Align Technology, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2019; comparisons are with the three and nine months ended September 30, 2018 unless stated otherwise. Align sells Invisalign clear aligners and iTero intraoral scanners through its Clear Aligner and Scanner segments. Financial figures below are in U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $607.3 million | $505.3 million | $1,757.0 million | $1,432.5 million |
| Gross profit | $437.6 million | $371.8 million | $1,271.9 million | $1,064.8 million |
| Gross margin | 72.0% | 73.6% | 72.4% | 74.3% |
| Operating income | $127.2 million | $125.2 million | $391.3 million | $346.1 million |
| Operating margin | 20.9% | 24.8% | 22.3% | 24.2% |
| Net income | $102.5 million | $100.9 million | $321.5 million | $302.8 million |
| Diluted EPS | $1.28 | $1.24 | $4.00 | $3.71 |
- Quarterly revenue increased 20.2%; net income increased about 1.6%. For the nine-month period, revenue rose 22.7% and net income about 6.2%.
- Clear Aligner revenue was $516.3 million in Q3, up 20.9%; Scanner revenue was $91.1 million, up 16.5%. Nine-month growth was 19.0% and 47.3%, respectively.
- Clear Aligner case volume grew 15.2% in Q3: International volume rose 32.1%, while Americas volume rose 4.7%. Scanner growth reflected more units and higher CAD/CAM service revenue.
- Gross margin declined, principally because more aligners were required per case. SG&A rose 29.8% in Q3, including higher compensation, advertising and marketing, and legal and outside-service costs. Operating margin contracted despite higher revenue.
- Nine-month results included a $51.0 million Straumann litigation settlement gain and $23.0 million net impairment and other charges related to closing Invisalign stores. Q3 included a $6.8 million lease-termination gain.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $529.1 million, compared with $313.4 million a year earlier. The increase included higher net income and a $138.1 million increase in deferred revenue; accounts receivable and inventory uses of cash were $95.6 million and $40.8 million, respectively.
- Investing cash outflow was $290.3 million, including $107.2 million of capital expenditures and net purchases of marketable securities. Financing cash outflow was $383.2 million, including $299.5 million of share repurchases.
- At September 30, cash and cash equivalents were $490.4 million and short-term marketable securities were $292.0 million, totaling $782.4 million in cash and short-term investments. Current assets were $1,505.6 million and current liabilities $870.1 million.
- There were no outstanding borrowings under the $200 million revolving credit facility, which matures in February 2021; Align reported compliance with its requirements. The filing does not report funded debt outstanding.
- Deferred revenue was $520.7 million current and $27.6 million long-term. Unfilled performance obligations, including deferred revenue and backlog, totaled $558.1 million and were expected to be recognized over one to five years.
- Align repurchased $299.5 million of shares during the first nine months and had $200.5 million remaining under its $600 million authorization. Management said available liquidity and borrowing capacity should fund operations for at least the next 12 months.
Outlook, commentary and risks
- No specific revenue or earnings guidance for a future quarter is provided in the filing. Management expected international revenue to grow faster than Americas revenue for the foreseeable future, citing market opportunity and lower penetration, while noting that adoption rates vary by region and channel.
- Management cited a tougher consumer-demand environment in China and increased competition, including direct-to-consumer aligner advertising and competing products offered through dental practices. It reported slower adult case growth from North American orthodontists in Q2 and Q3.
- Management expected 2019 expenses to increase with investment in manufacturing capacity, international expansion, sales coverage, marketing, product development, legal matters and a planned corporate restructuring. It expected the new Wroclaw and Yokohama facilities to take several quarters to ramp up, with underutilized capacity during the transition.
- The restructuring included moving the European headquarters from the Netherlands to Switzerland, expected to be completed in early 2020; near-term costs and execution disruption could precede any benefits. Management also expected $30–35 million of additional capital expenditures in the remainder of 2019.
- The SDC arbitration required closure of Invisalign stores and restricted certain retail activities through August 18, 2022. Align disputed the calculation of the purchase price for its tendered SDC interest; a related arbitration was scheduled for June 2020. SDC also brought a separate arbitration alleging further non-compete violations, with damages and hearing date not specified.
- Other material legal matters include securities and shareholder derivative actions, litigation with 3Shape, and an antitrust action by Simon & Simon. Outcomes and potential losses were not estimable in the filing. The 3Shape antitrust complaint was dismissed with leave to amend; a securities motion to dismiss was granted with leave to amend.
- Key risks include dependence on Invisalign, price and product-mix pressure, competition and patent expirations, international and currency exposure, manufacturing capacity and supplier concentration, regulatory requirements, cybersecurity and patient-data protection, and uncertain litigation outcomes. Management stated that a 10% currency-rate move could have a material impact; a 10% interest-rate move was not expected to materially affect results or cash flows.
Important facts for investors to verify
- Whether case-volume growth, particularly in the Americas, can offset competitive pressure, softer China demand and potential pricing or mix effects.
- Whether gross-margin pressure from higher aligners per case persists and whether rising operating expenses convert revenue growth into earnings growth.
- Execution, ramp costs and expected returns from new international facilities and the Switzerland headquarters relocation.
- Developments and potential financial exposure in the SDC disputes, 3Shape proceedings and other litigation; the filing does not provide estimable loss ranges for several matters.
- Cash conversion and working-capital trends, including receivables, inventory and deferred revenue, alongside planned capital spending and continued share repurchases.