Align Technology, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2016, compared with Q1 2015. Align sells Invisalign clear-aligner products and iTero intraoral scanners and services. Its reportable segments are Clear Aligner and Scanner.
Financial performance
Amounts are in millions of dollars except per-share data. Year-over-year changes are calculated from the filing’s reported figures.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $238.7 | $198.1 | +20.5% |
| Gross profit / margin | $180.6 / 75.7% | $151.1 / 76.3% | +19.5%; margin down 0.6 percentage point |
| Operating expenses | $127.3 | $102.2 | +24.6% |
| Operating income / margin | $53.3 / 22.3% | $48.9 / 24.7% | +9.0%; margin down 2.4 percentage points |
| Net income | $40.5 | $36.2 | +12.1% |
| Diluted EPS | $0.50 | $0.44 | +13.6% |
| Operating cash flow | $30.7 | $35.6 | Down $5.0 |
| Capital expenditures | $20.2 | $15.6 | Up $4.6 |
Revenue drivers. Clear Aligner revenue rose 17.5% to $219.7 million; Scanner revenue rose 72.0% to $19.0 million. Invisalign case volume increased 25.2% to 163,700 cases, including 21.3% growth in North America and 34.1% internationally. Scanner gross margin improved to 45.0% from 28.3%; Clear Aligner gross margin declined to 78.3% from 79.1%.
Cash, liquidity and debt. Cash, cash equivalents and short- and long-term marketable securities totaled $680.8 million at March 31, 2016, versus $678.7 million at year-end. Current assets were $783.0 million and current liabilities $274.8 million. The company reported no outstanding borrowings on its $50 million revolving facility, amended to mature March 22, 2017; it requires at least $50 million of unrestricted cash and compliance with specified financial conditions. Total liabilities were $315.5 million. Approximately $464.8 million of cash and investments was held by foreign subsidiaries; repatriation costs would likely be material, and Align intends to permanently reinvest foreign earnings.
Material changes, outlook and commentary
- Revenue growth was led by higher Invisalign volumes and increased iTero Element scanner shipments. Management attributed lower Clear Aligner average selling prices to the “Additional Aligners at No Charge” policy, related revenue deferrals, discounts, foreign exchange and product mix. The policy affects revenue-recognition timing; Align expects it to support customer satisfaction, utilization and volume over time.
- SG&A increased $23.9 million, mainly from higher compensation and marketing costs; the prior-year quarter included a $6.8 million medical-device excise-tax refund. Management expects operating expenses to increase in 2016, including for international expansion, sales and customer support, and product development.
- Management expects international revenue to grow faster than North America for the foreseeable future and utilization to improve gradually, while noting utilization may fluctuate. It trained 2,470 new Invisalign doctors in Q1; total utilization was 4.9 cases per doctor versus 4.5 a year earlier.
- Align expects 2016 capital expenditures of $65–$70 million, primarily for manufacturing capacity and infrastructure, including an ERP implementation. It expected to spend a further $45–$50 million during the remainder of 2016. Management stated available liquidity and operating cash flows should fund operations and planned repurchases for at least 12 months. No specific revenue or earnings guidance was provided.
- After quarter-end, Align announced a new $300 million repurchase authorization on April 28, 2016. On May 3 it entered a $50 million accelerated share repurchase under the prior authorization, with another $50 million open-market repurchase planned after completion; these actions were expected to complete the prior program. No shares were repurchased during Q1.
Risks, contingencies and unusual items
- iTero Element production may be constrained by limited yields and reliance on third-party suppliers for key components. Clear-aligner capacity, trained staffing, demand forecasting and international operations also pose fulfillment and margin risks.
- The Additional Aligners policy and more than one million grandfathered open cases are expected to reduce recognized revenue as additional aligners ship, potentially for at least the next two years. Foreign currency movements also affect reported results; management says a 10% aggregate currency change could have a material impact.
- Key U.S. patents begin expiring in 2017, with foreign patents beginning to expire in 2018, potentially increasing competition. Other disclosed risks include economic weakness, regulatory requirements, cybersecurity and patient-data protection, and ERP implementation.
- Two older shareholder matters concerning alleged goodwill impairment and past forecasts remained unresolved as described: the securities class-action dismissal was appealed, and a related derivative case was stayed pending the appeal. Align could not predict outcomes or estimate possible losses. It did not believe other proceedings would materially affect its financial position, results or cash flows.
- Q1 effective tax rate was 23.4%; Costa Rica tax incentives reduced income taxes by $8.6 million. The incentives begin expiring in various years from 2017 and depend on meeting employment and investment conditions. Gross unrecognized tax benefits were $40.9 million; Israel and California tax audits were ongoing.
- Cash from operations was below net income, reflecting working-capital movements including a $20.8 million increase in receivables and a $14.5 million decrease in accrued and other long-term liabilities, primarily payment of the 2015 bonus. The filing reports no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Invisalign case growth and customer utilization persist, and how the free-additional-aligners policy and related deferrals affect revenue, average selling prices and margins.
- Whether iTero Element production can scale to meet demand and whether scanner margin improvement continues.
- Progress on manufacturing expansion, planned capital spending and ERP implementation, including any capacity, delivery or cost effects.
- Foreign-currency exposure, foreign-held liquidity and the conditions and remaining duration of Costa Rica tax incentives; monitor tax audits and unrecognized tax benefits.
- Developments in the securities appeal and derivative litigation, patent expirations, and execution and funding of announced share repurchases.