What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-04 compared with 2022-05-05 · 126 added, 102 removed, 189 unchanged (55% 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 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 include, among other things, our expectations and intentions regarding our strategic objectives and the means to achieve them, our beliefs and expectations regarding macroeconomic conditions, including inflation, fluctuations in currency exchange rates, consumer confidence and demand, weakness in general economic conditions and recessions, our expectations regarding the near and long-term implications of the COVID-19 pandemic on the global and regional economies, 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 and impact on our workforce located in Russia, 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, 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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(i) international expansion;

(ii) general practitioner dentists adoption;

(ii) general practitioner dentists (“GPs”) adoption;

(iii) patient demand and conversion;

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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.

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

These factors can be further exacerbated by the anticipation of, or actual, global and regional economic recessions which compound the impacts of existing macroeconomic challenges.

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

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

dollar has caused a negative impact on our financial condition and results of operations which we expect to continue into the future.

Specifically, during the first half 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.

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

The military conflict between Russia and Ukraine has increased the unpredictability of the already uncertain macroeconomic conditions.

We remain deeply concerned about the devastating events that have and continue to unfold in Ukraine and the significant humanitarian, economic and societal tragedy unfolding there.

Our top priority remains 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 continue to employ a significant number of research and development personnel in Russia as well as sales, marketing and administrative 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.

We furthermore accelerated programs underway before the conflict began aimed at maintaining and growing our research and development operations over the long run that includes diversifying the facilities at which our personnel are located.

Our Board of Directors and its applicable committees receive regular updates from management and have and continue to provide oversight of the risks associated with the military conflict between Russia and Ukraine and other areas of strategic importance related to the conflict.

Our management continues to closely monitor the situation and evaluate additional ways in which we can support our employees.

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

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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.

The pace at which sanctions are being imposed and the expanding number and breadth of the sanctions enacted continue to create global and regional economic challenges that have caused and are expected to continue to cause significant uncertainty and unpredictability to our operations.

COVID-19 Pandemic Update

As new variants of the virus emerge, there has been a patchwork response 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.

The emergence of new variants, vaccinations and public health measures are driving the pace of economic recovery unevenly in various regions.

These factors 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.

Concerns regarding the spread and impact of the virus have lessened in many countries in which we operate, including the U.S.

Consequently, efforts to r eopen many of our offices in 2022 are continuing but remain in fluctuation as certain parts of the world at certain periods of time continue to respond to o utbreaks of COVID-19 and new variants of the virus .

Where our offices have reopened, we have adopted a flexible hybrid schedule that will allow many of our employees the opportunity to collaborate and connect with others in our offices three days per week while having the option to work remotely other days.

We believe that this added flexibility benefits employees and Align overall.

Overall, we expect the challenges and risks discussed above 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 flexibility and efficiencies in our processes, and adjusting our business models to changing circumstances.

Specifically, we are managing cost impacts through pricing actions, implementing cost saving measures, and averting supply chain shortages and delays.

We do this 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 as required.

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

Further discussion of the impact of the unpredictable macroeconomic conditions, the military conflict in Ukraine, and the ramifications from the impacts of COVID-19 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

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

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 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;

For the three months ended June 30, 2022, our business operations reflect the following:

• Revenues of $969.6 million, a decrease of 4.1% year-over-year;

• Clear Aligner revenues of $798.4 million, a decrease of 5.1% year-over-year;

◦ Americas Clear Aligner revenues of $385.2 million, a decrease of 3.8% year-over-year;

◦ International Clear Aligner revenues of $346.2 million, a decrease of 11.2% year-over-year;

◦ Clear Aligner case volume decrease of 10.0% year-over-year and Clear Aligner case volume decrease for teenage patients of 2.1% year-over-year;

• Imaging Systems and CAD/CAM Services revenues of $171.2 million, an increase of 0.8% year-over-year;

• Income from operations of $188.2 million and operating margin of 19.4%;

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• Net income of $112.8 million with diluted net income per share of $1.44;

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

• Cash, cash equivalents and marketable securities of $977.2 million as of June 30, 2022;

• Operating cash flow of $127.0 million;

• Capital expenditures of $76.0 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.

• Number of employees was 24,020 as of June 30, 2022, an increase of 17.8% year-over-year.

Other Statistical Data and Trends

• 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.

