Align Technology, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; unaudited. Align designs, manufactures, and sells Invisalign clear aligners and iTero intra-oral scanners and CAD/CAM services.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $163.8 million | $145.6 million | $317.4 million | $280.7 million |
| Gross profit / margin | $123.7 million / 75.5% | $108.8 million / 74.7% | $236.5 million / 74.5% | $209.6 million / 74.7% |
| Operating income (loss) | $37.9 million | $36.0 million | $(0.2) million | $64.0 million |
| Net income (loss) | $29.3 million | $28.5 million | $(12.7) million | $49.5 million |
| Diluted EPS | $0.36 | $0.34 | $(0.16) | $0.60 |
- Q2 revenue grew 12.5% year over year; Invisalign case volume rose 11.3%. Clear Aligner revenue grew 14.7%, while Scanner and CAD/CAM Services (SCCS) revenue fell 11.8%.
- Q2 operating income increased about 5%, and net income increased about 3%. Clear Aligner gross margin eased to 78.4% from 79.0%; total gross margin improved to 75.5% from 74.7%.
- The six-month operating and net losses reflect first-quarter SCCS impairment charges: $40.7 million for goodwill and $26.3 million for long-lived assets. The goodwill charge was not tax deductible.
- Six-month operating cash flow was $63.7 million, versus $42.8 million in 2012. Investing cash outflow was $143.8 million and financing cash outflow was $61.9 million.
- Cash, cash equivalents, and marketable securities totaled $341.3 million at June 30, 2013, versus $356.1 million at December 31, 2012. Total liabilities were $183.7 million. No borrowings were outstanding under the $50 million revolving credit facility; the facility requires at least $50 million of unrestricted cash.
- Align repurchased and retired about 2.7 million shares for $95.1 million in the first half; the $150 million repurchase program was complete at quarter-end. No dividends are reported in the supplied filing text.
Material changes and management commentary
- Growth was led by Invisalign volume, international Clear Aligner sales, and non-case revenue. Q2 international Clear Aligner revenue increased 22.5%; North American Clear Aligner revenue increased 9.9%.
- Align began directly selling in Australia, New Zealand, Hong Kong, and Singapore after acquiring its Asia-Pacific distributor on April 30. Management expects higher average selling prices, but said added direct operating costs may offset the benefit in the near term.
- SmartTrack aligner material became the standard in certain markets in 2013. Management expects higher material costs to pressure Clear Aligner gross margin, partly offset by pricing and operating improvements.
- Effective June 15, Align included up to three free mid-course corrections in Invisalign Full and Teen list prices. The change reduced Q2 revenue by $1.2 million through deferral; management expects about $700,000 lower quarterly revenue from no longer charging for these orders.
- New lower-priced scanner competition caused Align to lower SCCS growth and profitability expectations and record the impairments. The company also cited challenging international restorative-dentistry conditions and reduced scanner sales expectations in the near term.
Outlook, risks, and contingencies
- Management expects Invisalign volume to be flat to down in Q3 versus Q2, reflecting seasonal patterns. It expects SCCS revenue to decline sequentially, citing a lower scanner selling price and competition. The filing provides no specific full-year revenue or earnings guidance.
- Align expected to train about 7,220 new Invisalign doctors in 2013; 3,810 had been trained in the first half. Management also expected operating expenses to increase in 2013 due to sales-force expansion, the Asia-Pacific direct-sales transition, and the medical-device excise tax.
- Key risks include dependence on Invisalign, competition and pricing pressure, economic weakness, product adoption and utilization, seasonality, foreign exchange, manufacturing and single-supplier dependencies, international operations, regulatory requirements, and protection of patient information and intellectual property.
- A securities class action alleges that Align and executives failed to record an earlier Cadent goodwill impairment; the company intended to seek dismissal and could not estimate the likelihood or range of loss. A related shareholder derivative suit was stayed pending an initial ruling in the securities action. Align said other proceedings were not expected to materially affect its financial position or results.
- Gross unrecognized tax benefits were $24.0 million; Israel and Germany subsidiaries were under tax audits. Align reported no material off-balance-sheet arrangements and said current liquidity plus borrowing capacity should fund operations for at least 12 months.
Important facts for investors to verify
- Whether Invisalign case-volume growth and utilization can offset rebate participation, lower-priced product mix, and the free mid-course-correction policy.
- How scanner competition affects SCCS sales, margins, and the assumptions underlying the $67.0 million of impairments.
- Whether the Asia-Pacific direct-sales transition delivers expected revenue and average-selling-price benefits after added costs.
- The cash and investment balance, cash conversion, and impact of completed buybacks; also confirm credit-facility covenants and availability.
- Developments in the securities and derivative litigation, tax audits, and the $24.0 million of unrecognized tax benefits.