Align Technology, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2014. Financial statements are unaudited. Align sells Invisalign clear aligners and iTero intra-oral scanners and related services.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net revenues | $192.5 million | $163.8 million | $373.2 million | $317.4 million |
| Gross profit / margin | $145.5 million / 75.6% | $123.7 million / 75.5% | $282.7 million / 75.8% | $236.5 million / 74.5% |
| Operating income (loss) | $48.7 million | $37.9 million | $90.5 million | $(0.2) million |
| Net income (loss) | $35.6 million | $29.3 million | $68.0 million | $(12.7) million |
| Diluted EPS | $0.43 | $0.36 | $0.82 | $(0.16) |
- Q2 revenue increased 17.5% year over year; six-month revenue increased 17.6%.
- Q2 clear-aligner revenue was $179.7 million, up 17.2%; scanner and services revenue was $12.8 million, up 21.9%. Invisalign case volume rose 12.4% in Q2, including 26.4% international growth.
- Higher clear-aligner average selling prices and product mix supported gross margin. Scanner Q2 gross margin declined to 29.5% from 33.9%, reflecting lower scanner selling prices.
- Q2 operating expenses were $96.7 million versus $85.8 million. Sales and marketing and R&D spending rose; G&A was broadly flat. Six-month 2013 results included $40.7 million of goodwill impairment and $26.3 million of long-lived-asset impairment in the Scanner business; neither charge recurred in 2014.
- Six-month operating cash flow was $87.7 million, compared with $63.7 million in 2013. Investing cash outflow was $117.6 million and financing cash outflow was $45.9 million. Accounts receivable increased $21.4 million, partly reflecting revenue growth.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $167.5 million; short- and long-term marketable securities totaled $335.2 million. Combined cash and investments were $502.7 million, versus $472.0 million at December 31, 2013.
- Total liabilities were $209.6 million, including $187.1 million of current liabilities. No borrowings were outstanding under the $50 million revolving credit facility, which matures in March 2016; the facility requires at least $50 million of unrestricted cash. The company reported compliance with its covenants.
- The company authorized up to $300 million of repurchases over three years, with $100 million authorized for the first twelve months. A $70 million accelerated share repurchase was completed July 29, 2014; approximately 1.4 million shares were delivered at an average price of $51.46. Approximately $230 million remained available under the authorization as of June 30.
- Approximately $260 million of cash and investments were held by foreign subsidiaries. Align intends to permanently reinvest foreign earnings; repatriation costs would likely be material.
Outlook, commentary and material risks
- Management expected Invisalign volume to be relatively flat in Q3 2014 versus Q2, citing seasonal patterns. This is a volume expectation, not a specific revenue or earnings forecast.
- Management estimated 2014 capital expenditures of $40–$50 million, primarily for manufacturing capacity and infrastructure, including $30–$40 million expected in the remainder of the year. It believed available liquidity and operating cash flow would fund operations and repurchases for at least 12 months.
- Align reported that the IRS indicated aligners were not subject to the medical device excise tax, while scanners remained subject to it. The company received a $1.2 million refund for 2014 aligner taxes and expected roughly $1.8 million lower quarterly G&A expense based on current revenue. A separate $6.8 million claim for 2013 taxes remained subject to IRS review and was not recorded as a receivable.
- The six-month effective tax rate was 25.3%; the comparable 2013 rate was affected by the non-deductible Scanner goodwill impairment. Costa Rica tax incentives reduced six-month 2014 income taxes by $15.1 million. The company also disclosed $29.5 million of unrecognized tax benefits and a $35.4 million valuation allowance against deferred tax assets.
- Key risks include reliance on Invisalign for most revenue; competition and pricing pressure, particularly in scanners; adoption and utilization variability; seasonality and foreign-exchange exposure; reliance on international manufacturing and single-source suppliers; and regulatory, product-liability, cybersecurity and intellectual-property risks. The filing cites geopolitical uncertainty in Israel and Russia as possible operational risks.
- Pending matters include a securities class action and a stayed shareholder derivative action relating to allegations about the timing of goodwill impairment and past forecasts. Align could not predict outcomes or estimate possible losses. It stated that other claims and proceedings were not expected to materially affect its financial position, results or cash flows.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It was evaluating the effect and transition method for the new revenue-recognition standard, effective for Align in fiscal 2017.
Most important facts for investors to verify
- Whether case-volume growth, international expansion and higher clear-aligner selling prices continue to support revenue and margins.
- Whether scanner pricing pressure and competitive offerings affect scanner sales, margins or trigger further impairment.
- Q3 seasonality and the subsequent reported results compared with management’s expectation of relatively flat Invisalign volume.
- Whether the IRS approves the $6.8 million 2013 aligner excise-tax refund claim and how tax incentives and uncertain tax positions evolve.
- Completion and final share delivery of the $70 million repurchase, subsequent repurchase activity and remaining liquidity after capital spending.
- Developments in the pending lawsuits and geopolitical or supply-chain conditions affecting international operations.