Align Technology, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Align sells Invisalign clear aligners and iTero intraoral scanners and reports Clear Aligner and Scanner segments. Financial amounts below are in U.S. dollars; statement figures are in millions unless noted.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $356.5 | $269.4 | $666.8 | $508.1 |
| Gross profit / margin | $270.9 / 76.0% | $205.2 / 76.2% | $506.5 / 76.0% | $385.8 / 75.9% |
| Operating income / margin | $83.6 / 23.4% | $65.1 / 24.2% | $145.2 / 21.8% | $118.5 / 23.3% |
| Net income | $69.2 | $50.1 | $138.6 | $90.7 |
| Diluted EPS | $0.85 | $0.62 | $1.70 | $1.11 |
| Operating cash flow | — | $158.1 | $106.8 |
- Q2 revenue increased 32.3% year over year; six-month revenue increased 31.2%. Clear Aligner revenue grew 31.9% in Q2 and 30.3% for the half; Scanner revenue grew 36.2% and 40.9%, respectively.
- Q2 Clear Aligner case volume rose 35.6% to 240,000; international volume increased 37.5%. Total Invisalign utilization increased to 5.6 cases per doctor from 5.1, with North American orthodontist utilization at 13.6 versus 10.7.
- Profitability rose in dollars, but consolidated Q2 and first-half operating margins declined year over year. Clear Aligner margin pressure reflected lower average selling prices, higher compensation costs and, for the half, higher costs per case. Scanner margins improved for the half.
- SG&A increased to $163.0 million in Q2 and $314.1 million for the half, mainly from headcount, marketing, outside services and equipment costs. R&D increased to $24.4 million and $47.2 million, respectively, primarily due to higher compensation costs.
- Six-month effective tax rate was 5.4% versus 23.2%, largely reflecting $22.4 million of excess tax benefits from share-based compensation under newly adopted accounting guidance. Q2 rates were 17.7% versus 23.2%.
Financial position and liquidity
- At June 30, cash and cash equivalents were $358.2 million; short- and long-term marketable securities totaled $318.4 million. Combined liquid resources were $676.6 million, down from $700.0 million at year-end 2016.
- Current assets were $1.003 billion and current liabilities $424.8 million. Total liabilities were $472.9 million; the company had no borrowings under its $50 million revolving credit facility and reported compliance with its requirements.
- Six-month operating cash flow was $158.1 million; investing cash outflow was $108.6 million, including $78.0 million in property and equipment purchases and a $15.0 million loan advance to SmileDirectClub (SDC). Financing cash outflow was $84.2 million, including repurchases and employee tax withholding on vested stock awards. Cash declined by $31.1 million.
- Align expected $115–$125 million of additional capital expenditures in the remainder of 2017, primarily for manufacturing capacity and international expansion. Management said existing liquidity and borrowing capacity should fund operations for at least 12 months.
Outlook, developments and risks
- Management expected operating expenses to increase in 2017 for international expansion, manufacturing capacity, sales and customer support, legal work and product development. It expected international Invisalign revenue to grow faster than North America over the foreseeable future, and stated the SDC supply agreement was expected to add to 2017 revenue growth. No specific consolidated revenue or earnings guidance was provided in the filing text.
- New products included Invisalign Teen with mandibular advancement, available in selected international markets but pending U.S. 510(k) clearance. Align opened a treatment-planning facility in Chengdu and planned a Cologne facility for Q3 2017.
- After quarter-end, Align bought an additional 2% of SDC for $12.8 million, bringing its fully diluted interest to 19%; it also amended the SDC loan facility from up to $15 million to up to $30 million. The June 30 balance under the loan was $15 million outstanding. These related-party exposures merit review alongside the reported $2.2 million Q2 share of SDC losses.
- Other post-quarter-end items included a $26.1 million agreement to buy a Costa Rica building, with $5.2 million deposited into escrow subject to a due-diligence termination right, and an amendment to the credit facility’s negative covenants.
- Key risks include rising competition as certain U.S. patents began expiring in 2017 and foreign patents in 2018; pricing and product-mix pressure; foreign-exchange exposure; dependence on international manufacturing and single-source suppliers; capacity and execution risks; regulatory and data-security risks; and potential impairment of strategic investments. A 10% aggregate currency movement could materially affect results, according to the filing.
- A $1.9 million out-of-period adjustment reduced Q2 interest and other income and increased accrued liabilities; management said it was not material to current or prior-period financial statements. A securities class action dismissal was affirmed on appeal, with a possible Supreme Court petition still pending at the reporting date; a related derivative case was dismissed with prejudice.
Important facts for investors to verify
- Whether case-volume growth and doctor utilization can continue, and whether lower-priced mix, promotions and currency movements will constrain average selling prices and margins.
- The expected economics, credit risk and related-party implications of Align’s SDC supply, equity and expanded loan arrangements.
- Whether forecast 2017 capital spending and facility expansion proceed on schedule and within budget, and how quickly capacity supports growth.
- The final settlement and share count for the accelerated share repurchase; the filing reports a $50 million ASR payment and a $15 million equity forward contract, with settlement expected in August 2017.
- Potential effects of patent expirations and increased competition, and the company’s progress in obtaining U.S. clearance for Invisalign Teen with mandibular advancement.
- Exposure to foreign earnings and tax incentives, including Costa Rica’s employment and investment conditions, and the pending Israeli tax audit.