Align Technology, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; comparison with the corresponding 2011 periods. Align designs, manufactures, and sells Invisalign clear aligners and intra-oral scanners/CAD-CAM services. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $136.5m | $125.9m | $417.2m | $350.8m |
| Gross profit / margin | $100.4m / 73.5% | $92.4m / 73.4% | $309.9m / 74.3% | $265.7m / 75.7% |
| Operating income (loss) | $4.5m | $26.3m | $68.5m | $63.9m |
| Net income (loss) | $(0.3)m | $19.3m | $49.1m | $46.3m |
| Diluted earnings (loss) per share | $(0.00) | $0.24 | $0.59 | $0.58 |
| Operating cash flow | Not separately stated | Not separately stated | $83.0m | $82.5m |
- Q3 revenue grew 8.4%; nine-month revenue grew 18.9%. Invisalign case shipments rose 16.5% in Q3 and 20.4% year to date.
- Clear Aligner revenue was $126.7m in Q3, up 10.8%; SCCS revenue was $9.8m, down 15.5%. Nine-month SCCS revenue increased 85.1%, mainly because 2012 includes a full nine months of Cadent, versus five months in 2011.
- Q3 results include a $24.7m goodwill impairment charge. The charge was nondeductible for tax, contributing to a 108.3% quarterly effective tax rate and the quarterly net loss. Excluding the impairment, management reported a 15.6% effective tax rate.
- At September 30, cash and equivalents were $304.9m; short- and long-term marketable securities totaled $43.9m. Combined cash and securities were $348.9m, versus $248.1m at year-end 2011. Total liabilities were $166.0m; no credit-facility borrowings were outstanding.
- Nine-month investing cash outflow was $65.6m, including $31.5m of capital expenditures and net purchases of marketable securities. Financing cash inflow was $46.8m, including $40.2m from common-stock issuance, partly offset by $9.8m of repurchases.
Material changes and notable items
- Clear Aligner growth reflected higher case volumes across products and channels, partly offset by lower average selling prices from rebates, promotions, distributor mix, and foreign exchange. Q3 Clear Aligner gross margin was 77.6%, down from 78.6%.
- SCCS Q3 revenue declined, particularly internationally, amid lower scanner volumes and the termination of Straumann distribution arrangements for iTero in Europe and North America. SCCS Q3 gross margin fell to 20.6% from 21.5%, partly due to excess/obsolete raw-material charges and excess training capacity.
- Management recorded a preliminary $24.7m impairment of SCCS goodwill after lower-than-expected results and changed distribution arrangements. The step-two analysis remained in progress; the company expected to finalize it in Q4 and could adjust the charge. SCCS goodwill remaining was $52.6m.
- The company revised prior-period accounting for excess tax benefits on stock awards. It said the errors were not material and did not affect statements of operations; cash-flow presentations were reclassified between operating and financing activities without changing net cash movement.
- Accounts receivable increased $15.5m during the first nine months, including from higher revenue and slower customer payments late in September. Scanner inventory increased in preparation for the move to a larger Israel facility.
Outlook, commentary, and risks
- Management expected Q4 2012 international SCCS revenue to be flat sequentially and primarily CAD/CAM services. It provided no clear company-wide revenue or earnings guidance in the filing.
- Align expected to train approximately 6,500 orthodontists and general practitioners in 2012, 500 more than in 2011. It said long-term utilization should gradually improve but quarterly comparisons may fluctuate; Q3 utilization eased to 4.2 cases per doctor from 4.3 in Q2.
- Align planned to end its Asia-Pacific distribution agreement when it expires in April 2013 and resume direct sales in the region in Q2 2013. Additional transition costs were expected in Q4 2012 and Q1 2013.
- Effective January 1, 2013, Invisalign case prices were to increase by $26–$50, partly reflecting the U.S. medical-device excise tax and continued R&D and advertising investment. Invisalign Teen and retainer prices were unchanged.
- The completed New Jersey SCCS consolidation reduced headcount by 119; management expected approximately $4.0m in annualized net savings. However, it reported recent lower customer-service levels and warned that persistent issues could affect results.
- Management said current cash and borrowing capacity should fund operations for at least 12 months. A $30m revolving credit facility matured December 31, 2012; it was undrawn and covenants were met at quarter-end.
- Risks include dependence on Invisalign, pricing and utilization pressure, weak economic conditions, scanner-market adoption and competition, manufacturing transitions and capacity, international and currency exposure, single-source suppliers, regulatory and product-liability matters, and possible further impairment. Hurricane Sandy caused customer damage and disruption; the company could not yet estimate its financial or operational impact.
- Legal proceedings included intellectual-property, patent, government, employment, contract, and tax matters. The company did not believe these matters would materially affect its financial position, results, or cash flows.
Investor verification priorities
- Confirm the final SCCS goodwill impairment and whether the November annual goodwill review led to further charges.
- Track SCCS scanner revenue, margins, customer-service recovery, and the transition from Straumann distribution.
- Assess whether Clear Aligner volume growth can offset rebates, lower average selling prices, and foreign-exchange effects; monitor doctor utilization.
- Review cash conversion and receivables collection following slower September payments, as well as spending on new facilities and manufacturing capacity.
- Evaluate execution of the Asia-Pacific direct-sales transition, expected savings from the New Jersey consolidation, and the impact of the 2013 price increase and medical-device tax.
- Check the subsequent-period impact of Hurricane Sandy and the final resolution of the stock-award tax-benefit presentation revisions.