Align Technology, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. Align sells Invisalign clear aligners and iTero scanners and related services. Results are unaudited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $209.5 million | $192.5 million | $407.6 million | $373.2 million |
| Gross profit / margin | $158.6 million / 75.7% | $145.5 million / 75.6% | $309.7 million / 76.0% | $282.7 million / 75.8% |
| Operating income | $42.3 million | $48.7 million | $91.2 million | $90.5 million |
| Net income | $31.4 million | $35.6 million | $67.5 million | $68.0 million |
| Diluted EPS | $0.39 | $0.43 | $0.83 | $0.82 |
| Operating cash flow | Not separately stated for the quarter | $98.6 million | $87.7 million |
- Q2 revenue grew 8.8%; six-month revenue grew 9.2%. Invisalign case volume increased 21.1% in Q2 and 18.9% for the half year.
- Q2 operating income fell 13.2% and net income fell 11.9% year over year, as operating expenses grew faster than revenue. SG&A increased $17.1 million in Q2, primarily from higher compensation and headcount, ERP consulting, education and launch costs. R&D increased $2.4 million.
- Clear Aligner revenue rose 11.7% in Q2 and 11.4% for the half year. Scanner and Services revenue fell 32.0% and 21.8%, respectively, reflecting fewer scanner sales ahead of the next-generation product and a permanent price reduction. Scanner gross margin also declined.
- Q2 Clear Aligner gross margin was 78.3%, down from 78.8%; lower average selling prices were partly offset by lower manufacturing costs. Consolidated gross margin was broadly stable.
- Cash and cash equivalents were $161.8 million; short- and long-term marketable securities totaled $435.0 million. Combined liquidity was $596.7 million, versus $602.6 million at year-end 2014. Current assets were $657.9 million and current liabilities $222.9 million.
- Six-month investing cash outflow was $60.3 million, including $26.2 million of capital expenditure; financing outflow was $74.9 million, principally share repurchases and employee tax withholding. Cash decreased $38.1 million.
- No borrowings were outstanding under the $50 million revolving credit facility; Align reported compliance with its terms. Total liabilities were $258.8 million. No material off-balance-sheet arrangements were reported.
Outlook, commentary and notable items
- Management expected Invisalign volume to be relatively flat to slightly down in Q3 versus Q2, citing seasonality. It expected international revenue to grow faster than North America over the foreseeable future.
- The July 2015 “Additional Aligners at No Charge” policy applies to eligible new and open cases. Management expected lower Clear Aligner revenue of approximately $6–7 million in Q3 and $7–8 million in Q4 2015; the revenue is expected to be recognized later as additional aligners ship. More than one million open cases were grandfathered.
- Management expected 2015 operating expenses to rise with sales-force expansion, infrastructure/ERP work and product and market investment. Estimated 2015 capital expenditure was $65–75 million, mainly for manufacturing capacity and infrastructure. A second Juarez facility was expected to begin aligner production in Q3 2015.
- Align launched Invisalign G6 with limited commercialization and expected broader rollout through 2015, with North America in early 2016. The iTero Element scanner was expected to become available in the second half of 2015.
- CEO Joseph Hogan took office June 1, 2015, succeeding Thomas Prescott, who retired as CEO and remained on the board. Management noted transition-related execution and retention risk.
- Foreign exchange, particularly the weaker euro, pressured international average selling prices; Q2 revenue was reduced by $1.2 million versus Q1 by currency movements. Align generally did not use derivatives to manage this exposure.
- Costa Rica tax incentives reduced income taxes by $16.4 million, or $0.20 per diluted share, in the first half. The incentives depend on meeting local employment and investment requirements and begin expiring in various years from 2017. Gross unrecognized tax benefits were $36.3 million; California and Israeli tax audits were noted.
- Align spent $70 million on a 2015 accelerated share repurchase; it received about 1.2 million shares at an average $60.52 per share when completed July 23, 2015. Approximately $130 million remained under the repurchase authorization at June 30.
- A securities class action dismissal was appealed; a related shareholder derivative case remained stayed. Align could not estimate potential loss in either matter, but said other proceedings were not expected to materially affect results or financial position.
- Key disclosed risks include dependence on Invisalign revenue, price and competitive pressure, manufacturing capacity and supply concentration, international operations and currency exposure, product adoption, regulation, cybersecurity and ERP implementation. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether volume growth and utilization can offset lower average selling prices, foreign-exchange pressure and the deferred revenue effects of the additional-aligners policy.
- Whether scanner sales and margins recover following iTero Element’s launch, and whether the new Juarez facility ramps on schedule and within budget.
- Whether elevated SG&A and R&D investment converts into sustained revenue growth and operating profitability.
- The status and potential financial impact of the securities appeal, derivative litigation, tax audits and Costa Rica incentive conditions.
- How much of the $596.7 million liquidity balance is held offshore: approximately $389.2 million, which Align intended to permanently reinvest and said could incur material costs if repatriated.