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ALGN > SEC Filings for ALGN > Form 10-Q on 31-Jul-2014All Recent SEC Filings

Show all filings for ALIGN TECHNOLOGY INC

Form 10-Q for ALIGN TECHNOLOGY INC


31-Jul-2014

Quarterly Report


ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

In addition to historical information, this quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, among other things, our expectations regarding the anticipated impact that our new products and product enhancements will have on doctor utilization and our market share, our expectations regarding product mix and product adoption, our expectations regarding the existence and impact of seasonality, our expectations regarding the financial and strategic benefits of the scanner and services business, our expectations to increase our investment in manufacturing capacity, our expectations regarding the continued expansion of our international markets, the anticipated number of new doctors trained and their impact on volumes, the impact of the termination of our Asia Pacific distributor relationship and reverting to a direct sales model in that region by acquiring the distributor business, our expectations regarding our stock repurchase program, the level of our operating expenses and gross margins, and other factors beyond our control, as well as other statements regarding our future operations, financial condition and prospects and business strategies. These statements may contain words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," or other words indicating future results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations", and in particular, the risks discussed below in Part II, Item 1A "Risk Factors". We undertake no obligation to revise or update these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

The following discussion and analysis of our financial condition and results of operations should be read together with our Condensed Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.
Overview

Align Technology, Inc. is a global medical device company that advanced the invisible orthodontics market with the introduction of the Invisalign System in 1999. Today, we are focused on designing, manufacturing and marketing innovative technology-rich products to help dental professionals achieve the clinical results they expect and deliver effective, convenient cutting-edge dental treatment options to their patients. Align Technology was founded in March 1997 and is headquartered in San Jose, California with offices worldwide. Our international headquarters are located in Amsterdam, the Netherlands. We have two operating segments: (1) Clear Aligner, known as the Invisalign System; and
(2) Scanner and Services ("Scanner"), known as the iTero intra-oral scanners and OrthoCAD services (which we previously referred to as Scanner and CAD/CAM Services ("SCCS")). We received FDA clearance in 1998 and began our first commercial sales of Invisalign to U.S. orthodontists in 1999 followed by U.S. General Practitioner Dentists ("GPs") in 2002. Over the next decade, we introduced Invisalign to the European market and Japan, added distribution partners in Asia-Pacific, Latin America, and Europe Middle East and Africa ("EMEA"), and introduced a full range of treatment options including Invisalign Express 10, Invisalign Teen, Invisalign Assist, and Vivera Retainers. By 2011, we launched significant new aligner and software features across all Invisalign products that make it easier for doctors to use Invisalign on more complex cases, and introduced Invisalign to the People's Republic of China. In 2013, we launched SmartTrack, the next generation of Invisalign clear aligner material, which became the new standard aligner material for Invisalign products in North America, Europe and other international markets where we have obtained regulatory approval. Most recently, in February 2014, we launched Invisalign G5 innovations, specifically designed for treatment of deep bite malocclusion as well as ClinCheck Pro, the next generation Invisalign treatment software tool, designed to help Invisalign providers achieve their treatment goals. We also sell iTero intra-oral scanners and provide computer-aided design and computer-aided manufacturing ("CAD/CAM") services. Intra-oral scanners provide a dental "chair-side" platform for accessing valuable digital diagnosis and treatment tools, with potential for enhancing accuracy of records, treatment efficiency, and the overall patient experience. We believe there are numerous benefits for customers and the opportunity to accelerate the adoption of Invisalign through interoperability with our intra-oral scanners. The use of digital technologies such as CAD/CAM for restorative dentistry or in-office restorations has been growing rapidly and intra-oral scanning is a critical part of enabling these new digital technologies and procedures in dental practices. In late 2012, we commercially launched the Invisalign Outcome Simulator, the first Invisalign chair-side application powered by the iTero scanner. The interactive application provides dentists and orthodontists an enhanced platform for patient education and is designed to increase treatment acceptance by helping patients visualize the benefits possible with Invisalign treatment. In January 2014, we announced that the 3M True Definition scanner was


qualified for use with Invisalign case submissions. This qualification enables Invisalign providers with a True Definition scanner to submit a digital impression in place of a traditional PVS impression as part of the Invisalign case submission process. The 3M True Definition scanner is currently the only third-party scanner that has been qualified for use with Invisalign treatment. We continue to believe in an open systems approach to digital impressions, and are committed to working with other intra-oral scanning companies interested in developing interoperability for use with Invisalign treatment.
The Invisalign System is offered in more than 60 countries and has been used to treat more than 2.7 million patients. Our iTero intra-oral scanner, which is primarily sold in North America, provides dental professionals with an open choice to send digital impressions to any laboratory-based CAD/CAM system or to any of the more than 1,200 dental labs worldwide.
Our goal is to establish Invisalign clear aligners as the standard method for treating malocclusion and to establish the iTero intra-oral scanner as the preferred scanning device for 3D digital scans, ultimately driving increased product adoption by dental professionals. We intend to achieve this by continued focus and execution of our strategic growth drivers set forth in the Business Strategy section in our Annual Report on Form 10-K.
The successful execution of our business strategy and our results in 2014 and beyond may be affected by a number of other factors, which are updated below:
New Products, Feature Enhancements and Technology Innovation. Product innovation drives greater treatment predictability and clinical applicability, and ease of use for our customers, which supports adoption of Invisalign in their practices. Increasing applicability and treating more complex cases requires that we move away from individual features to more comprehensive solutions so that Invisalign providers can more predictably treat the whole case, such as with Invisalign G5 for deep bite treatment. Launched in February 2014, Invisalign G5 was engineered to help doctors achieve even better clinical outcomes when treating patients with deep bites - a prevalent orthodontic problem. In North America, in February 2014, we also launched ClinCheck Pro, the next generation Invisalign treatment software tool, designed to provide more precise control over final tooth position and to help Invisalign providers achieve their treatment goals. We intend to launch ClinCheck Pro in our other country markets in the first quarter of 2015. We believe that over the long-term, clinical solutions and treatment tools will increase adoption of Invisalign; however, it is difficult to predict the rate of adoption which may vary by region and channel.

         Invisalign Utilization rates.  Our goal is to establish Invisalign as
          the treatment of choice for treating malocclusion ultimately driving
          increased product adoption and frequency of use by dental
          professionals, also known as "utilization rates". Our quarterly

utilization rates for the previous 9 quarters are as follows:

[[Image Removed]]

* Invisalign Utilization rates = # of cases shipped divided by # of doctors cases were shipped to

Total utilization in the second quarter of 2014 was 4.4 cases per doctor and was up compared to the second quarter of 2013 driven primarily by North America orthodontist and International customers. Utilization among our North American orthodontist customers increased slightly to 8.4 cases per doctor in the second quarter of 2014 from 8.0 cases in the second quarter of 2013, while our International doctor utilization increased to 4.5 cases


in the second quarter of 2014 from 4.3 cases in the second quarter of 2013. This increase in North America orthodontist utilization reflects improvements in product and technology, which continues to strengthen our doctors' clinical confidence in the use of Invisalign such that they now utilize Invisalign more often and on more complex cases, including their teenage patients. Increased International utilization reflects strong growth in both the EMEA and Asia Pacific regions driven by go-to-market and sales coverage investments, improving clinical education and support as well as ongoing technology innovation. Year over year utilization for our North American GP customers decreased to 2.9 cases per doctor in the second quarter of 2014 from 3.0 cases in the second quarter of 2013. Although we expect that over the long-term our utilization rates will gradually improve, we expect that period over period comparisons of our utilization rates will fluctuate.

         Seasonal Trends. In North America, summer is typically the busiest
          season for orthodontists with practices that have a high percentage of
          adolescent and teenage patients as many parents want to get their
          teenagers started in treatment before the start of the school year;
          however, many GPs are on vacation during this time and, therefore, tend
          to start fewer cases.  Internationally, sales of Invisalign treatment
          are often weaker in the summer months due to our customers and their
          patients being on holiday. Consequently, we expect that our Invisalign
          volume will be relatively flat in the third quarter of 2014 compared to
          the second quarter.



