What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-02 · 151 added, 172 removed, 140 unchanged (70% 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, 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 include, among other things, our expectations and intentions regarding our strategic objectives and the means to achieve them, our expectations regarding the near and long-term implications of the COVID-19 pandemic on the global and regional economies, our beliefs and expectations regarding macroeconomic conditions, including inflation, customer and consumer sentiments, our expectations regarding the impact of the military conflict in Ukraine generally and specifically regarding our operations and assets in Russia, including the potential ramifications of sanctions and regarding relations with other countries, our marketing and efforts to build our brand awareness, 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 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, including sanctions and retaliatory sanctions related to the military conflict in Ukraine, 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.

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Executive Overview of Results

COVID-19 Update

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.

For instance, globally both public and private dental practices largely remain open, although many continue to operate at less than pre-pandemic capacities.

Conversely, as a result of the restrictive measures imposed to contain the spread of the virus, the demand for digital solutions has increased as society and businesses have adapted to practices such as social distancing and remote working.

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 remain unpredictable.

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, 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.

As such, our recent operating results and levels of growth may not be indicative of our future performance.

Ultimately, however, we believe the digital transition to dentistry that began before the pandemic will continue to be positive for our business, results of operations, cash flows, and financial condition, and we intend to adjust spending to coincide with the pace of recovery and changes in demand.

Further discussion of the impact of the COVID-19 pandemic on our business may be found in Part II, Item 1A of this Quarterly Report on Form 10-Q under the heading “Risk Factors.”

Key financial and operating metrics

Trends and Uncertainties

Our business strategic priorities remain focused on four principal pillars of growth:

(i) international expansion;

(ii) general practitioners (“GP”) adoption;

(iii) patient demand & conversion;

(ii) general practitioner dentists adoption;

(iii) patient demand and conversion;

and (iv) orthodontic utilization.

Below is a discussion of the significant trends and uncertainties that could impact to our operations:

COVID-19 Pandemic Update

The COVID-19 pandemic continues to cause significant volatility and uncertainty in the global and regional economies, leading to changes in consumer and business behavior, market fluctuations, materials and product shortages and restrictions on business and individual activities, all of which are materially impacting supply and demand in broad sectors of the world markets.

As the pandemic continues and new variants of the virus emerge, we are seeing a resurgence of measures to prevent its spread and, consequently, continuing fluctuations in the numbers of patients seeking treatment for dental services and the number of doctors providing services and treatments in other markets.

Vaccinations and pandemic containment measures are driving the pace of economic recovery unevenly in various regions.

These preventative measures and ongoing consumer concerns regarding the virus have continued to impact our results of operations, sometimes materially, and may continue to impact our results in future periods.

Therefore, comparing our financial results for the reporting periods of 2022 to the same reporting periods of 2021 or earlier may not be a useful means by which to evaluate the health of our business and our results of operations.

Our top priority remains the health and safety of our employees and their families, our customers and their staff, and we are taking prudent measures to safeguard them while remaining flexible in our operational efforts.

Concerns regarding the spread and impact of the virus have lessened in many countries in which we operate, including the U.S., and consequently, we expect to substantially reopen our offices in those countries in the second quarter of 2022 and are adopting a flexible hybrid schedule that will allow many of our employees the opportunity to collaborate and connect with others in the office three days per week while having the option to work remotely other days.

We believe that this added flexibility will benefit employees and Align overall.

Further discussion of the impact of the COVID-19 pandemic on our business may be found in Part II, Item 1A of this Quarterly Report on Form 10-Q under the heading “Risk Factors.”

Macroeconomic Challenges and Military Conflict in Ukraine

Our revenues and costs are also susceptible to fluctuations in macroeconomic conditions, in line with changes in customer and consumer sentiment and demand, capital equipment seasonality, inflation and slowing economic growth and contractions, increasing prices for commodities and services and transportation costs, disruptions in the manufacturing, supply and distribution operations of us and our suppliers.

These factors are further exacerbated by projections for slowing economic growth and contractions in the future.

The nature and extent of the impact of these factors varies by region and remain uncertain and unpredictable.

The military conflict between Russia and Ukraine is increasing the unpredictability of the already uncertain macroeconomic conditions.

We are deeply concerned about the devastating events unfolding in Ukraine and the significant humanitarian, economic and societal tragedy unfolding there.

Our top priority is ensuring the safety and security of our employees and their families, particularly those most directly impacted by the hostilities and the resulting sanctions and retaliatory sanctions.

We employ a significant number of research and development personnel in Russia as well as sales and marketing personnel.

We do not have employees in Ukraine.

We have taken extraordinary efforts to support our team members in the region, including helping them financially and working to maintain their safety and security.

Our leadership continues to closely monitor the situation and evaluate ways in which we can support local leadership and employees.

Although immaterial to our consolidated financial statements, our commercial business operations in Russia have been significantly impacted by the conflict.

In February 2022, after the military conflict commenced, our primary shipping vendor, UPS, ceased deliveries into Russia and shortly thereafter, we suspended all commercial activities.

Our current focus is on providing continuity of care consistent with our values and ethical responsibility to patients, who are in treatment.

In doing so, we are also focused on managing compliance with global sanctions applicable to our business, including significant restrictions imposed by countries on both sides of the conflict targeting business entities, persons and certain activities.

The pace at which sanctions are being imposed and the expanding number and breadth of the sanctions enacted are creating significant global and regional economic challenges that bring significant uncertainty and unpredictability to our operations.

Moreover, many of our international operations are denominated in currencies other than the U.S.

dollar and any weakening of the foreign currencies against the U.S.

dollar could have a negative impact on our financial condition and results of operations.

During the first quarter of 2022, primarily due to the military conflict between Russia and Ukraine and the significant sanctions that followed, Russia’s currency, the ruble, weakened against the U.S.

While the weakening did not materially impact our financial results in the first quarter of 2022, we continue to monitor the situation for future risks.

Overall, we expect the ramifications from the impacts of COVID-19, unpredictable macroeconomic conditions, and the military conflict in Ukraine to persist, creating uncertainty and unpredictability for consumers, global and regional economies as well as our business and the businesses of our customers and suppliers.

We strive to manage the challenges by focusing on improving our operations, building efficiencies in our processes, and adjusting our business models to the changing circumstances.

Specifically, we are managing cost impacts through pricing actions and implementing cost saving measures and averting supply chain shortages and delays by proactively communicating with our suppliers and distributors and modifying our purchase order commitments to mitigate the risks of production interruptions and maintaining inventory levels greater than historically required.

We have also increased our cybersecurity measures to detect, protect and recover against potential incidents.

We are actively monitoring the impact of COVID-19 cases and restrictions, macroeconomic challenges and the conflict in Ukraine and assessing various means to potentially mitigate material unfavorable impacts on our future results.

Key Financial and Operating Metrics

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

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 $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.

For the three months ended March 31, 2022, we achieved the following:

• Revenues of $973.2 million, an increase of 8.8% year-over-year;

• Clear Aligner revenues of $809.7 million, an increase of 7.5% year-over-year reflecting the expanding opportunity for Invisalign system 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 $376.2 million, an increase of 5.2% year-over-year;

◦ International Clear Aligner revenues of $371.1 million, an increase of 5.0% 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;

◦ Clear Aligner volume increase of 0.5% year-over-year and Clear Aligner volume increase for teenage patients of 6.0% year-over-year;

• Imaging Systems and CAD/CAM Services revenues of $163.5 million, an increase of 15.6% year-over-year primarily as a result of higher iTero service revenues mostly due to a larger scanner install base;

• Income from operations of $198.1 million and operating margin of 20.4%;

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• Net income of $134.3 million with diluted net income per share of $1.70;

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

• Cash, cash equivalents and marketable securities of $1,120.6 million as of March 31, 2022;

• Operating cash flow of $30.5 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.

• Capital expenditures of $87.3 million, predominantly related to increases in our manufacturing capacity and facilities;

• Number of employees was 23,625 as of March 31, 2022, an increase of 24.5% year-over-year.

Other Statistical Data and Trends

• Digital Scanner Case Submissions.

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:

• As of March 31, 2022, approximately 12.8 million people worldwide have been treated with our Invisalign system, approximately 73,000 iTero scanners have been sold and approximately 49,000 exocad software licenses have been installed.

Management measures these results by comparing to the millions of people who can benefit from straighter teeth and dental practices that could use intraoral scanners and uses this data to target opportunities to expand the market for orthodontics by educating consumers about the benefits of straighter teeth using the Invisalign system, dental professionals and/or labs and service providers to use iTero intraoral scanners, and dental labs and practitioners to install exocad CAD/CAM software.

• For the first quarter of 2022, total Invisalign cases submitted with a digital scanner in the Americas increased to 90.6%, up from 85.5% in the first quarter of 2021 and international scans increased to 82.8%, up from 75.1% in the first quarter of 2021.

For the first quarter of 2022, 97.1% of Invisalign cases submitted by North American orthodontists were submitted digitally.

• Total utilization rate in the first quarter of 2022 decreased to 7.3 cases per doctor compared to 7.6 cases per doctor in the first quarter of 2021.

Utilization rates in North America and our International locations were as follows:

▪ North America:

Utilization rate among our North American orthodontist customers remained consistent at 26.8 cases per doctor in both the first quarter of 2022 and 2021 and the utilization rate among our North American GP customers increased to 5.0 cases per doctor in the first quarter of 2022 compared to 4.8 cases per doctor in the first quarter of 2021.

▪ International:

International doctor utilization rate was 6.4 cases per doctor in the first quarter of 2022 compared to 6.8 cases per doctor in the first quarter of 2021.

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

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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 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 29.7 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 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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▪ Comprehensive Products include, but are not limited to, Invisalign Comprehensive and Invisalign First.

▪ Non-Comprehensive Products include, but are not limited to, Invisalign Moderate, Lite and Express packages and Invisalign Go.

▪ 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 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, 2021 and 2020 are as follows (in millions):

▪ Non-Comprehensive Products include, but are not limited to, Invisalign Moderate, Lite and Express packages and Invisalign Go and Invisalign Go Plus.

▪ Non-Case products include, but are not limited to, retention products, Invisalign training, adjusting tools used by dental professionals during the course of treatment and, more recently, Consumer Products that are complementary to our doctor-prescribed principal products such as aligner cases (clamshells), teeth whitening products, cleaning solutions (crystals, foam and other material) and other oral health products available in certain e-commerce channels in select markets.

We also offer in the U.S.

and Canada, a Doctor Subscription Program which is a monthly subscription program based on the doctor’s monthly need for retention or limited treatment.

The program allows doctors the flexibility to order both “touch-up” or retention aligners within their subscribed tier and is designed for a segment of experienced Invisalign doctors who are currently not regularly using our retainers or low-stage aligners.

• Our Systems and Services segment consists of our iTero intraoral scanning systems, which includes a single hardware platform and restorative or orthodontic software options.

Our services include subscription software, disposables, rentals, pay per scan services, as well as exocad ’ s CAD/CAM software solutions that integrate workflows to dental labs and dental practices.

Net revenues for our Clear Aligner and Systems and Services segments by region for the three months ended March 31, 2022 and 2021 are as follows (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30,

Net Revenues 2021 2020

Change 2021 2020 Change

Net Revenues 2022 2021 Change

Clear Aligner net revenues:

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Certain tables may not sum or recalculate due to rounding.

Clear Aligner Case Volume

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):

Case volume data which represents Clear Aligner case shipments for the three months ended March 31, 2022 and 2021 is as follows (in thousands):

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 Change 2021 2020 Change

2022 2021 Change

Total case volume 598.8 595.8 3.0 0.5 %

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Certain tables may not sum or recalculate due to rounding.

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.

For the three months ended March 31, 2022, total net revenues increased by $78.4 million as compared to the same period in 2021, primarily due to an increase in Clear Aligner ASP, an increase in Clear Aligner non-case revenues, and increased service revenues.

Clear Aligner - Americas

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.

For the three months ended March 31, 2022, Americas net revenues increased by $18.8 million as compared to the same period in 2021, primarily due to an increase in ASP which increased net revenues by $24.3 million.

Higher ASP was mainly due to processing fees charged on most clear aligner orders and price increases in certain markets which increased revenues by $11.6 million and lower net deferrals which increased net revenues by $9.8 million.

Higher ASP was partially offset by 1.5% decrease in case volume, which resulted in lower net revenues of $5.5 million.

