Align Technology(US:ALGN)2024-11-05 21:09PART I FINANCIAL INFORMATION Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Q3 and nine months ended September 30, 2024, covering operations, balance sheets, cash flows, and detailed notes Condensed Consolidated Statements of Operations Q3 2024 net revenues slightly increased to $977.9 million, while net income decreased to $116.0 million; nine-month revenues grew to $3.00 billion with a slight net income decrease Q3 & Nine Months 2024 Statement of Operations (in thousands, except per share data) | Metric | Q3 2024 | Q3 2023 | Nine Months 2024 | Nine Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Net Revenues | $977,872 | $960,214 | $3,003,793 | $2,905,534 | | Gross Profit | $681,774 | $663,076 | $2,102,218 | $2,037,339 | | Income from Operations | $162,298 | $166,346 | $463,479 | $471,793 | | Net Income | $115,963 | $121,427 | $317,555 | $321,039 | | Diluted EPS | $1.55 | $1.58 | $4.23 | $4.18 | Condensed Consolidated Statements of Comprehensive Income Q3 2024 comprehensive income increased to $126.8 million due to foreign currency adjustments, while the nine-month comprehensive income remained nearly flat at $332.3 million Q3 & Nine Months 2024 Comprehensive Income (in thousands) | Metric | Q3 2024 | Q3 2023 | Nine Months 2024 | Nine Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $115,963 | $121,427 | $317,555 | $321,039 | | Other Comprehensive Income (Loss) | $10,872 | $(9,296) | $14,745 | $12,331 | | Comprehensive Income | $126,835 | $112,131 | $332,300 | $333,370 | Condensed Consolidated Balance Sheets Total assets increased to $6.37 billion as of September 30, 2024, driven by higher cash, while total liabilities remained stable and stockholders' equity grew to $3.94 billion Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,041,935 | $937,438 | | Total current assets | $2,597,387 | $2,446,618 | | Total assets | $6,365,974 | $6,083,877 | | Total current liabilities | $2,063,613 | $2,066,611 | | Total liabilities | $2,421,620 | $2,453,388 | | Total stockholders' equity | $3,944,354 | $3,630,489 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased to $3.94 billion by September 30, 2024, primarily due to $317.6 million in net income, partially offset by $150.6 million in stock repurchases - For the nine months ended September 30, 2024, the company repurchased and retired 634,000 shares of common stock for a total cost of $150.6 million14 - Stock-based compensation expense for the nine months ended September 30, 2024, was $134.9 million14 Condensed Consolidated Statements of Cash Flows Net cash from operations decreased to $452.2 million for the nine months ended September 30, 2024, with $201.0 million used in investing and $152.7 million in financing activities Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $452,153 | $738,878 | | Net cash used in investing activities | $(200,996) | $(182,619) | | Net cash used in financing activities | $(152,703) | $(248,059) | | Net increase in cash | $104,462 | $296,995 | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, the $85.8 million Cubicure acquisition, a $31.1 million antitrust legal accrual, a $100 million VAT refund, and a post-quarter restructuring plan costing $25-$30 million - On January 2, 2024, the company completed the acquisition of Cubicure GmbH for a total purchase consideration of $85.8 million, resulting in $47.6 million of goodwill allocated to the Clear Aligner segment535456 - During the nine months ended September 30, 2024, the company accrued a loss of $31.1 million for legal settlements, primarily related to Section 1 antitrust claims74 - In October 2024, the company reached a settlement with UK's HMRC regarding a VAT dispute, resulting in a full refund of approximately $100 million in previously paid assessments78 - Subsequent to the quarter end, on October 23, 2024, the company announced a restructuring plan to reduce headcount by approximately 700 employees, with estimated costs of $25.0 million to $30.0 million108 - On October 25, 2024, the company announced a plan to repurchase $275.0 million of its common stock through open market repurchases109 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2024 financial results, noting a 1.8% revenue increase to $977.9 million driven by Systems and Services growth, macroeconomic challenges, and a slight operating margin decrease, while maintaining strong liquidity Executive Overview of Results The company's strategic priorities include international expansion and GP treatment, with Q3 2024 revenues reaching $977.9 million, up 1.8% YoY, despite ongoing macroeconomic challenges - The company's growth strategy focuses on four pillars: international expansion, general practitioner (GP) treatment, patient demand, and orthodontic utilization112 - Management believes sales have been and will continue to be impacted by macroeconomic conditions, including inflation and market uncertainties from military conflicts, which dampen consumer sentiment and demand113 Q3 2024 Key Metrics | Metric | Value | Change (YoY) | | :--- | :--- | :--- | | Revenues | $977.9M | +1.8% | | Clear Aligner Revenues | $786.8M | -1.0% | | Systems & Services Revenues | $191.0M | +15.6% | | Clear Aligner Case Volume | - | +2.5% | | Operating Margin | 16.6% | - | Results of Operations Q3 2024 net revenues increased by $17.7 million YoY, driven by a 15.6% rise in Systems and Services revenue, offsetting a 1.0% decline in Clear Aligner revenue, while gross margins varied by segment and operating expenses rose Net Revenues by Segment (in millions) | Segment | Q3 2024 | Q3 2023 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Clear Aligner | $786.8 | $794.9 | $(8.1) | (1.0)% | | Americas | $349.2 | $366.6 | $(17.4) | (4.7)% | | International | $361.5 | $355.3 | $6.2 | 1.8% | | Systems and Services | $191.0 | $165.3 | $25.8 | 15.6% | | Total Net Revenues | $977.9 | $960.2 | $17.7 | 1.8% | Gross Margin by Segment | Segment | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | Clear Aligner | 70.3% | 70.7% | | Systems and Services | 67.5% | 61.0% | | Total Gross Margin | 69.7% | 69.1% | - Selling, general and administrative (SG&A) expenses increased in Q3 2024 compared to Q3 2023, primarily due to higher employee costs, including salary, benefits, stock-based compensation, and bonus150 - For the nine months ended September 30, 2024, the company recorded a legal settlement loss of $31.2 million156157 Liquidity and Capital Resources As of September 30, 2024, the company held $1.04 billion in cash, with $452.2 million from operations, and plans over $100 million in capital expenditures, ongoing share repurchases, and a $25-$30 million restructuring cost - The company's cash and cash equivalents totaled $1.04 billion as of September 30, 2024169 - Capital expenditures for 2024 are expected to be above $100.0 million, primarily for building construction and manufacturing capacity expansion171 - As of September 30, 2024, $500.0 million remained available for repurchases under the January 2023 stock repurchase program172 - A restructuring plan announced in October 2024 is expected to incur charges between $25.0 million and $30.0 million176 Critical Accounting Estimates Revenue recognition, particularly determining standalone selling price (SSP) for multi-option treatment plans, is a critical accounting estimate requiring significant judgment that can materially impact revenue timing - Revenue recognition is a critical accounting estimate, specifically the determination of standalone selling price (SSP) to allocate revenue to distinct performance obligations184 - Estimating SSP for clear aligner treatment plans requires significant judgment and evaluation of inputs, including historical usage data by region, country, and channel185 Quantitative and Qualitative Disclosures About Market Risk The company faces significant market risks from foreign currency fluctuations, inflation impacting costs and revenues, and interest rate changes, with a 10% currency shift potentially having a material impact - The company has significant international operations and is exposed to fluctuations in foreign currencies; a 10% aggregate change in foreign currency exchange rates could be material191193 - The company uses foreign currency forward contracts, primarily for the Euro, British Pound, Chinese Yuan, Polish Zloty, and Canadian Dollar, to minimize short-term impacts of currency fluctuations192 - Rising inflation has impacted and is expected to continue to impact revenues and costs globally; the company may not be able to fully offset higher costs through price increases194 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2024, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2024195 - No material changes were made to the company's internal control over financial reporting during the quarter ended September 30, 2024196 PART II OTHER INFORMATION Legal Proceedings The company is involved in multiple legal matters, including a settled shareholder derivative suit, an antitrust class action settlement for $27.5 million, and ongoing patent infringement litigation against Straumann, accruing $31.1 million in legal losses - A 2019 shareholder derivative lawsuit reached a settlement agreement, which received preliminary court approval on August 2, 202469199 - In June 2024, the company reached a settlement in principle in an antitrust lawsuit, which includes a $27.5 million cash payment and coupons for class members; a renewed motion for preliminary approval was filed in October 202473 - In April 2024, Align filed a lawsuit against ClearCorrect/Straumann for false advertising and patent infringement; Straumann has filed counterclaims for antitrust violations and other claims75 - For the nine months ended September 30, 2024, the company accrued a loss of $31.1 million for legal settlements, primarily related to the antitrust claims74 Risk Factors The company faces significant risks from macroeconomic pressures, geopolitical events, intense competition, product dependence, supply chain disruptions, cybersecurity threats, and legal, regulatory, and ESG compliance failures Macroeconomic and External Risks The company's performance is vulnerable to macroeconomic conditions like inflation, currency fluctuations, and recessions, alongside geopolitical events that can disrupt operations and supply chains - Macroeconomic conditions like inflation and potential recessions can adversely affect consumer confidence and discretionary spending on the company's products202 - Significant international operations expose the company to material foreign currency fluctuations204 - Geopolitical events, including the conflict in the Middle East, could disrupt iTero operations, which are headquartered in Israel209 Business and Industry Risks Business risks include reliance on core products, intense competition from various clear aligner providers, challenges in new product adoption, and operational vulnerabilities from supply chain dependence and IT system disruptions - Net revenues are largely dependent on sales of Invisalign treatment plans and iTero intraoral scanners216 - Competition is increasing rapidly from traditional wires and brackets, other clear aligner manufacturers, direct-to-consumer companies, and doctors using in-office 3D printing221 - The company is highly dependent on third-party suppliers, some of whom are sole-source suppliers for key machines and materials, creating supply chain vulnerability245 - The business relies on complex IT systems, and issues with software integration, updates, or cybersecurity could disrupt operations and harm the company's reputation239240 Legal, Regulatory and Compliance Risks The company faces significant legal, regulatory, and compliance risks from extensive global regulations, potential cybersecurity breaches, product liability claims, increasing ESG scrutiny, and emerging AI-related legal challenges - The company is subject to extensive and frequently changing regulations for medical devices, data privacy, marketing, and anti-corruption, with non-compliance potentially leading to significant penalties265270 - Cybersecurity incidents, data breaches, and failure to comply with privacy laws could lead to litigation, regulatory action, and reputational harm273274 - Increasing focus on Environmental, Social, and Governance (ESG) laws and stakeholder expectations may materially increase costs and expose the company to liability and reputational risk281288 - The incorporation of Artificial Intelligence (AI) into products and operations presents new legal, regulatory, and reputational risks289290 Intellectual Property Risks The company's success depends on its ability to obtain and enforce intellectual property rights, facing risks of patent invalidation and costly, unpredictable IP litigation - The company's success depends on its ability to obtain, maintain, and enforce its portfolio of patents and other intellectual property rights291292 - The company is and will likely continue to be involved in extensive and costly litigation over IP rights, the outcomes of which are unpredictable and could adversely affect the business300 Financial, Tax and Accounting Risks The company faces financial risks from potential asset impairment, changes in accounting rules, volatile effective tax rates due to evolving laws, and historical stock price volatility - Goodwill, intangible, or other long-lived assets could become impaired, which would require the company to record a material charge to earnings301 - The company's effective tax rate may vary significantly due to changes in tax laws, regulations, and the jurisdictional mix of income307310 - The market price of the company's common stock has been historically volatile and is subject to fluctuations from numerous factors beyond its control313 Unregistered Sales of Equity Securities and Use of Proceeds No stock repurchases occurred during Q3 2024, with $500.0 million remaining available under the January 2023 repurchase program - There were no stock repurchases during the three months ended September 30, 2024318 - As of September 30, 2024, $500.0 million remained available for repurchases under the January 2023 Repurchase Program318 Defaults Upon Senior Securities This section is not applicable to the company's current financial reporting - Not applicable319 Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable319 Other Information No director or officer adopted or terminated Rule 10b5-1 trading arrangements during Q3 2024 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the fiscal quarter ended September 30, 2024319 Exhibits This section lists exhibits filed with the Form 10-Q, including corporate documents, CEO and CFO certifications, and Inline XBRL documents - The report includes a list of filed exhibits, such as CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1) and Inline XBRL data files321