What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-10-30 compared with 2020-07-31 · 185 added, 160 removed, 227 unchanged (60% of the section changed)

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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 in clude, among other things, our expectations and intentions regarding our strategic objectives and the means to achieve them, our beliefs regarding the impact of technological innovation in general, and in our solutions and products in particular, on target markets, our beliefs regarding digital dentistry and its potential to impact our business, our expectations for the impact of the exocad acquisition, our beliefs regarding the potential for clinical solutions and their utilization to increase sales of our Invisalign system as well as the complementary products and solutions themselves, our expectations regarding product mix and product adoption, our expectations regarding the utilization rates for our products, including the impact of marketing on those rates and causes for periodic fluctuations of the rates, our expectations regard the existence and impact of seasonality, our expectations regarding the sales growth of our intra-oral scanner sales in international markets, our expectations regarding the productivity impact additional sales representatives will have on our sales, our expectations regarding the continued expansion of our international markets, including our expectation that international revenues will grow at a faster rate than Americas for the foreseeable future, our expectation regarding customer and consumer purchasing behavior, including expectations related to the consumer demand environment in China especially for U.S.

These statements in clude, among other things, our expectations and intentions regarding our strategic objectives and the means to achieve them, our beliefs regarding the impact of technological innovation in general, and in our solutions and products in particular, on target markets, our beliefs regarding digital dentistry and its potential to impact our business, our expectations for the impact of the exocad acquisition, our beliefs regarding the potential for clinical solutions and their utilization to increase sales of our Invisalign system as well as the complementary products and solutions themselves, our expectations regarding product mix and product adoption, our expectations regarding the utilization rates for our products, including the impact of marketing on those rates and causes for periodic fluctuations of the rates, our expectations regarding the existence and impact of seasonality, our expectations regarding the sales growth of our intraoral scanner sales in international markets, our expectations regarding the productivity impact additional sales representatives will have on our sales and the impact of specialization of those representatives in sales channels, our expectations regarding the continued expansion of our international markets, including our expectation that international revenues will grow at a faster rate than Americas for the foreseeable future, our expectation regarding customer and consumer purchasing behavior, including expectations related to the consumer demand environment in China especially for U.S.

based products and services, our expectations regarding competition, our expectations regarding the implications of the COVID-19 pandemic and the health, safety and economic recovery from it, on the global economy, the businesses of our customers, and us, including our preparedness to react to changing circumstances and overall on our revenues, results of operations and financial condition, our expectations for our expenses and capital expenditures in particular, the actions we will take to control spending and for investments, our intentions regarding the investment of our international earnings from operations, our belief regarding the sufficiency of our cash balances and borrowing capacity, our expectations regarding potential additional litigation with SDC Financial LLC and certain affiliates regarding the “capital account” balance and other matters, 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.

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To date, over 9.0 million people worldwide have been treated with our Invisalign System.

To encourage consumers to treat malocclusions with clear aligners under the direction and supervision of licensed dental professionals, we bring to market solutions we believe will strengthen our digital dental platform for doctors, labs and partners, including establishing the iTero intraoral scanner and related services as the preferred 3D digital scanning solution and integrating newly acquired CAD/CAM solutions and workflows into the markets for clear aligner orthodontics and dental restorative treatments.

To encourage consumers to treat malocclusions with clear aligners under the direction and supervision of licensed dental professionals, we bring to market solutions that we believe will strengthen our digital dental platform for doctors, labs and partners, including establishing the iTero intraoral scanner and related services as the preferred 3D digital scanning solution and integrating newly acquired CAD/CAM solutions and workflows into the markets for clear aligner orthodontics and dental restorative treatments.

We intend to continue focusing on these efforts through execution of our strategic growth drivers.

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The successful execution of our business strategy may be affected by a number of factors including:

• New Products, Feature Enhancements and Technology.

We believe product innovation to treat a wide range of cases from simple to complex drives greater treatment predictability, clinical applicability and ease of use for the dental professionals we serve which supports adoption of Invisalign treatment in their practices.

Furthermore, we believe the digital revolution in dentistry is an important aspect of the experience for our customers and their patients, encouraging the utilization of our Invisalign solution.

It therefore comprises an important component of our digital approach.

▪ Invisalign:

Since 2018, we have launched or announced various new offerings including our Invisalign treatment with Mandibular Advancement, Invisalign Go, Invisalign First and Invisalign Moderate.

• New Technology, Products, and Feature Enhancements.

We believe technological innovations allowing dental professionals to more quickly and accurately diagnose, plan and treat a wide range of cases from simple to complex combined with new and improved products drives greater treatment predictability, clinical applicability and ease of use for the dental professionals we serve;

thereby supporting adoption of Invisalign treatment in their practices.

Furthermore, we believe the digital revolution in dentistry is an important aspect of the experience for our customers and their patients, encouraging the utilization of our Invisalign solution and therefore comprising an important component of our digital approach.

▪ Invisalign clear aligners:

Since 2018, we have expanded our product portfolio and launched or announced various new offerings including our Invisalign treatment with Mandibular Advancement, Invisalign Go, Invisalign First and Invisalign Moderate.

We also continue to increase the clinical efficacy and applicability of our products as exemplified most recently in the announcement of Invisalign G8 with SmartForce Aligner Activation.

In each instance, we have broadened and strengthened our reach into key markets and demographics central to our strategic plans.

▪ iTero Scanner:

Over the last two years, we have expanded or announced several new aspects of our intraoral digital scanning solutions including the iTero Element, iTero Element Foundation and the iTero Element 5D Imaging syste m, for which we announced in March 2020 that we had obtained U.S.

FDA 501(K) clearance.

The approval of the iTero Element 5D Imaging system opens the U.S.

markets for sales of this unique solution that combines 3D data, intra-oral color photos and NIRI images into a single, integrated scan improving doctor experiences and improving engagement opportunities and communications with their patients.

Over the last two years, we have expanded our intraoral digital scanning solutions and launched or announced several new offerings including the iTero Element, iTero Element Foundation and the iTero Element 5D Imaging syste m, for which we announced in March 2020 that we had obtained U.S.

FDA 501(K) clearance and which we continue to release in additional countries, most recently Mexico.

The clearance of the iTero Element 5D Imaging system in the U.S.

markets and its release in other countries allows us to sell this unique solution that combines 3D data, intraoral color photos and NIRI images into a single, integrated scan improving doctor experiences and improving engagement opportunities and communications with their patients.

The iTero Element 5D aids in the detection and monitoring of interproximal caries lesions above the gingiva without using harmful radiation.

On April 1, 2020, we completed the acquisition of privately-held exocad Global Holdings GmbH (“exocad”), a German dental CAD/CAM software company that offers fully integrated workflows to dental labs and dental practices.

We believe the acquisition strengthens our digital platform by adding exocad's expertise in restorative dentistry, implantology, guided surgery, and smile design to extend our digital solutions and paves the way for new, seamless cross-disciplinary dentistry in lab and at chairside.

We believe the acquisition strengthens our digital platform by adding exocad’s expertise in restorative dentistry, implantology, guided surgery, and smile design to extend our digital dental solutions and broadens the Align digital platform towards fully interdisciplinary end-to-end workflows dentistry in lab and at chairside.

exocad also broadens our reach in digital dentistry with close to 200 partners and more than 35,000 licenses installed worldwide.

To further the transformation of dental practices to the digital age, we introduced virtual solutions such as Invisalign ® Virtual Appointment and Invisalign ® Virtual Care;

To further the transformation of dental and orthodontic practices from outdated manual and analog practices to end-to-end digital workflows, we recently introduced virtual solutions such as Invisalign ® Virtual Appointment and Invisalign ® Virtual Care;

solutions that facilitate the safe, effective and successful treatment of patients by conveniently connecting doctors and their patients throughout their treatment plans.

We believe that over the long term, clinical solutions, treatment tools and virtual solutions will increase adoption of clear aligners, sales of our intraoral scanners and integration of exocad CAD/CAM solutions chairside and in dental workflows;

however, it is difficult to predict the rate and success of adoption or each and all of these products and solutions, which may vary by region and channel.

• Invisalign Adoption.

Our goal is to establish Invisalign clear aligners as the treatment of choice for treating malocclusion, ultimately driving increased product adoption and frequency of use by dental professionals, also known as “utilization rates.” Although we believe the closure, reduced operations and slow reopening of many dental and orthodontic practices in the first and second quarters of 2020 negatively impacted the number of patients seen and orders for clear aligners submitted, the use of iTero and other digital scanners for Invisalign case submissions in place of PVS impressions continues to be a positive catalyst for Invisalign utilization.

For the second quarter of 2020, total Invisalign cases submitted with a digital scanner in the Americas in creased to 85.8%, up from 80.5% in the first quarter of 2020, including 95.9% of all cases submitted in the second quarter of 2020 by North American orthodontists.

International scans in creased to 72.0%, up from 68.7% in the first quarter of 2020.

• For the third quarter of 2020, total Invisalign cases submitted with a digital scanner in the Americas increased to 83.2%, up from 78.8% in the third quarter of 2019 and international scans increased to 72.1%, up from 62.6% in the third quarter of 2019.

For the third quarter of 2020, 94.9% of Invisalign cases submitted by North American orthodontists were submitted digitally.

Our quarterly utilization rates for the last five quarters are as follows:

* Invisalign utilization rates are calculated by the # of cases shipped divided by the # of doctors to whom cases were shipped.

* Invisalign utilization rates are calculated by the number of cases shipped divided by the number of doctors to whom cases were shipped.

Our International region includes Europe, Middle East and Africa ("EMEA") and Asia Pacific ("APAC").

Latin America ("LATAM") is excluded from above chart as it is immaterial.

• Total utilization rate in the second quarter of 2020 decreased to 4.6 cases per doctor compared to 6.2 cases per doctor in the second quarter of 2019.

Latin America ("LATAM") is excluded from the above chart based on its immateriality to the quarter.

• Total utilization rate in the third quarter of 2020 increased to 7.1 cases per doctor compared to 6.1 cases per doctor in the third quarter of 2019.

▪ North America:

Utilization rate among our North American orthodontist customers de creased to 11 .0 cases per doctor in the second quarter of 2020 compared to 18.9 cases per doctor in the second quarter of 2019 and the utilization rate among our North American GP customers decreased to 2.5 cases per doctor in the second quarter of 2020 compared to 3.6 cases per doctor in the second quarter of 2019.

The decrease in utilization rates for the second quarter of 2020 is due primarily to COVID-19 related practice closures.

Utilization rate among our North American orthodontist customers increased to 24.1 cases per doctor in the third quarter of 2020 compared to 19.1 cases per doctor in the third quarter of 2019 and the utilization rate among our North American GP customers increased to 4.2 cases per doctor in the third quarter of 2020 compared to 3.5 cases per doctor in the third quarter of 2019.

▪ International:

International doctor utilization rate wa s 4.7 cases per doctor in the second quarter of 2020 compared to 5.

7 cas es in the second quarter of 2019.

We expect global utilization rates to continue to recover from COVID-19 practice closure related decreases absent additional or more restrictive practice closures and thereafter to steadily improve as doctors’ clinical confidence in the use of Invisalign clear aligners increases with advancements in products and technology and as COVID-19 restrictions create demand for treatments that reduce or minimize the need for physical interactions between dental professionals and their patients.

In addition, the teenage and younger market makes u p 7 5% of the approximately 12 million to tal orthodontic case starts each year, and as we continue to drive adoption by teenage and younger patients through sales and marketing programs, we expect our utilization rates to improve.

Our utilization rates, however, may fluctuate from period to period due to a variety of factors beyond the impact of COVID-19 pandemic-related preventative measures, including seasonal trends in our business and adoption rates for new products and features.

International doctor utilization rate wa s 6.4 cases per doctor in the third quarter of 2020 compared to 5.

5 cas es in the third quarter of 2019.

We expect global utilization rates to steadily improve as doctors’ clinical confidence in the use of Invisalign clear aligners increases with advancements in products and technology and as patient and doctor demands for treatments that emphasize convenience and safety through fewer in office visits and less invasive and quicker treatments rise.

In addition, the teenage and younger market makes up 75% of the approximately 12 million total orthodontic case starts each year, and as we continue to drive adoption by teenage and younger patients through sales and marketing programs, we expect utilization rates to imp rove.

However, our utilization rates will fluctuate from period to period due to a variety of factors, which may include seasonal trends in our business, COVID-19-related preventative measures and adoption rates for new products and features.

• Number of New Invisalign Doctors Trained.

We continue to expand our Invisalign customer base through the training of new doctor s.

During the six months ended June 30, 2020, we tr ained 8,125 new Invisalign doctors of which 3,175 were trained in the Americas region and 4,950 in the Internatio nal region.

During the nine months ended September 30, 2020, we tr ained 14,650 new Invisalign doctors of which 6,525 were trained in the Americas region and 8,125 in the International re gion.

In 2019, we trained a total of 22,275 new Invisalign doctors, of which 9,765 were trained in the Americas region and 12,510 in the International region.

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Accordingly, we continue to focus our efforts towards increasing Invisalign clear aligner adoption by dental professionals internationally.

Starting in the first quarter of 2020, the outbreak of COVID-19 caused significant disruption and uncertainty to our business, employees, doctors’ practices, their patients and consumers beginning in China and spreading globally thereafter.

While the negative impact of COVID-19 on sales decreased as the second quarter of 2020 progressed, we remain prepared to react should the

localized spread of the virus result in additional preventative measures that adversely impact us or our customers.

Starting with the outbreak and spread of COVID-19 in the first quarter of 2020, we experienced significant disruption and uncertainty to our business, employees, doctors’ practices, and the patterns and habits of their patients and consumers.

While the most significant disruptions continued into the second quarter of 2020, their severity began to diminish in more recent months although significant uncertainties continue.

For a further discussion of COVID-19 and its impact on our business, see the section entitled "COVID-19 Update" below.

Prior to the impact of COVID-19, beginning in the second quarter of 2019, we experienced slower growth rates than prior periods in China primarily due to the U.S.-China trade war and resulting economic uncertainty which caused headwind for consumer demand especially for consumption of luxury goods and considered purchases.

We also believe there has been increased competitive activity from wires and bracket manufacturers and clear aligner suppliers.

Prior to the impact of COVID-19, we experienced slower growth rates than prior periods in China which we believe were primarily due to the U.S.-China trade war and resulting economic

uncertainty which caused headwind for consumer demand especially for consumption of luxury goods and considered purchases.

We also believe there has been increased competitive activity from clear aligner suppliers.

Notwithstanding these issues in China, we continue to see growth opportunities with international orthodontists and GP customers, particularly with adopters of digital dentistry platforms and as we continue to segment our sales and marketing resources and programs specifically around each customer channel.

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Starting in the second quarter of 2019, we began experiencing slower adult case growth from North American orthodontists, reflecting a more competitive environment especially for the young adult demographic.

Given increased awareness for direct to consumer clear aligners and heavy advertising spend from direct to consumer companies, case starts may be shifting away from traditional practices.

We also believe that doctors are sampling alternative products and/or taking advantage of wires and brackets bundles that essentially give clear aligners away for free or at low prices.

In the third quarter of 2019, we increased investment in consumer demand with a new advertising campaign for North America and in the second half of 2020 are looking at further investments to create additional demand for Invisalign treatment and to drive teens and parents to dental professionals for those treatments.

In addition, we launched new sales tools and professional marketing materials and we also expect to see increased productivity from sales representatives we added in the U.S.

in 2019 and those more recently added in APAC in 2020.

Additionally, increased awareness of direct to consumer clear aligners and heavy advertising spend by those companies may have shifted business away from traditional dental practices.

We also believe that doctors may choose to sample alternative products and/or take advantage of wires and brackets bundles that essentially give clear aligners away for free or at low prices.

In the third quarter of 2019 we began increasing our investments with the goal of generating greater consumer demand starting with a new advertising campaign for North America.

During the third quarter of 2020, our marketing and consumer engagement included social media campaigns targeting teens and mothers through social media influencers, becoming the Official Clear Aligner Sponsor of the National Football League and introducing Invisalign Stickables which patients can apply to their aligners as a fun and simple way to distinguish themselves and our products from the competition.

We expect to make further investments to create additional demand for Invisalign treatment;

driving more consumers to dental professionals for those treatments.

We also believe that investing in our sales teams is important to our success.

The addition of sales representatives in APAC in 2020 follows other additions in the U.S.

We believe the realignment of our sales teams to focus on the channels they serve allows us to partner with doctors in more meaningful ways;

allowing us to assess their specific needs and tailor plans for post-pandemic success that encourage increased adoption and engagement of a variety of products and services.

If, however, we are unable to compete effectively with existing products or respond effectively to any products developed by new or existing competitors, our business could be harmed.

COVID-19 Update

Beginning in the first quarter of fiscal year 2020 and continuing into the second quarter, our sales and results of operations were markedly impacted by the COVID-19 pandemic.

As a result, we began to experience a sudden downturn in sales initially in Asia, China in particular, starting in January.

As the virus spread beyond China and into Europe and thereafter the Americas in early March, a rapid deceleration of all sales commenced shortly thereafter as the practices of many of our customers were severely curtailed or completely close d.

By the end of the second quarter of 2020, dental practices across every region had largely reopened and were seeing patients, with recovery in the Orthodontic channel leading the GP channel.

For the six months ended June 30, 2020, we recorded net revenues of $903.3 million , a de crease of 21.4% compared to the same period in 2019 .

For the three months ended June 30, 2020, c lear aligner case volume was 221.9 thousand, a decrease of 41.4% compared to the same period in 2019 and for the three months ended June 30, 2020, Systems and Services net revenues decreased by 48.1% compared to the same period in 2019.

In the short term, our business may be particularly susceptible to the impact of the COVID-19 pandemic.

On the one hand, all or a material portion of our products may be viewed as discretionary purchases and therefore more susceptible to any global or regional recession that may result from efforts to prevent or delay the spread of the virus.

Moreover, efforts to slow or prevent a recurrence of the spread of the virus are likely to continue causing disruption and uncertainties in the markets resulting in curtailed operations by our customers and their patients for an indeterminate period of time.

This in turn could impact our operations as purchasing decisions are delayed or lost, logistics complexities as a result of closed customer offices, sales and marketing efforts are postponed, and manufacturing operations are curtailed to adjust to declining sales.

On the other hand, COVID-19 has also demonstrated the benefits of digital dentistry and virtual appointments, which may motivate doctors to use more digital solutions such as Align’s products and services including the iTero scanner and Invisalign system.

As we assess the possible future short and long-term impacts to revenue, operations and financial condition from the COVID-19 pandemic, we are continually evaluating macroeconomic as well as industry-specific factors.

For instance, among the many factors we continue to monitor are governmental and societal reactions to the virus, the potential impacts of delays in the restarting of global and regional economic activities, the impact of unemployment on discretionary spending and health insurance coverage, patient reluctance or fear of exposure as a result of orthodontic or dental office visits and other external factors related to COVID-19 that are beyond our control.

For example, many jurisdictions have imposed a wide range of

restrictions on the physical movement of our employees and vendors to limit the spread of COVID-19.

Furthermore, if the COVID-19 pandemic or the speed and timeframe in which dental practices reopen and demand for our products increases has a substantial impact on our employees or suppliers, our operations, including our ability to obtain the materials needed to manufacture our products and to actually manufacture and deliver our products to customers, may suffer, and in turn our results of operations, financial condition and overall financial performance may be harmed.

Since the first quarter of fiscal year 2020, our sales and results of operations have been markedly impacted first by the preventative measures implemented to slow the spread of COVID-19, including the complete closure or significantly reduced operations of dental practices and, more recently, the inconsistent pace and scale of recovery in various markets.

By the end of the second quarter of 2020, dental practices across every region had largely reopened and were seeing patients, although at varying capacities as compared to pre-pandemic, with recovery in the Orthodontic channel leading the GP channel.

As of the end of the third quarter of 2020, dental practices continued to recover although at capacities less than pre-pandemic levels.

Additionally, in virtually all practices the effects of COVID-19 persist, typically in the form of additional preventative safety measures such as added sterilization requirements, increased costs for personal protective equipment and staggered patient visits intended to reduce the risks of cross contamination, each of which contribute to fewer patient visits per day.

To help doctors through the pandemic and to stimulate demand for our products and services during the recovery, we modified existing programs and implemented new promotions starting in the second quarter of 2020, some of which continued into all or part of the third quarter of 2020 and may currently remain in effect.

For instance, to aid doctors during closures and to accelerate recovery as they began to reopen, we temporarily suspended certain subscription usage fees related to our iTero scanners, did not implement annual price increases on our various clear aligner products, encouraged doctors with patients in wires and brackets to switch to our Invisalign clear aligners, delayed accounts receivable collection efforts, allowed doctors to maintain their promotional status levels notwithstanding declining sales, increased advertising and launched new media campaigns, implemented new promotions and modified others, all in an effort to help our customers and accelerate our mutual return to normal operations.

As a result of these efforts, for the nine months ended September 30, 2020, we recorded net revenues of $1.6 billion, a decrease of 6.8% compared to the same period in 2019.

For the three months ended September 30, 2020, clear aligner case volume was 496.1 thousand, an increase of 28.7% compared to the same period in 2019 and for the three months ended September 30, 2020, Systems and Services net revenues increased by 24.5% compared to the same period in 2019.

In the short term, our business remains susceptible to the impact of the COVID-19 pandemic.

On the one hand, our products may be viewed as discretionary purchases and therefore more susceptible to any global or regional recessions that may occur if unemployment or decreased consumer demand impacts specific industries or economies in general.

Moreover, concerns about additional outbreaks of the virus and any efforts to slow or prevent a recurrence of its spread are likely to continue causing disruption and uncertainties in the markets, adversely impacting our customers and their patients for an indeterminate period of time.

This in turn could impact our operations as purchasing decisions are delayed or lost, logistics complexities related to uneven or rapid changes in demand, sales and marketing efforts are postponed or prove ineffective, and inefficiencies in manufacturing operations as a consequence of fluctuating or unpredictable sales.

On the other hand, we believe the pandemic emphasizes the benefits of digital dentistry and virtual appointments over traditional practice methods that require more frequent in office patient visits like manual adjustments of wires and brackets.

We further believe that this will in turn motivate doctors to use more digital solutions such as Align’s products and services including the iTero scanner and Invisalign system.

As we assess the possible future short- and long-term impacts to our revenues, operations and financial condition from the COVID-19 pandemic, we are continually evaluating macroeconomic as well as industry-specific factors.

For instance, among the many factors we continue to monitor are governmental and societal reactions to the virus, global and regional economic activity, unemployment and its potential impact on discretionary spending and health insurance coverage, patient reluctance or fear of exposure as a result of orthodontic or dental office visits, travel restrictions on employees, suppliers, customers and their patients and other external factors related to COVID-19 that are beyond our control.

Furthermore, if the threat of further spread of COVID-19 occurs or the pace of recovery by dental practices is haphazard or inconsistent, there may be a substantial impact on our employees or suppliers, our operations, including our ability to timely obtain the materials needed to manufacture our products and manufacture and deliver those products to customers;

any of which may cause our results of operations, financial condition and overall financial performance to be harmed.

Furthermore, if our employees or their families are sickened by COVID-19, our ability to respond or mitigate the impact of COVID-19 may be adversely impacted.

Moreover, we are continuing to provide certain help and take further actions to respond to changes in our environment, including the COVID-19 pandemic, quickly and effectively.

As a result of the COVID-19 pandemic, we instructed employees at many of our offices across the globe (including our corporate headquarters) to work from home on a temporary basis.

We have also taken additional measures in response to the COVID-19 pandemic including screening our employees, providing them with personal protective equipment, and altering work environments to facilitate social distancing.

Furthermore, we are working to mitigate the impact of social distancing for our customers and their patients.

These efforts include moving most of our clinical education program critical to doctor engagement online, launching our Invisalign Virtual Appointment tool and launching the Invisalign Virtual Care Program.

Moreover, as it relates to our products we have provided advice regarding the safety and efficacy of various treatment options doctors are considering as their practices adapt to patient concerns and governmental requirements limiting or reducing the frequency of in-patient appointments, we have purchased equipment to manufacture personal protective equipment and distributed the equipment to doctors and hospitals, and we have redirected shipments to optimize patient care, as needed.

Our support to doctors also extends to the financial challenges they may encounter, including providing the assistance of industry experts and helping as they consider strategic relationships with lenders that can help improve their cash flow.

Moreover, many of the measures we implemented to protect our employees from the spread of the virus remain in effect.

For instance, many of our offices across the globe (including our corporate headquarters) remain underutilized as employees continue to work from home.

We are also screening our employees, providing them with personal protective equipment, and altering work environments to facilitate social distancing, which has in the past and may in the future harm productivity.

Furthermore, our efforts to mitigate the impact of social distancing on our customers and their patients continue.

These include moving most of our clinical education program critical to doctor engagement online, launching our Invisalign Virtual Appointment tool and launching the Invisalign Virtual Care Program.

The COVID-19 pandemic continues to impact our employees, customers and the global economy in unprecedented ways.

At this time, we believe the markets we serve are recovering from COVID-19 preventative measures at differing rates and times corresponding with regional outbreaks and recoveries.

However, the strategic re-implementation of preventative COVID-19 measures in one or more of our principal markets remains possible and could materially impact our business and results of operations in the third quarter of 2020 and beyond.

We believe the markets we serve will continue to recover from the COVID-19 preventative measures at differing rates and times corresponding with regional outbreaks and recoveries.

However, the strategic re-implementation of preventative COVID-19 measures in one or more of our principal markets, unemployment, the threat to domestic and international economies and other events beyond our control remains.

Should any one or more events or circumstances previously mentioned or others occur or materially adversely increase or other unknown circumstances arise, they could materially impact our business and results of operations in the fourth quarter of 2020 and beyond.

Please refer to “Risk Factors” for further discussion of the impact of the COVID-19 pandemic on our business.

2020 Expenses

Overall, we expect expenses in 2020 to slightly increase over 2019 levels;

however, as a result of the financial impacts of COVID-19, we expect to control our discretionary spend, such as travel and meeting related expenses, and focus investments in the following key areas:

Overall, we expect expenses in 2020 to increase over 2019 levels;

however, as a result of the financial impacts of COVID-19, we expect to control our discretionary spending, such as travel and meeting related expenses, and focus investments in the following key areas:

• Manufacturing capacity and facilities to enhance our regional capabilities;

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▪ Non-Case includes, but is not limited to, Vivera retainers along with our training and ancillary products for treating malocclusion.

• Our Systems and Services segment consists of our iTero intraoral scanning systems, which includes a single hardware platform and restorative or orthodontic software options, OrthoCAD services and ancillary products, as well as exocad's software solution that integrates workflows to dental labs and dental practices.

Net revenues for our Clear Aligner and Systems and Services segments by region for the three and six months ended June 30, 2020 and 2019 are as follows (in millions):

• Our Systems and Services segment consists of our iTero intraoral scanning systems, which includes a single hardware platform and restorative or orthodontic software options, OrthoCAD services and ancillary products, as well as exocad ’ s CAD/CAM software solution that integrates workflows to dental labs and dental practices.

Net revenues for our Clear Aligner and Systems and Services segments by region for the three and nine months ended September 30, 2020 and 2019 are as follows (in millions):

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

Net Revenues 2020 2019 Net

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Clear Aligner Case Volume by Region

Case volume data which represents Clear Aligner case shipments by region for the three and six months ended June 30, 2020 and 2019 is as follows (in thousands):

Case volume data which represents Clear Aligner case shipments by region for the three and nine months ended September 30, 2020 and 2019 is as follows (in thousands):

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

Region 2020 2019 Net

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Certain tables may not sum or recalculate due to rounding.

For the three and six months ended June 30, 2020, total net revenues decreased by $248.4 million and $246.4 million as compared to the same periods in 2019 primarily as a result of lower Clear Aligner volumes and lower Systems and Services net revenues in most regions.

For the three months ended September 30, 2020, total net revenues increased by $126.8 million compared to the same period in 2019 primarily as a result of higher Clear Aligner and Systems and Services volumes across all regions.

For the nine months ended September 30, 2020, total net revenues decreased by $119.6 million as compared to the same periods in 2019 primarily as a result of lower Clear Aligner volumes in the Americas region and lower Systems and Services net revenues in most regions.

Clear Aligner - Americas

For the three months ended June 30, 2020, Americas net revenues decreased by $125.3 million as compared to the same period in 2019 primarily due to lower Clear Aligner volume which decreased revenues by $130.5 million.

The volume decrease was slightly offset by higher ASP, which in creased net revenues by $ 5.3 million.

Higher ASP was a result of lower net deferrals which increased net revenues by $6.7 million, in addition to July 2019 price increases across most products and higher revenues from other case revenues contributed $ 5.4 million to the revenue growth .

The ASP increases were partially offset by higher promotional discounts and unfavorable foreign exchange rates that reduced net revenues by $7.3 million .

For the six months ended June 30, 2020, Americas net revenues decreased by $115.0 million as compared to the same period in 2019 primarily due to lower Clear Aligner volume that decreased revenues by $129.0 million.

The volume decrease was partially offset by higher ASP which in creased net revenues by $ 14.2 million as a result of July 2019 price increases across most products which contributed $ 18.4 million to the revenue growth, and lower net deferrals which increased net revenues by $ 11.5 million.

In addition, net revenues increased slightly due to a product mix shift towards products with higher ASP,

primarily driven by decreased SDC revenues which carried a lower ASP .

The ASP increases were partially offset by higher promotional discounts that reduced net revenues by $ 17.9 million in addition to unfavorable foreign exchange rates.

For the three months ended September 30, 2020, Americas net revenues increased by $44.4 million as compared to the same period in 2019 primarily due to higher Clear Aligner volume which increased net revenues by $64.6 million.

The volume increase was partially offset by lower ASP which de creased net revenues by $ 20.2 million.

Lower ASP was primarily a result of higher promotional discounts which decreased net revenues by $9.0 million and unfavorable foreign exchange rates which lowered net revenues by $5.4 million in addition to higher net deferrals and unfavorable product mix shift to lower priced products.

For the nine months ended September 30, 2020, Americas net revenues decreased by $70.6 million as compared to the same period in 2019 primarily due to lower Clear Aligner volume that decreased net revenues by $68.0 million in addition to slightly lower ASP.

The ASP was slightly lower as a result of higher promotional discounts which reduced net revenues by $28.8 million and unfavorable foreign exchange rates reduced net revenues by $9.4 million;

however, these were mostly offset by the July 2019 price increases which contributed $18.7 million to net revenues in addition to lower net deferrals and a product mix shift towards products with higher ASP, primarily driven by decreased SDC revenues which carried a lower ASP .

Clear Aligner - International

For the three months ended June 30, 2020, International net revenues decreased by $61.2 million as compared to the same period in 2019 primarily due to decreased Clear Aligner volume which decreased revenues by $58.6 million.

In addition, Clear Aligner ASP de creased slightly as a result of higher promotional discounts and unfavorable foreign exchange rates that reduced net revenues by $15.0 million partially offset by July 2019 price increases across most products which increased revenues by $6.8 million and lower net deferrals and increased other case revenues which increased net revenues by $6.2 million .

For the six months ended June 30, 2020, International net revenues decreased by $60.3 million as compared to the same period in 2019 primarily due to lower Clear Aligner volume which decreased net revenues by $59.6 million.

In addition, we had lower ASP which was a result of higher promotional discounts that reduced net revenues by $15.8 million, unfavorable foreign exchange rates and a product mix shift towards lower priced products that combined reduced net revenues by $11.9 million.

The ASP decreases were mostly offset by July 2019 price increases across most products, along with a benefit from going direct in several additional countries and therefore we now recognize direct sales at full ASP rather than the discounted distributor ASP, which increased net revenues by $16.5 million, and lower net deferrals that increased net revenues by $9.3 million.

For the three months ended September 30, 2020, International net revenues increased by $55.2 million as compared to the same period in 2019 primarily due to increased Clear Aligner volume which increased revenues by $75.9 million.

The volume increase was partially offset by lower ASP, which decreased revenues by $20.7 million.

Lower ASP was as a result of higher promotional discounts which reduced net revenues by $21.5 million, higher net deferrals which decreased net revenues by $7.2 million along with a product mix shift towards lower priced products.

The reductions in net revenues were partially offset by favorable foreign exchange rates which increased net revenues by $6.7 million and the July 2019 price increases across most products which increased net revenues.

For the nine months ended September 30, 2020, International net revenues decreased by $5.1 million as compared to the same period in 2019 primarily due to lower ASP which reduced net revenues by $20.7 million.

Lower ASP was the result of higher promotional discounts that reduced net revenues by $37.8 million along with a product mix shift towards lower priced products;

however, these reductions were partially offset by July 2019 price increases across most products along with a benefit from going direct in several additional countries and therefore we now recognize direct sales at full ASP rather than the discounted distributor ASP, which increased net revenues by $18.3 million.

The reduction in net revenues due to lower ASP was partially offset by higher Clear Aligner volume which increased net revenue by $15.7 million.

Clear Aligner - Non-Case

For the three and six months ended June 30, 2020, non-case net revenues, consisting of Vivera Retainers, training fees and other product revenues, decreased by $11.9 million and $10.7 million as compared to the same periods in 2019.

This was primarily due to de creased Vivera volume and training revenues across all regions.

For the three months ended September 30, 2020, non-case net revenues increased by $4.9 million as compared to the same period in 2019 primarily due to increased Vivera volume across all regions.

For the nine months ended September 30, 2020, non-case net revenues decreased by $5.8 million as compared to the same period in 2019 primarily due to de creased training revenues across all regions.

Systems and Services

For the three months ended June 30, 2020, Systems and Services net revenues decreased by $50.0 million as compared to the same period in 2019 primarily due to a lower number of scanners recognized decreasing net revenues by $ 46.8 million, lower scanner ASP decreasing net revenues by $4.2 million and lower iTero service revenues.

These decreases were slightly offset by the addition of exocad revenues from our acquisition.

For the six months ended June 30, 2020, Systems and Services net revenues decreased by $60.4 million as compared to the same period in 2019 primarily due to a lower number of scanners recognized which decreased net revenues by $46.8 million and a lower scanner ASP which decreased net revenues by $21.7 million.

The ASP decrease was mostly due to higher promotional discounts and a product mix shift to lower priced scanners.

These decreases were partially offset by higher services revenues which increased net revenues by $8.1 million mostly due to a larger scanner install base and the addition of exocad revenues from our acquisition.

For the three months ended September 30, 2020, Systems and Services net revenues increased by $22.3 million as compared to the same period in 2019 primarily due to a higher number of scanners recognized which increased net revenues by $ 16.6 million, partially offset by lower scanner ASP decreasing net revenues by $10.1 million.

The ASP decrease was mostly due to higher promotional discounts and an increase in the number of scanner contracts that included multiple years of service.

The ASP decreases were partially offset by a product mix shift to higher priced scanners.

In addition, iTero service revenues and the addition of exocad’s CAD/CAM revenues from our acquisition increased net revenues by $15.8 million.

For the nine months ended September 30, 2020, Systems and Services net revenues decreased by $38.1 million as compared to the same period in 2019 primarily due to a lower number of scanners recognized which decreased net revenues by $45.3 million and a lower scanner ASP which decreased net revenues by $16.6 million.

The ASP decrease was mostly due to higher promotional discounts partially offset by product mix shift to higher priced scanners.

These decreases were partially offset by higher iTero service revenues mostly due to a larger scanner install base and the addition of exocad’s CAD/CAM revenues from our acquisition which combined, increased net revenues by $23.8 million.

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

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 Change 2020 2019 Change

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Clear Aligner

For the three and six months ended June 30, 2020, our gross margin decreased as compared to the same periods in 2019 primarily due to lower clear aligner volumes resulting in higher costs per case.

For the three months ended September 30, 2020, our gross margin percentage increased as compared to the same period in 2019 primarily due to manufacturing efficiencies resulting in lower costs per case and higher training margins which was offset in part by lower ASP.

For the nine months ended September 30, 2020, our gross margin percentage decreased as compared to the same period in 2019 primarily due to an increase in aligners per case driven by additional aligners, higher manufacturing spend partially driven by operational expansion activities and lower ASP which was offset in part by manufacturing efficiencies.

Systems and Services

For the three and six months ended June 30, 2020, our gross margin decreased compared to the same periods in 2019 primarily driven by a decrease in manufacturing volumes and lower ASP.

These factors were offset in part by lower service support costs.

For the three months ended September 30, 2020, our gross margin percentage decreased compared to the same period in 2019 primarily driven by lower ASP and higher freight costs which was offset in part by product mix shift towards products with higher margins in addition to higher service revenues.

For the nine months ended September 30, 2020, our gross margin percentage decreased compared to the same period in 2019 primarily driven by lower ASP and a decrease in manufacturing volumes which was offset in part by higher service revenues.

Selling, general and administrative (in millions):

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 Change 2020 2019 Change

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Certain tables may not sum or recalculate due to rounding.

Selling, general and administrative expense includes personnel-related costs including payroll, commissions and stock-based compensation for our sales force, marketing and administration in addition to media and advertising expenses, clinical education, trade shows and industry events, product marketing, equipment and maintenance costs, legal and outside service costs, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and Information Technology (“IT”).

For the three months ended June 30, 2020, selling, general and administrative expense de creased compared to the same period in 2019 primarily due to a decrease in advertising and marketing costs of $1 2 .

6 million and a decrease in travel related costs of $11.3 million due to the impact of COVID-19 .

These decreases were partially offset by higher equipme nt, software and maintenance expenses of $ 7.7 million and legal and outside service costs of $ 5.9 million including transaction costs related to our acquisition of exocad.

For the six months ended June 30, 2020, selling, general and administrative expense increased compared to the same period in 2019 primarily due to higher expenses from equipment, software and maintenance costs of $13.3 million, legal and outside service costs of $9.5 million including transaction costs related to our acquisition of exocad and higher compensation related costs of $9.6 million mainly from increased headcount resulting in higher salaries expense, fringe benefits and stock-based compensation partially offset by lower incentive compensation.

These increases were offset in part by a decrease in travel related costs of $9.5 million due to the impact of COVID-19.

costs, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and Information Technology (“IT”).

For the three months ended September 30, 2020, selling, general and administrative expense increased compared to the same period in 2019 primarily due to higher compensation related costs of $34.2 million mainly from increased headcount resulting in higher salaries expense, fringe benefits and incentive compensation, in addition to higher equipment, software and maintenance expenses of $6.4 million and higher advertising and marketing costs of $5.9 million.

These increases were partially offset by a decrease in travel related costs of $8.0 million due to the impact of COVID-19 and lower legal and outside service costs of $3.5 million.

For the nine months ended September 30, 2020, selling, general and administrative expense increased compared to the same period in 2019 primarily due to higher compensation related costs of $43.8 million mainly from increased headcount resulting in higher salaries expense, fringe benefits and stock-based compensation partially offset by lower incentive compensation.

We also incurred higher equipment, software and maintenance costs of $19.7 million, higher advertising and marketing costs of $6.6 million and higher legal and outside service costs of $6.0 million which included transaction costs related to our acquisition of exocad.

These increases were partially offset by a decrease in travel related costs of $17.5 million due to the impact of COVID-19.

Research and development (in millions):

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 Change 2020 2019 Change

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Research and development expense includes the personnel-related costs including payroll and stock-based compensation and outside consulting expenses associated with the research and development of new products and enhancements to existing products and allocations of corporate overhead expenses including facilities and IT.

For the three and six months ended June 30, 2020, research and development expense increased compared to the same period in 2019 primarily due to higher equipment and material costs in addition to higher compensation costs mainly from increased headcount resulting in higher salaries expense, fringe benefits and stock-based compensation which was partially offset by lower incentive compensation.

Impairments and other charges (in millions):

For the three months ended September 30, 2020, research and development expense increased compared to the same period in 2019 primarily due to higher compensation costs mainly from increased headcount resulting in higher salaries expense and fringe benefits in addition to higher equipment and material costs.

For the nine months ended September 30, 2020, research and development expense increased compared to the same period in 2019 primarily due to higher compensation costs mainly from increased headcount resulting in higher salaries expense and fringe benefits, which was partially offset by lower incentive compensation.

We also incurred higher equipment and material costs.

Impairments and other (gains) charges (in millions):

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 Change 2020 2019 Change

Impairments and other charges $ — $ — $ — $ — $ 29.8 $ (29.8)

Impairments and other (gains) charges $ — $ (6.8) $ 6.8 $ — $ 23.0 $ (23.0)

% of net revenues — % (1.1) % — % 1.3 %

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Certain tables may not sum or recalculate due to rounding.

During the six months ended June 30, 2019, we recorded impairments and other charges of $29.8 million due to costs related to the Invisalign store closures.

The impairments and other charges are comprised of operating lease right-of-use assets impairments of $14.2 million, store leasehold improvement and other fixed asset impairments of $14.3 million, and employee severance and other expenses of $1.3 million (Refer to Note 8 “Impairments and Other Charges” and Note 9 “Legal Proceedings” of the Notes to Condensed Consolidated Financial Statements for more information).

For the three months ended September 30, 2019, we negotiated early termination of our Invisalign store leases and recorded lease termination gains of $6.8 million.

For the nine months ended September 30, 2019, we recorded impairments and other (gains) charges of $23.0 million which are comprised of operating lease right-of-use assets impairments of $14.2 million, store leasehold improvement and other fixed asset impairments of $14.3 million, and employee severance and other expenses of $1.3 million, partially offset by the Invisalign store lease termination gains of $6.8 million (Refer to Note 8 “Impairments and Other (Gains) Charges” and Note 9 “Legal Proceedings” of the Notes to Condensed Consolidated Financial Statements for more information).

Litigation settlement gain (in millions):

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 Change 2020 2019 Change

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Certain tables may not sum or recalculate due to rounding.

For the three and six months ended June 30, 2019, we recorded a gain of $51.0 million due to the litigation settlement with Straumann.

Income (loss) from operations (in millions):

For the nine months ended September 30, 2019, we recorded a gain of $51.0 million due to the litigation settlement with Straumann.

Income from operations (in millions):

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 Change 2020 2019 Change

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Operating margin % 30.8 % 36.0 % 22.1 % 36.5 %

Total income (loss) from operations 1

Total income from operations 1

$ 177.1 $ 127.2 $ 49.9 $ 174.0 $ 391.3 $ (217.4)

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Clear Aligner

For the three months ended June 30, 2020, our operating margin decreased compared to the same period in 2019 primarily due to a lower Clear Aligner gross margin due to decreased volumes and a gain recognized from the litigation settlement with Straumann during the second quarter of 2019.

For the six months ended June 30, 2020, our operating margin decreased compared to the same period in 2019 primarily due to a lower Clear Aligner gross margin due to decreased volumes and a gain recognized from the litigation settlement with Straumann during the second quarter of 2019.

These decreases were offset in part by costs recognized in the first quarter of 2019 related to the Invisalign store closures.

S ystems and Services

For the three and six months ended June 30, 2020, our operating margin decreased compared to the same periods in 2019 primarily driven by a lower Systems and Services gross margin primarily due to a lower number of scanners recognized .

For the three months ended September 30, 2020, our operating margin percentage increased compared to the same period in 2019 primarily due to a higher Clear Aligner gross margin.

For the nine months ended September 30, 2020, our operating margin percentage decreased compared to the same period in 2019 primarily due to a lower Clear Aligner gross margin and a $51.0 million gain recognized from the litigation settlement with Straumann during the prior year period.

These decreases were offset in part by a net impairment charge of $23.0 million recognized during the nine months ended September 30, 2019 related to the Invisalign store closures.

Systems and Services

For the three and nine months ended September 30, 2020, our operating margin percentage decreased compared to the same periods in 2019 primarily driven by a lower gross margin.

Interest income (in millions):

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 Change 2020 2019 Change

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Interest income includes interest earned on cash, cash equivalents, investment balances and our unsecured promissory note.

For the three and six months ended June 30, 2020, interest income decreased compared to the same periods in 2019 mainly due to the divestiture of our marketable securities portfolio during the first quarter of 2020 and lower interest rates.

For the three and nine months ended September 30, 2020, interest income decreased compared to the same periods in 2019 mainly due to the divestiture of our marketable securities portfolio during the first quarter of 2020 and lower interest rates.

Other income (expense), net (in millions):

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 Change 2020 2019 Change

4 unchanged sentences

Other income (expense), net, includes foreign exchange gains and losses, gains and losses on foreign currency forward contracts, interest expense, gains and losses on equity investments and other miscellaneous charges.

For the three months ended June 30, 2020, other income (expense), net decreased compared to the same period in 2019 primarily due to the $15.8 million gain from the sale of our investment in SDC that was recorded during the three months ended June 30, 2019.

This decrease was partially offset by net foreign exchange gains in the three months ended June 30, 2020 as compared to net foreign exchange losses in the same period in 2019.

For the six months ended June 30, 2020, other income (expense), net decreased compared to the same period in 2019 primarily due to the $15.8 million gain from the sale of our investment in SDC that was recorded during the six months ended June 30, 2019 and higher losses in the current period including a $10.2 million loss on a foreign currency forward contract related to the exocad acquisition in addition to foreign exchange net losses .

For the three months ended September 30, 2020, other income (expense), net increased compared to the same period in 2019 primarily due to net foreign exchange gains in the three months ended September 30, 2020 as compared to net foreign exchange losses in the same period in 2019.

For the nine months ended September 30, 2020, other income (expense), net decreased compared to the same period in 2019 primarily due to the $15.8 million gain from the sale of our investment in SDC that was recorded during the nine months ended September 30, 2019 and a $10.2 million loss on a foreign currency forward contract related to the exocad acquisition that was recorded during the current period.

These decreases were partially offset by net foreign exchange gains in the nine months ended September 30, 2020 as compared to net foreign exchange losses in the same period in 2019.

Equity in losses of investee, net of tax (in millions):

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 Change 2020 2019 Change

3 unchanged sentences

Certain tables may not sum or recalculate due to rounding.

For the three and six months ended June 30, 2020, there were no equity in losses of investee, net of tax.

For the three and nine months ended September 30, 2020, there were no equity in losses of investee, net of tax.

After the second quarter of 2019, we no longer incur equity in losses of investee, net of tax related to SDC as we tendered our SDC equity interest on April 3, 2019 (Refer to Note 6 “Equity Method Investments” of the Notes to Condensed Consolidated Financial Statements for details on equity method investments).

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 Change 2020 2019 Change

3 unchanged sentences

Certain tables may not sum or recalculate due to rounding.

During the six months ended June 30, 2020, we completed an intra-entity transfer of certain intellectual property rights and fixed assets to our Swiss subsidiary, where our EMEA regional headquarters is located beginning January 1, 2020.

During the nine months ended September 30, 2020, we completed an intra-entity transfer of certain intellectual property rights and fixed assets to our Swiss subsidiary, where our EMEA regional headquarters is located beginning January 1, 2020.

The transfer of intellectual property rights did not result in a taxable gain;

however, it did result in a step-up of the Swiss tax deductible basis in the transferred assets, and accordingly, created a temporary difference between the book basis and the tax basis of such intellectual property rights.

Consequently, this transaction resulted in the recognition of a deferred tax asset and related one-time tax benefit of approximately $1,493.5 million during the six months ended June 30, 2020, which is the net impact of the deferred tax asset recognized as a result of the additional Swiss tax deductible basis in the transferred assets and certain costs related to the transfer of fixed assets and inventory.

Our benefit from income taxes was $32.9 million for the three months ended June 30, 2020 and our provision for income taxes was $43.1 million for the three months ended June 30, 2019, representing effective tax rates of 44.8% and 22.2%, respectively.

Our benefit from income taxes was $1,497.7 million for the six months ended June 30, 2020 and our provision for income taxes was $51.9 million for the six months ended June 30, 2019, representing effective tax rates of 7,437.0% and 18.6%, respectively.

Our effective tax rate differs from the statutory federal income tax rate of 21% for the three months ended June 30, 2020 primarily due to the recognition of additional tax benefits resulting from changes in annual effective tax rate caused by a shift in jurisdictional mix of forecasted annual income.

Our effective tax rate differs from the statutory federal income tax rate of 21% for the six months ended June 30, 2020 mainly as a result of the aforementioned intra-entity transfer and the recognition of excess tax benefits related to stock-based compensation, partially offset by unrecognized tax benefits associated with certain foreign payments.

Our effective tax rate differs from the statutory federal income tax rate of 21% for the three and six months ended June 30, 2019 mainly as a result of the recognition of excess tax benefits related to stock-based compensation and certain foreign earnings, primarily from the Netherlands and Costa Rica, being taxed at lower tax rates.

The increase in our effective tax rate for the three months ended June 30, 2020 compared to the same period in 2019 is primarily attributable to the tax impact of a higher annual forecasted effective tax rate driven by changes in the jurisdictional mix of forecasted income.

The increase in our effective tax rate for the six months ended June 30, 2020 compared to the same period in 2019 is primarily attributable to the recognition of a deferred tax asset related to the intra-entity transfer of certain intellectual property rights during the six months ended June 30, 2020.

While the recognition of a deferred tax asset would normally cause a reduction in tax rate, due to our net loss before tax for the six months ended June 30, 2020, it has the effect of increasing the effective tax rate.

Consequently, this transaction resulted in the recognition of a deferred tax asset and related one-time tax benefit of approximately $1,493.5 million during the nine months ended September 30, 2020, which is the net impact of the deferred tax asset recognized as a result of the additional Swiss tax deductible basis in the transferred assets and certain costs related to the transfer of fixed assets and inventory.

Our provision for income taxes was $45.2 million and $25.9 million for the three months ended September 30, 2020 and 2019, representing effective tax rates of 24.5% and 20.2%, respectively.

Our benefit from income taxes was $1,452.5 million for the nine months ended September 30, 2020 and our provision for income taxes was $77.8 million for the nine months ended September 30, 2019, representing effective tax rates of (883.5)% and 19.1%, respectively.

Our effective tax rate differs from the

statutory federal income tax rate of 21% for the three months ended September 30, 2020 primarily due to the recognition of additional tax expense resulting from state tax and non-deductible expenses in the U.S, partially offset by the recognition of a tax benefit for the release of certain unrecognized tax benefits following the settlement of an Internal Revenu e Service ( “IRS”) income tax audit for years 2015 and 2016.

Our effective tax rate differs from the statutory federal income tax rate of 21% for the nine months ended September 30, 2020 mainly as a result of the recognition of tax benefits related to the intra-entity transfer of certain intellectual property rights and fixed assets mentioned above.

Our effective tax rate differs from the statutory federal income tax rate of 21% for the three and nine months ended September 30, 2019 mainly as a result of certain foreign earnings, primarily from the Netherlands and Costa Rica, being taxed at lower tax rates and the recognition of excess tax benefits related to stock-based compensation, partially offset by non-deductible officers’ compensation.

The increase in our effective tax rate for the three months ended September 30, 2020 compared to the same period in 2019 is primarily attributable to reduced tax benefit of certain foreign earnings being taxed at lower tax rates and tax benefits recorded last year related to certain statute of limitations expirations and adjustments for prior years that did not recur in 2020, offset in part by a tax benefit recorded this quarter for the release of certain unrecognized tax benefits following the settlement of an IRS income tax audit for years 2015 and 2016.

The decrease in our effective tax rate for the nine months ended September 30, 2020 compared to the same period in 2019 is primarily attributable to the recognition of a deferred tax asset related to the intra-entity transfer of certain intellectual property rights during the nine months ended September 30, 2020.

Liquidity and Capital Resources

We fund our operations from product sales.

As of June 30, 2020 and December 31, 2019, we had the following cash and cash equivalents and short-term marketable securities (in thousands):

As of September 30, 2020 and December 31, 2019, we had the following cash and cash equivalents and short-term marketable securities (in thousands):

September 30,

2020 December 31,

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government treasury bonds and certificates of deposit.

As of June 30, 2020, approximately $244.2 million of cash and cash equivalents was held by our foreign subsidiaries.

As of September 30, 2020, approximately $316.7 million of cash and cash equivalents was held by our foreign subsidiaries.

Our intent is to permanently reinvest our earnings from our international operations going forward, and our current plans do not require us to repatriate them to fund our U.S.

1 unchanged sentence

On April 1, 2020, we paid $420.8 million, net of $9.2 million cash acquired, from our cash on hand to complete our acquisition of exocad.

Our business has been materially adversely affected by the COVID-19 pandemic and the global and regional efforts by governments to mitigate its spread, and we expect the adverse impacts to our business to continue.

Beginning in the first quarter of 2020, our business has been materially adversely affected by the COVID-19 pandemic and the global and regional efforts by governments to mitigate its spread.

While these impacts lessened in the third quarter of 2020, we could continue to experience further adverse impacts to our business.

We believe that our current cash balances and the borrowing capacity under our credit facility, if necessary, will be sufficient to fund our business for at least the next 12 months.

However, as a result of the COVID-19 pandemic, we expect to experience reduced cash flow from operations as a result of decreased revenues and slower collections on our accounts receivable.

In addition, as a result of the COVID-19 pandemic, we could experience reduced cash flow from operations as a result of decreased revenues and slower collections on our accounts receivable.

For additional information regarding the impact of COVID-19 on our liquidity and capital resources, refer to Item 1A “Risk Factors."

Cash flows (in thousands):

Six Months Ended

Nine Months Ended

September 30,

Net cash flow provided by (used in):

3 unchanged sentences

Effect of exchange rate changes on cash, cash equivalents, and restricted cash (568) (2,098)

Net decrease in cash, cash equivalents, and restricted cash $ (146,190) $ (213,373)

Net increase (decrease) in cash, cash equivalents, and restricted cash $ 64,988 $ (146,501)

Operating Activities

For the six months ended June 30, 2020, cash flows from operations of $69.7 million resulted primarily from our net income of approximately $1.5 billion as well as the following:

For the nine months ended September 30, 2020, cash flows from operations of $280.8 million resulted primarily from our net income of approximately $1.6 billion as well as the following:

Significant non-cash activities

2 unchanged sentences

• Depreciation and amortization of $68.8 million related to our investments in property, plant and equipment and intangible assets;

• Allowance for doubtful accounts of $12.6 million related to slower collections;

• Non-cash operating lease cost of $16.8 million;

• Allowance for doubtful accounts provisions of $13.1 million related to slower collections from the impacts of COVID-19.

Significant changes in working capital

• Decrease of $106.6 million in accrued and other long-term liabilities due to timing of payment and activities;

• Decrease of $64.6 million in accounts receivable which is primarily a result of the decrease in net revenues due to the impact of COVID-19;

• Increase of $40.9 million in deferred revenues corresponding primarily to cases eligible under our additional aligner policy and timing of revenue recognition;

• Increase of $31.1 million in prepaid expenses and other assets due to the timing of payments and activities.

• Increase of $128.6 million in deferred revenues primarily related to increased cases eligible under our additional aligner policy and timing of revenue recognition;

• Increase of $101.9 million in accounts receivable which is primarily a result of the increase in net revenues;

• Decrease of $28.3 million in accrued and other long-term liabilities and an increase of $28.3 million in prepaid expenses and other assets due to the timing of payment and activities.

Investing Activities

Net cash used in investing activities was $172.3 million for the six months ended June 30, 2020 which primarily consisted of cash paid for the acquisition of exocad of $420.8 million, net of cash acquired, purchases of property and plant and equipment purchases of $80.5 million and purchases of marketable securities of $5.3 million.

These outflows were partially offset by maturities and sales of marketable securities of $321.5 million and payments of $11.1 million received on an unsecured promissory note issued by SDC in exchange for tendering our shares to them.

For the remainder of 2020 we expect to invest an additional $90.0 million to $100.0 mill io n in capital expenditures related to building purchases and improvements as well as additional manufacturing capacity to support our international expansion.

Net cash used in investing activities was $186.8 million for the nine months ended September 30, 2020 which primarily consisted of cash paid for the acquisition of exocad of $420.8 million, net of cash acquired, purchases of property and plant and equipment purchases of $101.8 million and purchases of marketable securities of $5.3 million.

These outflows were partially offset by maturities and sales of marketable securities of $321.5 million and $17.8 million received from payments on an unsecured promissory note issued by SDC in exchange for tendering our shares to them.

For the remainder of 2020 we expect to invest an additional $70.0 million to $80.0 million in capital expenditures related to building improvements as well as additional manufacturing capacity to support our international expansion.

Financing Activities

Net cash used in financing activities was $36.4 million for the six months ended June 30, 2020 which consisted of payroll taxes paid for equity awards through share withholdings of $47.0 million which was partially offset by $10.7 million of proceeds from the issuance of common stock.

Net cash used in financing activities was $28.4 million for the nine months ended September 30, 2020 which consisted of payroll taxes paid for equity awards through share withholdings of $48.7 million which was partially offset by $20.3 million of proceeds from the issuance of common stock.

Common Stock Repurchases

As of June 30, 2020, we have $100.0 million available for repurchase under the $600.0 million repurchase program authorized by our Board of Directors in May 2018 (Refer to Note 12 “Common Stock Repurchase Programs” of the Notes to Condensed Consolidated Financial Statements for details on our stock repurchase programs).

As of September 30, 2020, we have $100.0 million available for repurchase under the $600.0 million repurchase program authorized by our Board of Directors in May 2018 (Refer to Note 12 “Common Stock Repurchase Program” of the Notes to Condensed Consolidated Financial Statements for details on our stock repurchase programs).

Contractual Obligations

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We believe that our current cash balances and the borrowing capacity under our credit facility, if necessary, will be sufficient to fund our business for at least the next 12 months.

However, as a result of the COVID-19 pandemic, we expect to experience reduced cash flow from operations as a result of decreased revenues and slower collections on our accounts receivable.

In addition, as a result of the COVID-19 pandemic, we could experience reduced cash flow from operations as a result of decreased revenues and slower collections on our accounts receivable.

If we are unable to generate adequate operating cash flows and need more funds beyond our available liquid investments and those available under our credit facility, we may need to suspend our stock repurchase programs or seek additional sources of capital through equity or debt financing, collaborative or other arrangements with other companies, bank financing and other sources in order to realize our objectives and to continue our operations.

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Off-Balance Sheet Arrangements

As of June 30, 2020, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources other than certain items disclosed in Note 10 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K.

As of September 30, 2020, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources other than certain items disclosed in Note 10 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K.

Critical Accounting Policies and Estimates

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis