Align Technology, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Comparisons are with Q1 2023 unless stated otherwise. Align sells clear aligners and related products, intraoral scanners, and CAD/CAM software and services.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $997.4 million | $943.1 million | +5.8% |
| Gross profit / margin | $697.8 million / 70.0% | $660.7 million / 70.0% | Margin unchanged |
| Operating income / margin | $154.1 million / 15.5% | $133.5 million / 14.2% | Margin +1.3 pts |
| Net income | $105.0 million | $87.8 million | +19.6% |
| Diluted EPS | $1.39 | $1.14 | +21.9% |
| Operating cash flow | $28.7 million | $199.9 million | Down $171.2 million |
| Capital expenditures | $9.4 million | $64.1 million | Down $54.8 million |
Clear Aligner revenue rose 3.5% to $817.3 million; case volume increased 2.4% to 605,100. Systems and Services revenue increased 17.5% to $180.2 million. Segment gross margin fell to 70.9% for Clear Aligners from 71.7%, while Systems and Services margin rose to 65.9% from 61.6%. Total gross margin remained 70.0%.
The 33.7% effective tax rate declined from 34.8%. Management attributed higher operating income to revenue growth and improved Systems and Services margins; Clear Aligner margin pressure reflected higher manufacturing spend. SG&A and R&D expenses increased, primarily due to employee costs and continued innovation investment.
Liquidity, debt, and cash flow
At March 31, cash and cash equivalents were $865.8 million and marketable securities totaled $36.7 million, for combined liquidity of $902.5 million, down from $980.8 million at year-end 2023. Current assets were $2.48 billion and current liabilities $2.02 billion. Total liabilities were $2.40 billion. No borrowings were outstanding under the $300 million unsecured revolving credit facility, which matures in December 2027; the company reported compliance with its requirements.
Operating cash flow was constrained by working-capital outflows, including $79.2 million for prepaid expenses and other assets, primarily related to UK VAT assessments, and $69.6 million from accounts receivable timing. Investing cash outflow was $79.6 million, including the Cubicure acquisition. Financing cash outflow was $11.7 million. Cash, cash equivalents, and restricted cash declined $71.6 million during the quarter.
Material changes and notable items
- Revenue growth was led by Systems and Services and international clear aligners. Americas Clear Aligner revenue grew 1.6%; International grew 4.6%. Product mix and promotional discounts pressured average selling prices in both regions.
- On January 2, Align acquired the remaining interest in Cubicure for total purchase consideration of $85.8 million. The acquisition added $47.0 million of developed technology and preliminary goodwill of $47.7 million. A $4.1 million pre-tax gain was recorded on remeasurement of Align’s prior investment.
- Q1 restructuring liability declined to $1.4 million from $5.3 million at December 31, 2023, primarily due to cash payments.
- No shares were repurchased during Q1. The January 2023 repurchase authorization had $650 million remaining at quarter-end. After quarter-end, Align announced a planned $150 million open-market repurchase.
- After quarter-end, Align agreed to invest a further $75 million in Heartland Dental, bringing total investment to $150 million for a less-than-5% interest.
Outlook, risks, and contingencies
The filing provides no specific revenue or earnings guidance. Management expects approximately $100 million of 2024 capital expenditures and says cash balances and available borrowing capacity should fund operations for at least 12 months. It intends to continue investing in R&D, manufacturing, treatment planning, sales, and marketing, while managing costs through pricing actions, cost savings, and slower hiring.
Management cited macroeconomic weakness, inflation, consumer demand, currency volatility, competition, product mix, and military conflicts as sources of uncertainty. The Middle East conflict has affected iTero shipping and may affect Israeli personnel and operations; the Russia-Ukraine conflict may weigh on European sentiment and demand. Foreign-exchange movements were unfavorable year over year, despite a favorable sequential effect in Q1.
- UK VAT: HMRC assessments totaled approximately $95 million for certain clear-aligner sales from October 2019 through May 2023. Align disputes the assessments and has not recorded a loss because an unfavorable outcome was not considered probable. Estimated potential exposure is approximately $115 million, excluding interest and penalties; payment is required before contesting or litigating.
- SmileDirectClub: Align has a $63 million judgment, but recovery is uncertain following SDC’s conversion to Chapter 7 bankruptcy.
- Antitrust matters: Align obtained summary judgment on specified claims in two cases; plaintiffs appealed. A jury trial on remaining Section 1 allegations in one matter was scheduled for January 2025. Align says it cannot estimate potential loss.
- Other matters: A shareholder derivative settlement is subject to court approval, with no monetary payment by Align other than a potential $575,000 attorneys’ fee covered by insurance. Align also filed a patent and unfair-competition lawsuit against Straumann-related defendants in April 2024.
- Other principal risks include reliance on sole-source suppliers, cybersecurity and IT disruptions, regulatory and product-liability exposure, and potential impairment of goodwill or intangible assets.
Investor verification priorities
- Track operating cash conversion and working-capital trends, particularly receivables and the cash impact of VAT assessments.
- Monitor the UK VAT dispute, additional assessments, and any change in the estimated $115 million exposure.
- Assess whether clear-aligner volume growth can offset discounting, lower-priced product mix, and manufacturing-cost pressure.
- Review Systems and Services growth and margins, and the integration and returns from Cubicure and the additional Heartland investment.
- Follow appeals and trial developments in antitrust cases, and the recoverability of the SDC judgment.
- Verify execution of the announced repurchase and planned capital expenditures against liquidity and operating cash flow.