What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-05-05 compared with 2022-11-04 · 92 added, 153 removed, 188 unchanged (57% of the section changed)

2 unchanged sentences

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, rising interest rates, market volatility, weakness in general economic conditions and recessions and the impact of efforts by central banks and federal, state and local governments to combat inflation and recession, our expectations and beliefs regarding customer and consumer purchasing behavior and changes in consumer spending habits, our expectations regarding the impact of the military conflict in Ukraine and our operations and assets 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 estimates regarding the size and opportunities of the markets we are targeting along with our expectations for growth in those markets, our beliefs regarding the impact of technological innovation in general, and in our solutions and products in particular, on target markets and patient care, our beliefs regarding digital dentistry and its potential to impact our business, our intentions regarding expanding our business, including its impact on our operational flexibility and responsiveness to customer demand, our beliefs regarding the importance of our manufacturing operations on our success, our beliefs regarding the need for and benefits of our technological development on Invisalign treatment, the areas of development in which we focus our efforts, and the advantages of our intellectual property portfolio, our beliefs regarding our business strategy and growth drivers, our expectations regarding product mix and product adoption, our expectations regarding the utilization rates for our products, including the impact of marketing on those rates and causes for periodic fluctuations of the rates, our expectations regarding the existence and impact of seasonality, our expectations regarding the sales growth of our intraoral scanner sales in international markets, our expectations regarding the productivity impact additional sales representatives will have on our sales and the impact of specialization of those representatives in sales channels, our expectations regarding the continued expansion of our international markets and their growth, our expectations regarding competition and our ability to compete in our target markets, 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, our beliefs regarding our culture and commitment and its impact on our financial and operational performance and its importance to our future success, our expectations for future investments in and benefits from consumer demand sales and marketing activities, our preparedness and our customers ’ preparedness to react to changing circumstances and demand, 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 judgements we make related to our tax obligations, our predicted level of operating expenses and gross margins and other factors beyond our control, as well as other statements regarding our future operations, financial condition and prospects and business strategies.

These statements may contain words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or other words indicating future results.

5 unchanged sentences

Trends and Uncertainties

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

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

(i) international expansion;

3 unchanged sentences

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:

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

Macroeconomic Challenges and Military Conflict in Ukraine

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.

Our revenues are susceptible to fluctuations in macroeconomic conditions, in line with inflation, rising interest rates, threats of or actual recessions, fluctuations in currency exchange rates, supply chain challenges, market volatility, actual and threatened wars and military actions, and other factors, each of which impact customer confidence, consumer sentiment and demand.

Many of these same factors also impact our costs and those of our suppliers through higher raw material prices, transportation costs, labor costs, supply and distribution operations.

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 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.

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.

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.

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

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.

dollar which were impacted in 2022 by macroeconomic slowing or contraction causing weakening against the U.S.

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

In the first quarter of 2023, the U.S.

dollar weakened against a number of these other currencies, favorably impacting our financial condition and results of operations.

We expect this moderation of the strength of the dollar to continue, although we also expect the dollar to remain historically strong compared to many of these currencies.

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

The military conflict between Russia and Ukraine increased the unpredictability of the volatile macroeconomic conditions in 2022 and is likely to continue doing so in 2023.

While we continue to employ research and development personnel in Russia as well as limited post-sales support and administrative personnel, our total number of employees in Russia was materially reduced in 2022 following actions and initiatives designed to align the size of our operations with our ongoing resource needs.

We do not anticipate the military conflict between Russia and Ukraine to materially impact our 2023 financial condition and results of operations although we expect the conflict will continue to create market uncertainties and dampen consumer sentiment and demand, particularly in Europe.

COVID-19 Pandemic Update

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.

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.

Although there remains significant uncertainty surrounding the COVID-19 pandemic for regional economies, its global impact continues to decline.

During 2022, we experienced the impacts of the COVID-19 pandemic primarily in the Asia Pacific region, particularly in China, where lockdowns decreased economic activity throughout most of the year.

With the easing of the COVID-19 restrictions in China in late 2022 and early 2023, rates of infection in China increased early in the first quarter of 2023 and decreased as the quarter progressed.

We expect the impacts of the COVID-19 pandemic to remain unpredictable in 2023, although we expect them to decrease compared to 2022.

