.1% | Income +47.5% |
| Net income | $181.0 million | $139.4 million | +29.8% |
| Diluted EPS | $2.28 | $1.76 | +29.5% |
| Operating cash flow | $355.0 million | Not clearly provided for the quarter | — |
Q3 Clear Aligner revenue was $837.6 million (+34.9%); Systems and Services revenue was $178.3 million (+57.3%). Clear Aligner case volume rose 32.1% to 655,100 cases. Management attributed growth to higher case volume, scanner sales, and service revenue. Gross margin improved primarily from manufacturing efficiencies at higher volumes, scanner mix, and increased service revenue; higher freight costs partly offset the latter benefits.
For the first nine months, revenue was $2.921 billion (+78.4%), gross profit $2.191 billion (75.0% margin versus 70.4%), operating income $755.5 million (25.9% margin versus 10.6%), and net income $581.1 million versus $1.617 billion. Diluted EPS was $7.29 versus $20.45. The year-over-year net income and EPS comparison is distorted by a one-time $1.494 billion tax benefit recognized in 2020 from an intra-entity transfer of intellectual property and fixed assets to Switzerland.
Financial position and liquidity
- At September 30, 2021, cash and cash equivalents were $1.238 billion, up from $960.8 million at December 31, 2020. Cash, cash equivalents and restricted cash totaled $1.238 billion.
- Nine-month operating cash flow was $899.7 million, investing cash outflow $255.7 million, and financing cash outflow $356.8 million. Capital expenditures were $292.0 million for the nine months and $124.3 million in Q3.
- Current assets were $2.455 billion and current liabilities $1.790 billion. Current deferred revenue was $1.070 billion; total deferred revenue, including long-term, was approximately $1.178 billion. Unfulfilled performance obligations, including deferred revenue and backlog, were $1.2 billion and expected to be recognized over one to five years.
- No borrowings were outstanding under the $300 million unsecured revolving credit facility, which matures July 2023; the company reported compliance with its requirements. Total debt is not otherwise reported as outstanding.
- Stockholders’ equity was $3.517 billion and total liabilities $2.133 billion. The company repurchased $275.0 million of shares during the first nine months and had $825.0 million remaining under its May 2021 $1 billion authorization at quarter-end.
Material changes, outlook and management commentary
- Revenue growth spanned both segments and geographies. Nine-month Clear Aligner case volume increased 77.9%; Q3 total utilization rose to 7.7 cases per doctor from 7.1 a year earlier. Digital scanner submissions also increased across regions.
- SG&A increased to $428.4 million in Q3, including higher compensation and $53.4 million more advertising and marketing costs than the prior-year quarter. R&D rose to $65.6 million as Align invested in personnel and innovation.
- Management expected 2021 capital expenditures to exceed $400 million, mainly for facilities and manufacturing capacity, including a planned facility in Wroclaw, Poland. It also planned continued investment in sales, marketing and innovation. The filing provides no specific revenue or earnings guidance.
- Management said cash and available credit should fund the business for at least the next 12 months. It intends to adjust spending to the pace of recovery and demand and views dentistry’s longer-term digital transition as supportive, while cautioning that recent growth may not predict future performance.
- COVID-19 remains a source of uncertainty, alongside raw-material, component, freight and labor shortages, supply-chain delays and inflationary pressures. Other principal risks include demand changes as pandemic restrictions ease, competition and pricing pressure, international and foreign-exchange exposure, cybersecurity and privacy risks, and reliance on key suppliers.
Unusual items, contingencies and controls
- A March 2021 arbitration award against SmileDirectClub resulted in $43.4 million of other income; the award plus interest was paid in March. A separate supply-agreement arbitration, including an SDC counterclaim, was scheduled for a Q1 2022 hearing.
- A securities class-action settlement for $16 million was agreed in June 2021 and was expected to be funded by insurance; final court approval remained pending. Other securities, derivative, antitrust and patent disputes were ongoing. Align said it could not estimate the likelihood or range of loss for several matters.
- A supplier agreement requires minimum aligner-material purchases of approximately $425.9 million through 2022 and an additional approximately $348.0 million from 2023 through 2026.
- Gross unrecognized tax benefits were $64.6 million at September 30, 2021; the company said the balance could materially change in the next 12 months but could not estimate the range of adjustments.
- Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm the durability of case-volume and scanner growth, utilization gains, and the drivers of segment revenue and margins.
- Track whether supply-chain constraints, freight costs, labor availability, and planned capacity expansion affect production, delivery, margins, or the more-than-$400 million 2021 capex plan.
- Separate underlying earnings trends from the 2020 one-time tax benefit and the 2021 SDC arbitration gain; review effective tax rate and deferred-tax-asset realizability.
- Monitor cash conversion and working capital, particularly the growth in receivables, inventory, and deferred revenue, as well as share repurchases and liquidity needs.
- Follow court approval and insurance funding of the $16 million settlement, the SDC supply arbitration, and material developments in antitrust and patent litigation.