XNAS:ALGN Align Technology Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________ 
FORM 10-Q
____________________________ 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to
Commission file number: 0-32259 
____________________________
ALIGN TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
____________________________ 
Delaware
94-3267295
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
2560 Orchard Parkway
San Jose, California 95131
(Address of principal executive offices)
(408) 470-1000
(Registrant’s telephone number, including area code)
 ____________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The number of shares outstanding of the registrant’s Common Stock, $0.0001 par value, as of July 27, 2012 was 81,352,708.

 



ALIGN TECHNOLOGY, INC.
INDEX
 
Invisalign, Align, ClinCheck, Invisalign Assist, Invisalign Teen Vivera, SmartForce, Power Ridges, iTero, iOC,Orthocad iCast, Orthocad iRecord and Orthocad iQ amongst others, are trademarks belonging to Align Technology, Inc., and/or its subsidiaries and are pending or registered in the United States and other countries.

2


PART I—FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ALIGN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Net revenues
$
145,626

 
$
120,086

 
$
280,705

 
$
224,942

Cost of net revenues
36,826

 
28,949

 
71,145

 
51,579

Gross profit
108,800

 
91,137

 
209,560

 
173,363

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
39,087

 
38,586

 
77,804

 
71,407

General and administrative
22,152

 
26,094

 
44,778

 
45,086

Research and development
10,680

 
9,270

 
21,206

 
18,660

Amortization of acquired intangible assets
869

 
592

 
1,754

 
592

Total operating expenses
72,788

 
74,542

 
145,542

 
135,745

Profit from operations
36,012

 
16,595

 
64,018

 
37,618

Interest and other income (expense), net
541

 
(306
)
 
(271
)
 
(217
)
Net profit before provision for income taxes
36,553

 
16,289

 
63,747

 
37,401

Provision for income taxes
8,061

 
5,127

 
14,271

 
10,398

Net profit
$
28,492

 
$
11,162

 
$
49,476

 
$
27,003

Net profit per share:
 
 
 
 
 
 
 
Basic
$
0.35

 
$
0.14

 
$
0.62

 
$
0.35

Diluted
$
0.34

 
$
0.14

 
$
0.60

 
$
0.34

Shares used in computing net profit per share:
 
 
 
 
 
 
 
Basic
80,384

 
77,888

 
79,810

 
77,369

Diluted
82,954

 
80,321

 
82,446

 
79,903

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


ALIGN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Net profit
$
28,492

 
$
11,162

 
$
49,476

 
$
27,003

Foreign currency translation adjustments
(521
)
 
103

 
(361
)
 
586

Change in unrealized gains (losses) on available-for-sale securities, net of tax
(12
)
 
16

 
(25
)
 
23

Net change in accumulated other comprehensive income (losses)
(533
)
 
119

 
(386
)
 
609

Other comprehensive income
$
27,959

 
$
11,281

 
$
49,090

 
$
27,612

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


ALIGN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
 
 
June 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
262,799

 
$
240,675

Restricted cash
1,178

 
4,026

Marketable securities, short-term
20,752

 
7,395

Accounts receivable, net of allowance for doubtful accounts and returns of $1,207 and $780, respectively
102,149

 
91,537

Inventories
14,623

 
9,402

Prepaid expenses and other current assets
33,634

 
31,781

Total current assets
435,135

 
384,816

Marketable securities, long-term
20,475

 

Property, plant and equipment, net
72,207

 
53,965

Goodwill
135,827

 
135,383

Intangible assets, net
47,901

 
50,022

Deferred tax assets
29,853

 
22,337

Other assets
2,765

 
2,741

Total assets
$
744,163

 
$
649,264

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
15,226

 
$
19,265

Accrued liabilities
69,207

 
76,600

Deferred revenues
59,403

 
52,252

Total current liabilities
143,836

 
148,117

Other long-term liabilities
14,032

 
10,366

Total liabilities
157,868

 
158,483

Commitments and contingencies (Note 7)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.0001 par value (5,000 shares authorized; none issued)

 

Common stock, $0.0001 par value (200,000 shares authorized; 80,760 and 78,776 issued and outstanding, respectively)
8

 
8

Additional paid-in capital
655,307

 
607,240

Accumulated other comprehensive income, net
(340
)
 
46

Accumulated deficit
(68,680
)
 
(116,513
)
Total stockholders’ equity
586,295

 
490,781

Total liabilities and stockholders’ equity
$
744,163

 
$
649,264

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5


ALIGN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Six Months Ended
June 30,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net profit
$
49,476

 
$
27,003

Adjustments to reconcile net profit to net cash provided by operating activities:
 
 
 
Deferred taxes
9,228

 
7,905

Depreciation and amortization
5,905

 
6,109

Amortization of intangibles
2,246

 
2,175

Stock-based compensation
10,142

 
9,252

Provision for (recovery of) doubtful accounts and returns
310

 
(85
)
Loss (gain) on retirement and disposal of fixed assets
74

 
(10
)
Excess tax benefit from share-based payment arrangements
(16,745
)
 

Changes in assets and liabilities, net of acquired assets and liabilities:
 
 
 
Accounts receivable
(11,813
)
 
(10,789
)
Inventories
(5,221
)
 
(960
)
Prepaid expenses and other assets
(1,970
)
 
(1,036
)
Accounts payable
(1,954
)
 
(165
)
Accrued and other long-term liabilities
(3,927
)
 
1,770

Deferred revenues
7,004

 
5,775

Net cash provided by operating activities
42,755

 
46,944

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Restricted cash
2,848

 

Purchase of property, plant and equipment
(25,778
)
 
(8,522
)
Acquisition, net of cash acquired

 
(186,949
)
Purchase of marketable securities
(43,857
)
 

Maturities of marketable securities
10,002

 
6,859

Other assets
(125
)
 
406

Net cash used in investing activities
(56,910
)
 
(188,206
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of common stock
23,689

 
16,548

Common stock repurchase
(2,524
)
 

Excess tax benefit from share-based payment arrangements
16,745

 

Employees’ taxes paid upon the vesting of restricted stock units
(1,627
)
 
(1,420
)
Net cash provided by financing activities
36,283

 
15,128

Effect of foreign exchange rate changes on cash and cash equivalents
(4
)
 
77

Net increase (decrease) in cash and cash equivalents
22,124

 
(126,057
)
Cash and cash equivalents, beginning of the period
240,675

 
294,664

Cash and cash equivalents, end of the period
$
262,799

 
$
168,607

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6


ALIGN TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by Align Technology, Inc. (“we”, “our”, or “Align”) in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) and contain all adjustments, including normal recurring adjustments, necessary to present fairly, our results of operations for the three and six months ended June 30, 2012 and 2011, our comprehensive income for the three and six months ended June 30, 2012 and 2011, our financial position as of June 30, 2012 and our cash flows for the six months ended June 30, 2012 and 2011. The Condensed Consolidated Balance Sheet as of December 31, 2011 was derived from the December 31, 2011 audited financial statements.

The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any other future period, and we make no representations related thereto. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk” and the Consolidated Financial Statements and notes thereto included in Items 7, 7A and 8, respectively, in our Annual Report on Form 10-K for the year ended December 31, 2011.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in our Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) requires our management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates, including those related to the fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, stock-based compensation, income taxes, and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Accounting Standards Codification “ASC” 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This accounting standard update provides certain amendments to the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for the year beginning after December 15, 2011. We adopted this standard in the first quarter of 2012.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (ASC 220): Presentation of Comprehensive Income.” This accounting standard update eliminated the option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, an entity will be required to present items of net income and other comprehensive income in one continuous statement or in two separate statements. The standard is effective for the year beginning after December 15, 2011. We adopted this standard in the first quarter of 2012.

In September 2011, FASB issued ASU 2011-08, “Intangibles—Goodwill and Other (ASC 350): Testing Goodwill for Impairment.” This accounting standard update is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We adopted this standard in the first quarter of 2012, and the adoption of this standard did

7


not have an impact on our condensed consolidated financial statements.

Note 2. Marketable Securities and Fair Value Measurements

Our short-term and long-term marketable securities as of June 30, 2012 and December 31, 2011 are as follows (in thousands):

Short-term
 
June 30, 2012
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Commercial paper
$
5,494

 
$
2

 
$

 
$
5,496

Corporate bonds
11,449

 
3

 
(10
)
 
11,442

Foreign bonds
2,809

 
1

 
(1
)
 
2,809

Agency bonds
1,004

 
1

 

 
1,005

Total
$
20,756

 
$
7

 
$
(11
)
 
$
20,752


Long-term
 
June 30, 2012
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Corporate bonds
$
16,677

 
$
2

 
$
(22
)
 
$
16,657

Foreign bonds
3,822

 

 
(4
)
 
3,818

Total
$
20,499

 
$
2

 
$
(26
)
 
$
20,475


Short-term
 
December 31, 2011
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Corporate bonds
$
4,135

 
$

 
$
(1
)
 
$
4,134

Foreign bonds
1,248

 

 
(5
)
 
1,243

Agency bonds
2,015

 
3

 

 
2,018

Total
$
7,398

 
$
3

 
$
(6
)
 
$
7,395


For the three and six months ended June 30, 2012 and 2011, no significant gains or losses were realized on the sale of marketable securities. We had no long-term investments as of December 31, 2011.

Fair Value Measurements

We measure the fair value of our cash equivalents and marketable securities as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We use the GAAP fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value:

Level 1—Quoted (unadjusted) prices in active markets for identical assets or liabilities.

Our Level 1 assets consist of money market funds. We did not hold any Level 1 liabilities as of June 30, 2012.

Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.


8


Our Level 2 assets consist of commercial paper, corporate bonds, foreign bonds, agency bonds, and our Israeli severance funds that are mainly invested in insurance policies. We obtain these fair values for level 2 investments from our asset manager for each of our portfolios. Our custody bank and asset managers independently use professional pricing services to gather pricing data which may include quoted market prices for identical or comparable financial instruments, or inputs other than quoted prices that are observable either directly or indirectly, and we are ultimately responsible for these underlying estimates. We did not hold any Level 2 liabilities as of June 30, 2012.

Level 3—Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.

We did not hold any Level 3 assets or liabilities as of June 30, 2012.

The following table summarizes our financial assets measured at fair value on a recurring basis as of June 30, 2012 (in thousands):
 
Description
Balance as of
June 30, 2012
 
Quoted Prices in
Active  Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable  Inputs
(Level 2)
Cash equivalents:
 
 
 
 
 
Money market funds
$
95,731

 
$
95,731

 
$

Commercial paper
2,200

 
 
 
2,200

Short-term investments:
 
 
 
 
 
Commercial paper
5,496

 
 
 
5,496

Corporate bonds
11,442

 
 
 
11,442

Foreign bonds
2,809

 
 
 
2,809

Agency bonds
1,005

 
 
 
1,005

Long-term investments:
 
 
 
 
 
Corporate bonds
16,657

 
 
 
16,657

Foreign bonds
3,818

 
 
 
3,818

Other assets:
 
 
 
 
 
Israeli severance funds
1,785

 
 
 
1,785

 
$
140,943

 
$
95,731

 
$
45,212


The following table summarizes our financial assets measured at fair value on a recurring basis as of December 31, 2011 (in thousands):
 
Description
Balance as of
December 31, 2011
 
Quoted Prices in
Active  Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable  Inputs
(Level 2)
Cash equivalents:
 
 
 
 
 
Money market funds
$
86,897

 
$
86,897

 
$

Short-term investments:
 
 
 
 
 
Corporate bonds
4,134

 

 
4,134

Foreign bonds
1,243

 

 
1,243

Agency bonds
2,018

 

 
2,018

Other assets:
 
 
 
 
 
Israeli severance funds
1,859

 

 
1,859

 
$
96,151

 
$
86,897

 
$
9,254


Note 3. Balance Sheet Components

Inventories

9



Inventories are comprised of (in thousands):
 
 
June 30,
2012
 
December 31,
2011
Raw materials
$
4,029

 
$
4,542

Work in process
5,082

 
2,486

Finished goods
5,512

 
2,374

 
$
14,623

 
$
9,402


Work in process includes costs to produce our clear aligner and intra-oral scanner products. Finished goods primarily represent our intra-oral scanners and ancillary products that support our clear aligner products. During the first half of 2012, we increased our production volumes of our intra-oral scanners in preparation for the move into our new facility in Israel scheduled for the second half of 2012.

Accrued liabilities

Accrued liabilities consist of the following (in thousands):
 
 
June 30,
2012
 
December 31,
2011
Accrued payroll and benefits
$
35,031

 
$
41,827

Accrued sales rebate
8,851

 
8,358

Accrued sales tax and value added tax
6,371

 
7,052

Unclaimed merger consideration
1,178

 
4,026

Accrued warranty
3,513

 
3,177

Accrued sales and marketing expenses
3,083

 
3,508

Accrued accounts payable
3,155

 
3,048

Accrued professional fees
1,399

 
654

Accrued income taxes
714

 
426

Other
5,912

 
4,524

Total
$
69,207

 
$
76,600


Warranty

We regularly review the accrued balances and update these balances based on historical warranty trends. Actual warranty costs incurred have not materially differed from those accrued. However, future actual warranty costs could differ from the estimated amounts.

Clear Aligner

We warrant our Invisalign products against material defects until the Invisalign case is complete. We accrue for warranty costs in cost of net revenues upon shipment of products. The amount of accrued estimated warranty costs is primarily based on historical experience as to product failures as well as current information on replacement costs.

Scanners

We warrant our scanners for a period of one year from the date of training and installation. We accrue for these warranty costs which includes materials and labor based on estimated historical repair costs. Extended service packages may be purchased for additional fees.

The following table reflects the change in our warranty accrual during the six months ended June 30, 2012 and 2011, respectively (in thousands):
 

10


 
Six Months Ended
June 30,
 
2012
 
2011
Balance at beginning of period
$
3,177

 
$
2,607

Charged to cost of revenues
2,113

 
1,692

Assumed warranty from Cadent

 
339

Actual warranty expenditures
(1,777
)
 
(1,531
)
Balance at end of period
$
3,513

 
$
3,107


Note 4. Business Combination

On April 29, 2011, we completed the acquisition of Cadent Holdings, Inc. (“Cadent”) for an aggregate cash purchase price of approximately $187.6 million. Cadent is a leading provider of 3D digital scanning solutions for orthodontics and dentistry. We believe that the combination of Align’s and Cadent’s technologies and capabilities creates greater growth opportunities for Align by bringing innovative new Invisalign treatment tools to customers and by extending the value of intra-oral scanning in dental practices.

The following table summarizes the allocation of the purchase price as of April 29, 2011 (in thousands):
 
Assets
$
15,745

Property, plant and equipment
3,624

Acquired identifiable intangible assets:
 
Trademarks (one to fifteen-year useful lives)
7,100

Existing technology (thirteen year useful life)
12,600

Customer relationships (eleven year useful life)
33,500

Goodwill
135,349

Liabilities assumed
(20,330
)
Total
$
187,588


Goodwill of $135.3 million represents the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets, and represents the expected synergies of the transaction and the knowledge and experience of the workforce in place. None of this goodwill will be deductible for tax purposes. Under the applicable accounting guidance, goodwill will not be amortized but will be tested for impairment on an annual basis or more frequently if certain indicators are present. We allocated approximately $77.3 million of the goodwill from the Cadent acquisition to our Scanner and CAD/CAM Services reporting unit and approximately $58.0 million to our Clear Aligner reporting unit. We allocated this goodwill to our reporting units based on the expected relative synergies generated by the acquisition.

For the three and six months ended June 30, 2012, Cadent contributed net revenues of approximately $12.0 million and $23.7 million and gross profit of approximately $3.2 million and $6.6 million, respectively. During the period of May 2011 through June 2011, Cadent contributed net revenues of approximately $6.4 million and gross profit of approximately $2.1 million. Sales, marketing, development and administrative activities for our Clear Aligner and Scanner and CAD/CAM Services reporting units were integrated during the post-acquisition period, therefore the operating results below gross profit is not available.

The following table presents the results of Align and Cadent for three and six months ended June 30, 2011, on a proforma basis, as though the companies had been combined as of January 1, 2011. The proforma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place as of January 1, 2011 or of results that may occur in the future (in thousands):
 
 
Proforma Net Revenues and Net Profit
Three Months Ended
June 30,
 
Proforma Net Revenues and Net Profit
Six Months Ended
June 30,
 
2011
 
2011
Net revenues
$
123,626

 
$
237,669

Net profit
$
8,116

 
$
22,703


11



Note 5. Goodwill and Acquired Intangible Assets

Goodwill

The change in the carrying value of goodwill for the period ended June 30, 2012 is as follows (in thousands):
 
Balance as of December 31, 2011
$
135,383

Adjustment to Goodwill (1)
444

Balance as of June 30, 2012
$
135,827

 ______________
(1)
Pursuant to the accounting guidance for business combinations, we recorded goodwill adjustments for the effect on goodwill of changes to net assets acquired related our acquisition of Cadent during the measurement period (up to one year from April 29, 2011, the date of our acquisition of Cadent). Goodwill adjustments were not significant to our previously reported operating results or financial position.

Goodwill of $135.8 million primarily represents the excess of the purchase price of Cadent over the fair value of the underlying net tangible and identifiable intangible assets, and represents the expected relative synergies of the transaction and the knowledge and experience of the workforce in place. 

The following table summarizes goodwill by reportable segment as of June 30, 2012 and December 31, 2011 (in thousands):
 
 
Clear Aligner
 
Scanner and
CAD/CAM
Services
 
Total
As of June 30, 2012
$
58,543

 
$
77,284

 
$
135,827

As of December 31, 2011
$
58,445

 
$
76,938

 
$
135,383


Acquired Intangible assets

Information regarding our intangible assets either as a direct result from the Cadent acquisition or individually acquired are being amortized as follows (in thousands):
 
 
Gross Carrying Amount as of
June 30, 2012
 
Accumulated
Amortization
 
Net Carrying
Value as of
June 30, 2012
Trademarks
$
7,100

 
$
(670
)
 
$
6,430

Existing technology
12,600

 
(1,227
)
 
11,373

Customer relationships
33,500

 
(3,527
)
 
29,973

Other
125

 

 
125

 
$
53,325

 
$
(5,424
)
 
$
47,901


Amortization of the acquired existing technology is recorded in cost of revenue, while the amortization of acquired trademarks, customer relationships, and individually acquired intangible assets are included in operating expenses. The following table summarizes the amortization expense of acquired intangible assets for the periods indicated (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Amortization of acquired intangible assets
 
 
 
 
 
 
 
In cost of net revenues
$
231

 
$
183

 
$
492

 
$
183

In operating expenses
869

 
592

 
1,754

 
592

Total
$
1,100

 
$
775

 
$
2,246

 
$
775



12


The total estimated annual future amortization expense for these acquired intangible assets as of June 30, 2012 is as follows (in thousands):
 
Fiscal Year
 
2012 (remaining six months)
$
2,268

2013
4,537

2014
4,493

2015
4,470

2016
4,470

Thereafter
27,663

Total
$
47,901


Impairment assessment

We perform an impairment test whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Examples of such events or circumstances include significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of acquired assets or the strategy for its business, significant negative industry or economic trends, and/or a significant decline in our stock price for a sustained period. Impairments are recognized based on the difference between the fair value of the asset and its carrying value, and fair value is generally measured based on discounted cash flow analysis. There were no impairments of intangible assets during the periods presented.

Note 6. Credit Facilities

On December 14, 2010, we renegotiated and amended our existing credit facility with Comerica Bank. Under this revolving line of credit, we have $30.0 million of available borrowings with a maturity date of December 31, 2012. The interest rate on borrowings will range from Libor plus 1.5% to 2.0% depending upon the amount of cash we maintain at Comerica Bank. This credit facility requires a quick ratio covenant and also requires us to maintain a minimum unrestricted cash balance of $10.0 million. Additionally, in the event our unrestricted cash deposited is less than $55.0 million, the unused facility fee will increase from 0.050% per quarter to 0.125% per quarter. As of June 30, 2012, we had no outstanding borrowings under this credit facility and are in compliance with the financial covenants.


Note 7. Commitments and Contingencies

Operating Leases

As of June 30, 2012, minimum future lease payments for non-cancelable leases are as follows (in thousands):
 
 
 
 
Fiscal Year
 
Operating leases
2012 (remaining six months)
$
3,780

2013
 
6,016

2014
 
4,741

2015
 
4,569

2016
 
4,612

Thereafter
2,217

Total minimum lease payments
$
25,935


Note 8. Stock-based Compensation

Summary of stock-based compensation expense

On May 19, 2011 the Shareholders approved an increase of 3,000,000 shares to the 2005 Incentive Plan (as amended) for a total reserve of 16,283,379 shares for issuance, plus up to an aggregate of 5,000,000 shares that would have been returned to our 2001 Stock Incentive Plan as a result of termination of options on or after March 28, 2005.

13



Stock-based compensation expense is based on the estimated fair value of awards, net of estimated forfeitures and recognized over the requisite service period. Estimated forfeitures are based on historical experience at the time of grant and may be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The stock-based compensation expense related to all of our stock-based awards and employee stock purchases for the three and six months ended June 30, 2012 and 2011 are as follows (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Cost of net revenues
$
457

 
$
440

 
$
920

 
$
957

Sales and marketing
1,447

 
1,435

 
2,618

 
2,533

General and administrative
2,493

 
2,340

 
4,922

 
4,440

Research and development
882

 
758

 
1,682

 
1,322

Total stock-based compensation expense
$
5,279

 
$
4,973

 
$
10,142

 
$
9,252


Options

Activity for the six month period ended June 30, 2012 under the stock option plans are set forth below (in thousands, except years and per share amounts):
 
 
Stock Options
Number of
Shares
Underlying
Stock Options
 
Weighted
Average
Exercise
Price per Share
 
Weighted Average
Remaining
Contractual Term
(in years )
 
Aggregate
Intrinsic
Value
Outstanding as of December 31, 2011
6,190

 
 
 
 
 
 
Granted (1)

 
 
 
 
 
 
Exercised
(1,603
)
 


 
 
 
 
Cancelled or expired
(21
)
 


 
 
 
 
Outstanding as of June 30, 2012
4,566

 
$
14.66

 
4.78

 
$
85,831

Vested and expected to vest at June 30, 2012
4,508

 
$
14.61

 
4.77

 
$
84,967

Exercisable at June 30, 2012
3,667

 
$
14.05

 
4.64

 
$
71,187


The fair value of stock options granted was estimated at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Stock options (1):
 
 
 
 
 
 
 
Expected term (in years)

 
4.3

 

 
4.4

Expected volatility

 
60.0
%
 

 
61.0
%
Risk-free interest rate

 
1.5
%
 

 
1.7
%
Expected dividends

 

 

 

Weighted average fair value at grant date
$

 
$
11.70

 
$

 
$
10.87

 ______________
(1)
There were no stock options granted during the three and six months ended June 30, 2012.

As of June 30, 2012, we expect to recognize $7.0 million of total unamortized compensation cost, net of estimated forfeitures, related to stock options over a weighted average period of 1.8 years.

Restricted Stock Units (“RSUs”)

A summary of the nonvested shares for the six months ended June 30, 2012 is as follows (in thousands, except years):
 

14


 
Number of Shares
Underlying RSUs
 
Weighted Remaining
Vesting Period
 
Aggregate
Intrinsic Value
 
 
 
(in years)
 
 
Nonvested as of December 31, 2011
1,208

 
 
 
 
Granted
808

 
 
 
 
Vested and released
(382
)
 
 
 
 
Forfeited
(36
)
 
 
 
 
Nonvested as of June 30, 2012
1,598

 
1.74

 
$
53,467


As of June 30, 2012 the total unamortized compensation cost related to restricted stock units, net of estimated forfeitures, was $28.5 million, which we expect to recognize over a weighted average period of 2.8 years.

On February 18, 2011, we granted market-performance based restricted stock units (“MSUs”) to our executive officers. Each MSU represents the right to one share of Align’s common stock and will be issued through our amended 2005 Incentive Plan. The actual number of MSUs which will be eligible to vest will be based on the performance of Align’s stock price relative to the performance of the NASDAQ Composite Index over the vesting period, generally two to three years, up to 150% of the MSUs initially granted.

The following table summarizes the MSU performance for the six months ended June 30, 2012 (in thousands, except years):
 
 
Number of Shares
Underlying MSUs
 
Weighted Average
Remaining
Vesting Period
 
Aggregate
Intrinsic Value
 
 
 
(in years )
 
 
Nonvested as of December 31, 2011
128

 
 
 
 
Granted
192

 
 
 
 
Vested and released

 
 
 
 
Forfeited

 
 
 
 
Nonvested as of June 30, 2012
320

 
2.04

 
$
10,726


As of June 30, 2012, we expect to recognize $5.0 million of total unamortized compensation cost, net of estimated forfeitures, related to MSU over a weighted average period of 2.0 years.

Employee Stock Purchase Plan

In May 2010, our shareholders approved the 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”) to replace the 2001 Purchase Plan. The terms and features of the 2010 Purchase Plan are substantially the same as the 2001 Purchase Plan and will continue until terminated by either the Board or its administrator. The maximum number of shares available for purchase under the 2010 Purchase Plan is 2,400,000 shares. As of June 30, 2012, there remains 2,076,302 shares available for purchase under the 2010 Purchase Plan.

As of June 30, 2012, we expect to recognize $0.8 million of the total unamortized compensation cost related to employee purchases over a weighted average period of 0.4 years.

Note 9. Common Stock Repurchase Program

On October 27, 2011, we announced that our Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $150.0 million of common stock. Purchases under the stock repurchase program may be made from time to time in the open market. During the first half of 2012, we repurchased approximately 0.1 million shares of common stock at an average price of $24.68 per share for an aggregate purchase price of approximately $2.5 million including commissions. The common stock repurchases reduced additional paid-in capital by approximately $0.9 million and increased accumulated deficit by $1.6 million. All repurchased shares were retired.

Note 10. Accounting for Income Taxes

During the second quarter of fiscal 2012, the amount of gross unrecognized tax benefits increased by $1.2 million

15


primarily due to current period exposures. The total amount of unrecognized tax benefits was $17.9 million as of June 30, 2012, all of which would impact our effective tax rate if recognized. We do not expect any significant changes to the amount of unrecognized tax benefit within the next twelve months.

We are subject to taxation in the U.S., various states and foreign jurisdictions. All of our tax years will be open to examination by the U.S. federal and most state tax authorities due to our net operating loss and overall credit carryforward position. With few exceptions, we are no longer subject to examination by foreign tax authorities for years before 2007.

Note 11. Net Profit Per Share

Basic net profit per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net profit per share is computed using the weighted average number of shares of common stock, adjusted for the dilutive effect of potential common stock. Potential common stock, computed using the treasury stock method, includes options, RSUs, MSUs and the dilutive component of our employee stock purchase plan.

The following table sets forth the computation of basic and diluted net profit per share attributable to common stock (in thousands, except per share amounts):
 
 
Three Months Ended,
June 30,
 
Six Months Ended,
June 30,
 
2012
 
2011
 
2012
 
2011
Numerator:
 
 
 
 
 
 
 
Net profit
$
28,492

 
$
11,162

 
$
49,476

 
$
27,003

Denominator:
 
 
 
 
 
 
 
Weighted-average common shares outstanding, basic
80,384

 
77,888

 
79,810

 
77,369

Dilutive effect of potential common stock
2,570

 
2,433

 
2,636

 
2,534

Total shares, diluted
82,954

 
80,321

 
82,446

 
79,903

Net profit per share, basic
$
0.35

 
$
0.14

 
$
0.62

 
$
0.35

Net profit per share, diluted
$
0.34

 
$
0.14

 
$
0.60

 
$
0.34


For the three and six months ended June 30, 2012, stock options, RSUs, MSUs and our employee stock purchase plan totaling 0.1 million and 0.1 million, respectively, were excluded from diluted net profit per share because of their anti-dilutive effect.

For the three and six months ended June 30, 2011, stock options, RSUs, MSUs and our employee stock purchase plan totaling 0.8 million and 1.7 million, respectively, were excluded from diluted net profit per share because of their anti-dilutive effect.


Note 12. Segments and Geographical Information

Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is our Chief Executive Officer. We report segment information based on the “management” approach. The management approach designates the internal reporting used by management for decision making and performance assessment as the basis for determining our reportable segments. The performance measures of our reportable segments include net revenues and gross profit.

We have grouped our operations into two reportable segments: Clear Aligner segment and Scanner and CAD/CAM Services segment.

Our Clear Aligner segment consists of our Invisalign system which includes Invisalign Full, Express/Lite, Teen, Assist, Vivera retainers, along with our training and ancillary products for treating malocclusion.
Our Scanners and CAD/CAM Services segment consists of intra-oral scanning systems and additional services

16


available with the intra-oral scanners that provide digital alternatives to the traditional cast models. This segment includes our iTero scanners, iOC scanners, and OrthoCAD services.
These reportable operating segments are based on how our CODM views and evaluates our operations as well as allocation of resources (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Revenue
2012
 
2011
 
2012
 
2011
Clear Aligner
$
133,669

 
$
113,647

 
$
256,997

 
$
218,503

Scanners and CAD/CAM Services (1)
11,957

 
6,439

 
23,708

 
6,439

Total
$
145,626

 
$
120,086

 
$
280,705

 
$
224,942

Gross profit
 
 
 
 
 
 
 
Clear Aligner
$
105,617

 
$
89,047

 
$
203,006

 
$
171,273

Scanners and CAD/CAM Services (1)
3,183

 
2,090

 
6,554

 
2,090

Total
$
108,800

 
$
91,137

 
$
209,560

 
$
173,363

 

As of June 30,
2012
 

As of December 31,
2011
 
 
 
 
Total Assets including goodwill
 
 
 
 
 
 
 
Clear Aligner
$
538,832

 
$
469,084

 
 
 
 
Scanners and CAD/CAM Services
205,331

 
180,180

 
 
 
 
Total
$
744,163

 
$
649,264

 
 
 
 
Goodwill
 
 
 
 
 
 
 
Clear Aligner
$
58,543

 
$
58,445

 
 
 
 
Scanners and CAD/CAM Services
77,284

 
76,938

 
 
 
 
Total
$
135,827

 
$
135,383

 
 
 
 
______________
(1)
The Scanners and CAD/CAM services segment was created as a result of our acquisition of Cadent on April 29, 2011 and the financial results for that segment reflect activity since that date.

Geographical Information

Net revenues and long-lived assets are presented below by geographic area (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Net revenues (1):
 
 
 
 
 
 
 
United States
$
110,838

 
$
89,988

 
$
214,096

 
$
169,123

the Netherlands
32,460

 
27,613

 
61,907

 
52,150

Other international
2,328

 
2,485

 
4,702

 
3,669

Total net revenues
$
145,626

 
$
120,086

 
$
280,705

 
$
224,942

 

As of June 30,
2012
 

As of December  31,
2011
 
 
 
 
Long-lived assets:
 
 
 
 
 
 
 
United States
$
56,639

 
$
45,720

 
 
 
 
the Netherlands
4,571

 
1,726

 
 
 
 
Other international
13,761

 
9,261

 
 
 
 
Total long-lived assets
$
74,971

 
$
56,707

 
 
 
 
______________ 
(1)
Net Revenues are attributed to countries based on location of where revenue is recognized.




17


Note 13. Exit Activities

In the third quarter of 2011, we announced our plan to consolidate our Carlstadt, New Jersey-based Scanner and CAD/CAM services activities with our existing manufacturing and shared services organizations in order to optimize efficiency, consolidate customer-facing functions, and reduce operating costs. The exit from our New Jersey operations includes a total reduction of 119 full time headcount in Carlstadt, New Jersey. These actions include a phased transition of our CAD/CAM services, intra-oral scanner customer care, distribution and repair into our existing shared services organization in San Jose, Costa Rica and our manufacturing facilities in Juarez, Mexico. Additionally, all accounting and finance functions will be consolidated into our corporate headquarters in San Jose, California. The transition began in the fourth quarter of 2011 and is expected to be completed in the third quarter of 2012. We expect to realize annualized net savings of approximately $4.0 million per year as a result of these consolidation activities.

Activity and liability balances related to this exit activity during the first six months of 2012 are as follows (in thousands):
 
 
Severance and
Benefits
Balance at December 31, 2011
$
1,010

Exit cost incurred during the period
636

Cash payments
(856
)
Balance at June 30, 2012
$
790


During the first half of 2012, we incurred approximately $0.6 million in exit costs of which approximately $0.4 million were recorded in our cost of net revenues and $0.2 million operating expenses.


18



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 of 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 Cadent Holdings, Inc. (“Cadent”) acquisition, our expectations to increase our investment in manufacturing capacity, our expectations regarding the continued expansion of our international markets, the timing of our plans and transition into our new manufacturing facilities, the anticipated number of new doctors trained and their impact on volumes, our expectations regarding the International Scanner and CAD/CAM Services revenues, 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.

Align Technology, Inc. is a global medical device company that pioneered 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 CAD/CAM Services, known as iTero and iOC intra-oral scanners and OrthoCAD services.

We received FDA clearance in 1998 as a Class II medical device. Commercial sales to U.S. orthodontists began 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 EMEA, and introduced a full range of treatment options including Invisalign Express 10, Invisalign Teen, Invisalign Assist, and Vivera retainers. Most recently we launched Invisalign G3 and Invisalign G4, which includes 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 2011, we acquired Cadent Holdings, Inc., a leading provider of 3D digital scanning solutions for orthodontics and dentistry, and makers of the iTero and iOC intra-oral scanners and OrthoCAD services. We believe that the combination of Align’s and Cadent’s technologies and capabilities creates greater growth opportunities for Align by bringing innovative new Invisalign treatment tools to customers and by extending the value of intra-oral scanning in dental practices. 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.

The Invisalign system is offered in more than 45 countries and has been used to treat more than 1.9 million patients. Our iTero and iOC intra-oral scanners are available in over 25 countries and provide dental professionals with an open choice to send digital impressions to any laboratory-based CAD/CAM system or to any of the more than 1,800 dental labs worldwide.

Our goal is to establish the Invisalign system as the standard method for treating malocclusion and to establish our intra-oral scanning platform as the preferred scanning protocol for 3D digital scans, ultimately driving increased product adoption by dental professionals. We intend to achieve this by focusing on the key strategic initiatives set forth in our Annual Report on

19


Form 10-K.

In addition to the successful execution of our business strategy, there are a number of other factors which may affect our results in 2012 and beyond, which are updated below:

Product innovation and clinical effectiveness. We believe feature innovations introduced in Invisalign G3 and Invisalign G4 are important contributors to the increased utilization across our channels worldwide. Additionally, due to the higher number of complex malocclusion cases in international markets compared to North America, we believe the international launch of Invisalign G3 in May 2011 was important for continued growth both in our existing international markets and to support our expansion in new markets like China. We expect that the innovations in Invisalign G4 (launched October 2011 in North America and in international markets) will build on the success we have seen with Invisalign G3 and encourage even greater confidence and adoption in our customers’ practices. Additionally, with the introduction of new software features to the iOC and iTero intra-oral scanners along with Invisalign interoperability, we believe that over the long-term these types of product and clinical innovations will increase adoption of Invisalign and increase sales of our intra-oral scanners. However, it is difficult to predict the rate of adoption which may vary by region and channel.
Investments to Increase Manufacturing Capacity. We are currently transitioning from our existing manufacturing facility in Juarez, Mexico into our new 150,000 square foot facility purchased in September 2011, which is also located in Juarez, Mexico. The lease on our existing facility expires in July 2013. In addition, in the second half of 2012, we plan to transition our intra-oral scanner research and development and manufacturing operations in Or Yehuda, Israel into a new, larger facility in the same city. Our ability to plan, construct and equip either of these manufacturing facilities is subject to significant risk and uncertainty, including delays and cost overruns. If the opening of either of these facilities is significantly delayed for any reason, or if demand for our product in 2012 exceeds our current expectations, or if the timing of receipt of case product orders during a given quarter is different from our expectations, we may not be able to fulfill orders in a timely manner, which may negatively impact our financial results and overall business.
Consolidation of New Jersey Operations. In September 2011, we announced plans to consolidate our CAD/CAM services and intra-oral scanner-related activities based in Carlstadt, New Jersey with our existing manufacturing and shared services organizations in order to optimize efficiency, consolidate customer-facing functions, and reduce operating costs. All existing intra-oral scanner research and development and manufacturing operations will remain in Or Yehuda, Israel. These actions include a phased transition of the following activities:
Consolidation of customer care for CAD/CAM services and intra-oral scanners into our existing shared services organization in San Jose, Costa Rica;
Transition of CAD/CAM services and intra-oral scanner distribution and repair to our Treat operations in San Jose, Costa Rica and our manufacturing facility in Juarez, Mexico; and
Consolidation of accounting and finance functions at our corporate headquarters in San Jose, California; and
Closure of the New Jersey facility in the third quarter of 2012.
The consolidation of our New Jersey operations includes a total reduction of 119 full time headcount in Carlstadt, New Jersey. The transition began in the fourth quarter of 2011 and is expected to be completed in the third quarter of 2012. As part of this consolidation, we will incur costs for severance estimated to be approximately $2.0 million, of which approximately $1.1 million was realized in 2011 and $0.9 million over the first three quarters of 2012. During the first half of 2012, we incurred approximately $0.6 million of severance costs. After the New Jersey consolidation is complete, we expect to realize annualized net savings of approximately $4.0 million per year. In the course of creating a more integrated business, we have recently experienced lower service levels in our scanner and CAD/CAM services business negatively impacting our customer-facing functions such as customer service and technical support. We are committed to improving customer service levels, however if these issues persist, our financial results may be affected. See Part II, Item 1A— “Risk Factors” for risks related to the Consolidation of New Jersey Operations”.


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, or utilization. Our

20


quarterly utilization rates for the previous 10 quarters are as follows:
______________
Invisalign Utilization rates = # of cases shipped divided by # of doctors cases were shipped to

Total utilization in the second quarter of 2012 increased slightly to 4.3 cases per doctor, driven by all channels particularly our North American orthodontic customers. Utilization among our North American orthodontist customers increased from 7.2 the first quarter of 2012 to 7.7 cases per doctor, reflecting continued adoption of our Invisalign products driven by ongoing product improvements and feature launches such as Invisalign G3 and Invisalign G4. 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.

Acquisition of Cadent. On April 29, 2011, we acquired privately-held Cadent, a leading provider of 3D digital scanning solutions for orthodontics and dentistry. The acquisition of Cadent positions us as a leader in one of the best growth opportunities in dentistry and medical devices today. Over the next five years, we expect that intra-oral scanners will become widely used in dental practices. We believe that the combination of the two companies will help accelerate the use of intra-oral scanning in the dental industry by leveraging Align’s global sales reach, extensive professional and consumer marketing capabilities and base of over 55 thousand ClinCheck software users. Intra-oral scanners also strengthen our ability to drive adoption of Invisalign by integrating Invisalign treatment more fully with mainstream tools and procedures in doctors’ practices. We may, however, experience difficulties in achieving the anticipated financial or strategic benefits of the acquisition. Information regarding risks associated with the Cadent acquisition may be found in See Part II, Item A – “Risk Factors” for risks related to the acquisition of Cadent.
Number of new Invisalign doctors trained. We continue to expand our Invisalign customer base through training new doctors. In 2012, we expect to train approximately 6,000 orthodontists and GPs in North America and internationally, which is approximately the same number we trained in 2011.
International Clear Aligner. We will continue to focus our efforts towards increasing adoption of our products by dental professionals in our core European markets as well as expansion into new markets. In the second quarter of 2012, Clear Aligner International case volumes increased 34.5% compared to the same quarter in 2011, driven primarily by growth in our direct business in Europe as well as by continued strong performance by our distribution partners. Although sales through our distribution partners represented 7% of total worldwide case shipments in the second quarter of 2012, sales through our distributors, particularly our partner covering the Asia Pacific region, continued to grow at a faster rate than direct sales in other international geographic regions and we expect this trend to continue in the near term.  If this shift in sales to distributors continues at the same pace or accelerates, our average selling price may decline.

21



International Scanner and CAD/CAM Services. In the second quarter of 2012, International Scanner and CAD/CAM Services declined significantly from the same quarter in 2011. Although we are committed to working through the challenges we face in Europe, we expect our International Scanner and CAD/CAM Services revenues in the third quarter of 2012 will be flat compared to the second quarter.
Foreign exchange rates. Although the U.S. dollar is our reporting currency, a portion of our net revenues and profits are generated in foreign currencies. Net revenues and profits 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 exchanges rates against the U.S. dollar will continue to affect the reported amount of net revenues and profits in our consolidated financial statements.
Results of Operations

Net revenues by Reportable Segment

We group our operations into two reportable segments: Clear Aligner segment and Scanners and CAD/CAM Services segment.

Our Clear Aligner segment consists of our Invisalign system which includes Invisalign Full, Express/Lite, Teen, Assist, Vivera retainers, along with our training and ancillary products for treating malocclusion.
Our Scanners and CAD/CAM Services 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 scanners, iOC scanners, and OrthoCAD services.
The below represents net revenues for our Clear Aligner segment by region, channel, and product and our Scanner and CAD/CAM Services segment by region and product for the three and six months ended June 30, 2012 and 2011 as follows (in millions):


22


 
Three Months Ended June 30,
 
Six Months Ended June 30,
Clear Aligner:
2012
 
2011
 
Net
Change
 
%
Change
 
2012
 
2011
 
Net
Change
 
%
Change
Region and Channel
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ortho
$
43.9

 
$
37.1

 
$
6.8

 
18.3
 %
 
$
85.6

 
$
72.1

 
$
13.5

 
18.7
 %
GP
49.1

 
42.6

 
6.5

 
15.3
 %
 
94.2

 
81.9

 
12.3

 
15.0
 %
Total North America
93.0

 
79.7

 
13.3

 
16.7
 %
 
179.8

 
154.0

 
25.8

 
16.8
 %
International
32.9

 
27.9

 
5.0

 
17.9
 %
 
62.6

 
53.0

 
9.6

 
18.1
 %
Invisalign non-case revenues
7.8

 
6.0

 
1.8

 
30.0
 %
 
14.6

 
11.4

 
3.2

 
28.1
 %
Total
$
133.7

 
$
113.6

 
$
20.1

 
17.7
 %
 
$
257.0

 
$
218.4

 
$
38.6

 
17.7
 %
Product
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Invisalign Full
$
88.6

 
$
76.6

 
$
12.0

 
15.7
 %
 
$
171.0

 
$
147.7

 
$
23.3

 
15.8
 %
Invisalign Express/Lite
13.6

 
11.1

 
2.5

 
22.5
 %
 
25.4

 
21.2

 
4.2

 
19.8
 %
Invisalign Teen
16.4

 
12.8

 
3.6

 
28.1
 %
 
31.5

 
24.7

 
6.8

 
27.5
 %
Invisalign Assist
7.3

 
7.1

 
0.2

 
2.8
 %
 
14.5

 
13.4

 
1.1

 
8.2
 %
Invisalign non-case revenues
7.8

 
6.0

 
1.8

 
30.0
 %
 
14.6

 
11.4

 
3.2

 
28.1
 %
Total
$
133.7

 
$
113.6

 
$
20.1

 
17.7
 %
 
$
257.0

 
$
218.4

 
$
38.6

 
17.7
 %
Scanners and CAD/CAM Services (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Region
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
$
11.7

 
$
5.3

 
$
6.4

 
120.8
 %
 
$
22.9

 
$
5.3

 
$
17.6

 
332.1
 %
International
0.2

 
1.2

 
(1.0
)
 
(83.3
)%
 
0.8

 
1.2

 
(0.4
)
 
(33.3
)%
Total
$
11.9

 
$
6.5

 
$
5.4

 
83.1
 %
 
$
23.7

 
$
6.5

 
$
17.2

 
264.6
 %
Product
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Scanners
$
6.0

 
$
2.7

 
$
3.3

 
122.2
 %
 
$
11.4

 
$
2.7

 
$
8.7

 
322.2
 %
CAD/CAM Services
5.9

 
3.8

 
2.1

 
55.3
 %
 
12.3

 
3.8

 
8.5

 
223.7
 %
Total
$
11.9

 
$
6.5

 
$
5.4

 
83.1
 %
 
$
23.7

 
$
6.5

 
$
17.2

 
264.6
 %
Total Revenue
$
145.6

 
$
120.1

 
$
25.5

 
21.2
 %
 
$
280.7

 
$
224.9

 
$
55.8

 
24.8
 %
______________
(1)
The Scanners and CAD/CAM services segment was created as a result of our acquisition of Cadent on April 29, 2011 and the financial results for that segment reflect activity since that date.


Clear Aligner Case Volume by Channel and Product

Case volume data which represents Invisalign case shipments by channel and product, for the three and six months ended June 30, 2012 and 2011 as follows (in thousands):
 

23


 
Three Months Ended June 30,
 
Six Months Ended June 30,
Region and Channel
2012
 
2011
 
Net
Change
 
%
Change
 
2012
 
2011
 
Net
Change
 
%
Change
North America:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ortho
35.4

 
28.5

 
6.9

 
24.2
%
 
67.7

 
55.4

 
12.3

 
22.2
%
GP
37.3

 
30.7

 
6.6

 
21.5
%
 
70.3

 
59.0

 
11.3

 
19.2
%
Total North American Invisalign
72.7

 
59.2

 
13.5

 
22.8
%
 
138.0

 
114.4

 
23.6

 
20.6
%
International Invisalign
22.6

 
16.8

 
5.8

 
34.5
%
 
42.6

 
33.0

 
9.6

 
29.1
%
Total Invisalign case volume
95.3

 
76.0

 
19.3

 
25.4
%
 
180.6

 
147.4

 
33.2

 
22.5
%
Product
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Invisalign Full
62.5

 
51.1

 
11.4

 
22.3
%
 
119.7

 
99.2

 
20.5

 
20.7
%
Invisalign Express/Lite
15.3

 
11.3

 
4.0

 
35.4
%
 
28.2

 
21.8

 
6.4

 
29.4
%
Invisalign Teen
11.9

 
8.6

 
3.3

 
38.4
%
 
21.8

 
16.5

 
5.3

 
32.1
%
Invisalign Assist
5.6

 
5.0

 
0.6

 
12.0
%
 
10.9

 
9.9

 
1.0

 
10.1
%
Total Invisalign case volume
95.3

 
76.0

 
19.3

 
25.4
%
 
180.6

 
147.4

 
33.2

 
22.5
%

Total net revenues increased by $25.5 million and $55.8 million for the three and six months ended June 30, 2012, respectively, as compared to the same period in 2011 primarily as a result of worldwide volume growth across all customer channels and products for the Clear Aligner segment as well as the addition of our Scanners and CAD/CAM Services segment resulting from the acquisition of Cadent in April 2011.

Clear Aligner

In the three and six months ended June 30, 2012, Clear Aligner North America net revenues increased by 16.7% and 16.8%, respectively, compared to the same period in 2011. The growth was primarily driven by volume growth across all products and customer channels partially offset by lower average selling price (“ASPs”), as a result of an overall increase in our volume rebate and other promotions.

In the three and six months ended June 30, 2012, Clear Aligner International net revenues increased by 17.9% and 18.1%, respectively, compared to the same period in 2011, driven primarily by volume growth across all products, partially offset by lower ASPs due to an increase in discounts and promotions and an unfavorable exchange rate of the Euro against the U.S. dollar.

Other non-case revenues, consisting of training fees and sales of ancillary products, increased 30.0% and 28.1% for the three and six months ended June 30, 2012, respectively, compared to the same period in 2011 primarily due to increased sales of Vivera and training fees in North America and International.

We expect total net revenues and ASPs to decline in the third quarter of 2012 compared to the second quarter of 2012 primarily due to revenue deferrals associated with the Teen/Vivera Retainer promotion, higher volume rebates and adverse impact of foreign exchange rates.

Scanner and CAD/CAM Services

The Scanner and CAD/CAM Services segment was created when we acquired Cadent on April 29, 2011 and the financial results of Cadent have been included in this segment since the acquisition date. Scanners and CAD/CAM services revenue increased 83.1% and 264.6% for the three and six months ended June 30, 2012, respectively, compared to the same period in 2011. The revenue increase for the three months ended June 30, 2012 was primarily driven by scanner volume growth in North America as well as the inclusion of Cadent for a full quarter compared to two months in the prior year. The revenue increase for the six months ended June 30, 2012 was due to the inclusion of Cadent revenue for a full six months in 2012, compared to two months in 2011.








24



Cost of net revenues and gross profit (in millions):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
Clear Aligner
 
 
 
 
 
 
 
 
 
 
 
Cost of net revenues
$
28.0

 
$
24.6

 
$
3.4

 
$
54.0

 
$
47.3

 
$
6.7

% of net segment revenues
21.0
%
 
21.6
%
 
 
 
21.0
%
 
21.6
%
 
 
Gross profit
$
105.6

 
$
89.0

 
$
16.6

 
$
203.0

 
$
171.3

 
$
31.7

Gross margin %
79.0
%
 
78.4
%
 
 
 
79.0
%
 
78.4
%
 
 
Scanner and CAD/CAM Services (1)
 
 
 
 
 
 
 
 
 
 
 
Cost of net revenues
$
8.8

 
$
4.3

 
$
4.5

 
$
17.2

 
$
4.3

 
$
12.9

% of net segment revenues
73.4
%
 
67.5
%
 
 
 
72.4
%
 
67.5
%
 
 
Gross profit
$
3.2

 
$
2.1

 
$
1.1

 
$
6.6

 
$
2.1

 
$
4.5

Gross margin %
26.6
%
 
32.5
%
 
 
 
27.6
%
 
32.5
%
 
 
Total cost of net revenues
$
36.8

 
$
28.9

 
$
7.9

 
$
71.2

 
$
51.6

 
$
19.6

% of net revenues
25.3
%
 
24.1
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