Nevertheless, comparing our financial results for the reporting periods of 2023 to the same reporting periods of 2022 or earlier may not be a useful means by which to evaluate our business and results of operations due to volatility in regional business environments caused by the pandemic.

Evolving Product Offerings

As the markets for clear aligners and digital processes and workflows used to transform the practice of dentistry continue to mature, we anticipate customer and patient expectations and demands will evolve and competition to supplant traditional bracket and wires to increase.

We expect to succeed in these evolving markets by continuing to meet customer demands with innovative treatment options that include more choices to address a wider scope of treatment goals and budgets based on our existing and new products.

Our efforts to succeed with these innovative treatment options may result in larger and unpredictable variations in geographic and product mix and selling prices, causing uncertainty, including variations in products sold, changes in the amount and timing of deferred revenues and other potential impacts on our financial statements and business operations.

We strive to manage the challenges from the macroeconomic conditions, the conflict in Ukraine, COVID-19 and the evolution of our target 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, cost saving measures that drive value and maintaining control of our employee headcount.

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

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.”

1 unchanged sentence

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

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

For the three months ended March 31, 2023, our business operations reflect the following:

• Revenues of $943.1 million, a decrease of 3.1% year-over-year;

2 unchanged sentences

◦ International Clear Aligner revenues of $354.2 million, a decrease of 4.5% year-over-year;

◦ 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;

◦ Clear Aligner case volume decrease of 3.9% year-over-year and Clear Aligner case volume increase for teenage patients of 3.8% year-over-year;

• Imaging Systems and CAD/CAM Services revenues of $153.3 million, a decrease of 6.2% year-over-year;

2 unchanged sentences

• Net income of $87.8 million with diluted net income per share of $1.14;

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

• Cash, cash equivalents and marketable securities of $921.4 million as of March 31, 2023;

• Operating cash flow of $199.9 million;

• Capital expenditures of $64.1 million, predominantly related to increases in our manufacturing capacity and facilities;

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

• Number of employees was 23,035 as of March 31, 2023, a decrease of 2.5% year-over-year.

Other Statistical Data and Trends

• 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 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.

• As of March 31, 2023, approximately 15.1 million people worldwide have been treated with our Invisalign system.

Management measures these results by comparing to the millions of people who can benefit from straighter teeth 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.

• For the first quarter of 2023, total Invisalign cases submitted with a digital scanner in the Americas increased to 93.1%, up from 90.6% in the first quarter of 2022 and international scans increased to 87.0%, up from 82.8% in the first quarter of 2022.

For the first quarter of 2023, 97.7% of Invisalign cases submitted by North American orthodontists were submitted digitally.

• The total utilization rate in the first quarter of 2023 decreased to 7.0 cases per doctor compared to 7.3 cases per doctor in the first quarter of 2022.

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

▪ North America:

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.

The utilization rate among our North American orthodontist customers decreased to 26.2 cases per doctor in the first quarter of 2023 compared to 26.8 cases per doctor in the first quarter of 2022 and the utilization rate among our North American GP customers decreased to 4.9 cases per doctor in the first quarter of 2023 compared to 5.0 cases per doctor in the first quarter of 2022.

▪ International:

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.

International doctor utilization rate was 6.2 cases per doctor in the first quarter of 2023 compared to 6.4 cases per doctor in the first quarter of 2022.

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

9 unchanged sentences

▪ 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 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 Invisalign Accessory 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 commerce channels in select markets.

We also offer in the U.S.

2 unchanged sentences

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

Our services include subscription software, disposables, rentals, leases, 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, 2023 and 2022 are as follows (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30,

Net Revenues 2022 2021 Change 2022 2021 Change

Net Revenues 2023 2022 Change

Clear Aligner net revenues:

7 unchanged sentences

Certain tables may not sum or recalculate due to rounding.

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):

Case volume data which represents Clear Aligner case shipments for the three months ended March 31, 2023 and 2022 is as follows (in thousands):

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 Change 2022 2021 Change

2023 2022 Change

Total case volume 575.3 598.8 (23.6) (3.9) %

1 unchanged sentence

Certain tables may not sum or recalculate due to rounding.

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”).

For the three months ended March 31, 2023, total net revenues decreased $30.1 million as compared to the same period in 2022, primarily due to a decrease in both Clear Aligner case volumes and scanner volumes and unfavorable foreign exchange rates, partially offset by increases in service revenues and Clear Aligner non-case revenues.

