Align Technology, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Align designs and sells Invisalign clear aligners, iTero scanners and services, and—since its April acquisition—exocad dental CAD/CAM software. Results were materially affected by COVID-19 disruptions to dental practices and customer demand.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $352.3 million | $600.7 million | $903.3 million | $1,149.7 million |
| Gross profit / margin | $224.3 million / 63.7% | $432.3 million / 72.0% | $618.7 million / 68.5% | $834.4 million / 72.6% |
| Operating income (loss) | $(73.0) million | $176.5 million | $(3.1) million | $264.2 million |
| Net income (loss) | $(40.6) million | $147.1 million | $1,477.5 million | $219.0 million |
| Diluted earnings (loss) per share | $(0.52) | $1.83 | $18.70 | $2.71 |
| Operating cash flow | Not presented quarterly in the filing | $69.7 million | $294.6 million |
- Q2 revenue declined 41.3%; six-month revenue declined 21.4%. Clear Aligner revenue fell 39.9% in Q2 and Systems and Services revenue fell 48.1%.
- Clear Aligner case volume was 221,900 in Q2, down 41.4%. Americas volume fell 52.5%, while international volume fell 27.1%.
- Consolidated Q2 operating margin was negative 20.7%, versus 29.4% a year earlier. Lower production volumes weighed on gross margins; consolidated SG&A was 72.9% of revenue in Q2.
- Six-month net income includes a one-time $1,493.5 million tax benefit from an intra-entity transfer of intellectual property and fixed assets to the Swiss subsidiary. The resulting reported earnings do not reflect operating performance alone.
- Cash and cash equivalents were $404.4 million at June 30, 2020, down from $550.4 million at year-end 2019; short-term marketable securities declined from $318.2 million to zero. Six-month cash flow from operations was $69.7 million. Investing cash outflow was $172.3 million, including $420.8 million paid net of cash acquired for exocad.
- Total liabilities were $1.18 billion, including $941.6 million of current liabilities. Align had no borrowings on its $200 million revolving credit facility at June 30. A new $300 million unsecured revolver was entered into July 21, 2020, replacing the prior facility and maturing in 2023.
Material changes and notable items
- COVID-19-related office closures and restrictions sharply reduced case submissions and scanner sales. Practices had largely reopened by quarter-end, but recovery varied by region and channel.
- On April 1, Align acquired exocad for approximately $430.0 million. Preliminary purchase accounting included $344.2 million of goodwill and $118.7 million of identified intangible assets. Exocad results were included from the acquisition date.
- The company reorganized its international structure, moving EMEA headquarters from the Netherlands to Switzerland. The related tax-basis step-up generated the one-time tax benefit described above.
- Prior-year comparisons included a $51 million Straumann litigation settlement gain in Q2 2019 and $29.8 million of 2019 impairment and other charges related to Invisalign store closures.
- Other income and expense included a $10.2 million six-month loss on a euro forward contract related to the exocad acquisition.
Outlook, risks and contingencies
- Management said 2020 expenses were expected to increase slightly over 2019, while discretionary spending would be controlled. Planned investment areas included manufacturing capacity, sales and marketing, and product and technology development.
- Align expected $90–$100 million of additional capital expenditures in the remainder of 2020, principally for buildings, improvements and manufacturing capacity.
- Management expected utilization to recover from COVID-related declines absent renewed or more restrictive closures, but cautioned that additional restrictions could materially affect Q3 2020 and beyond. No specific revenue or earnings guidance was provided in the supplied filing text.
- Management believed cash balances and available borrowing capacity would fund operations for at least 12 months, while warning that lower revenue and slower customer collections could reduce operating cash flow.
- Principal risks include renewed COVID-19 disruption, discretionary-demand weakness, competition and pricing pressure, international and foreign-exchange exposure, manufacturing and supplier constraints, and challenges integrating exocad. A 10% aggregate currency-rate change could materially affect results and financial position.
- Pending matters include securities and shareholder derivative lawsuits, patent and antitrust litigation involving 3Shape, and ongoing SDC arbitrations. Align said it could not predict outcomes or estimate possible losses for these matters. The company also reported a $36 million promotional-rights commitment payable through 2023.
Important facts for investors to verify
- Whether post-reopening demand and Invisalign case utilization continued to recover, and whether that recovery persisted across regions and customer channels.
- The extent to which the $1.49 billion tax benefit, including the assumptions supporting deferred tax asset realization, affects future reported tax rates and earnings comparability.
- Exocad integration progress, realized synergies, and the final purchase-price allocation, which was preliminary.
- Liquidity and cash conversion trends, including receivable collections, operating cash flow, planned capital spending, and availability under the replacement credit facility.
- Developments and potential financial exposure in the SDC, 3Shape, securities and derivative litigation matters.