Align Technology, Inc. — Q2 2012 Form 10-Q
Business context and reporting period. The unaudited filing covers the quarter and six months ended June 30, 2012. Align sells Invisalign clear aligners and, following its 2011 Cadent acquisition, intra-oral scanners and CAD/CAM services. Invisalign remains the company’s principal revenue source.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $145.6m | $120.1m | $280.7m | $224.9m |
| Gross profit / margin | $108.8m / 74.7% | $91.1m / 75.9% | $209.6m / 74.7% | $173.4m / 77.1% |
| Operating profit / margin | $36.0m / 24.7% | $16.6m / 13.8% | $64.0m / 22.8% | $37.6m / 16.7% |
| Net profit / diluted EPS | $28.5m / $0.34 | $11.2m / $0.14 | $49.5m / $0.60 | $27.0m / $0.34 |
| Operating cash flow | Not presented quarterly in this filing | $42.8m | $46.9m |
- Q2 revenue rose 21.2% year over year; first-half revenue rose 24.8%. Clear Aligner revenue grew 17.7% in both periods. Scanner and CAD/CAM Services revenue grew 83.1% in Q2 and 264.6% in the first half, with comparisons affected by Cadent being included for only two months in the 2011 periods.
- Q2 Invisalign case volume increased 25.4% to 95,300 cases; international case volume increased 34.5%. Q2 Clear Aligner revenue growth reflected higher volume, partly offset by lower average selling prices from discounts/promotions and, internationally, unfavorable euro exchange rates.
- Overall gross margin declined year over year, chiefly reflecting the lower-margin scanner and services segment. Clear Aligner gross margin improved modestly; scanner/services gross margin fell to 26.6% in Q2 from 32.5%.
- At June 30, cash and cash equivalents were $262.8m; short- and long-term marketable securities totaled $41.2m, for $304.0m in cash and investments. Total liabilities were $157.9m. The company had no borrowings on its $30m revolving credit facility and was covenant-compliant.
- First-half investing cash use was $56.9m, including $25.8m of property and equipment purchases and $43.9m of securities purchases, partly offset by maturities and release of restricted cash. Financing provided $36.3m, including $23.7m from common-stock issuance and a $16.7m share-based-payment tax benefit. Cash increased $22.1m.
Material changes and unusual items
- Net profit more than doubled in Q2 versus the prior-year quarter. Lower G&A, including reduced Cadent integration costs, and a lower effective tax rate contributed alongside revenue growth. First-half net profit increased to $49.5m from $27.0m.
- Effective tax rates were 22.0% for Q2 and 22.3% for the first half, down from 31.5% and 27.8%, respectively. Management attributed the decrease mainly to a shift in forecast earnings toward lower-tax jurisdictions and fewer nondeductible expenses. The filing reports $17.9m of unrecognized tax benefits and a $20.2m valuation allowance.
- Capital investment increased as Align transitioned production to a new Juarez facility and prepared a larger Israel facility. Scanner inventories rose to $14.6m from $9.4m, partly in preparation for the Israel move.
- First-half New Jersey consolidation costs were approximately $0.6m; $0.8m remained accrued at June 30. Align expects the transition to finish in Q3 2012 and projects approximately $4.0m in annualized net savings.
Outlook, commentary and risks
- Management expected Q3 2012 total revenue and average selling prices to decline from Q2, citing Teen/Vivera promotion revenue deferrals, higher volume rebates and foreign-exchange effects. International Scanner and CAD/CAM Services revenue was expected to be flat sequentially in Q3.
- Management expected to train approximately 6,000 new Invisalign doctors in 2012, about the same number as in 2011, and expected long-term utilization to improve while cautioning that quarterly comparisons may fluctuate.
- Key risks include dependence on Invisalign, pricing and discount pressure, economic sensitivity, competition, foreign-exchange exposure, manufacturing transition and capacity execution, weaker scanner customer-service levels during consolidation, Cadent integration and adoption, reliance on international operations and single-source suppliers, regulatory compliance, and intellectual-property litigation.
- The filing says existing legal matters were not currently expected to materially affect financial position, results or cash flows, but acknowledges litigation-related costs. Management reported disclosure controls were effective; integration of Cadent’s internal controls was still in progress, with completion expected in 2012.
- Management stated cash, cash equivalents and borrowing capacity should fund operations for at least the next 12 months. The filing also notes potential exposure to a 2.3% U.S. medical-device excise tax beginning in 2013.
Important facts for investors to verify
- Whether Q3 revenue and ASP declines materialized, and the extent of promotion-related revenue deferrals and foreign-exchange effects.
- Whether scanner customer-service levels, international scanner revenue and scanner gross margins improved, and whether the New Jersey transition finished on schedule and achieved expected savings.
- How much revenue growth reflects underlying demand and case-volume gains versus the Cadent acquisition, and whether Cadent delivers expected strategic and financial benefits.
- Whether manufacturing moves in Juarez and Israel stayed on schedule and within budget, without disrupting order fulfillment or requiring excess inventory or capacity charges.
- Cash-flow quality and capital allocation, including working-capital needs, capital expenditures, remaining share-repurchase authorization, tax benefits and the company’s tax exposures.