Align Technology(ALGN) - 2023 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents Align Technology's unaudited condensed consolidated financial statements for the three months ended March 31, 2023, including statements of operations, comprehensive income, balance sheets, stockholders' equity, and cash flows, along with detailed notes on significant accounting policies, financial instruments, balance sheet components, goodwill, intangible assets, credit facility, legal proceedings, commitments, stockholders' equity, stock repurchase programs, income taxes, net income per share, supplemental cash flow information, segment and geographical data, restructuring charges, and a subsequent event Condensed Consolidated Statements of Operations Financial Performance (Q1 2023 vs Q1 2022): | Metric | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :---------------------------------- | :--------------------- | :--------------------- | | Net revenues | $943,147 | $973,219 | | Cost of net revenues | $282,493 | $263,873 | | Gross profit | $660,654 | $709,346 | | Total operating expenses | $527,138 | $511,264 | | Income from operations | $133,516 | $198,082 | | Net income before income taxes | $134,624 | $187,486 | | Provision for income taxes | $46,826 | $53,188 | | Net income | $87,798 | $134,298 | | Basic EPS | $1.14 | $1.71 | | Diluted EPS | $1.14 | $1.70 | Condensed Consolidated Statements of Comprehensive Income Comprehensive Income (Q1 2023 vs Q1 2022): | Metric | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :--------------------------------------- | :--------------------- | :--------------------- | | Net income | $87,798 | $134,298 | | Change in foreign currency translation adjustment, net of tax | $10,474 | $(7,311) | | Change in unrealized gains (losses) on investments, net of tax | $1,645 | $(2,728) | | Other comprehensive income (loss) | $12,119 | $(10,039) | | Comprehensive income | $99,917 | $124,259 | Condensed Consolidated Balance Sheets Balance Sheet Highlights (March 31, 2023 vs December 31, 2022): | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :----------------------------------- | :------------------------------ | :------------------------------- | | Cash and cash equivalents | $832,383 | $942,050 | | Accounts receivable, net | $884,430 | $859,685 | | Inventories | $311,885 | $338,752 | | Total current assets | $2,331,882 | $2,424,391 | | Total assets | $5,901,448 | $5,947,947 | | Total current liabilities | $2,004,598 | $1,925,887 | | Deferred revenues | $1,376,789 | $1,343,643 | | Total liabilities | $2,421,399 | $2,346,589 | | Total stockholders' equity | $3,480,049 | $3,601,358 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' Equity Changes (Q1 2023): | Item | Amount (in thousands) | | :---------------------------------------------------- | :-------------------- | | Balance as of December 31, 2022 | $3,601,358 | | Net income | $87,798 | | Net change in unrealized gains (losses) from investments | $1,645 | | Net change in foreign currency translation adjustment | $10,474 | | Issuance of common stock relating to employee equity compensation plans | $14,256 | | Tax withholdings related to net share settlements of equity awards | $(20,857) | | Common stock repurchased and retired | $(292,360) | | Equity forward contract related to accelerated stock repurchase | $40,000 | | Stock-based compensation | $37,735 | | Balance as of March 31, 2023 | $3,480,049 | Condensed Consolidated Statements of Cash Flows Cash Flow Summary (Q1 2023 vs Q1 2022): | Activity | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :------------------------------------------------------------------- | :--------------------- | :--------------------- | | Net cash provided by operating activities | $199,895 | $30,498 | | Net cash used in investing activities | $(52,829) | $(90,198) | | Net cash used in financing activities | $(258,961) | $(111,742) | | Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash | $2,221 | $(1,826) | | Net decrease in cash, cash equivalents, and restricted cash | $(109,674) | $(173,268) | | Cash, cash equivalents, and restricted cash at end of the period | $832,681 | $926,871 | Notes to Condensed Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies - The financial statements are unaudited and prepared in accordance with SEC rules and U.S. GAAP, omitting certain disclosures found in the annual report[25] - Management relies on estimates and assumptions for financial reporting, including revenue recognition, asset useful lives, income taxes, and fair values, which could differ from actual results[27] - The business is materially impacted by macroeconomic conditions (inflation, rising interest rates, supply chain, foreign currency) and geopolitical issues, which could lead to adverse consequences[28] Note 2. Financial Instruments Cash, Cash Equivalents and Marketable Securities (March 31, 2023): | Category | Fair Value (in thousands) | Reported as: Cash and Cash Equivalents | Reported as: Marketable securities, short-term | Reported as: Marketable securities, long-term | | :----------------------------- | :------------------------ | :------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | | Cash | $650,946 | $650,946 | — | — | | Money market funds | $181,437 | $181,437 | — | — | | Corporate bonds | $59,816 | — | $35,284 | $24,532 | | U.S. government treasury bonds | $16,708 | — | $12,039 | $4,669 | | Asset-backed securities | $4,837 | — | $1,887 | $2,950 | | Municipal bonds | $2,434 | — | $2,434 | — | | U.S. government agency bonds | $5,228 | — | — | $5,228 | | Total | $921,406 | $832,383 | $51,644 | $37,379 | - Total accounts receivable sold under factoring arrangements was $8.0 million during Q1 2023[39] - The company uses foreign currency forward contracts to minimize short-term foreign currency exchange rate fluctuations, recognizing a net loss of $6.4 million in Q1 2023 from settlements[48] Gross Notional Value of Foreign Exchange Forward Contracts (March 31, 2023): | Currency | Notional Contract Amount (USD, in thousands) | | :--------------------- | :------------------------------------------- | | Euro | $222,215 | | Canadian Dollar | $72,007 | | Chinese Yuan | $69,842 | | Polish Zloty | $64,459 | | British Pound | $53,198 | | Japanese Yen | $46,513 | | Brazilian Real | $31,055 | | Swiss Franc | $28,081 | | Israeli Shekel | $14,864 | | Mexican Peso | $12,744 | | New Zealand Dollar | $6,575 | | Korean Won | $4,946 | | New Taiwan Dollar | $2,737 | | Australian Dollar | $2,615 | | Czech Koruna | $2,589 | | Total | $634,440 | Note 3. Balance Sheet Components Inventories (March 31, 2023 vs December 31, 2022): | Category | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :------------------ | :---------------------------- | :------------------------------- | | Raw materials | $146,435 | $172,758 | | Work in process | $91,325 | $96,558 | | Finished goods | $74,125 | $69,436 | | Total inventories | $311,885 | $338,752 | Prepaid Expenses and Other Current Assets (March 31, 2023 vs December 31, 2022): | Category | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :---------------------------- | :------------------------------- | | Value added tax receivables | $144,668 | $140,484 | | Prepaid expenses | $84,363 | $69,124 | | Other current assets | $22,509 | $16,762 | | Total | $251,540 | $226,370 | Accrued Liabilities (March 31, 2023 vs December 31, 2022): | Category | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :---------------------------- | :------------------------------- | | Accrued payroll and benefits | $171,354 | $149,508 | | Accrued income taxes | $105,038 | $74,323 | | Accrued expenses | $51,212 | $64,341 | | Accrued sales and marketing expenses | $36,227 | $36,407 | | Current operating lease liabilities | $27,776 | $26,574 | | Accrued property, plant and equipment | $18,186 | $19,922 | | Other accrued liabilities | $87,455 | $83,299 | | Total accrued liabilities | $497,248 | $454,374 | - Deferred revenues (current) increased to $1,376.8 million as of March 31, 2023, from $1,343.6 million at December 31, 2022[56] - Unfulfilled performance obligations as of March 31, 2023, were $1,540.9 million, expected to be fulfilled over six months to five years[57] Note 4. Goodwill and Intangible Assets Goodwill by Segment (March 31, 2023 vs December 31, 2022): | Segment | December 31, 2022 (in thousands) | Foreign Currency Translation Adjustments (in thousands) | March 31, 2023 (in thousands) | | :------------------- | :------------------------------- | :------------------------------------------------------ | :---------------------------- | | Clear Aligner | $109,480 | $852 | $110,332 | | Systems and Services | $298,071 | $5,819 | $303,890 | | Total | $407,551 | $6,671 | $414,222 | Intangible Long-Lived Assets, Net (March 31, 2023 vs December 31, 2022): | Category | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :---------------------- | :---------------------------- | :------------------------------- | | Existing technology | $71,237 | $74,186 | | Customer relationships | $15,050 | $15,587 | | Trademarks and tradenames | $6,177 | $6,636 | | Patents | $1,024 | $1,223 | | Foreign currency translation adjustments | $(168) | $(1,912) | | Total intangible assets, net | $93,320 | $95,720 | - Amortization expense for Q1 2023 was $4.1 million, compared to $4.3 million in Q1 2022[63] Note 5. Credit Facility - The company has a $300.0 million unsecured revolving line of credit and a $50.0 million letter of credit[64] - The credit facility was amended in December 2022, extending the maturity to December 23, 2027, and changing the interest rate basis from LIBOR to SOFR[64] - As of March 31, 2023, there were no outstanding borrowings, and the company was in compliance with all financial conditions and performance requirements[64] Note 6. Legal Proceedings - Three shareholder derivative lawsuits were filed in January 2019, later consolidated, alleging breaches of fiduciary duty, insider trading, and unjust enrichment; a similar lawsuit was filed in California Superior Court in April 2019; all are currently stayed[65][66] - Two antitrust class actions were filed in June 2020 and May 2021, alleging market activities in clear aligner and intraoral scanner markets; jury trials are scheduled for June 29, 2024, and September 30, 2024[66][67][68] - In an arbitration against SmileDirectClub LLC (SDC), an interim award on October 27, 2022, found SDC breached the Supply Agreement and caused harm to Align; SDC's motion to re-open was denied on March 3, 2023, and Align filed to confirm the interim award[69][70] - The company is unable to predict the outcome of these lawsuits or estimate a range of possible loss, but does not believe they will materially affect its financial position, results of operations, or cash flows[66][68][72] Note 7. Commitments and Contingencies - No material off-balance sheet