Clear Aligner - Americas

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.

For the three months ended March 31, 2023, Americas net revenues decreased by $15.0 million as compared to the same period in 2022 due to a 5.3% decrease in case volumes, which reduced net revenues by $20.0 million, partially offset by an increase in ASP which increased net revenues by $5.0 million.

Higher ASP was mainly due to price increases on most products which increased revenues by $19.3 million along with higher additional aligners which increased net revenues by $5.0 million.

The increases in ASP were partially offset by unfavorable promotional discounts which decreased net revenues by $15.8 million and a product mix shift to lower priced products which decreased net revenues by $2.6 million.

Clear Aligner - International

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.

For the three months ended March 31, 2023, International net revenues decreased by $16.9 million as compared to the same period in 2022, due to a 2.3% decrease in case volumes, which decreased net revenues by $8.4 million, and lower ASP which decreased net revenues by $8.5 million.

Lower ASP was largely due to a product mix shift to lower priced products which decreased net revenues by $33.1 million, unfavorable foreign exchange rates which resulted in lower net revenues of $26.4 million, and unfavorable promotional discounts which decreased net revenues $6.0 million.

The decrease in ASP was partially offset by higher additional aligners which increased net revenues by $30.9 million and price increases on most products which increased net revenues by $24.4 million.

Clear Aligner - Non-Case

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.

For the three months ended March 31, 2023, non-case net revenues increased by $12.0 million as compared to the same period in 2022 mainly due to increased volumes from the Doctor Subscription program and retention products across all regions primarily driven by Vivera retainers.

Systems and Services

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.

For the three months ended March 31, 2023, Systems and Services net revenues decreased by $10.2 million as compared to the same period in 2022 primarily due to by a lower number of scanners sold which decreased net revenues by $27.3 million.

The decrease in net revenue due to lower scanner volume was partially offset by higher service and other revenues which increased net revenues by $15.2 million mostly due to a larger scanner installed base and higher scanner ASP which increased net revenues $1.9 million.

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

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 Change 2022 2021 Change

2023 2022 Change

Clear Aligner

16 unchanged sentences

Clear Aligner

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.

For the three months ended March 31, 2023, our gross margin percentage decreased as compared to the same period in 2022 primarily due to increased manufacturing spend as we continue to ramp our new manufacturing facility in Poland in addition to higher mix of additional aligners.

Systems and Services

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.

For the three months ended March 31, 2023, our gross margin percentage decreased as compared to the same period in 2022 primarily due to manufacturing inefficiencies from lower production volumes and higher inventory costs.

These factors were partially offset by higher service revenues and higher ASP.

Selling, general and administrative (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 Change 2022 2021 Change

2023 2022 Change

Selling, general and administrative $ 439.7 $ 439.5 $ 0.2

2 unchanged sentences

Certain tables may not sum or recalculate due to rounding.

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

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, clinical education, marketing materials, 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, 2023, selling, general and administrative expense remained flat compared to the same period in 2022 primarily due to higher salaries expense, fringe benefits and stock-based and incentive compensation, offset by lower advertising and marketing costs and outside service costs.

Research and development (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 Change 2022 2021 Change

2023 2022 Change

Research and development $ 87.4 $ 71.8 $ 15.6

3 unchanged sentences

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

For the three and nine months ended September 30, 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.

For the three months ended March 31, 2023, research and development expense increased compared to the same period in 2022 primarily due to higher salaries expense, fringe benefits and stock-based and incentive compensation as we continue to focus on our investments in innovation and research.

Income from operations (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 Change 2022 2021 Change

2023 2022 Change

Clear Aligner

11 unchanged sentences

Clear Aligner

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.

For the three months ended March 31, 2023, our operating margin percentage decreased compared to the same period in 2022 primarily due to lower gross margin.

Systems and Services

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.

For the three months ended March 31, 2023, our operating margin percentage decreased compared to the same period in 2022 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

September 30, Nine Months Ended

September 30,

2022 2021 Change 2022 2021 Change

2023 2022 Change

Interest income $ 2.3 $ 0.7 $ 1.7

3 unchanged sentences

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

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.

For the three months ended March 31, 2023, interest income increased compared to the same period in 2022 primarily due to higher interest rates in the first quarter of 2023.

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

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 Change 2022 2021 Change

2023 2022 Change

Other income (expense), net $ (1.2) $ (11.3) $ 10.0

3 unchanged sentences

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

For the three months ended September 30, 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.

For the three months ended March 31, 2023, other income (expense), net increased compared to the same period in 2022 primarily due to the favorable impact of foreign exchange rates and higher interest rates.

Provision for income taxes (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 Change 2022 2021 Change

2023 2022 Change

Provision for income taxes $ 46.8 $ 53.2 $ (6.4)

2 unchanged sentences

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 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 nine months ended September 30, 2022.

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.

Our effective tax rate differs from the statutory federal income tax rate of 21% for both the three month periods ended March 31, 2023 and 2022 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.

The increase in our effective tax rate for the three months ended March 31, 2023 compared to the same period in 2022 is primarily attributable to the decrease and change in our jurisdictional mix of income, foreign income taxed at different rates, and lower excess tax benefits from stock-based compensation.

Liquidity and Capital Resources

Liquidity and Trends

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

As of March 31, 2023 and December 31, 2022, we had the following cash and cash equivalents and short-term and long-term marketable securities (in thousands):

March 31, 2023 December 31, 2022

Cash and cash equivalents $ 832,383 $ 942,050

2 unchanged sentences

Total $ 921,406 $ 1,041,562

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.

As of March 31, 2023 and December 31, 2022, approximately $610.9 million and $653.7 million, respectively, of cash, cash equivalents and marketable securities were held by our foreign subsidiaries.

We intend to continue reinvesting our foreign subsidiary earnings indefinitely and expect the additional costs upon repatriation of these foreign earnings not to be significant.

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

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 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 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.

As of March 31, 2023, cash and cash equivalents domiciled in Russia, which is required to fund their current operating requirements, represent approximately 2.2% of our total cash, cash equivalents and marketable securities.

Our material cash requirements are as follows:

3 unchanged sentences

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 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.

• During the three months ended March 31, 2023, we entered into or completed ASRs providing for the repurchase of our common stock based on the volume-weighted average price during the term of the agreement, less an agreed upon discount.

As of March 31, 2023, the May 2021 Repurchase Program was completed.

In January 2023, our Board of Directors authorized a plan to repurchase up to $1.0 billion of our common stock (“January 2023 Repurchase Program”), none of which had been utilized as of March 31, 2023.

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, 2022.

Sources and Uses of Cash

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,

The following table summarizes our condensed consolidated cash flows for the three months ended March 31, 2023 and 2022 (in thousands):

Three Months Ended

Net cash flow provided by (used in):

5 unchanged sentences

Operating Activities

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:

For the three months ended March 31, 2023, cash flows from operations of $199.9 million resulted primarily from our net income of approximately $87.8 million as well as the following:

Significant adjustments to net income

1 unchanged sentence

• Depreciation and amortization of $35.8 million related to our investments in property, plant and equipment and intangible assets;

• Non-cash operating lease costs of $22.8 million.

• Deferred taxes of $18.4 million related to increase in long term deferred tax position;

• Non-cash operating lease costs of $7.8 million related majority to amortization of deferred commissions.

Significant changes in working capital

• 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 $37.4 million in accrued and other long-term liabilities primarily due to higher incentive accruals for 2023, as well as timing of payment of other activities;

• Decrease of $32.7 million in accounts receivable due to timing of collections and offset by an increased sales volumes;

• Increase of $27.7 million in deferred revenues due to the deferral of revenue on shipments over the period as well as timing of revenue recognition;

• 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.

• Increase of $24.0 million in inventories primarily due our efforts to manage stock at appropriate levels as required.

Investing Activities

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.

Net cash used in investing activities was $52.8 million for the three months ended March 31, 2023 which primarily consisted of purchases of property, plant and equipment of $64.1 million and purchases of marketable securities of $2.4 million, partially offset by sales and maturities of our marketable securities of $13.7 million.

Financing Activities

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.

Net cash used in financing activities was $259.0 million for the three months ended March 31, 2023 which consisted of common stock repurchases of $252.4 million and payroll taxes paid for equity awards through share withholdings of $20.9 million which were partially offset by $14.3 million of proceeds from the issuance of common stock under our employee stock purchase plan.

Critical Accounting Policies and Estimates

14 unchanged sentences

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

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

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

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

3 unchanged sentences

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