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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended June 30, 2012
For the transition period from to
Commission file number: 0-32259
ALIGN TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
2560 Orchard Parkway
San Jose, California 95131
(Address of principal executive offices)
(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):
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.
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.
PART I—FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ALIGN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
ALIGN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
ALIGN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
ALIGN TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
ALIGN TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
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):
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.
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):
The following table summarizes our financial assets measured at fair value on a recurring basis as of December 31, 2011 (in thousands):
Note 3. Balance Sheet Components
Inventories are comprised of (in thousands):
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 consist of the following (in thousands):
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.
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.
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):
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):
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):
Note 5. Goodwill and Acquired Intangible Assets
The change in the carrying value of goodwill for the period ended June 30, 2012 is as follows (in thousands):
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):
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):
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):
The total estimated annual future amortization expense for these acquired intangible assets as of June 30, 2012 is as follows (in thousands):
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
As of June 30, 2012, minimum future lease payments for non-cancelable leases are as follows (in thousands):
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.
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):
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):
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:
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):
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):
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
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):
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
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.
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):
Net revenues and long-lived assets are presented below by geographic area (in thousands):
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):
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.
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
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:
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”.
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.
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.
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):
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):
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.
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.
Cost of net revenues and gross profit (in millions):