arrangements as of March 31, 2023[73] - The company indemnifies customers, vendors, lessors, and directors/executive officers for certain matters, including intellectual property claims[74] - It is not possible to estimate the maximum potential amount under these indemnification agreements, but past payments have not been material, and no material claims were probable or reasonably possible as of March 31, 2023[75] Note 8. Stockholders' Equity Total Stock-Based Compensation Expense (Q1 2023 vs Q1 2022): | Category | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :-------------------------------- | :--------------------- | :--------------------- | | Cost of net revenues | $1,807 | $1,514 | | Selling, general and administrative | $28,691 | $24,725 | | Research and development | $7,237 | $5,382 | | Total stock-based compensation | $37,735 | $31,621 | - As of March 31, 2023, 792 thousand RSUs were unvested with a weighted average grant date fair value of $366.76[79] - As of March 31, 2023, 160 thousand MSUs were unvested with a weighted average grant date fair value of $812.75[82] - The company expects to recognize $246.2 million in unamortized compensation costs for RSUs (over 3.2 years) and $76.1 million for MSUs (over 2.2 years)[79][83] - As of March 31, 2023, 2,046,725 shares were available for future issuance under the 2010 Employee Stock Purchase Plan[85] Note 9. Common Stock Repurchase Programs - The May 2021 Repurchase Program ($1.0 billion) was completed as of March 31, 2023[87] - A new $1.0 billion January 2023 Repurchase Program was authorized, with no utilization as of March 31, 2023[87] Accelerated Share Repurchase (ASR) Activity (Q1 2023): | Repurchase Program | Amount Paid (millions) | Total Shares Received | Average Price per Share | | :----------------- | :--------------------- | :-------------------- | :---------------------- | | May 2021 (Q4 2022 ASR) | N/A (final $40.0M paid in Q1 2023) | 136,448 | $293.15 | | May 2021 (Q1 2023 ASR) | $250.0 | 805,908 | $310.21 | Note 10. Accounting for Income Taxes Provision for Income Taxes (Q1 2023 vs Q1 2022): | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | | :------------------------- | :-------------------- | :-------------------- | | Provision for income taxes | $46.8 | $53.2 | | Effective tax rate | 34.8% | 28.4% | - The effective tax rate increased primarily due to a decrease and change in jurisdictional mix of income, foreign income taxed at different rates, and lower excess tax benefits from stock-based compensation[149] - Total gross unrecognized tax benefits were $145.3 million as of March 31, 2023, an increase from $141.6 million at December 31, 2022[92] Note 11. Net Income per Share Net Income per Share (Q1 2023 vs Q1 2022): | Metric | Q1 2023 | Q1 2022 | | :------------------------------------------ | :------ | :------ | | Net income (in thousands) | $87,798 | $134,298 | | Weighted average common shares outstanding, basic (in thousands) | 76,921 | 78,742 | | Dilutive effect of potential common stock (in thousands) | 190 | 451 | | Total shares, diluted (in thousands) | 77,111 | 79,193 | | Net income per share, basic | $1.14 | $1.71 | | Net income per share, diluted | $1.14 | $1.70 | Note 12. Supplemental Cash Flow Information Non-Cash Investing and Financing Activities (Q1 2023 vs Q1 2022): | Activity | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :--------------------------------------------------------------------------------- | :--------------------- | :--------------------- | | Acquisition of property, plant and equipment in accounts payable and accrued liabilities | $30,907 | $58,876 | | Operating cash flows from operating leases | $7,871 | $7,292 | | Right-of-use assets obtained in exchange for lease obligations (Operating leases) | $5,559 | $12,262 | Note 13. Segments and Geographical Information Net Revenues by Segment (Q1 2023 vs Q1 2022): | Segment | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :----------------------- | :--------------------- | :--------------------- | | Clear Aligner | $789,804 | $809,696 | | Systems and Services | $153,343 | $163,523 | | Total net revenues | $943,147 | $973,219 | Gross Profit by Segment (Q1 2023 vs Q1 2022): | Segment | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :----------------------- | :--------------------- | :--------------------- | | Clear Aligner | $566,139 | $605,696 | | Systems and Services | $94,515 | $103,650 | | Total gross profit | $660,654 | $709,346 | Income from Operations by Segment (Q1 2023 vs Q1 2022): | Segment | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :----------------------- | :--------------------- | :--------------------- | | Clear Aligner | $277,521 | $312,719 | | Systems and Services | $35,576 | $50,799 | | Unallocated corporate expenses | $(179,581) | $(165,436) | | Total income from operations | $133,516 | $198,082 | Net Revenues by Geographic Area (Q1 2023 vs Q1 2022): | Region | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :-------------------- | :--------------------- | :--------------------- | | U.S. | $411,138 | $420,920 | | Switzerland | $313,131 | $331,739 | | Other International | $218,878 | $220,560 | | Total net revenues | $943,147 | $973,219 | Note 14. Restructuring and Other Charges - Restructuring plan initiated in Q4 2022, expected to complete in H1 2023[104] - In Q1 2023, $3.7 million was paid for restructuring expenses, and $0.1 million in incremental expenses were recorded[104] - As of March 31, 2023, $0.3 million in restructuring expenses remained unpaid[104] Note 15. Subsequent Event - On April 24, 2023, Align Technology agreed to acquire less than a 5% equity interest in Heartland Dental Holding Corporation for $75 million[105] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of Align Technology's financial condition and results of operations, highlighting strategic priorities, macroeconomic challenges, and the impact of the COVID-19 pandemic; it details key financial and operating metrics, analyzes revenue and expense trends by segment, and discusses liquidity, capital resources, and critical accounting policies; the company reported a decline in overall revenues and profitability in Q1 2023, while operating cash flow significantly increased Forward-Looking Statements - The report includes forward-looking statements about strategic objectives, macroeconomic conditions, customer behavior, market growth, technological innovation, and future financial performance[108] - These statements are subject to risks and uncertainties, including those discussed in "Risk Factors," which could cause actual results to differ materially[108] Executive Overview of Results Trends and Uncertainties - Strategic priorities: international expansion, general practitioner dentists (GPs) adoption, patient demand and conversion, and orthodontic utilization[109] - Business is susceptible to macroeconomic conditions (inflation, interest rates, recessions, currency fluctuations, supply chain) and geopolitical issues (Russia-Ukraine conflict)[111] - The U.S. dollar weakening in Q1 2023 favorably impacted financial results, a trend expected to continue but with the dollar remaining historically strong[111] - The global impact of the COVID-19 pandemic is declining, but regional unpredictability remains, particularly in the Asia Pacific region and China[113] - The company manages challenges by improving operations, building flexibility, adjusting business models, and offering innovative products, including pricing actions, cost savings, and headcount control[115] Key Financial and Operating Metrics Key Financial Metrics (Q1 2023 vs Q1 2022): | Metric | Q1 2023 | Change YoY | | :------------------------------------------ | :--------------------- | :--------- | | Revenues | $943.1 million | -3.1% | | Clear Aligner revenues | $789.8 million | -2.5% | | Americas Clear Aligner revenues | $361.3 million | -4.0% | | International Clear Aligner revenues | $354.2 million | -4.5% | | Imaging Systems and CAD/CAM Services revenues | $153.3 million | -6.2% | | Income from operations | $133.5 million | -32.5% | | Operating margin | 14.2% | -6.2 ppts | | Effective tax rate | 34.8% | +6.4 ppts | | Net income | $87.8 million | -34.6% | | Diluted net income per share | $1.14 | -32.9% | | Cash, cash equivalents and marketable securities (as of March 31, 2023) | $921.4 million | -11.5% (vs Dec 31, 2022) | | Operating cash flow | $199.9 million | +555.4% (vs Q1 2022) | | Capital expenditures | $64.1 million | -26.6% (vs Q1 2022) | | Number of employees (as of March 31, 2023) | 23,035 | -2.5% | Other Statistical Data and Trends - Approximately 15.1 million people worldwide have been treated with the Invisalign system as of March 31, 2023[117] - Digital scanner submissions for Invisalign cases in Q1 2023: * Americas: 93.1% (up from 90.6% in Q1 2022) * International: 87.0% (up from 82.8% in Q1 2022) * North American orthodontists: 97.7% (submitted digitally)[117] - Total utilization rate in Q1 2023 decreased to 7.0 cases per doctor (from 7.3 in Q1 2022): * North America orthodontist customers: 26.2 cases per doctor (down from 26.8 in Q1 2022) * North America GP customers: 4.9 cases per doctor (down from 5.0 in Q1 2022) * International doctor utilization rate: 6.2 cases per doctor (down from 6.4 in Q1 2022)[118] Results of Operations Net Revenues by Reportable Segment Net Revenues by Segment (Q1 2023 vs Q1 2022): | Segment | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (millions) | Change (%) | | :------------------------- | :-------------------- | :-------------------- | :---------------- | :--------- | | Americas Clear Aligner | $361.3 | $376.2 | $(15.0) | (4.0)% | | International Clear Aligner | $354.2 | $371.1 | $(16.9) | (4.5)% | | Non-case | $74.3 | $62.4 | $12.0 | 19.2% | | Total Clear Aligner | $789.8 | $809.7 | $(19.9) | (2.5)% | | Systems and Services | $153.3 | $163.5 | $(10.2) | (6.2)% | | Total net revenues | $943.1 | $973.2 | $(30.1) | (3.1)% | - Total Clear Aligner case volume decreased by 3.9% year-over-year in Q1 2023[126] - Americas Clear Aligner net revenues decreased by $15.0 million due to a 5.3% decrease in case volumes, partially offset by a $5.0 million increase in ASP (driven by price increases and additional aligners, offset by promotional discounts and product mix shift)[127] - International Clear Aligner net revenues decreased by $16.9 million due to a 2.3% decrease in case volumes and lower ASP (impacted by product mix shift, unfavorable foreign exchange rates of $26.4 million, and promotional discounts, partially offset by additional aligners and price increases)[128] - Non-case net revenues increased by $12.0 million, mainly from increased volumes in the Doctor Subscription program and Vivera retainers[129] - Systems and Services net revenues decreased by $10.2 million, primarily due to a $27.3 million decrease from lower scanner sales, partially offset by a $15.2 million increase in service and other revenues and a $1.9 million increase in scanner ASP[130][131] Cost of net revenues and gross profit Cost of Net Revenues and Gross Profit (Q1 2023 vs Q1 2022): | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (millions) | | :-------------------------------- | :-------------------- | :-------------------- | :---------------- | | Clear Aligner Cost of net revenues | $223.7 | $204.0 | $19.7 | | Clear Aligner Gross margin % | 71.7% | 74.8% | -3.1 ppts | | Systems and Services Cost of net revenues | $58.8 | $59.9 | $(1.0) | | Systems and Services Gross margin % | 61.6% | 63.4% | -1.8 ppts | | Total cost of net revenues | $282.5 | $263.9 | $18.6 | | Total gross profit | $660.7 | $709.3 | $(48.7) | | Total Gross margin % | 70.0% | 72.9% | -2.9 ppts | - Clear Aligner gross margin decreased due to increased manufacturing spend, including ramping up the new Poland facility, and a higher mix of additional aligners[134] - Systems and Services gross margin decreased due to manufacturing inefficiencies from lower production volumes and higher inventory costs, partially offset by higher service revenues and ASP[135] Selling, general and administrative Selling, General and Administrative Expense (Q1 2023 vs Q1 2022): | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (millions) | | :-------------------------------- | :-------------------- | :-------------------- | :---------------- | | Selling, general and administrative | $439.7 | $439.5 | $0.2 | | % of net revenues | 46.6% | 45.2% | +1.4 ppts | - SG&A remained flat due to higher salaries, fringe benefits, stock-based and incentive compensation, offset by lower advertising, marketing, and outside service costs[138] Research and development Research and Development Expense (Q1 2023 vs Q1 2022): | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (millions) | | :----------------------- | :-------------------- | :-------------------- | :---------------- | | Research and development | $87.4 | $71.8 | $15.6 | | % of net revenues | 9.3% | 7.4% | +1.9 ppts | - R&D expense increased due to higher salaries, fringe benefits, and stock-based and incentive compensation, reflecting a focus on innovation and research investments[140] Income from operations Income from Operations by Segment (Q1 2023 vs Q1 2022): | Segment | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (millions) | | :----------------------- | :-------------------- | :-------------------- | :---------------- | | Clear Aligner Income from operations | $277.5 | $312.7 | $(35.2) | | Clear Aligner Operating margin % | 35.1% | 38.6% | -3.5 ppts | | Systems and Services Income from operations | $35.6 | $50.8 | $(15.2) | | Systems and Services Operating margin % | 23.2% | 31.1% | -7.9 ppts | | Total income from operations | $133.5 | $198.1 | $(64.6) | | Total Operating margin % | 14.2% | 20.4% | -6.2 ppts | - Clear Aligner operating margin decreased primarily due to lower gross margin[143] - Systems and Services operating margin decreased due to higher operating expenses as a percentage of net revenues and lower gross margin[144] Interest income Interest Income (Q1 2023 vs Q1 2022): | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (millions) | | :--------------- | :-------------------- | :-------------------- | :---------------- | | Interest income | $2.3 | $0.7 | $1.7 | | % of net revenues | 0.2% | 0.1% | +0.1 ppts | - Increase primarily due to higher interest rates in Q1 2023[145] Other income (expense), net Other Income (Expense), Net (Q1 2023 vs Q1 2022): | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (millions) | | :-------------------------- | :-------------------- | :-------------------- | :---------------- | | Other income (expense), net | $(1.2) | $(11.3) | $10.0 | | % of net revenues | (0.1)% | (1.2)% | +1.1 ppts | - Improvement primarily due to the favorable impact of foreign exchange rates and higher interest rates[147] Provision for income taxes Provision for Income Taxes (Q1 2023 vs Q1 2022): | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | | :------------------------- | :-------------------- | :-------------------- | | Provision for income taxes | $46.8 | $53.2 | | Effective tax rate | 34.8% | 28.4% | - The increase in effective tax rate is primarily attributable to the decrease and change in jurisdictional mix of income, foreign income taxed at different rates, and lower excess tax benefits from stock-based compensation[149] Liquidity and Capital Resources Liquidity and Trends Cash, Cash Equivalents and Marketable Securities (March 31, 2023 vs December 31, 2022): | Category | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :------------------------------------ | :---------------------------- | :------------------------------- | | Cash and cash equivalents | $832,383 | $942,050 | | Marketable securities, short-term | $51,644 | $57,534 | | Marketable securities, long-term | $37,379 | $41,978 | | Total | $921,406 | $1,041,562 | - Approximately $610.9 million of cash, cash equivalents, and marketable securities were held by foreign subsidiaries as of March 31, 2023, intended for indefinite reinvestment[151] - The company expects its current cash balances and $300.0 million revolving line of credit to be sufficient for at least the next 12 months[151] - Capital expenditures for 2023 are expected to exceed $200.0 million, primarily for manufacturing capacity and facilities, including a new aligner fabrication facility in Poland[152] - A new $1.0 billion January 2023 Repurchase Program was authorized, with no utilization as of March 31, 2023[153] Sources and Uses of Cash Net Cash Flow Summary (Q1 2023 vs Q1 2022): | Activity | Q1 2023 (in thousands) | Q1 2022 (in thousands) | | :------------------------------------------------------------------- | :--------------------- | :--------------------- | | Operating activities | $199,895 | $30,498 | | Investing activities | $(52,829) | $(90,198) | | Financing activities | $(258,961) | $(111,742) | | Effect of exchange rate changes on cash, cash equivalents, and restricted cash | $2,221 | $(1,826) | | Net (decrease) increase in cash, cash equivalents, and restricted cash | $(109,674) | $(173,268) | - Operating cash flow of $199.9 million in Q1 2023 was driven by net income ($87.8 million) and adjustments like stock-based compensation ($37.7 million), depreciation and amortization ($35.8 million), and favorable working capital changes (e.g., increase in accrued liabilities, decrease in accounts receivable, increase in deferred revenues, increase in inventories)[155] - Net cash used in investing activities was $52.8 million, primarily for property, plant and equipment purchases ($64.1 million) and marketable securities purchases ($2.4 million), partially offset by sales/maturities of marketable securities ($13.7 million)[156] - Net cash used in financing activities was $259.0 million, mainly due to common stock repurchases ($252.4 million) and payroll taxes for equity awards ($20.9 million), partially offset by common stock issuance proceeds ($14.3 million)[157] Critical Accounting Policies and Estimates - Management's discussion and analysis is based on condensed consolidated financial statements prepared in accordance with GAAP, requiring estimates and judgments[158] - Revenue recognition is a critical accounting policy, especially for contracts with multiple distinct performance obligations[159] - Determining standalone selling price (SSP) for allocating consideration involves various factors like market conditions, historical prices, costs, and gross margins, and changes could impact revenue recognition timing[159] - Estimating SSP for clear aligner treatment plans also considers usage rates (expected additional aligner orders), which requires significant judgment and historical data[160] Recent Accounting Pronouncements - The company does not believe any recently issued accounting pronouncements will have a material impact on its consolidated financial statements or disclosures[29][161] Item 3. Quantitative and Qualitative Disclosures About Market Risk Align Technology is exposed to interest rate, foreign currency exchange, and inflation risks, exacerbated by global market disruptions from macroeconomic challenges, the Russia-Ukraine conflict, and the COVID-19 pandemic; the company uses forward contracts to mitigate foreign currency risk but acknowledges that significant fluctuations could still materially impact financial results Interest Rate Risk - Exposure to interest rate risk on cash equivalents and marketable securities[163] - As of March 31, 2023, $89.0 million was invested in available-for-sale marketable securities[163] - An immediate 10% change in interest rates would not have a material adverse impact on future operating results and cash flows[163] - The company does not use derivative financial instruments for interest rate risk and has no outstanding borrowings under its credit facility[164] Currency Rate Risk - Financial results are affected by foreign currency exchange rate fluctuations due to international sales and operations[165] - The company uses foreign currency forward contracts (primarily Euro, Chinese Yuan, Polish Zloty, Canadian Dollar) to minimize short-term impacts on trade and intercompany receivables/payables[166] - These forward contracts are not designated as hedging instruments and are marked to market through earnings[166] - An aggregate 10% change in foreign currency exchange rates relative to the U.S. dollar could materially impact results of operations and financial position[167] Military Conflict in Ukraine - The military conflict between Russia and Ukraine continues to create macroeconomic challenges[167] - As of March 31, 2023, the company does not expect a material impact on its operations from the conflict[167] - Russia's net revenues and assets domiciled there are immaterial as a percentage of consolidated totals[167] Inflation Risk - The economy is impacted by rising inflationary trends affecting revenues and costs globally, expected to continue[168] - Inability to fully offset higher costs through price increases could materially impact results of operations and financial condition[168] Item 4. Controls and Procedures Align Technology's management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2023; there were no material changes in internal control over financial reporting during the quarter Evaluation of disclosure controls and procedures - Disclosure controls and procedures were evaluated as of March 31, 2023[169] - CEO and CFO concluded that disclosure controls and procedures are effective[169] Changes in internal control over financial reporting - No material changes in internal control over financial reporting during Q1 2023[170] PART II—OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 6 "Legal Proceedings" in Part I, Item 1 for a discussion of the company's legal proceedings - Refer to Note 6 "Legal Proceedings" for details on legal proceedings[171] Item 1A. Risk Factors This section outlines various risks that could adversely affect Align Technology's business, financial condition, results of operations, and stock price; these risks are categorized into macroeconomic, business, operational, legal/regulatory, intellectual property, and financial/tax/accounting risks Summary of Risk Factors - Business is subject to risks including macroeconomic, external, business, industry, operational, legal, regulatory, compliance, intellectual property, financial, tax, and accounting risks[174] - These risks could prevent the company from achieving business objectives or adversely affect its financial condition, results of operations, cash flows, and prospects[174] Macroeconomic and External Risks - Operations and financial performance depend on global and regional economic conditions, including inflation, currency exchange rates, consumer confidence, and general economic weakness/recessions[174] - Macroeconomic conditions impact consumer discretionary spending, potentially reducing demand for elective procedures and capital equipment[175] - Higher inflation increases shipping costs, raw material prices, and labor rates, which may not be fully offset by price increases, pressuring operating results[176] - International operations expose the company to foreign currency fluctuations, which can materially impact operating results and cash flows despite hedging strategies[178] - Political events, trade disputes, war (e.g., Russia-Ukraine conflict), and terrorism can disrupt international commerce, supply chains, and IT systems, leading to increased costs, tariffs, and reduced consumer spending[179][180][181][184] - Major public health issues, like pandemics, can adversely affect demand, supply chains, and distribution channels[185] - Natural disasters, potentially exacerbated by climate change, can disrupt operations, impact employees, and compromise manufacturing and service capabilities[187] Business and Industry Risks - Demand for products may decrease due to resistance to non-traditional treatment methods (e.g., Invisalign vs. traditional braces) or reluctance of dental professionals to adopt digital solutions[188] - Net revenues are largely dependent on sales of the Invisalign system and iTero intraoral scanners; declines in sales or average selling prices (ASPs) could harm financial results[189][191] - ASPs are influenced by promotions, discounts, product/geographic mix shifts, competitive pricing, and regulatory actions (e.g., China's volume-based procurement)[192] - The dental industry is undergoing rapid digital transformation, increasing competition from new market entrants, traditional manufacturers, DTC companies, and even doctors/DSOs manufacturing their own aligners[193][194][195][197] - Success depends on the ability to profitably and quickly develop, manufacture, market, and obtain regulatory approval for new products and services, and achieve market acceptance[198][199] - Investments in or acquisitions of other businesses, products, or technologies may not strengthen competitive position, achieve desired synergies, or could lead to unexpected issues, dilution, or impairment charges[201][202][203] Operational Risks - Material or prolonged business disruptions (internal or at key suppliers) could harm business, revenues, profitability, and competitive position[204][205] - Operating results fluctuate due to changing doctor and consumer demand, making revenue, cost, and expenditure predictions difficult[206][209] - Underestimating demand can lead to insufficient manufacturing capacity, understaffing, and material shortages, while overestimating can result in excessive staffing, materials, and capacity, impacting gross margin[210][211] - The company is subject to operating risks like excess or constrained capacity and pressure on internal systems, personnel, and suppliers, requiring continuous improvement in systems and employee management[213][215] - Issues with product development, IT system integration, or software updates can disrupt operations, damage reputation, and impact financial results[217][218][219][220][221] - High dependence on third-party suppliers, some sole-source, for key machines, components, and materials exposes the company to supply chain vulnerabilities, potential disruptions, and price increases[223][224][225] - Reliance on distributors for international sales exposes the company to risks if distributors fail to comply with laws, satisfy customers, or if relationships are disrupted[226][227] - Disruptions in freight carriers, higher shipping costs, or delays can impact supply chain, revenues, and gross margin[228][229] - Success depends on attracting, motivating, training, and retaining personnel, especially highly skilled individuals; failure to do so can impede growth and strategic priorities[230][232][233][234][236] - Marketing activities are significant but may not always be successful or cost-effective, and negative public perception of endorsements could harm reputation[237][238][239][240] Legal, Regulatory and Compliance Risks - Subject to antitrust and competition regulations, litigation, and enforcement actions, which could result in fines, penalties, business practice restrictions, and substantial costs[241][242] - Extensive and frequently changing regulations (personal healthcare/financial information, quality systems, anti-corruption, anti-bribery) are expensive and time-consuming to comply with[243][244][246][247][248][249][250] - Failure to obtain or maintain regulatory approvals for new products or uses, or non-compliance by suppliers, could harm sales, result in penalties, and damage reputation[247][248] - Security breaches, data breaches, cyber attacks, or failure to comply with privacy/security laws could materially impact operations, patient care, lead to liability, and harm business/reputation[250][251][252][254][255][256] - Exposure to potential liability for product quality/safety, advertising, marketing, and sales practices; claims could result in substantial expenses, damages, or penalties[257][258] - Increased focus on ESG laws and scrutiny of ESG policies may materially increase costs, expose to liability, and adversely impact reputation, employee retention, and investor/customer willingness to engage[259][260][261][262][263][264][265] Intellectual Property Risks - Success depends on maintaining existing and obtaining further IP protection (patents, copyrights, trademarks, trade secrets)[266][268] - Patents may be challenged, invalidated, circumvented, or not broad enough; patent applications may not result in issued patents or may be narrower than sought[266][267] - Misappropriation of proprietary information has occurred and is expected again; agreements may not provide adequate protection[268] - Extensive IP litigation is common and can be unpredictable, protracted, expensive, and distracting, potentially affecting the validity/scope of IP rights, hindering product manufacturing/marketing, or resulting in monetary damages/injunctions[270][271] Financial, Tax and Accounting Risks - Goodwill and long-lived assets are reviewed for impairment, and changes in assumptions (revenue growth, discount rates) could lead to material charges to earnings[272] - Changes in, or interpretations of, accounting rules and regulations could result in unfavorable accounting charges[273] - Failure to maintain effective internal control over financial reporting could lead to delayed filings, restatements, and loss of investor confidence[274] - Exposure to global financial and securities market risks, including potential impairment losses on marketable investments and limited access to capital due to market volatility or bank failures[276][277] - Effective tax rate may vary significantly due to global economic environment, legal entity structure, tax laws, and changes in income mix[278][279] - New tax laws (e.g., OECD BEPS project), changes to existing laws, or disputes over tax positions could negatively affect provision for income taxes and operations[280][281][282] - Market price for common stock has been volatile due to various factors, including operating results, market recommendations, competitive announcements, and general economic conditions[283][284][285] - Future stock repurchase programs are contingent on various factors and may not achieve desired objectives; the IRA's 1% excise tax on repurchases will increase tax liabilities[286][287] - Future sales of significant amounts of common stock by existing stockholders may depress the stock price[288] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports that there were no unregistered sales of equity securities during the period; it also details the company's common stock repurchase activity for Q1 2023, including the completion of the May 2021 Repurchase Program and the authorization of a new $1.0 billion program in January 2023 Unregistered Sales of Equity Securities - No unregistered sales of equity securities[288] Purchases of Equity Securities by the Issuer and Affiliated Purchasers Stock Repurchase Activity (Q1 2023): | Period | Total Number of Shares Purchased | Average Price per Share | Total Shares Purchased as Part of Publicly Announced Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Programs | | :------------------------------------ | :------------------------------- | :---------------------- | :------------------------------------------------------------ | :---------------------------------------------------------------------------- | | January 1, 2023 - January 31, 2023 | — | — | — | $290,000,067 | | February 1, 2023 - February 28, 2023 | 719,368 | $333.63 | 719,368 | $50,000,148 | | March 1, 2023 - March 31, 2023 | 222,988 | $224.23 | 222,988 | — | | Total | 942,356 | | 942,356 | | - The May 2021 Repurchase Program was completed[291] - A new $1.0 billion January 2023 Repurchase Program was authorized, with no utilization as of March 31, 2023[292] Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reported period - Not applicable[293] Item 4. Mine Safety Disclosures This item is not applicable to the company for the reported period - Not applicable[293] Item 5. Other Information There is no other information to report for this item - None[293] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, equity compensation agreements, an accelerated share repurchase transaction, and certifications - Lists various exhibits filed, including Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, Restricted Stock Unit Agreements, Market Stock Unit Agreements, Fixed Dollar Accelerated Share Repurchase Transaction, and CEO/CFO certifications[295] SIGNATURES - Signed by Joseph M. Hogan (President and CEO) and John F. Morici (CFO and EVP, Global Finance) on May 5, 2023[299]