What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-04 compared with 2022-08-04 · 128 added, 102 removed, 213 unchanged (52% 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 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 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, rising interest rates, supply chain challenges, implications and impacts of trends in consumer confidence, consumer sentiment and demand, market volatility, weakness in general economic conditions and recession concerns, 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 expectations regarding the near and long-term implications of the COVID-19 pandemic on the global and regional economies, 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 and investment 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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and (iv) orthodontic utilization.

Our growth strategy depends on our ability to facilitate the digital transformation of dentistry happening around the world, our continuous focus on innovation, and expansion to meet and exceed evolving customer expectations as the array of products and services available to them increases.

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

Macroeconomic Challenges and Military Conflict in Ukraine

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.

Our revenues are susceptible to fluctuations in macroeconomic conditions, in line with factors such as inflation, rising interest rates, recession concerns, supply chain challenges, market volatility, and wars and military actions, each of which are impacting customer confidence, consumer sentiment and demand.

Many of these same factors are further impacting our costs through increases in raw material prices, transportation costs, labor costs, supply and distribution operations and the operations of our suppliers.

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

dollar and are being impacted by macroeconomic slowing or contraction causing weakening against the U.S.

dollar, which is negatively impacting our financial condition and results of operations.

We expect the dollar to remain strong or strengthen further against

many of these currencies.

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.

The military conflict between Russia and Ukraine has continued to increase 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 top priority continues to be the safety and security of our employees and their families, particularly those most directly impacted by the hostilities and the resulting sanctions, retaliatory sanctions and recently the military conscription of hundreds of thousands of people.

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

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.

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.

We remain committed to providing continuity of care consistent with our values and ethical responsibility to patients who are in Invisalign treatment.

In doing so, we remain diligent 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 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.

In September 2022, Russia announced a partial mobilization of reserve military personnel creating additional operational impacts for us, including reduced operational activities and prompting the relocation or departure of some of our employees that has continued into the fourth quarter of 2022.

This has caused and is expected to continue to cause significant uncertainty, unpredictability and difficulties with staffing and operations.

Our Board of Directors and its applicable committees receive regular updates from management regarding the military conflict between Russia and Ukraine and continue to provide oversight of the risks to our personnel, operations and other areas of strategic importance.

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

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.

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.

Although there remains significant uncertainty surrounding the COVID-19 pandemic for global and regional economies, its overall impact is gradually declining.

During the third quarter of 2022, we experienced the impacts of the COVID-19 pandemic primarily in the Asia Pacific region, particularly in China where continued lockdowns decreased economic activity generally;

however, in other regions, we observed that most dental practices are substantially functioning at pre-pandemic levels.

Our top priority remains the health and safety of our employees and their families, our customers and their staff.

I n 2022 , we have gradually reopened many of our offices and adopted a flexible hybrid schedule that allows 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 .”

In general, we expect the challenges and risks discussed above to persist, although to a lesser extent than those experienced over the last few years.

In turn, we expect the uncertainties and unpredictability that have impacted consumers, global and regional economies as well as our business and the businesses of our customers and suppliers to continue but to a lesser degree.

Nevertheless , 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 due to volatility in business environment caused by the pandemic.

Changing Product Preferences

As the markets for clear aligners continue to mature, we anticipate customer demands will evolve.

We expect to meet customer preferences with innovative treatment options that may include more choices to address a wider scope of treatment goals and budgets based on our existing and new products.

This has and may continue to result in larger variations in product mix and selling prices regionally and globally.

The implications of variations in product mix on our financial statements and business operations remains uncertain.

We strive to manage the challenges from the macroeconomic conditions, the conflict in Ukraine, COVID-19 and the evolution of our markets by focusing on improving our operations, building flexibility and efficiencies in our processes, adjusting our business models to changing circumstances and offering products that meet market demand.

Specifically, we are managing cost impacts through pricing actions, implementing cost saving measures and slowing hiring.

We have also sought to address 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 as appropriate.

We also continue to innovate and introduce new and enhanced products that augment our doctor customer experiences.

Additionally, we have also increased our cybersecurity efforts to detect, protect against potential incidents and recover from actual incidents and events.

Further discussion of the impact of these challenges 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 June 30, 2022, our business operations reflect the following:

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

• Revenues of $890.3 million, a decrease of 12.4% year-over-year;

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◦ Clear Aligner case volume decrease of 11.9% year-over-year and Clear Aligner case volume decrease for teenage patients of 2.9% year-over-year;

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

• Imaging Systems and CAD/CAM Services revenues of $157.5 million, a decrease of 11.7% year-over-year;

• Income from operations of $143.7 million and operating margin of 16.1%;

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• Net income of $72.7 million with diluted net income per share of $0.93;

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

• Cash, cash equivalents and marketable securities of $1,141.0 million as of September 30, 2022;

• Operating cash flow of $266.5 million;

• Capital expenditures of $75.3 million, predominantly related to increases in our manufacturing capacity and facilities;

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

• Number of employees was 23,800 as of September 30, 2022, an increase of 10.2% year-over-year.

Other Statistical Data and Trends

• 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.

• As of September 30, 2022, approximately 13.9 million people worldwide have been treated with our Invisalign system, approximately 81,000 iTero scanners have been sold and approximately 52,000 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 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.

• For the third quarter of 2022, total Invisalign cases submitted with a digital scanner in the Americas increased to 92.1%, up from 87.9% in the third quarter of 2021 and international scans increased to 84.3%, up from 79.3% in the third quarter of 2021.

For the third quarter of 2022, 97.3% of Invisalign cases submitted by North American orthodontists were submitted digitally.

• Total utilization rate in the third quarter of 2022 decreased to 6.8 cases per doctor compared to 7.7 cases per doctor in the third 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 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.

Utilization rate among our North American orthodontist customers decreased to 25.9 cases per doctor in the third quarter of 2022 compared to 29.7 cases per doctor in the third quarter of 2021 and the utilization rate among our North American GP customers decreased to 4.8 cases per doctor in the third quarter of 2022 compared to 5.0 cases per doctor in the third quarter of 2021.

▪ International:

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.

International doctor utilization rate was 6.0 cases per doctor in the third quarter of 2022 compared to 6.5 cases per doctor in the third 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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▪ 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.

▪ 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 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.

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 trained 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 and six months ended June 30, 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 nine months ended September 30, 2022 and 2021 are as follows (in millions):

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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 and six months ended June 30, 2022 and 2021 is as follows (in thousands):

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

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Certain tables may not sum or recalculate due to rounding.

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.

For the three months ended September 30, 2022, total net revenues decreased $125.6 million as compared to the same period in 2021, primarily due to a decrease in Clear Aligner case volumes, unfavorable foreign exchange rates, and a decrease in scanner volumes, partially offset by favorable Clear Aligner net deferrals.

For the nine months ended September 30, 2022, total net revenues decreased $88.4 million as compared to the same period in 2021, primarily due to decreases in Clear Aligner case volumes and scanner volumes, and unfavorable foreign exchange rates, partially offset by increases in Clear Aligner non-case revenues, service revenues and an increase in Clear Aligner average selling price (“ASP”).

Clear Aligner - Americas

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.

For the three months ended September 30, 2022, Americas net revenues decreased by $56.4 million as compared to the same period in 2021, primarily due to a 15.5% decrease in case volumes, which reduced net revenues by $63.1 million, which was partially offset by an increase in ASP which increased net revenues by $6.7 million.

Higher ASP was mainly due to lower net deferrals which increased net revenues by $12.0 million, processing fees charged on most shipments and price increases in certain markets which increased revenues by $11.7 million.

The ASP increase was partially offset by unfavorable promotional discounts which decreased net revenues $11.6 million.

For the nine months ended September 30, 2022, Americas net revenues decreased by $52.9 million as compared to the same period in 2021, primarily due to a decrease in case volumes of 9.2% which reduced net revenues by $107.7 million, partially offset by an increase in ASP which increased net revenues by $54.8 million.

Higher ASP was mainly due to processing fees charged on most shipments and price increases in certain markets which increased revenues by $40.1 million along with lower net deferrals which increased net revenues by $28.9 million.

The increase in ASP were partially offset by unfavorable promotional discounts which reduced net revenues by $8.3 million.

Clear Aligner - International

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.

For the three months ended September 30, 2022, International net revenues decreased by $62.8 million as compared to the same period in 2021, primarily due to lower ASP, which decreased net revenues by $35.1 million and a 7.4% decrease in case volumes which also reduced net revenues by $27.7 million.

Lower ASP was largely driven by unfavorable foreign exchange rates which decreased net revenues by $42.7 million and a product mix shift to lower priced products which decreased net revenues by $26.4 million.

The decrease in ASP was partially offset by lower net deferrals, which increased net revenues by $27.7 million, and processing fees charged on most shipments, which increased net revenues by $17.0 million.

For the nine months ended September 30, 2022, International net revenues decreased by $88.5 million as compared to the same period in 2021 due to a 5.1% decrease in case volumes, which decreased net revenues by $57.1 million, and lower ASP, which decreased net revenues by $31.4 million.

Lower ASP was largely due to unfavorable foreign exchange rates which resulted in lower net revenues of $99.0 million, a product mix shift to lower priced products which decreased net revenues by $38.6 million, and unfavorable promotional discounts which decreased net revenues $25.6 million.

The decrease in ASP was partially offset by lower net deferrals which increased net revenues by $70.5 million, and processing fees charged on most shipments, which increased net revenues by $59.6 million.

Clear Aligner - Non-Case

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.

For the three and nine months ended September 30, 2022, non-case net revenues increased by $14.5 million and $50.6 million as compared to the same periods in 2021 mainly due to increased volume for retention products across most regions primarily driven by Vivera retainers.

Systems and Services

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.

For the three months ended September 30, 2022, Systems and Services net revenues decreased by $20.8 million as compared to the same period in 2021 primarily due to by a lower number of scanners sold, which decreased net revenues $33.8 million, in addition to a lower scanner ASP.

These decreases were partially offset by higher service and other revenues which increased $13.8 million, mostly due to a larger installed base.

For the nine months ended September 30, 2022, Systems and Services net revenues increased by $2.5 million as compared to the same period in 2021 primarily due to higher service and other revenues, which increased $49.1 million, mostly due to a larger installed base mostly offset by a lower number of scanners sold, which decreased net revenues by $43.2 million, and lower scanner ASP.

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

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Clear Aligner

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.

For the three months ended September 30, 2022, our gross margin percentage decreased as compared to the same period in 2021 primarily due to increased manufacturing spend as we continue to ramp our new manufacturing facility in Poland,

higher freight costs, lower ASP and a higher mix of additional aligners.

For the nine months ended September 30, 2022, our gross margin percentage decreased as compared to the same period in 2021 primarily due to increased manufacturing spend as we continue to ramp our new manufacturing facility in Poland, higher freight costs in addition to a higher mix of additional aligners.

These factors were partially offset by higher ASP.

Systems and Services

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.

For the three and nine months ended September 30, 2022, our gross margin percentage decreased as compared to the same periods in 2021 primarily due to manufacturing inefficiencies from lower production volumes and higher component costs in addition to lower ASP.

These factors were partially offset by higher service revenues.

Selling, general and administrative (in millions):

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Selling, general and administrative expense generally includes personnel-related costs, including payroll, stock-based compensation and commissions for our sales force, marketing and advertising expenses including media, 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 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.

For the three months ended September 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.

For the nine months ended September 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 equipment, software and maintenance costs in addition to increased travel and expense related costs.

These increases were offset by lower incentive compensation and lower advertising and marketing costs.

Research and development (in millions):

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

For the three and six months ended June 30, 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.

For the three and nine months ended September 30, 2022, research and development expense increased compared to the same periods in 2021 primarily due to higher salaries expense, fringe benefits and stock-based compensation driven mainly by increased headcount as we continue to focus our investments in innovation and research.

These increases were partially offset by lower incentive compensation.

Income from operations (in millions):

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 Change 2022 2021 Change

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Clear Aligner

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.

For the three and nine months ended September 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.

Systems and Services

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.

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

Interest income (in millions):

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 Change 2022 2021 Change

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

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.

For the three months ended September 30, 2022, interest income increased compared to the same period in 2021 primarily due to higher interest rates during 2022.

For the nine months ended September 30, 2022, interest income increased marginally compared to the same period in 2021 primarily due to higher interest rates during 2022, which was partially offset by the 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

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 Change 2022 2021 Change

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

For the three months ended June 30, 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.

For the three months ended September 30, 2022, other income (expense), net decreased compared to the same period in 2021 primarily due to larger net foreign exchange losses from the weakening of international currencies against the U.S.

dollar in the three months ended September 30, 2022 as compared to the same period in 2021.

For the nine months ended September 30, 2022, other income (expense), net decreased compared to the same period in 2021 primarily due to a $43.4 million gain associated 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 from the weakening of international currencies against the U.S.

dollar in the nine months ended September 30, 2022 as compared to the same period in 2021.

Provision for income taxes (in millions):

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

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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 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.

Our effective tax rate differs from the statutory federal income tax rate of 21% for both the three and nine months ended September 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 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.

The increase in our effective tax rate for the three and nine months ended September 30, 2022 compared to the same periods in 2021 is primarily attributable to the decrease and change in our jurisdictional mix of income, 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.

Inflation Reduction Act of 2022 ( “ IRA ”) was enacted in the United States on August 16, 2022.

The IRA imposes a 15% alternative minimum tax on the financial statement income of certain corporations which is effective for tax years beginning after December 31, 2022, as well as a 1% excise tax on the net fair market value of stock repurchases made after December 31, 2022.

Based upon our analysis of the IRA, we have determined there is no impact to our tax provision for the three and nine months ended September 30, 2022.

We will continue to evaluate the impact of these tax law changes on future periods.

Liquidity and Capital Resources

Liquidity and Trends

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

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

September 30, 2022 December 31, 2021

Cash and cash equivalents $ 1,044,523 $ 1,099,370

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Total $ 1,141,021 $ 1,296,662

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.

As of September 30, 2022 and December 31, 2021, approximately $669.6 million and $713.8 million, respectively, of cash, cash equivalents and marketable securities were held by our foreign subsidiaries.

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

operations as we generate sufficient domestic operating cash flow and have access to external funding under our $300.0 million revolving line of credit.

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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.

As of September 30, 2022, cash and cash equivalents domiciled in Russia, which is required to fund their current operating requirements, represent approximately 3.9% of our total cash, cash equivalents and marketable securities.

Our material cash requirements are as follows:

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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 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.

• As of September 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 third quarter, on October 28, 2022 we entered into an accelerated stock repurchase agreement to repurchase $200.0 million under the program.

• 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 six months ended June 30, 2022 and 2021 (in thousands):

Six Months Ended

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

Nine Months Ended

September 30,

Net cash flow provided by (used in):

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Operating Activities

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:

For the nine months ended September 30, 2022, cash flows from operations of $424.0 million resulted primarily from our net income of approximately $319.8 million as well as the following:

Significant adjustments to net income

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• Non-cash operating lease costs of $22.8 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 $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;

• Decrease of $213.4 million in accrued and other long-term liabilities primarily due to lower incentive accruals for 2022 in addition to the payment of our 2021 corporate bonus, as well as timing of payment of other activities;

• Increase of $197.9 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.

• Increase of $108.5 million in inventories primarily due to lower shipment volumes over the period in addition to our efforts to manage stock at appropriate levels as required.

Investing Activities

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.

Net cash used in investing activities was $157.5 million for the nine months ended September 30, 2022 which primarily consisted of purchases of property, plant and equipment of $238.7 million, purchases of marketable securities of $20.5 million and $12.3 million cash paid relating to a business acquisition.

These outflows were partially offset by sales and maturities of our marketable securities of $116.1 million.

Financing Activities

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.

Net cash used in financing activities was $301.5 million for the nine months ended September 30, 2022 which consisted of common stock repurchases of $275.0 million and payroll taxes paid for equity awards through share withholdings of $52.6 million which were partially offset by $26.1 million of proceeds from the issuance of common stock under our employee stock purchase plan.

Critical Accounting Policies and Estimates

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis