Align Technology, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Align designs, manufactures, and markets Invisalign clear aligners and, following its April 29 acquisition of Cadent Holdings, intraoral scanners and related CAD/CAM services. Invisalign represented about 95% of worldwide revenue; scanners and services about 5%.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $120.1m | $108.2m | $224.9m | $198.3m |
| Gross profit / margin | $91.1m / 75.9% | $87.0m / 80.4% | $173.4m / 77.1% | $156.7m / 79.0% |
| Operating profit | $16.6m | $45.3m | $37.6m | $66.0m |
| Net profit | $11.2m | $32.6m | $27.0m | $47.5m |
| Diluted earnings per share | $0.14 | $0.42 | $0.34 | $0.61 |
| Operating cash flow | Not separately presented quarterly | $46.9m | $61.2m |
- Q2 revenue rose 11.0% reported; first-half revenue rose 13.4%. Invisalign case volume increased 12.6% in Q2 and 12.4% in the first half. North American orthodontist revenue was particularly strong; international revenue growth also reflected price increases and favorable euro exchange rates.
- Reported comparisons are affected by a $14.3m release of previously deferred Invisalign Teen revenue in Q2 2010. Excluding that prior-period item, Q2 2011 revenue of $120.1m compared with approximately $93.9m in Q2 2010. The filing attributes growth primarily to case-volume increases and the two months of Cadent sales.
- Gross margin declined 4.5 percentage points in Q2, principally because Cadent scanner and service sales carry lower margins than Invisalign. Operating expenses rose substantially, reflecting marketing and international launch costs, Cadent integration and transaction expenses, and increased staffing. Q2 2010 operating profit also included an $8.7m insurance settlement benefit related to OrthoClear litigation.
- At June 30, cash and cash equivalents were $168.6m and marketable securities totaled $10.9m, for $179.5m in combined cash and investments, versus $312.4m at year-end 2010. Current assets were $286.6m and current liabilities $109.5m. Total liabilities were $117.3m; no debt was outstanding under the $30m revolving credit facility.
- First-half investing cash outflow was $188.2m, primarily the approximately $187.0m cash acquisition of Cadent and $8.5m of capital expenditures. Operating cash flow was lower than prior year. Cadent contributed approximately $6.4m revenue and $3.1m net loss in May and June.
Material changes, outlook, and risks
- Cadent added scanner and CAD/CAM products, $135.3m of preliminary goodwill, and $52.1m of acquired intangible assets. The purchase-price allocation remained preliminary; goodwill is not tax-deductible. Management cited expected strategic benefits but cautioned that integration and realizing those benefits are uncertain.
- Management reported Q2 utilization of 4.0 cases per doctor overall and 6.9 for North American orthodontists. It credited Invisalign G3 and Invisalign Teen with supporting adoption. Invisalign sales in China began in Q2, but management did not expect meaningful China revenue for several years.
- Management expected Q3 operating expenses to decrease slightly, citing lower media spending and Cadent-related transaction costs. It expected 2011 capital expenditures to increase, planned an additional Juarez aligner-fabrication site by year-end, and anticipated transitioning into that facility in 2012. The filing gives no specific revenue or earnings guidance.
- Key risks include capacity constraints or delays at the planned facility, seasonal and quarterly demand variability, competition and pricing pressure, foreign exchange exposure, and reliance on international operations and single-source suppliers. Cadent integration, scanner adoption, and goodwill or intangible-asset impairment are additional uncertainties.
- The company said its cash and existing borrowing capacity should fund operations for at least 12 months. It reported effective disclosure controls. Its 2010 FDA Warning Letter concerning complaint-handling and medical-device reporting documentation remained under follow-up with the FDA.
- Align reported a pending securities class action; it said it considered the claims without merit and intended to defend itself. The Leiszler settlement took effect in May 2011, and Align reported no remaining liability at June 30. The filing stated there was no reasonable possibility of loss for the Weber matter as of that date.
Investor verification points
- Reconcile reported revenue growth with the $14.3m prior-year Teen deferred-revenue release and the two months of Cadent contribution.
- Track gross-margin trends and whether Cadent integration, acquisition charges, and scanner mix improve or continue to weigh on profitability.
- Assess Invisalign case volume and utilization by channel, international doctor training, and progress in China and scanner interoperability.
- Monitor cash use, capital spending, Juarez facility timing and capacity, and compliance with the credit-facility covenants.
- Check updates on Cadent purchase accounting and goodwill, the FDA Warning Letter, and the securities litigation.