Business context and reporting period
Align Technology, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. Its reportable businesses are Clear Aligner, principally Invisalign products, and Scanner, principally iTero systems and related services. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $600.7m | $490.3m | $1,149.7m | $927.2m |
| Gross profit / margin | $432.3m / 72.0% | $365.6m / 74.6% | $834.4m / 72.6% | $693.0m / 74.7% |
| Operating income / margin | $176.5m / 29.4% | $122.7m / 25.0% | $264.2m / 23.0% | $220.9m / 23.8% |
| Net income | $147.1m | $106.1m | $219.0m | $202.0m |
| Diluted EPS | $1.83 | $1.30 | $2.71 | $2.48 |
- Q2 revenue rose 22.5% year over year. Clear Aligner revenue increased 14.6% to $496.7m; Scanner revenue rose 82.4% to $104.0m. Six-month revenue increased 24.0%.
- Q2 Clear Aligner case volume increased 18.6% to 378,500 cases; international volume grew 36.7%. Q2 Scanner growth reflected more scanners recognized and increased related services.
- Clear Aligner gross margin fell to 73.7% from 76.5%, which management attributed mainly to more aligners per case and lower average selling prices. Scanner gross margin improved to 63.6% from 59.6%, primarily on manufacturing efficiencies.
- Q2 operating income includes a $51.0m Straumann litigation settlement gain; other income also includes a $15.8m gain related to the SDC investment tender. Six-month results include $29.8m of Invisalign store-closure impairments and other charges.
- The effective tax rate was 22.2% in Q2 and 18.6% for the first half, versus 6.6% and 4.9%, respectively, in 2018. The company cited lower excess tax benefits from stock compensation.
Cash, liquidity and capital resources
- At June 30, 2019, cash and cash equivalents were $423.5m and marketable securities were $342.4m, totaling $765.9m, compared with $744.5m at December 31, 2018.
- Six-month operating cash flow was $294.6m, versus $217.1m in 2018. Investing activities used $321.0m, including $354.0m of marketable-security purchases and $80.6m of property and equipment purchases. Financing activities used $188.4m, including $99.5m of share repurchases and $45.8m for a building purchase.
- The company had no borrowings on its $200m revolving credit facility at June 30 and reported compliance with its requirements. It stated that available liquidity and borrowing capacity should fund operations for at least 12 months.
- Current liabilities were $789.0m; total liabilities were $972.3m. Deferred revenue, current and long-term, totaled approximately $505.4m. Unfilled performance obligations were $521.4m, expected to be recognized over one to five years.
Changes, outlook and notable matters
- Revenue growth was broad-based, but average selling-price pressure and unfavorable foreign exchange reduced Clear Aligner revenue growth. North American Clear Aligner revenue grew 6.2% in Q2, while international Clear Aligner revenue grew 25.1%. Management noted softer consumer demand in China and slower adult case growth from North American orthodontists amid increased competition, including direct-to-consumer providers.
- Management expects international revenue to grow faster than Americas revenue for the foreseeable future, while noting adoption and utilization may fluctuate. It expects 2019 expenses to rise with investments in manufacturing, international expansion, sales coverage, marketing, product development, legal matters and corporate reorganization.
- For the remainder of 2019, Align expected an additional $80m–$100m of capital expenditures, including facility and manufacturing investments. The China manufacturing facility was still ramping and expected to take several quarters to reach full capacity.
- Align closed its Invisalign retail stores by April 3, 2019 following an arbitration decision involving SmileDirectClub (SDC), which also extended a non-compete restriction through August 18, 2022. Align disputed SDC’s calculation of the investment repurchase price and filed a further arbitration demand. The filing does not provide a clear estimate of potential loss.
- A $51m gain followed settlement of patent disputes with Straumann. The additional $16m payment was received in July 2019 after discussions over a proposed distribution agreement ended. On July 30, 2019, Align entered a $200m accelerated share repurchase agreement and paid the amount on July 31.
- Other significant exposures include securities and shareholder derivative litigation, patent and antitrust disputes involving 3Shape and other parties, foreign-exchange risk, international operating and regulatory risks, and dependence on key suppliers and the Invisalign business. Management could not estimate possible losses for several legal matters.
- Adoption of lease accounting in 2019 materially increased reported lease assets and liabilities; prior periods were not recast. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much reported earnings and operating margin depended on the Straumann settlement and SDC-related gain, and what normalized profitability looks like.
- Whether Clear Aligner margin pressure, promotional discounting, foreign exchange and higher aligners per case persist.
- Whether international growth can offset competitive pressure and softer demand in China, and whether scanner growth and manufacturing efficiencies continue.
- The outcome and financial consequences of the SDC repurchase-price dispute and other pending securities, antitrust and patent litigation.
- The cash and liquidity impact of the July $200m repurchase, planned capital expenditures, corporate reorganization and continuing share repurchases.