Align Technology, Inc. — Q1 2023 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. Align sells Invisalign clear aligners and related products, iTero scanners, and CAD/CAM software and services.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $943.1 million | $973.2 million | Down 3.1% |
| Gross profit / margin | $660.7 million / 70.0% | $709.3 million / 72.9% | Margin down 2.9 percentage points |
| Operating income / margin | $133.5 million / 14.2% | $198.1 million / 20.4% | Income down 32.6% |
| Net income | $87.8 million | $134.3 million | Down 34.6% |
| Diluted EPS | $1.14 | $1.70 | Down 32.9% |
| Operating cash flow | $199.9 million | $30.5 million | Up $169.4 million |
| Capital expenditures | $64.1 million | $87.3 million | Down $23.2 million |
Revenue and operations: Clear Aligner revenue was $789.8 million, down 2.5%; Systems and Services revenue was $153.3 million, down 6.2%. Clear Aligner case volume declined 3.9% to 575,300. Total revenue fell mainly on lower aligner case and scanner volumes and unfavorable foreign exchange, partly offset by higher service and non-case revenue. Gross margin pressure reflected Poland manufacturing ramp-up and additional-aligner mix; scanner-segment margins were affected by lower production volumes and higher inventory costs.
Cash, liquidity and capital: Cash, cash equivalents and marketable securities totaled $921.4 million at March 31, down from $1,041.6 million at year-end. Current assets were $2.33 billion and current liabilities $2.00 billion. The company had no borrowings on its $300 million revolving credit facility, maturing in December 2027, and reported compliance with its requirements. Management said existing cash and available borrowing capacity should fund operations for at least 12 months. Financing activities used $259.0 million; the company repurchased 942,356 shares during the quarter. The May 2021 $1 billion repurchase authorization was completed; the new January 2023 $1 billion authorization had not been used by quarter-end.
Debt and other obligations: No outstanding credit-facility borrowings were reported. Current deferred revenue was $1.38 billion; total unfulfilled performance obligations, including deferred revenue and backlog, were $1.54 billion, expected to be fulfilled over six months to five years.
Material changes and management commentary
- Revenue declined across both reported segments. Clear Aligner case volume was lower, while non-case revenue rose 19.2% and helped cushion the decline.
- Operating expenses rose to $527.1 million from $511.3 million, including research and development expense up $15.6 million to $87.4 million. SG&A was essentially flat.
- The effective tax rate increased to 34.8% from 28.4%, primarily reflecting income mix across jurisdictions and lower excess tax benefits from stock-based compensation.
- Operating cash flow improved substantially, supported in part by changes in accrued liabilities and deferred revenue, among other factors. Cash and investments nevertheless declined, notably alongside share repurchases.
- Management’s strategic priorities remain international expansion, general-practitioner adoption, patient demand and conversion, and orthodontic utilization. Total utilization fell to 7.0 cases per doctor from 7.3 a year earlier.
Outlook, risks and unusual items
- No specific quarterly or full-year revenue or earnings guidance is provided in the filing. Align expects 2023 capital expenditures to exceed $200 million, mainly for facilities and manufacturing capacity.
- Management cited inflation, interest rates, currency volatility, supply-chain and labor challenges, uncertain consumer demand, competition, and geopolitical conditions as risks. The company expects the Russia-Ukraine conflict to create market uncertainty but did not expect a material 2023 financial impact; it also said COVID-19 effects remain difficult to predict.
- In the SmileDirectClub arbitration, an interim award found that SDC breached the supply agreement and caused harm to Align. Align petitioned to confirm the award; recognition of any amount is expected only after confirmation of a final award and could be material. The outcome of SDC’s second counterclaim remains uncertain.
- Antitrust class actions are pending, with jury trials scheduled for June and September 2024. Align says it believes the claims are without merit; it cannot estimate the likelihood or range of loss for these matters or the shareholder derivative lawsuits.
- A restructuring plan begun in Q4 2022 is expected to be completed in the first half of 2023. Q1 2023 incremental restructuring expense was approximately $0.1 million.
- After quarter-end, Align agreed to invest $75 million for a less-than-5% equity interest in Heartland Dental, subject to related stockholder-agreement provisions.
- Gross unrecognized tax benefits were $145.3 million at quarter-end. The filing reports no material probable or reasonably possible indemnification claims and no material off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether aligner and scanner demand, case volumes, utilization, and revenue trends stabilize or improve.
- Whether gross and operating margins recover as manufacturing capacity ramps and product mix, discounts, and foreign exchange evolve.
- Whether operating cash flow is sustainable apart from working-capital timing, and how planned capital spending and repurchases affect liquidity.
- Developments and potential financial impact of the SDC arbitration and pending antitrust litigation.
- Execution and terms of the Heartland investment, and progress toward the stated 2023 capital-expenditure plan.