Align Technology, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Comparisons are against the corresponding 2022 periods. Financial figures are in U.S. dollars unless noted.
Business context and results
Align operates in clear aligners (including Invisalign) and imaging systems and CAD/CAM services (including iTero and exocad). Management’s growth priorities include international expansion, general-practitioner adoption, patient demand and conversion, and orthodontic utilization.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $960.2 million (+7.8%) | $890.3 million | $2,905.5 million (+2.6%) | $2,833.1 million |
| Gross profit / margin | $663.1 million / 69.1% | $619.2 million / 69.5% | $2,037.3 million / 70.1% | $2,016.1 million / 71.2% |
| Operating income / margin | $166.3 million / 17.3% | $143.7 million / 16.1% | $471.8 million / 16.2% | $529.9 million / 18.7% |
| Net income | $121.4 million | $72.7 million | $321.0 million | $319.8 million |
| Diluted EPS | $1.58 | $0.93 | $4.18 | $4.07 |
Q3 revenue growth reflected higher clear-aligner average selling prices and case volumes, plus scanner and aligner case volume growth, partly offset by lower scanner average selling prices. Clear Aligner revenue rose 8.5% to $794.9 million; Systems and Services revenue rose 4.9% to $165.3 million. Q3 clear-aligner case volume increased 2.3% year over year.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $738.9 million, versus $424.0 million in 2022. Investing activities used $182.6 million and financing activities used $248.1 million.
- Cash and cash equivalents were $1.239 billion at September 30; cash, cash equivalents and marketable securities totaled $1.302 billion, up from $1.042 billion at December 31, 2022. Q3 operating cash flow was reported as $287.2 million.
- No borrowings were outstanding under the $300 million unsecured revolving credit facility, which matures in December 2027. The company said it expects available cash and borrowing capacity to fund operations for at least 12 months.
- Nine-month capital expenditures were $144.3 million. Management expected 2023 capital expenditures to exceed $200 million, primarily for facilities and manufacturing capacity.
- Nine-month common-stock repurchases were $292.4 million gross cash outflow; the January 2023 $1 billion authorization remained unused as of September 30. On October 26, the company entered a $250 million accelerated share repurchase agreement.
Material changes and unusual items
- Nine-month operating income fell 11.0% year over year, while net income was broadly flat. Higher operating expenses, including R&D, contributed to the operating-income decline. Q3 operating income and net income increased year over year.
- R&D expense increased to $88.7 million in Q3 and $264.7 million year to date, reflecting investment in innovation. Total operating expenses rose to $496.7 million in Q3 and $1.566 billion year to date.
- A prospective change in estimated useful lives for certain manufacturing equipment, from 10 to 13 years, reduced depreciation by approximately $4.0 million and increased net income by $3.0 million, or $0.04 per share, for both Q3 and the nine-month period.
- A new IRS notice produced a one-time tax benefit related to prior-year tax positions; the filing does not state a clear dollar amount. The Q3 effective tax rate was 25.1%, versus 40.7% a year earlier; nine-month rates were 31.4% and 33.9%.
- The company invested $75 million in a less-than-5% equity interest in Heartland Dental. It also agreed to acquire Cubicure GmbH for approximately €79 million, subject to adjustments; closing was expected in Q4 2023 or early 2024.
Outlook, commentary and risks
The filing provides no specific revenue or earnings guidance. Management described deteriorating orthodontic trends in Q3, including fewer patient visits, more appointment cancellations and fewer case starts, particularly among adults, which it attributed mainly to macroeconomic pressures on disposable income and consumer demand. It also cited inflation, currency movements, higher interest rates, supply-chain and labor pressures, and geopolitical uncertainty. The company noted that the Middle East conflict could affect personnel, manufacturing, supply chains and sales; its iTero business is headquartered in Israel.
Other material risks include competition and pricing pressure, customer and product mix, foreign-exchange exposure, reliance on suppliers and global manufacturing, cybersecurity and regulatory exposure, and litigation. A U.K. tax authority issued an initial assessment of approximately $27 million for VAT on certain clear-aligner sales. Align disputes the assessment, has not accrued a contingent loss because an unfavorable outcome was not considered probable, and estimates potential exposure of up to approximately $100 million, excluding interest and penalties.
Align obtained a $63 million judgment against SmileDirectClub in September 2023; SmileDirectClub filed for Chapter 11 bankruptcy later that month, and collection is uncertain. Pending antitrust class actions have jury trials scheduled to begin in May 2024 and January 2025. Align says it intends to defend the claims and cannot estimate a possible loss.
Key investor verification points
- Whether case volumes, pricing and patient demand recover or weaken further, and how promotions and product mix affect average selling prices and margins.
- Whether revenue growth can translate into improved operating income, given the decline in nine-month operating margin.
- Progress against the more-than-$200 million 2023 capital expenditure expectation and the Cubicure acquisition timetable and cost.
- Outcome and potential cash impact of the U.K. VAT dispute, antitrust litigation and recovery of the $63 million SmileDirectClub judgment.
- Cash deployment, including the October $250 million accelerated repurchase and remaining repurchase authorization.
- Effects of foreign exchange, macroeconomic conditions and Middle East developments on demand, operations and supply chains.