What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-02 compared with 2021-08-04 · 119 added, 85 removed, 193 unchanged (51% of the section changed)

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Forward-Looking Statements

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 (the “ Exchange Act ” ).

These statements include, among other things, our expectations and intentions regarding our strategic objectives and the means to achieve them, our beliefs regarding digital dentistry and its potential to impact our business, our intentions regarding expanding our business, 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 expectation regarding customer and consumer purchasing behavior, including expectations related to consumer demand for digital solutions, our expectations for future investments in and benefits from consumer demand sales and marketing activities, our expectations regarding the near and long-term implications of the COVID-19 pandemic on the global economy, the businesses of our customers and us, including our preparedness to react to changing circumstances and demand, results of operations and financial condition, our expectations for our expenses and capital obligations and 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 judgments regarding the estimates used in our revenue recognition, and assessment of goodwill and intangible assets, our expectations regarding our tax positions and the judgments we make related to our tax obligations, 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.

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, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ” ).

These statements include, among other things, our expectations and intentions regarding our strategic objectives and the means to achieve them;

our beliefs regarding digital dentistry and its potential to impact our business;

our intentions regarding expanding our business;

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 expectation regarding customer and consumer purchasing behavior, including expectations related to consumer demand for digital solutions;

our expectations for future investments in and benefits from sales and marketing activities;

our expectations regarding the near and long-term implications of the COVID-19 pandemic on the global economy, including global supply chain issues;

our preparedness and our customers' preparedness to react to changing circumstances and demand, results of operations and financial condition;

our expectations for our expenses and capital obligations and expenditures in particular;

our intentions 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 judgments regarding the estimates used in our revenue recognition, and assessment of goodwill and intangible assets;

our expectations regarding our tax positions and the judgments we make related to our tax obligations;

our predicted level of operating expenses and gross margins and other factors beyond our control;

our expectations regarding staying in compliance with laws and regulations currently applicable to, or which may become applicable to, our business both in the United States and internationally;

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.

Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part I, 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.

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COVID-19 Update

Since the first quarter of fiscal year 2020, our sales and results of operations have been 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.

In 2021, the pandemic continues to cause general business and societal disruptions and uncertainties worldwide, with variants of the COVID-19 virus appearing to drive regional increases in infections that has led to localized preventative measures of varying degrees to curtail further spread of the virus.

The outbreak of COVID-19 virus in late 2019 and the pandemic that followed has caused significant volatility and uncertainty in the global and regional economies.

This has led to changes in consumer and business behavior, fear and market fluctuations, and restrictions on business and individual activities, all of which has materially impacted supply and demand in broad sectors of the world markets.

For us, sales and results of operations were initially materially impacted by the preventative measures implemented to slow the spread, including the complete closure or significantly reduced operations of dental practices.

In subsequent quarters, our business rebounded sharply, although the inconsistent pace and scale of recovery generally continues to reverberate throughout global markets, evidenced by significant shortages of raw materials, energy, components, transportation and delivery services, and labor.

Additionally, variants of the COVID-19 virus continue to drive unpredictability and hamper the normalization of supply and demand as businesses react to new or renewed localized preventative measures intended to slow the spread of the virus.

Notwithstanding these setbacks, in general, the scale and time during which these additional measures are implemented are less impactful on our customers and their patients than the most drastic measures imposed in 2020.

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Our efforts to promote the digital transformation of dental practices with our clear aligners, intraoral scanners, clinical treatment planning and other offerings has allowed us to quickly respond to increased demand in the dental field.

We expect the number of customers that realize the efficiencies and benefits of our digital solutions for their practices and patients to continue to grow even as the pandemic-related restrictions continue to ease generally.

To address the increasing demand for digital solutions, we intend to continue targeting our investment plans in sales, marketing and innovation as well as our capital expenditures, particularly as we expand our manufacturing operations in locations such as Europe, in order to meet the anticipated demand for our solutions.

Nevertheless, the continuing evolution of the pandemic, including the setbacks occurring as a result of new virus strains and the continuing business restrictions and lockdowns, the positive impacts of vaccinations, the uncertainties regarding consumer spending as demand for entertainment, dining, and travel returns and remote working diminishes, remains highly fluid and unpredictable.

Nevertheless, the continuing evolution of the pandemic, including the setbacks occurring as a result of new virus strains and the continuing business restrictions and lockdowns, supply chain shortages and delays, the positive impacts of vaccinations, the uncertainties regarding consumer spending as demand for entertainment, dining, and travel returns and remote working diminishes, remains highly fluid and unpredictable.

Consequently, the COVID-19 pandemic has caused, and is expected to continue causing for an unknown period of time, disruptions to many of the norms we have historically experienced in the cadence of our quarterly results of operations.

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We measure our performance against these strategic priorities by the achievement of key financial and operating metrics.

For the three months ended June 30, 2021, we achieved the following, taking into consideration that percentage changes from prior year financial results are unusual due to the significant impact of COVID-19 and do not necessarily reflect our future growth rates:

For the three months ended September 30, 2021, we achieved the following, taking into consideration that percentage changes from prior year financial results include the impact of COVID-19 and do not necessarily reflect our future growth rates:

• Revenues of $1.0 billion, an increase of 38.4% year-over-year;

• Clear Aligner revenues of $841.0 million, an increase of 181.9% year-over-year;

• Imaging Systems and CAD/CAM Services revenues of $169.8 million, an increase of 214.7% year-over-year;

• International Invisalign Revenues of $389.7 million, an increase of 151.0% year-over-year;

• Clear Aligner volume increased 200.0% year-over-year and Clear Aligner volume for teenage patients increased 156.3% year-over-year;

• Income from operations $268.9 million and operating margin 26.6%;

• Effective tax rate was 25.7%;

• Clear Aligner revenues of $837.6 million, an increase of 34.9% year-over-year reflecting the expanding opportunity for Invisalign treatment among adults globally, as well as the underlying orthodontic market as we continue to build awareness of the Invisalign brand and drive utilization among teens and younger patients through increased consumer marketing.

◦ Americas Clear Aligner revenues of $408.4 million, an increase of 34.3% year-over-year;

◦ International Clear Aligner revenues of $375.5 million, an increase of 33.5% year-over-year;

◦ Clear Aligner volume increase of 32.1% year-over-year and Clear Aligner volume for teenage patients increase of 26.6% year-over-year;

• Imaging Systems and CAD/CAM Services revenues of $178.3 million, an increase of 57.3% year-over-year reflecting strong growth across all regions with continued adoption of the iTero Element 5D and 5D Plus Series of next generation scanners and imaging systems launched in February 2021, as well as increased average selling prices (“ASP”) predominately due to favorable product mix shift towards higher priced scanners;

• Income from operations of $261.2 million and operating margin of 25.7%;

• Effective tax rate of 30.9%;

• Net income of $181.0 million with diluted net income per share of $2.28;

• Cash and cash equivalents were $1.1 billion as of June 30, 2021;

• Operating cash flow was $317.5 million;

• Capital expenditures were $124.2 million and predominantly relate to increases to our manufacturing capacity and facilities;

• Number of employees was 20,395 as of June 30, 2021, an increase of 31.5% year-over-year

• Cash and cash equivalents of $1.2 billion as of September 30, 2021;

• Operating cash flow of $355.0 million;

• Capital expenditures of $124.3 million, predominantly related to increases to our manufacturing capacity and facilities;

• Number of employees was 21,590 as of September 30, 2021, an increase of 25.4% year-over-year.

Other Statistical Data and Trends

• Digital Scanner Case Submissions.

For the second quarter of 2021, total Invisalign cases submitted with a digital scanner in the Americas increased to 86.6%, up from 85.7% in the second quarter of 2020 and international scans increased to 76.2%, up from 72.0% in the second quarter of 2020.

For the second quarter of 2021, 95.8% of Invisalign cases submitted by North American orthodontists were submitted digitally.

For the third quarter of 2021, total Invisalign cases submitted with a digital scanner in the Americas increased to 87.9%, up from 83.2% in the third quarter of 2020 and international scans increased to 79.3%, up from 72.1% in the third quarter of 2020.

For the third quarter of 2021, 96.1% of Invisalign cases submitted by North American orthodontists were submitted digitally.

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

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Latin America ( “ LATAM ” ) is excluded from the International region based on its immateriality to the quarter, however is included in the Total utilization.

• Total utilization rate in the second quarter of 2021 increased to 8.0 cases per doctor compared to 4.6 cases per doctor in the second quarter of 2020.

• Total utilization rate in the third quarter of 2021 increased to 7.7 cases per doctor compared to 7.1 cases per doctor in the third quarter of 2020.

▪ North America:

Utilization rate among our North American orthodontist customers increased to 29.4 cases per doctor in the second quarter of 2021 compared to 11.0 cases per doctor in the second quarter of 2020 and the utilization rate among our North American GP customers increased to 5.3 cases per doctor in the second quarter of 2021 compared to 2.5 cases per doctor in the second quarter of 2020.

Utilization rate among our North American orthodontist customers increased to 29.7 cases per doctor in the third quarter of 2021 compared to 24.1 cases per doctor in the third quarter of 2020 and the utilization rate among our North American GP customers increased to 5.0 cases per doctor in the third quarter of 2021 compared to 4.2 cases per doctor in the third quarter of 2020.

▪ International:

International doctor utilization rate was 7.1 cases per doctor in the second quarter of 2021 compared to 4.7 cases in the second quarter of 2020.

International doctor utilization rate was 6.5 cases per doctor in the third quarter of 2021 compared to 6.4 cases in the third quarter of 2020.

Results of Operations

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• 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 six months ended June 30, 2021 and 2020 are as follows (in millions):

Net revenues for our Clear Aligner and Systems and Services segments by region for the three and nine months ended September 30, 2021 and 2020 are as follows (in millions):

Three Months Ended

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Net Revenues 2021 2020

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Clear Aligner Case Volume

Case volume data which represents Clear Aligner case shipments for the three and six months ended June 30, 2021 and 2020 is as follows (in thousands):

Case volume data which represents Clear Aligner case shipments for the three and nine months ended September 30, 2021 and 2020 is as follows (in thousands):

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Certain tables may not sum or recalculate due to rounding.

For the three and six months ended June 30, 2021, total net revenues increased by $658.5 million and $1.0 billion, respectively, as compared to the same periods in 2020 primarily as a result of increases in Clear Aligner volume of 200.0% and 117.0%, respectively, and an increase in the number of scanners recognized across all regions.

For the three and nine months ended September 30, 2021, total net revenues increased by $281.8 million and $1.3 billion, respectively, as compared to the same periods in 2020 primarily as a result of increases in Clear Aligner volume of 32.1% and 77.9%, respectively, and an increase in the number of scanners recognized across most regions.

Clear Aligner - Americas

For the three months ended June 30, 2021, Americas net revenues increased by $277.2 million as compared to the same period in 2020 primarily due to a 260.7% increase in Clear Aligner volume which resulted in higher net revenues of $321.4 million, partially offset by lower Clear Aligner ASP that decreased net revenues by $44.2 million.

Lower ASP was mostly due to higher net deferrals which decreased net revenues by $33.8 million and higher promotional discounts which decreased net revenues by $13.1 million.

For the six months ended June 30, 2021, Americas net revenues increased by $379.1 million as compared to the same period in 2020 primarily due to a 120.3% increase in Clear Aligner volume which resulted in higher net revenues of $455.7 million, partially offset by lower Clear Aligner ASP that decreased net revenues by $76.6 million.

For the three months ended September 30, 2021, Americas net revenues increased by $104.3 million as compared to the same period in 2020 primarily due to a 36.4% increase in Clear Aligner volume which resulted in higher net revenues of $110.7 million, partially offset by lower Clear Aligner ASP that decreased net revenues by $6.4 million.

Lower ASP was mostly due to higher promotional discounts which decreased net revenues by $8.5 million and higher net deferrals which decreased net revenues by $4.2 million.

The decreases in ASP were partially offset by favorable foreign exchange which increased net revenues by $5.0 million.

For the nine months ended September 30, 2021, Americas net revenues increased by $483.4 million, as compared to the same period in 2020, primarily due to a 81.6% increase in Clear Aligner volume which resulted in higher net revenues of $557.3 million, partially offset by lower Clear Aligner ASP that decreased net revenues by $73.9 million.

Lower ASP was mostly due to higher net deferrals which decreased revenues by $55.4 million and higher promotional discounts which decreased net revenues by $42.5 million.

The decreases in ASP were partially offset by favorable product mix shift which increased net revenues by $22.4 million.

Clear Aligner - International

For the three months ended June 30, 2021, International net revenues increased by $234.5 million as compared to the same period in 2020 primarily due to a 149.2% increase in Clear Aligner volume which resulted in higher net revenues of $231.7 million.

For the six months ended June 30, 2021, International net revenues increased by $391.9 million as compared to the same period in 2020 primarily due to a 113.1% increase in Clear Aligner volume which resulted in higher net revenues of $397.1 million, partially offset by lower Clear Aligner ASP.

Lower ASP was the result of higher net revenue deferrals partially offset by favorable foreign exchange rates.

For the three months ended September 30, 2021, International net revenues increased by $94.3 million, as compared to the same period in 2020, primarily due to a 27.0% increase in Clear Aligner volume which resulted in higher net revenues of $75.8 million.

Higher Clear Aligner ASP increased net revenues by $18.5 million mostly due to lower promotional discounts and favorable exchange rates.

For the nine months ended September 30, 2021, International net revenues increased by $486.2 million, as compared to the same period in 2020, primarily due to a 73.5% increase in Clear Aligner volume which resulted in higher net revenues of $464.8 million.

Higher Clear Aligner ASP increased net revenues by $21.4 million mostly due to favorable exchange rates

which increased net revenues by $65.3 million and favorable product mix shift which increased net revenues by $18.3 million.

The increases in ASP were partially offset by higher net deferrals which decreased net revenues by $62.6 million.

Clear Aligner - Non-Case

For the three and six months ended June 30, 2021, non-case net revenues increased by $31.0 million and $43.3 million as compared to the same periods in 2020 due to increased Vivera volume across all regions.

For the three and nine months ended September 30, 2021, non-case net revenues increased by $18.3 million and $61.5 million, as compared to the same periods in 2020, due to increased Vivera volume across all regions.

Systems and Services

For the three months ended June 30, 2021, Systems and Services net revenues increased by $115.9 million as compared to the same period in 2020 due to a higher number of scanners recognized which increased net revenues by $63.8 million.

For the three months ended September 30, 2021, Systems and Services net revenues increased by $64.9 million, as compared to the same period in 2020, due to a higher number of scanners recognized which increased net revenues by $27.0 million.

Higher scanner ASP increased net revenues by $16.4 million mostly due to favorable product mix shift towards higher priced scanners.

Additionally, net revenues increased by $21.5 million primarily as a result of higher iTero service revenues mostly due to a larger scanner install base.

For the six months ended June 30, 2021, Systems and Services net revenues increased by $188.0 million as compared to the same period in 2020 due to a higher number of scanners recognized which increased net revenues by $113.2 million.

For the nine months ended September 30, 2021, Systems and Services net revenues increased by $253.0 million, as compared to the same period in 2020, due to a higher number of scanners recognized which increased net revenues by $138.3 million.

Higher scanner ASP increased net revenues by $39.1 million mostly due to favorable product mix shift towards higher priced scanners.

Additionally, net revenues increased by $75.5 million as a result of higher iTero service revenues mostly due to a larger scanner install base and additional exocad CAD/CAM revenues.

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Clear Aligner

For the three and six months ended June 30, 2021, our gross margin percentage increased as compared to the same periods in 2020 primarily due to manufacturing efficiencies driven by higher production volumes, which was partially offset by lower ASP.

For the three and nine months ended September 30, 2021, our gross margin percentage increased, as compared to the same periods in 2020, primarily due to manufacturing efficiencies driven by higher production volumes.

Systems and Services

For the three months ended June 30, 2021, our gross margin percentage increased as compared to the same period in 2020 as a result of higher ASP from a product mix shift, an increase in iTero service revenues and manufacturing efficiencies driven by higher production volumes which was partially offset by higher freight costs.

For the six months ended June 30, 2021, our gross margin percentage increased as compared to the same period in 2020 primarily driven by higher ASP from a product mix shift and manufacturing efficiencies driven by higher production volumes.

For the three and nine months ended September 30, 2021, our gross margin percentage increased, as compared to the same period in 2020, as a result of higher ASP from a product mix shift and an increase in service revenues which was partially offset by higher freight costs.

Selling, general and administrative (in millions):

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

For the three months ended June 30, 2021, selling, general and administrative expense increased compared to the same period in 2020 primarily due to higher compensation related costs of $86.9 million mainly from higher salaries, fringe benefits, commissions, incentive bonuses and stock-based compensation.

Higher salaries were driven by an increase in headcount as we continue to invest in sales and marketing to penetrate into new markets.

Additionally, we also incurred higher advertising and marketing costs of $64.2 million during the three months ended June 30, 2021.

For the six months ended June 30, 2021, selling, general and administrative expense increased compared to the same period in 2020 primarily due to higher compensation related costs of $150.2 million mainly from higher salaries, fringe benefits, commissions, incentive bonuses and stock-based compensation driven by an increase in headcount.

We also incurred higher advertising and marketing costs of $93.8 million during the six months ended June 30, 2021.

For the three months ended September 30, 2021, selling, general and administrative expense increased, compared to the same period in 2020, primarily due to higher compensation related costs of $41.5 million from higher salaries, fringe benefits, commissions, incentive bonuses and stock-based compensation mainly due to increased headcount.

Additionally, we also incurred higher advertising and marketing costs of $53.4 million during the three months ended September 30, 2021.

For the nine months ended September 30, 2021, selling, general and administrative expense increased, compared to the same period in 2020, primarily due to higher compensation related costs of $191.5 million from higher salaries, fringe benefits, commissions, incentive bonuses and stock-based compensation due to increased headcount as we continue to invest in sales and marketing to penetrate into new markets.

We also incurred higher advertising and marketing costs of $147.2 million during the nine months ended September 30, 2021.

Research and development (in millions):

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Research and development expense generally includes personnel-related costs, including payroll and stock-based compensation, outside service costs associated with the research and development of new products and enhancements to existing products, software, equipment, material and maintenance costs, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and IT.

For the three and six months ended June 30, 2021, research and development expense increased compared to the same periods in 2020 primarily due to higher compensation costs including higher salaries, fringe benefits, and incentive bonuses mainly from an increased headcount as we continue to focus our investments in innovation and research.

Income (loss) from operations (in millions):

For the three and nine months ended September 30, 2021, research and development expense increased, compared to the same periods in 2020, primarily due to higher compensation costs including higher salaries, fringe benefits, and incentive bonuses mainly from increased headcount as we continue to focus our investments in innovation and research.

Income from operations (in millions):

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Operating margin % 36.9 % 30.8 % 36.3 % 22.1 %

Total income (loss) from operations 1

Total income from operations 1

$ 261.2 $ 177.1 $ 84.1 $ 755.5 $ 174.0 $ 581.5

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Clear Aligner

For the three and six months ended June 30, 2021, our operating margin percentage increased compared to the same periods in 2020 due to operating leverage on higher net revenues and higher gross margins.

For the three months ended September 30, 2021, our operating margin decreased slightly, compared to the same period in 2020, due to higher operating expenses which were partially offset by higher gross margins.

For the nine months ended September 30, 2021, our operating margin increased, compared to the same period in 2020, due to higher gross margins and operating leverage on higher net revenues.

Systems and Services

For the three and nine months ended September 30, 2021, our operating margin percentage increased, compared to the same periods in 2020, due to operating leverage on higher net revenues and higher gross margins due to a favorable mix shift towards higher priced scanners.

Interest income (in millions):

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Interest income generally includes interest earned on cash, cash equivalents and investment balances.

For the three months ended June 30, 2021, there was no significant change to interest income compared to the same period in 2020.

For the six months ended June 30, 2021, interest income decreased compared to the same period in 2020 mainly due to the divestiture of our marketable securities portfolio during the first quarter of 2020 offset by interest income recognized during the six months ended June 30, 2021 from the SDC arbitration award regarding the value of Align’s capital account balance.

For the three months ended September 30, 2021, there was no significant change to interest income compared to the same period in 2020.

For the nine months ended September 30, 2021, interest income decreased slightly, compared to the same period in 2020, mainly due to the divestiture of our marketable securities portfolio during the first quarter of 2020 offset by interest income recognized during the nine months ended September 30, 2021 from the SDC arbitration award regarding the value of Align’s capital account balance.

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

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Other income (expense), net, generally 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, 2021, there was no significant change to other income (expense), net compared to the same period in 2020.

For the six months ended June 30, 2021, other income (expense), net increased compared to the same period in 2020 primarily due to a $43.4 million gain related to the SDC arbitration award recognized in the first quarter of 2021 in addition to a $10.2 million loss on a foreign currency forward contract related to the exocad acquisition recognized in 2020.

For the three months ended September 30, 2021, other income (expense), net decreased, compared to the same period in 2020, primarily due to net foreign exchange losses in the three months ended September 30, 2021 as compared to net foreign exchange gains in the same period in 2020.

This was partially offset by an unrealized gain on investment held in a private company recognized in the three months ended September 30, 2021.

For the nine months ended September 30, 2021, other income (expense), net increased, compared to the same period in 2020, primarily due to a $43.4 million gain related to the SDC arbitration award recognized in the first quarter of 2021, a $10.2 million loss on a foreign currency forward contract related to the exocad acquisition recognized in 2020 and an increase due to fair value changes relating to an investment held in a private company recognized in the nine months ended September 30, 2021 compared to 2020.

These increases were partially offset by net foreign exchange losses in the nine months ended September 30, 2021 as compared to net foreign exchange gains in the same period in 2020.

Provision for (benefit from) income taxes (in millions):

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Certain tables may not sum or recalculate due to rounding.

Our effective tax rate differs from the statutory federal income tax rate of 21% for the three and six months ended June 30, 2021 primarily due to state income taxes, non-deductible expenses in the U.S.

and foreign income taxed at different rates, partially offset by the recognition of excess tax benefits related to stock-based compensation.

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 foreign income taxed at different rates.

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 recognition of a deferred tax asset and related one-time tax benefit associated with the intra-entity transfer of certain intellectual property rights completed last year and the recognition of excess tax benefits related to stock-based compensation, partially offset by foreign income taxed at different rates.

The decrease in our effective tax rate for the three months ended June 30, 2021 compared to the same period in 2020 is primarily attributable to foreign income taxed at lower rates.

The decrease in our effective tax rate for the six months ended June 30, 2021 compared to the same period in 2020 is primarily attributable to the recognition of a deferred tax asset and related one-time tax benefit associated with the intra-entity transfer of certain intellectual property rights during the six months ended June 30, 2020.

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 entity.

Our effective tax rate differs from the statutory federal income tax rate of 21% for the three and nine months ended September 30, 2021 primarily due to foreign income taxed at different rates, state income taxes, and non-deductible expenses in the U.S., partially offset by the recognition of excess tax benefits related to stock-based compensation.

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 state income taxes and non-deductible expenses in the U.S., partially offset by tax benefit resulting from settlement of an income tax audit.

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 associated with the intra-entity transfer of certain intellectual property rights and fixed assets completed last year.

The increase in our effective tax rate for the three months ended September 30, 2021, compared to the same period in 2020, is primarily attributable to foreign income taxed at different rates and a tax benefit recognized last year resulting from settlement of an income tax audit.

The increase in our effective tax rate for the nine months ended September 30, 2021, compared to the same period in 2020, is primarily attributable to the recognition of tax benefits associated with the intra-entity transfer of certain intellectual property rights and fixed assets during the nine months ended September 30, 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 entity.

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.

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.

The amortization of this deferred tax asset depends on the profitability of our Swiss headquarters and the recognition of this tax benefit is allowed for a maximum recovery period of 15 years.

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We fund our operations from product sales.

As of June 30, 2021 and December 31, 2020, we had cash and cash equivalents, which are comprised of money market funds, of $1.1 billion and $960.8 million, respectively.

As of June 30, 2021 and December 31, 2020, approximately $535.3 million and $412.5 million of cash and cash equivalents was held by our foreign subsidiaries, respectively.

As of September 30, 2021 and December 31, 2020, we had cash and cash equivalents, which are comprised of money market funds, of $1.2 billion and $960.8 million, respectively.

As of September 30, 2021 and December 31, 2020, approximately $630.3 million and $412.5 million of cash and cash equivalents was held by our foreign subsidiaries, respectively.

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.

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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.

For 2021, we expect our investments in capital expenditures to be approximately $500.0 million.

For 2021, we expect our investments in capital expenditures to exceed $400.0 million.

Capital expenditures primarily relate to building construction and improvements as well as additional manufacturing capacity to support our international expansion.

This includes our planned investment in a new manufacturing facility in Wroclaw, Poland, our first one

in the EMEA region.

This includes our planned investment in a new manufacturing facility in Wroclaw, Poland, our first one in the EMEA region.

As we expand our manufacturing operations and penetrate into newer markets, we also expect to invest significantly in sales, marketing and innovation to meet the growing demand for our solutions.

As of June 30, 2021, we have $900.0 million available for repurchase under the stock repurchase program authorized by our Board of Directors in May 2021.

Subsequent to the second quarter, on July 30, 2021, we entered into an accelerated stock repurchase agreement to repurchase $75.0 million under the program.

As of September 30, 2021, we have $825.0 million available for repurchase under the stock repurchase program authorized by our Board of Directors in May 2021.

Subsequent to the third quarter, on October 29, 2021, we entered into an accelerated stock repurchase agreement to repurchase $100.0 million under the program.

Additional information regarding the impact of COVID-19 on our liquidity and capital resources may be found in Part II, Item 1A of this Quarterly Report on Form 10-Q under the heading “ Risk Factors ” .

Sources and Uses of Cash

The following table summarizes our condensed consolidated cash flows for the six months ended June 30, 2021 and 2020 (in thousands):

Six Months Ended

The following table summarizes our condensed consolidated cash flows for the nine months ended September 30, 2021 and 2020 (in thousands):

Nine Months Ended

September 30,

Net cash flow provided by (used in):

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Effect of exchange rate changes on cash, cash equivalents, and restricted cash (10,241) (568)

Net increase (decrease) in cash, cash equivalents, and restricted cash $ 125,504 $ (146,190)

Net increase in cash, cash equivalents, and restricted cash $ 276,976 $ 64,988

Operating Activities

For the six months ended June 30, 2021, cash flows from operations of $544.7 million resulted primarily from our net income of approximately $400.1 million as well as the following:

For the nine months ended September 30, 2021, cash flows from operations of $899.7 million resulted primarily from our net income of approximately $581.1 million as well as the following:

Adjustments to net income

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Investing Activities

Net cash used in investing activities was $123.9 million for the six months ended June 30, 2021 primarily consisted of purchases of property and plant and equipment of $167.7 million which was partially offset by $43.4 million of proceeds from our SDC arbitration award in addition to $4.6 million received on an unsecured promissory note.

Net cash used in investing activities was $255.7 million for the nine months ended September 30, 2021 which primarily consisted of purchases of property and plant and equipment of $292.0 million, which was partially offset by $43.4 million of proceeds from our SDC arbitration award in addition to $4.6 million received on an unsecured promissory note.

Financing Activities

Net cash used in financing activities was $291.8 million for the six months ended June 30, 2021 which consisted of payments related to our accelerated stock repurchase agreements of $200.0 million and payroll taxes paid for equity awards

through share withholdings of $104.9 million which were partially offset by $13.1 million of proceeds from the issuance of common stock.

Net cash used in financing activities was $356.8 million for the nine months ended September 30, 2021 which consisted of payments related to our accelerated stock repurchase agreements of $275.0 million and payroll taxes paid for equity awards through share withholdings of $107.3 million which were partially offset by $25.6 million of proceeds from the issuance of common stock.

Contractual Obligations

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Off-Balance Sheet Arrangements

As of June 30, 2021, 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 11 “ Commitments and Contingencies ” of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K.

As of September 30, 2021, 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 11 “ 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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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk during the six months ended June 30, 2021, compared to the disclosure s in Part II, Item 7A of our Annual Report on Form 10-K for th e year ended December 31, 2020.

There have been no material changes in our market risk during the nine months ended September 30, 2021, compared to the disclosure s in Part II, Item 7A of our Annual Report on Form 10-K for th e year ended December 31, 2020.

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