         Number of new Invisalign doctors trained.  We continue to expand our
          Invisalign customer base through the training of new doctors. In 2013,
          Invisalign growth was driven primarily by increased utilization by our
          orthodontist customers as well as by the continued expansion of our
          customer base as we trained a total of 8,065 new Invisalign doctors.
          GPs are one of the keys to driving growth in the adult segment, and, in
          2014, we launched a new CE I training course, now called Invisalign
          Fundamentals, designed to improve practice integration and increase
          utilization for newly trained doctors. We have implemented this new
          Invisalign Fundamentals program across North America and will look for
          opportunities to adjust our international training programs as we work
          to help our GP practices worldwide more successfully adopt Invisalign
          into their practices. During the six months ended June 30, 2014, we
          trained 4,185 new Invisalign doctors. We believe that this new training
          approach will increase the number of doctors submitting cases 90-days
          post-training, as well as the number of cases submitted per doctor.



         International Clear Aligner. We will continue to focus our efforts
          towards increasing adoption of our products by dental professionals in
          our direct international markets. On a year over year basis,
          international volume increased 26%, driven primarily by growth in
          Europe as well as by strong performance in the Asia Pacific region. In
          2014, we are continuing to expand in our existing markets through
          targeted investments in sales coverage and professional marketing and
          education programs, along with consumer marketing in selected country
          markets. In addition, given the significant long term potential this
          extensive geography represents and the support we can now provide by
          utilizing our direct coverage model in Europe, beginning in February
          2014, we transitioned a small number of these countries into direct
          sales regions. We expect to leverage our existing infrastructure and
          resources to bring sales coverage and customer support to these
          countries, most of which are adjacent to our directly covered European
          countries. Due to the small volume of business from our EMEA
          distributor, we do not anticipate that this transition will have a
          material effect on our financial results in the next several years.


         Foreign exchange rates. Although the U.S. dollar is our reporting
          currency, a portion of our net revenues and income are generated in
          foreign currencies. Net revenues and income generated by subsidiaries
          operating outside of the U.S. are translated into U.S. dollars using
          exchange rates effective during the respective period and as a result
          are affected by changes in exchange rates. We have generally accepted
          the exposure to exchange rate movements without using derivative
          financial instruments to manage this risk; therefore, both positive and
          negative movements in currency exchange rates against the U.S. dollar
          will continue to affect the reported amount of net revenues and income
          in our consolidated financial statements.


         Medical Device Excise Tax. During March 2014, Align had extensive
          discussions with the IRS and they informed us that our aligners are not
          subject to the medical device excise tax ("MDET") which we had been
          paying and expensing in general and administrative expenses in the
          consolidated statements of operations since January 1, 2013; however,
          our scanners are still subject to the MDET. As a result of these
          discussions, beginning in March 2014, we ceased expensing and paying
          the MDET for aligners, which reduced our first quarter general and
          administrative expense by approximately $0.5 million. In future
          quarters, we expect our general and administrative expense in relation
          to MDET to decrease by approximately $1.8 million per quarter based on
          current revenues. In June 2014, we received a $1.2 million refund for
          MDET paid in 2014 related to our aligners which reduced general and
          administrative expenses for the three months ended June 30, 2014.
          Additionally, we are in process of claiming a $6.8 million refund of
          MDET paid in 2013 related to our aligners; however, because


this claim is subject to review and approval by the IRS, we have not recorded a receivable as the outcome of the audit is uncertain. Any future changes in the applicability of the MDET as it applies to us or refunds of amounts previously paid will be recorded as an additional expense or a credit to the consolidated statement of operations in the period in which is becomes probable and reasonably estimable.

         Stock Repurchase Authorization. On April 23, 2014, we announced that
          our Board of Directors had authorized a stock repurchase program
          pursuant to which we may purchase up to $300.0 million of our common
          stock over the next three years, with $100.0 million of that amount
          authorized to be purchased over the first twelve months. Any purchases
          under this stock repurchase program may be made, from time-to-time,
          pursuant to open market purchases (including pursuant to Rule 10b5-1
          plans), privately-negotiated transactions, accelerated stock
          repurchases, block trades or derivative contracts or otherwise in
          accordance with applicable federal securities laws, including Rule
          10b-18 of the Securities Exchange Act of 1934. The program does not
          obligate Align to acquire any particular amount of common stock and
          depending on market conditions or other factors these purchases may be
          commenced or suspended at any time, or from time-to-time without prior
          notice. The authorization or continuance of any repurchases under stock
          repurchase programs is contingent on a variety of factors, including
          our financial condition, results of operations, business requirements,
          and our Board of Directors' continuing determination that such stock
          repurchases are in the best interests of our stockholders and in
          compliance with all laws and applicable agreements. Additionally, there
          can be no assurance that our stock repurchase program will have a
          beneficial impact on our stock price.


         Accelerated Stock Repurchase Agreement. As part of our $300.0 million
          stock repurchase program, we entered into an accelerated share
          repurchase agreement ("ASR") with Goldman, Sachs & Co. on April 28,
          2014 to repurchase $70.0 million of our common stock. We paid $70.0
          million on April 29, 2014 and received an initial delivery of
          approximately 1.0 million shares based on the then current market
          price, which were retired. The final number of shares to be repurchased
          is be based on our volume-weighted average stock price during the term
          of the transaction, less an agreed upon discount. The ASR was completed
          on July 29, 2014. In accordance with the terms of the ASR, we will have
          received a total of approximately 1.4 million shares of our common
          stock for an average purchase share price of $51.46. As of June 30,
          2014, there remains approximately $230 million available under our
          existing stock repurchase authorization.

Results of Operations

Net revenues by Reportable Segment

We group our operations into two reportable segments: Clear Aligner segment and
Scanner segment.

         Our Clear Aligner segment consists of our Invisalign system which
          includes Invisalign Full, Teen and Assist ("Full Products"),
          Express/Lite ("Express Products"),Vivera retainers, along with our
          training and ancillary products for treating malocclusion.



         Our Scanner segment consists of intra-oral scanning systems and
          additional services available with the intra-oral scanners that provide
          digital alternatives to the traditional cast models. This segment
          includes our iTero scanner and OrthoCAD services.


Table of Contents

Net revenues for our Clear Aligner segment by region and product and our Scanner segment by region for the three and six months ended June 30, 2014 and 2013 is as follows (in millions):

                                   Three Months Ended June 30,                     Six Months Ended June 30,
                                                       Net         %                                Net         %
Clear Aligner:               2014         2013       Change     Change      2014        2013       Change     Change
Region
North America             $   111.6     $ 102.2     $   9.4       9.2 %   $ 219.6     $ 199.3     $ 20.3      10.2  %
International                  56.0        40.3        15.7      39.0 %     105.8        72.1       33.7      46.7  %
Invisalign non-case net
revenues                       12.1        10.8         1.3      12.0 %      22.6        23.5       (0.9 )    (3.8 )%
Total Clear Aligner net
revenues                  $   179.7     $ 153.3     $  26.4      17.2 %   $ 348.0     $ 294.9     $ 53.1      18.0  %
Product
Invisalign Full Products  $   147.1     $ 123.3     $  23.8      19.3 %   $ 285.3     $ 236.1     $ 49.2      20.8  %
Invisalign Express
Products                       20.5        19.2         1.3       6.8 %      40.1        35.3        4.8      13.6  %
Invisalign non-case net
revenues                       12.1        10.8         1.3      12.0 %      22.6        23.5       (0.9 )    (3.8 )%
Total Clear Aligner net
revenues                  $   179.7     $ 153.3     $  26.4      17.2 %   $ 348.0     $ 294.9     $ 53.1      18.0  %
Scanner:
Region
North America             $    12.7     $  10.4     $   2.3      22.1 %   $  25.0     $  22.3     $  2.7      12.1  %
International                   0.1         0.1           -         - %       0.2         0.2          -         -  %
Total Scanner net
revenues                  $    12.8     $  10.5     $   2.3      21.9 %   $  25.2     $  22.5     $  2.7      12.0  %

Total net revenues        $   192.5     $ 163.8     $  28.7      17.5 %   $ 373.2     $ 317.4     $ 55.8      17.6  %

Clear Aligner Case Volume by Channel and Product

Case volume data which represents Invisalign case shipments by region and
product, for the three and six months ended June 30, 2014 and 2013 is as follows
(in thousands):

                                Three Months Ended June 30,                  Six Months Ended June 30,
                                                  Net        %                                Net         %
Region                      2014       2013     Change     Change       2014       2013      Change    Change
North American
Invisalign                 84.8        78.8       6.0       7.6  %    166.3       153.5       12.8       8.3 %
International Invisalign   34.5        27.3       7.2      26.4  %     65.2        50.8       14.4      28.3 %
Total Invisalign case
volume                    119.3       106.1      13.2      12.4  %    231.5       204.3       27.2      13.3 %
Product
Invisalign Full Product
Group                      98.6        84.8      13.8      16.3  %    190.9       164.1       26.8      16.3 %
Invisalign Express
Product Group              20.7        21.3      (0.6 )    (2.8 )%     40.6        40.2        0.4       1.0 %
Total Invisalign case
volume                    119.3       106.1      13.2      12.4  %    231.5       204.3       27.2      13.3 %

Total net revenues increased by $28.7 million and $55.8 million for the three and six months ended June 30, 2014, respectively, as compared to the same period in 2013 primarily as a result of Invisalign case volume growth across all regions and most products.

Clear Aligner

In the three months ended June 30, 2014, Clear Aligner North America net revenues increased by $9.4 million or 9.2% compared to the same period in 2013 primarily due to Invisalign case volume growth of approximately $7.8 million across all channels and most products and, to a lesser extent, higher average selling prices ("ASP") which contributed approximately $1.7 million to the increase in net revenues. The increase in ASP was primarily a result of product mix shift towards higher priced Invisalign full products in the current period compared to the same period in the prior year.


Table of Contents

In the six months ended June 30, 2014, Clear Aligner North America net revenues increased by $20.3 million million or 10.2% compared to the same period in 2013 mainly due to Invisalign case volume growth of $16.4 million and, to a lesser extent, higher ASP which contributed approximately $3.9 million to the increase in net revenues. The increase in ASP was primarily a result of product mix shift towards higher priced Invisalign full products in the current period compared to the same period in the prior year.

In the three months ended June 30, 2014, Clear Aligner international net revenues increased by $15.7 million or 39.0% compared to the same period in 2013 primarily driven by Invisalign case volume growth of $10.6 million across all products and higher ASP which contributed approximately $5.1 million to the increase in net revenues. In the six months ended June 30, 2014, Clear Aligner international net revenues increased by $33.7 million or 46.7% compared to the same period in 2013 mainly due to Invisalign case volume growth of $20.6 million and, to a lesser extent, higher ASP which contributed approximately $13.1 million to increase in net revenues. The increase in ASP for both periods was primarily due to the impact from acquiring our distributor in the Asia Pacific region on April 30, 2013 as we now recognize direct sales of Invisalign products sold in that region at our full ASP rather than the discounted ASP under the distributor agreement, as well as price increases effective July 2013 and a favorable impact from foreign exchange rates.

Invisalign non-case net revenues, consisting of training fees and ancillary product revenues, increased by $1.3 million or 12.0% for the three months ended June 30, 2014 compared to the same period in 2013 primarily due to increased Vivera volume both in North America and International.

Invisalign non-case net revenue decreased by $0.9 million or 3.8% for the six months ended June 30, 2014 compared to the same period in 2013 primarily due to the consolidation of our Vivera product shipments in North America from four shipments per year to one shipment in 2013, offset in part by increased Vivera volume both in North America and International.

Scanner and Services

Scanner and Services net revenues increased $2.3 million or 21.9% for the three months ended June 30, 2014 compared to the same period in 2013 and $2.7 million or 12.0% for the six months ended June 30, 2014 compared to the same period in 2013. The increase in both periods was primarily due to an increase in both scanner revenue as well as service revenue. The increase in scanner revenue was primarily due to an increase in the number of scanners recognized offset in part by lower scanner ASP as a result of promotional discounts as well as permanent price reductions. The increase in services revenue was primarily due to an increase in the volume of services resulting from a larger installed base of scanners. Additionally, net revenues for the three months ended March 31, 2013 included a release of $1.4 million of revenue previously reserved for the new iTero upgrade program which was completed in the first quarter of 2013.

Cost of net revenues and gross profit (in millions):

. . .
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