Clear Aligner - International

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.

For the three months ended March 31, 2022, International net revenues increased by $17.8 million as compared to the same period in 2021, primarily due to a 3.0% increase in case volume, which resulted in higher net revenues of $10.7 million.

Higher ASP increased net revenues by $7.1 million largely due to lower net deferrals which increased net revenues by $20.6 million, and processing fees charged on most clear aligner orders which increased net revenues by $13.9 million.

The increase in ASP were partially offset by unfavorable exchange rates which decreased net revenues by $22.9 million.

Clear Aligner - Non-Case

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.

For the three months ended March 31, 2022, non-case net revenues increased by $19.9 million as compared to the same period in 2021, due to increased volume for retention products across all regions primarily driven by Vivera retainers.

Systems and Services

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 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.

For the three months ended March 31, 2022, Systems and Services net revenues increased by $22.0 million as compared to the same period in 2021 primarily due to higher service revenues which increased $17.1 million mostly due to a larger install base.

Net revenues also increased $4.9 million mainly due to a higher number of scanners sold.

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

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 Change 2021 2020 Change

2022 2021 Change

Clear Aligner

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Certain tables may not sum or recalculate due to rounding.

Cost of net revenues includes personnel-related costs including payroll and stock-based compensation for staff involved in the production process, the cost of materials, packaging, shipping costs, depreciation on capital equipment and facilities used in the production process, amortization of acquired intangible assets and training costs.

Cost of net revenues includes personnel-related costs including payroll and stock-based compensation for staff involved in the production process, the cost of materials, packaging, freight and shipping related costs, depreciation on capital equipment and facilities used in the production process, amortization of acquired intangible assets and training costs.

Clear Aligner

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.

For the three months ended March 31, 2022, our gross margin percentage decreased as compared to the same period in 2021, primarily due to a higher mix of additional aligners, higher freight costs and manufacturing spend.

These factors were offset in part by higher ASP.

Systems and Services

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.

For the three months ended March 31, 2022, our gross margin percentage decreased as compared to the same period in 2021, primarily due to manufacturing inefficiencies driven by lower production volumes which was offset in part by higher service revenues and ASP.

Selling, general and administrative (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 Change 2021 2020 Change

2022 2021 Change

Selling, general and administrative $ 439.5 $ 397.1 $ 42.3

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Certain tables may not sum or recalculate due to rounding.

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 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.

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, market research, 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 March 31, 2022, selling, general and administrative expense increased compared to the same period in 2021, primarily due to higher compensation related costs of $18.4 million from higher salaries and fringe benefits due to increased 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 $27.8 million during the three months ended March 31, 2022.

Research and development (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 Change 2021 2020 Change

2022 2021 Change

Research and development $ 71.8 $ 54.5 $ 17.3

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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 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.

For the three months ended March 31, 2022, research and development expense increased compared to the same period in 2021, primarily due to higher compensation costs from higher salaries and fringe benefits driven mainly by increased headcount as we continue to focus our investments in innovation and research.

Income from operations (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 Change 2021 2020 Change

2022 2021 Change

Clear Aligner

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Clear Aligner

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.

For the three months ended March 31, 2022, our operating margin percentage decreased compared to the same period in 2021, primarily due to lower gross margins in addition to higher operating expenses as a percentage of 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.

For the three months ended March 31, 2022, our operating margin percentage decreased compared to the same period in 2021, primarily due to lower gross margins.

Interest income (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 Change 2021 2020 Change

2022 2021 Change

Interest income $ 0.7 $ 1.6 $ (1.0)

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

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.

For the three months ended March 31, 2022, interest income decreased compared to the same period in 2021 mainly due to interest earned from the SDC arbitration award in the first quarter of 2021.

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

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 Change 2021 2020 Change

2022 2021 Change

Other income (expense), net $ (11.3) $ 34.5 $ (45.8)

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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 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):

For the three months ended March 31, 2022, other income (expense), net decreased compared to the same period in 2021 primarily due to a $43.4 million gain related to the SDC arbitration award recognized in the first quarter of 2021.

Provision for income taxes (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 Change 2021 2020 Change

Provision for (benefit from) income taxes $ 81.0 $ 45.2 $ 35.8 $ 211.4 $ (1,452.5) $ 1,663.8

2022 2021 Change

Provision for income taxes $ 53.2 $ 61.2 $ (8.1)

Effective tax rates 28.4 % 23.4 %

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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 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 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.

Our effective tax rate differs from the statutory federal income tax rate of 21% for both the three months ended March 31, 2022 and 2021, primarily due to the recognition of additional tax expense resulting from 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.

Additionally, a change in U.S.

tax laws effective January 1, 2022 which requires capitalization and amortization of research and development expenses incurred after December 31, 2021 has increased our effective tax rate for the three months ended March 31, 2022.

The increase in our effective tax rate for the three months ended March 31, 2022 compared to the same period in 2021 is primarily attributable to foreign income taxed at different rates, capitalization and amortization of research and development expenses in 2022, and lower excess tax benefits from stock-based compensation.

Liquidity and Capital Resources

Liquidity and Trends

We fund our operations from product sales.

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.

As of March 31, 2022 and December 31, 2021, we had the following cash and cash equivalents and short-term and long term marketable securities (in thousands):

March 31, 2022 December 31, 2021

Cash and cash equivalents $ 926,119 $ 1,099,370

Marketable securities, short-term 86,749 71,972

Marketable securities, long-term 107,695 125,320

Total $ 1,120,563 $ 1,296,662

As of March 31, 2022 and December 31, 2021, approximately $667.6 million and $713.8 million of cash, cash equivalents and marketable securities were 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.

The geopolitical situation between Russia and Ukraine and the imposition of sanctions against Russian banks or international bank messaging systems could impact our ability to access our cash in Russia but would not materially impact our liquidity position.

As of March 31, 2022, cash and cash equivalents domiciled in Russia represent approximately 5.0% of our total cash, cash equivalents and marketable securities which is required to fund their working capital.

Our material cash requirements are as follows:

• For 2022, we expect our investments in capital expenditures to exceed $300.0 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.

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 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 ” .

This includes our investment in an aligner fabrication facility in Wroclaw, Poland which is expected to begin serving doctors in the second quarter of 2022, as a part of our strategy to bring operational facilities closer to customers.

As we continue growing, we intend to expand our investments in research and development, manufacturing, treatment planning, sales and marketing operations to meet actual and anticipated local and regional demands.

• As of March 31, 2022, we have $649.9 million available for repurchase under the stock repurchase program authorized by our Board of Directors in May 2021.

Refer to Note 9 “Common Stock Repurchase Program” of the Notes to Condensed Consolidated Financial Statements for details on our stock repurchase programs.

Subsequent to the first quarter, on April 29, 2022, we entered into an accelerated stock repurchase agreement to repurchase $200.0 million under the program.

• There have been no material changes to the purchase commitments for goods and services and future operating lease payments during the period covered by this 10-Q outside the normal course of business compared to the disclosure s in Part II, Item 7 of our Annual Report on Form 10-K for th e year ended December 31, 2021.

Sources and Uses of Cash

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,

The following table summarizes our condensed consolidated cash flows for the three months ended March 31, 2022 and 2021 (in thousands):

Three Months Ended

Net cash flow provided by (used in):

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Effect of exchange rate changes on cash, cash equivalents, and restricted cash (1,826) (7,487)

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

Net (decrease) increase in cash, cash equivalents, and restricted cash $ (173,268) $ 170,831

Operating Activities

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

For the three months ended March 31, 2022, cash flows from operations of $30.5 million resulted primarily from our net income of approximately $134.3 million, as well as the following:

Significant adjustments to net income

• Stock-based compensation of $31.6 million related to equity awards granted to employees and directors;

• Depreciation and amortization of $29.6 million related to our investments in property, plant and equipment and intangible assets;

• Gain related to our SDC arbitration award of $43.4 million;

• Changes in deferred taxes of $48.1 million primarily related to current year amortization and adjustments to our deferred tax assets of our Swiss entity.

• Changes in deferred taxes of $17.5 million primarily related to amortization and adjustments to our deferred tax assets of our Swiss entity.

Significant changes in working capital

• Decrease of $126.4 million in accrued and other long-term liabilities primarily due to payments of our 2021 corporate bonus in addition to the timing of payment of other activities;

• Increase of $69.0 million in deferred revenues primarily related to increased sales volume in both our Clear Aligner and Systems and Services segments and timing of revenue recognition;

• Increase of $216.1 million in accounts receivable which is primarily a result of the increase in sales;

• Increase of $74.7 million in prepaid expenses and other assets and an increase of $107.2 million in accrued and other long-term liabilities due to the timing of payment and activities.

• Increase of $55.5 million in accounts receivable which is primarily a result of increased sales;

• Increase of $49.5 million in inventories to support our demand, including safety stock, due to shipping delays during the COVID-19 pandemic as well as long lead times with our suppliers;

• Increase of $48.7 million in prepaid expenses and other assets due to the timing of payment and activities.

Investing Activities

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.

Net cash used in investing activities was $90.2 million for the three months ended March 31, 2022, which primarily consisted of purchases of property and plant and equipment of $87.3 million.

Financing Activities

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

Our contractual obligations have not significantly changed since December 31, 2020 as disclosed in our Annual Report on Form 10-K, other than obligations described in the Form 10-Q herein, including items disclosed in Note 7 “ Commitments and Contingencies ” of the Notes to Condensed Consolidated Financial Statements .

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.

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.

There can be no assurance that we will be able to obtain additional debt or equity financing on terms acceptable to us, or at all.

If adequate funds are not available, we may need to make business decisions that could adversely affect our operating results such as modifications to our pricing policy, business structure or operations.

Accordingly, the failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our business, results of operations and financial condition.

Off-Balance Sheet Arrangements

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.

Net cash used in financing activities was $111.7 million for the three months ended March 31, 2022, which consisted of our open market common stock repurchases of $75.0 million and payroll taxes paid for equity awards through share withholdings of $51.5 million which were partially offset by $14.8 million of proceeds from the issuance of common stock under our employee stock purchase plan.

Critical Accounting Policies and Estimates

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The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures at the date of the financial statements.

We evaluate our estimates on an on-going basis, including those related to revenue recognition, goodwill and finite-lived assets, business combination, income taxes and legal proceedings and litigations.

We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates.

We evaluate our estimates on an on-going basis, including those related to revenue recognition, goodwill and finite-lived acquired intangible assets, income taxes and legal proceedings and litigations.

We use authoritative pronouncements, historical experience and other assumptions as the basis for making the estimates.

Actual results could differ from those estimates.

There have been no material changes to our critical accounting policies and estimates from the information provided in the “Critical Accounting Policies and Estimates” section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2020.

Revenue Recognition

Our revenues are derived primarily from the sale of aligners, scanners, and services from our Clear Aligner and Systems and Services segments.

We enter into sales contracts that may consist of multiple distinct performance obligations where certain performance obligations of the sales contract are not delivered in one reporting period.

We measure and allocate revenues according to ASC 606-10, “Revenues from Contracts with Customers.”

Determining the standalone selling price (“SSP”) in order to allocate consideration from the contract to the individual performance obligations is the result of various factors, such as changing trends and market conditions, historical prices, costs, and gross margins.

While changes in the allocation of the SSP between performance obligations will not affect the amount of total revenues recognized for a particular contract, any material changes could impact the timing of revenue recognition, which would have a material effect on our financial position and result of operations.

This is because the contract consideration is

allocated to each performance obligation, delivered or undelivered, at the inception of the contract based on the SSP of each distinct performance obligation.

We allocate revenues for each clear aligner treatment plan based on each unit’s SSP.

Management considers a variety of factors such as same or similar product historical sales, costs, and gross margin, which may vary over time depending upon the unique facts and circumstances related to each performance obligation in making these estimates.

In addition to historical data, we take into consideration changing trends and market conditions.

For treatment plans with multiple future performance obligations, we also consider usage rates, which is the number of times a customer is expected to order more aligners after the initial shipment.

Our process for estimating usage rates requires significant judgment and evaluation of inputs, including historical usage data by region, country and channel.

We estimate the SSP of each element in a scanner system and services sale taking into consideration same or similar product historical prices as well as our discounting strategies.

Recent Accounting Pronouncements

See Note 1 “ Summary of Significant Accounting Policies ” of the Notes to Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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