• As of June 30, 2022, approximately 13.4 million people worldwide have been treated with our Invisalign system, approximately 77,000 iTero scanners have been sold and approximately 51,000 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.

• For the second quarter of 2022, total Invisalign cases submitted with a digital scanner in the Americas increased to 91.4%, up from 86.6% in the second quarter of 2021 and international scans increased to 84.4%, up from 76.2% in the second quarter of 2021.

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

• Total utilization rate in the second quarter of 2022 decreased to 7.3 cases per doctor compared to 8.0 cases per doctor in the second 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.

Utilization rate among our North American orthodontist customers decreased to 26.8 cases per doctor in the second quarter of 2022 compared to 29.4 cases per doctor in the second quarter of 2021 and the utilization rate among our North American GP customers decreased to 5.1 cases per doctor in the second quarter of 2022 compared to 5.3 cases per doctor in the second 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.

International doctor utilization rate was 6.4 cases per doctor in the second quarter of 2022 compared to 7.1 cases per doctor in the second 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.

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

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

Latin America ( “ LATAM ” ) is excluded from the International region based on its immateriality to the quarter;

however is included in the Total utilization.

Results of Operations

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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):

Net revenues for our Clear Aligner and Systems and Services segments by region for the three and six months ended June 30, 2022 and 2021 are as follows (in millions):

Three Months Ended

Net Revenues 2022 2021 Change

June 30, Six Months Ended

Net Revenues 2022 2021 Change 2022 2021 Change

Clear Aligner net revenues:

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Certain tables may not sum or recalculate due to rounding.

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

Case volume data which represents Clear Aligner case shipments for the three and six months ended June 30, 2022 and 2021 is as follows (in thousands):

Three Months Ended

2022 2021 Change

June 30, Six Months Ended

2022 2021 Change 2022 2021 Change

Total case volume 599.0 665.6 (66.6) (10.0) % 1,197.8 1,261.4 (63.6) (5.0) %

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Certain tables may not sum or recalculate due to rounding.

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.

For the three months ended June 30, 2022, total net revenues decreased $41.3 million as compared to the same period in 2021 primarily due to a decrease in Clear Aligner case volume partially offset by increases in Clear Aligner ASP, Clear Aligner non-case revenues and service revenues.

For the six months ended June 30, 2022, total net revenues increased $37.2 million as compared to the same period in 2021 primarily due to increases in Clear Aligner ASP, Clear Aligner non-case revenues and service revenues partially offset by a decrease in Clear Aligner case volume.

Clear Aligner - Americas

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.

For the three months ended June 30, 2022, Americas net revenues decreased by $15.3 million as compared to the same period in 2021 primarily due to a 9.9% decrease in case volume which reduced net revenues by $39.7 million which was partially offset by an increase in ASP which increased net revenues by $24.4 million.

Higher ASP was mainly due to processing fees charged on most clear aligner shipments and price increases in certain markets which increased revenues by $12.7 million along with lower net deferrals which increased net revenues by $11.4 million.

For the six months ended June 30, 2022, Americas net revenues increased by $3.5 million as compared to the same period in 2021 primarily due to an increase in ASP which increased net revenues by $48.5 million.

Higher ASP was mainly due to processing fees charged on most clear aligner shipments and price increases in certain markets which increased revenues by $25.5 million along with lower net deferrals which increased net revenues by $20.2 million.

Higher ASP was partially offset by a 5.9% decrease in case volume which reduced net revenues by $45.0 million.

Clear Aligner - International

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.

For the three months ended June 30, 2022, International net revenues decreased by $43.5 million as compared to the same period in 2021 primarily due to a 10.1% decrease in case volume which reduced net revenues by $39.5 million.

Lower ASP also decreased net revenues by $4.0 million largely due to unfavorable foreign exchange rates which decreased net revenues by $33.4 million and a product mix shift to lower priced products which decreased net revenues by $10.0 million.

The decrease in ASP was partially offset by lower net deferrals which increased net revenues by $29.2 million and processing fees charged on most clear aligner shipments which increased net revenues by $12.1 million.

For the six months ended June 30, 2022, International net revenues decreased by $25.7 million as compared to the same period in 2021 primarily due to a 3.9% decrease in case volume which resulted in lower net revenues of $29.3 million.

ASP increased net revenues by $3.6 million largely due to lower net deferrals which increased net revenues by $47.4 million and processing fees charged on most clear aligner shipments which increased net revenues by $36.9 million.

The increase in ASP was mostly offset by unfavorable foreign exchange rates which decreased net revenues by $56.3 million, unfavorable promotional discounts which decreased net revenues $14.6 million, and a product mix shift to lower priced products which decreased net revenues by $11.5 million.

Clear Aligner - Non-Case

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.

For the three and six months ended June 30, 2022, non-case net revenues increased by $16.2 million and $36.1 million as compared to the same periods 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 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.

For the three months ended June 30, 2022, Systems and Services net revenues increased by $1.3 million as compared to the same period in 2021 primarily due to higher service and other revenues which increased $18.7 million mostly due to a larger installed base.

These increases were mostly offset by a lower number of scanners sold which decreased net revenues $13.1 million in addition to a lower scanner ASP.

For the six months ended June 30, 2022, Systems and Services net revenues increased by $23.3 million as compared to the same period in 2021 primarily due to higher service and other revenues which increased $36.4 million mostly due to a larger installed base partially offset by a lower number of scanners sold which decreased net revenues by $9.5 million and lower scanner ASP.

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

Three Months Ended

2022 2021 Change

June 30, Six Months Ended

2022 2021 Change 2022 2021 Change

Clear Aligner

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Clear Aligner

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.

For the three and six months ended June 30, 2022, our gross margin percentage decreased as compared to the same periods in 2021 primarily due to a higher mix of additional aligners along with increased costs from freight and manufacturing spend.

These factors were offset in part by higher ASP.

Systems and Services

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.

For the three and six months ended June 30, 2022, our gross margin percentage decreased as compared to the same period in 2021 primarily due to lower ASP, manufacturing inefficiencies from lower production volumes and higher component costs partially offset by higher service revenues.

Selling, general and administrative (in millions):

Three Months Ended

2022 2021 Change

June 30, Six Months Ended

2022 2021 Change 2022 2021 Change

Selling, general and administrative $ 426.4 $ 431.9 $ (5.5) $ 865.9 $ 829.0 $ 36.8

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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, 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.

For the three months ended June 30, 2022, selling, general and administrative expense decreased compared to the same period in 2021 primarily due to lower advertising and marketing costs, and lower incentive compensation.

These decreases were partially offset by higher salaries expense, fringe benefits and stock-based compensation from increased headcount along with higher equipment, software and material costs.

For the six months ended June 30, 2022, selling, general and administrative expense increased compared to the same period in 2021 primarily due to higher salaries expense, fringe benefits and stock-based compensation from increased headcount, higher expense related to advertising and marketing, equipment, software and maintenance in addition to increased travel and expense related costs.

These increases were partially offset by lower incentive compensation.

Research and development (in millions):

Three Months Ended

2022 2021 Change

June 30, Six Months Ended

2022 2021 Change 2022 2021 Change

Research and development $ 73.0 $ 57.7 $ 15.3 $ 144.8 $ 112.3 $ 32.5

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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 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.

For the three and six months ended June 30, 2022, research and development expense increased compared to the same periods 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

2022 2021 Change

June 30, Six Months Ended

2022 2021 Change 2022 2021 Change

Clear Aligner

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Clear Aligner

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.

For the three months ended June 30, 2022, our operating margin percentage decreased compared to the same period in 2021 primarily due to lower gross margin which was partially offset by lower operating expenses as a percentage of net revenues.

For the six months ended June 30, 2022, our operating margin percentage decreased compared to the same period in 2021 primarily due to lower gross margin as well as higher operating expenses as a percentage of net revenues.

Systems and Services

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.

For the three and six months ended June 30, 2022, our operating margin percentage decreased compared to the same periods in 2021 primarily due to lower gross margin as well as higher operating expenses as a percentage of net revenues.

Interest income (in millions):

Three Months Ended

2022 2021 Change

June 30, Six Months Ended

2022 2021 Change 2022 2021 Change

Interest income $ 0.2 $ 0.4 $ (0.1) $ 0.9 $ 2.0 $ (1.1)

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

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.

For the three months ended June 30, 2022, there was no significant change to interest income compared to the same period in 2021.

For the six months ended June 30, 2022, interest income decreased compared to the same period in 2021 mainly due to interest earned from the arbitration award related to our investment in SmileDirectClub in the first quarter of 2021.

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

Three Months Ended

2022 2021 Change

June 30, Six Months Ended

2022 2021 Change 2022 2021 Change

Other income (expense), net $ (14.8) $ (0.5) $ (14.3) $ (26.1) $ 34.0 $ (60.2)

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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 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.

For the three months ended June 30, 2022, other income (expense), net decreased compared to the same period in 2021 primarily due to larger net foreign exchange losses in the three months ended June 30, 2022 as compared to the same period in 2021.

For the six months ended June 30, 2022, other income (expense), net decreased compared to the same period in 2021 primarily due to a $43.4 million gain related to the arbitration award related to our investment in SmileDirectClub recognized in the first quarter of 2021 as well as larger net foreign exchange losses in the six months ended June 30, 2022 as compared to the same period in 2021.

Provision for income taxes (in millions):

Three Months Ended

2022 2021 Change

June 30, Six Months Ended

2022 2021 Change 2022 2021 Change

Provision for income taxes $ 60.8 $ 69.1 $ (8.3) $ 114.0 $ 130.3 $ (16.3)

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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 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.

Our effective tax rate differs from the statutory federal income tax rate of 21% for both the three and six months ended June 30, 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.

tax laws effective January 1, 2022 which requires capitalization and amortization of research and development expenses incurred after December 31, 2021 increased our effective tax rate for the three and six months ended June 30, 2022.

The increase in our effective tax rate for the three and six months ended June 30, 2022 compared to the same periods 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

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

As of June 30, 2022 and December 31, 2021, we had the following cash and cash equivalents and short-term and long-term marketable securities (in thousands):

June 30, 2022 December 31, 2021

Cash and cash equivalents $ 877,501 $ 1,099,370

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Total $ 977,190 $ 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.

As of June 30, 2022 and December 31, 2021, approximately $725.8 million and $713.8 million, respectively, of cash, cash equivalents and marketable securities held by our foreign subsidiaries.

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

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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.

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

As of June 30, 2022, cash and cash equivalents domiciled in Russia represent approximately 7.0% of our total cash, cash equivalents and marketable securities which is required to fund their current operating requirements.

Our material cash requirements are as follows:

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

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.

This includes our investment in an aligner fabrication facility in Wroclaw, Poland which began serving doctors during 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.

• As of June 30, 2022, we have $449.9 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.

• There have been no material changes to our purchase commitments for goods and services and future operating lease payments during the periods 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 three months ended March 31, 2022 and 2021 (in thousands):

Three Months Ended

The following table summarizes our condensed consolidated cash flows for the six months ended June 30, 2022 and 2021 (in thousands):

Six Months Ended

Net cash flow provided by (used in):

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Operating Activities

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:

For the six months ended June 30, 2022, cash flows from operations of $157.5 million resulted primarily from our net income of approximately $247.1 million, as well as the following:

Significant adjustments to net income

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• Depreciation and amortization of $59.9 million related to our investments in property, plant and equipment and intangible assets;

• Non-cash operating lease costs of $15.1 million;

• Changes in deferred taxes of $14.7 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 $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.

• Decrease of $212.9 million in accrued and other long-term liabilities primarily due to payment of our 2021 corporate bonus and the timing of payment of other activities;

• Increase of $136.0 million in deferred revenues due to the deferral of revenue on shipments over the period as well as timing of revenue recognition;

• Increase of $91.1 million in inventories primarily due to lower shipment volumes over the period in addition to higher safety stock requirements to secure materials with long lead times to support our demand;

• Increase of $53.5 million in accounts receivable primarily related to timing of shipments and collections.

Investing Activities

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.

Net cash used in investing activities was $72.1 million for the six months ended June 30, 2022 which primarily consisted of purchases of property, plant and equipment of $163.3 million and purchases of marketable securities of $20.5 million.

These outflows were partially offset by sales and maturities of our marketable securities of $113.9 million.

Financing Activities

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.

Net cash used in financing activities was $312.4 million for the six months ended June 30, 2022 which consisted of common stock repurchases of $275.0 million and payroll taxes paid for equity awards through share withholdings of $52.2 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 acquired intangible assets, income taxes and legal proceedings and litigations.

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

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

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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.

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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis