ALIGN TECHNOLOGY INC quarterly report, Q3 FY2020

Business context and reporting period

Align Technology, Inc. (NASDAQ: ALGN) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. Its principal businesses are Invisalign clear aligners and iTero scanners and services; results also include exocad CAD/CAM software, acquired April 1, 2020.

Financial performance and position

Amounts are in U.S. dollars; financial figures below are in millions except per-share data.

• Q3 revenue increased 20.9% year over year; clear-aligner case volume rose 28.7% to 496,100. Systems and Services revenue increased 24.5%. Q3 operating margin improved, with management citing clear-aligner manufacturing efficiencies, partly offset by lower average selling prices and Systems and Services margin pressure.
• Nine-month revenue declined 6.8%. Nine-month operating income fell substantially; the prior-year comparison included a $51 million Straumann litigation settlement gain and $23 million of impairment and other charges. Current-year results also included acquisition-related effects.
• Nine-month 2020 net income includes a one-time income-tax benefit of approximately $1,493.5 million from an intra-entity transfer of certain intellectual property and fixed assets to Switzerland. The reported $1,452.5 million tax benefit and $20.45 diluted EPS are therefore not representative of ordinary operating performance.
• Net cash provided by operating activities was $280.8 million for the nine months, versus $529.1 million a year earlier. The cash-flow statement reports a large noncash deferred-tax adjustment; working capital included higher receivables and deferred revenue.
• At September 30, cash and cash equivalents were $615.5 million; there were no marketable securities. Current assets were $1,473.2 million and current liabilities $1,121.8 million. Total liabilities were $1,381.6 million. Align had no borrowings under its $300 million unsecured revolving credit facility, which matures in July 2023, and reported compliance with its requirements.
• Capital allocation included the $430.0 million exocad acquisition (cash paid, net of acquired cash, was $420.8 million) and $101.8 million of capital expenditures. No shares were repurchased in Q3; $100 million remained authorized under the existing repurchase program.

Material changes and management commentary

• Q3 revenue rebounded after pandemic-related disruption earlier in 2020. By quarter-end, dental practices in all regions had largely reopened, but generally remained below pre-pandemic capacity. Nine-month clear-aligner case volume was down 4.1% year over year, while Q3 volume was sharply higher.
• Promotions and discounts supported demand but reduced average selling prices. Align also deferred some revenue through timing and product mix. Management expects international revenue to grow faster than Americas revenue over the foreseeable future, citing investment and lower market penetration; this is an expectation, not a quantified forecast.
• Align expects 2020 expenses to exceed 2019 levels, while controlling discretionary spending and continuing investment in manufacturing capacity, sales and marketing, and product and technology innovation. It expected an additional $70–$80 million of capital expenditures for the remainder of 2020. Management stated existing cash and available borrowing capacity should fund the business for at least 12 months.
• Management reported improved Invisalign utilization: total utilization reached 7.1 cases per doctor in Q3 versus 6.1 a year earlier. Digital submissions also increased in the Americas and internationally. Utilization may fluctuate with seasonality, COVID-19 conditions, and product adoption.
• COVID-19 remains a significant uncertainty: renewed outbreaks, customer capacity, discretionary consumer spending, slower collections, supply-chain disruption, uneven demand, and manufacturing constraints could affect revenue, margins, cash flow, and operations. Align also noted potential productivity effects from remote work and protective measures.

Risks, contingencies, and unusual items

• Competition from direct-to-consumer aligners, traditional orthodontics, and other scanner and aligner providers may pressure volume, pricing, and margins. Promotional activity and product mix already affected average selling prices.
• Litigation includes securities and shareholder derivative actions, patent and antitrust disputes involving 3Shape, a putative dental-practice antitrust class action, and ongoing SmileDirectClub (SDC) arbitrations. Align said outcomes and potential losses could not be predicted or reasonably estimated; it stated it did not believe the proceedings would materially affect results or financial position, individually or in aggregate.
• The exocad acquisition added approximately $340.2 million of goodwill and $118.7 million of identified intangible assets; integration, realization of expected benefits, and impairment are risks. Goodwill is not tax deductible, according to the filing.
• Foreign exchange exposure is material; Align reported a $10.2 million loss on a euro forward contract related to the exocad acquisition in the nine-month period. The filing says a 10% aggregate currency movement could materially affect results and financial position.
• Other exposures include reliance on single-source suppliers and freight carriers, regulatory and product-liability risks, cybersecurity and patient-data risks, and the collectability and valuation of investments and the SDC promissory note. No material off-balance-sheet arrangements were reported.

Important facts for investors to verify

• Separate underlying operating performance from the approximately $1.49 billion one-time tax benefit when assessing nine-month earnings, EPS, deferred tax assets, and future tax rates.
• Track whether Q3’s case-volume rebound persists and whether promotions, product mix, and deferred revenue continue to affect average selling prices and margins.
• Review subsequent cash conversion, receivable collections, and the extent to which COVID-19 or demand volatility affects working capital and liquidity.
• Assess exocad integration, contribution to Systems and Services, and the ongoing valuation and impairment assumptions for acquired goodwill and intangibles.
• Monitor developments in the SDC, securities, antitrust, and patent proceedings; the filing provides no clear estimate of potential losses.
• Confirm execution of the stated capital spending plans and whether Align uses the remaining $100 million repurchase authorization.