What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-05 · 96 added, 73 removed, 207 unchanged (45% 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, 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 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 product mix and product adoption, our expectations regarding competition and our ability to compete in our target markets, 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 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, 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 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.

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

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

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

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

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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.

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 continue 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.

COVID-19 Pandemic Update

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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.

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

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.

We strive to manage the challenges from the macroeconomic conditions, the conflict in Ukraine, the evolution of our target markets and COVID-19 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.

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

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

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

• Clear Aligner revenues of $789.8 million, a decrease of 2.5% year-over-year;

For the three months ended June 30, 2023, our business operations reflect the following:

• Revenues of $1,002.2 million, an increase of 3.4% year-over-year;

• Clear Aligner revenues of $832.7 million, an increase of 4.3% year-over-year;

◦ Americas Clear Aligner revenues of $375.3 million, a decrease of 2.6% year-over-year;

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

◦ International Clear Aligner revenues of $378.4 million, an increase of 9.3% year-over-year;

◦ Clear Aligner case volume increase of 0.9% year-over-year and Clear Aligner case volume increase for teenage patients of 9.7% year-over-year;

• Imaging Systems and CAD/CAM Services revenues of $169.5 million, a decrease of 1.0% year-over-year;

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• Net income of $111.8 million with diluted net income per share of $1.46;

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

• Cash, cash equivalents and marketable securities of $1,033.8 million as of June 30, 2023;

• Operating cash flow of $251.8 million;

• Capital expenditures of $58.5 million, predominantly related to increases in our manufacturing capacity and facilities;

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

• Number of employees was 22,910 as of June 30, 2023, a decrease of 4.6% year-over-year.

Other Statistical Data and Trends

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

• As of June 30, 2023, approximately 15.7 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.

• For the second quarter of 2023, total Invisalign cases submitted with a digital scanner in the Americas increased to 94.0%, up from 91.4% in the second quarter of 2022 and international scans increased to 88.0%, up from 83.7% in the second quarter of 2022.

For the second quarter of 2023, 97.9% of Invisalign cases submitted by North American orthodontists were submitted digitally.

• The total utilization rate in the second quarter of 2023 decreased to 7.2 cases per doctor compared to 7.3 cases per doctor in the second quarter of 2022.

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

▪ North America:

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.

The utilization rate among our North American orthodontist customers decreased to 26.4 cases per doctor in the second quarter of 2023 compared to 26.8 cases per doctor in the second quarter of 2022 and the utilization rate among our North American GP customers increased to 5.2 cases per doctor in the second quarter of 2023 compared to 5.1 cases per doctor in the second quarter of 2022.

▪ International:

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.

International doctor utilization rate was 6.6 cases per doctor in the second quarter of 2023 compared to 6.4 cases per doctor in the second 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.

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▪ 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.

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

We also offer in the U.S., Canada, and EMEA, 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 trained doctors who are currently not regularly using our retainers or low-stage aligners.

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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):

Net revenues for our Clear Aligner and Systems and Services segments by region for the three and six months ended June 30, 2023 and 2022 are as follows (in millions):

Three Months Ended

Net Revenues 2023 2022 Change

June 30, Six Months Ended

Net Revenues 2023 2022 Change 2023 2022 Change

Clear Aligner net revenues:

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Certain tables may not sum or recalculate due to rounding.

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

Case volume data which represents Clear Aligner case shipments for the three and six months ended June 30, 2023 and 2022 is as follows (in thousands):

Three Months Ended

2023 2022 Change

June 30, Six Months Ended

2023 2022 Change 2023 2022 Change

Total case volume 604.4 599.0 5.5 0.9 % 1,179.8 1,197.8 (18.0) (1.5) %

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Certain tables may not sum or recalculate due to rounding.

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.

For the three months ended June 30, 2023, total net revenues increased by $32.6 million as compared to the same period in 2022, primarily due to an increase in Clear Aligner ASPs and non-case revenues, partially offset by unfavorable foreign exchange rates and a decrease in scanner volumes.

For the six months ended June 30, 2023, total net revenues increased by $2.5 million as compared to the same period in 2022, primarily due to an increase in Clear Aligner non-case revenue and ASPs mostly offset by a decrease in both Clear Aligner case volumes and scanner volumes and unfavorable foreign exchange rates.

Clear Aligner - Americas

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.

For the three months ended June 30, 2023, Americas net revenues decreased by $9.9 million as compared to the same period in 2022 due to a 4.0% decrease in case volumes, resulting in a reduction of net revenues by $15.4 million, partially offset by a $5.5 million increase due to higher ASP.

Higher ASP reflects a full quarter impact of price increases driving increased net revenues by $18.8 million along with higher additional aligners which increased net revenues by $5.9 million.

The increases in ASP were partially offset by unfavorable promotional discounts reducing net revenues by $13.2 million and unfavorable foreign exchange rates which decreased net revenues by $4.3 million.

For the six months ended June 30, 2023, Americas net revenues decreased by $24.9 million as compared to the same period in 2022 due to a 4.7% decrease in case volumes, resulting in a reduction of net revenues by $35.5 million, partially offset by a $10.6 million increase due to higher ASP.

Higher ASP includes the full impact of price increases driving increased net revenues by $38.1 million along with higher additional aligners which increased net revenues by $11.3 million.

The increases in ASP were partially offset by unfavorable promotional discounts reducing net revenues by $28.9 million, a product mix shift to lower priced products reducing net revenues by $5.7 million, and unfavorable foreign exchange rates which decreased net revenues by $5.2 million.

Clear Aligner - International

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.

For the three months ended June 30, 2023, International net revenues increased by $32.2 million as compared to the same period in 2022, due to a 6.9% increase in case volumes, resulting in an increase of net revenues by $23.8 million, in addition to a $8.4 million increase due to higher ASP.

Higher ASP reflects a full quarter impact of price increases driving increased net revenues by $27.8 million and higher additional aligners reducing net revenues by $24.0 million.

The increases in ASP were partially offset by a product mix shift to lower priced products reducing net revenues by $26.3 million, unfavorable foreign

exchange rates which decreased net revenues by $11.1 million, and unfavorable promotional discounts reducing net revenues by $7.7 million.

For the six months ended June 30, 2023, International net revenues increased by $15.3 million as compared to the same period in 2022, due to a 2.3% increase in case volumes, resulting in an increase of net revenues by $16.3 million, and lower ASP decreasing net revenues by $1.0 million.

Lower ASP was largely due to a product mix shift to lower priced products reducing net revenues by $63.7 million, unfavorable foreign exchange rates which decreased net revenues by $37.5 million, and unfavorable promotional discounts reducing net revenues by $15.5 million.

The decrease in ASP was primarily offset by higher additional aligners increasing net revenues by $56.5 million and price increases on most products which increased net revenues by $56.1 million.

Clear Aligner - Non-Case

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.

For the three and six months ended June 30, 2023, non-case net revenues increased by $12.0 million and $23.9 million, respectively, as compared to the same periods in 2022 mainly due to retention products across all regions primarily driven by Vivera retainers and increased volumes from the Doctor Subscription program.

Systems and Services

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.

For the three months ended June 30, 2023, Systems and Services net revenues decreased by $1.7 million as compared to the same period in 2022 primarily due to a lower number of scanners sold reducing net revenues by $14.4 million and lower scanner ASP reducing net revenues by $1.9 million.

The decreases in net revenues were primarily offset by higher service revenues of $7.5 million and other revenues which increased net revenues by $7.1 million primarily due to revenue from sales of certified pre-owned scanners.

For the six months ended June 30, 2023, Systems and Services net revenues decreased by $11.8 million as compared to the same period in 2022 primarily due to a lower number of scanners sold reducing net revenues by $41.8 million.

This decrease in net revenues was partially offset by higher service revenues of $16.4 million and other revenues increased by $13.6 million primarily due to revenue from sales of certified pre-owned scanners and scanner rentals.

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

Three Months Ended

2023 2022 Change

June 30, Six Months Ended

2023 2022 Change 2023 2022 Change

Clear Aligner

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Clear Aligner

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.

For the three and six months ended June 30, 2023, our gross margin percentage decreased as compared to the same periods in 2022 primarily due to increased manufacturing spend offset by higher ASP and lower freight costs.

Systems and Services

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.

For the three and six months ended June 30, 2023, our gross margin percentage increased as compared to the same periods in 2022 primarily due to lower purchase price variance, service and freight costs, higher service revenue mix and partially offset by lower ASP.

Selling, general and administrative (in millions):

Three Months Ended

2023 2022 Change

June 30, Six Months Ended

2023 2022 Change 2023 2022 Change

Selling, general and administrative $ 453.2 $ 426.4 $ 26.8 $ 892.9 $ 865.9 $ 27.0

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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, 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.

For the three and six months ended June 30, 2023, selling, general and administrative expense increased 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 reductions in litigation expense.

Research and development (in millions):

Three Months Ended

2023 2022 Change

June 30, Six Months Ended

2023 2022 Change 2023 2022 Change

Research and development $ 88.5 $ 73.0 $ 15.5 $ 175.9 $ 144.8 $ 31.2

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

For the three months ended March 31, 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.

For the three and six months ended June 30, 2023, research and development expense increased compared to the same periods 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

2023 2022 Change

June 30, Six Months Ended

2023 2022 Change 2023 2022 Change

Clear Aligner

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Clear Aligner

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.

For the three and six months ended June 30, 2023, our operating margin percentage decreased compared to the same periods in 2022 primarily due to higher operating expenses as a percentage of net revenues and lower gross margin.

Systems and Services

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.

For the three months ended June 30, 2023, our operating margin percentage increased compared to the same periods in 2022 primarily due to lower operating expenses as a percentage of net revenues and higher gross margins.

For the six months ended June 30, 2023, our operating margin percentage decreased compared to the same period in 2022 primarily due to higher operating expenses as a percentage of revenue partially offset by increased gross margin.

Interest income (in millions):

Three Months Ended

2023 2022 Change

June 30, Six Months Ended

2023 2022 Change 2023 2022 Change

Interest income $ 4.4 $ 0.2 $ 4.2 $ 6.8 $ 0.9 $ 5.8

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

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.

For the three and six months ended June 30, 2023, interest income increased compared to the same periods in 2022 primarily due to higher interest rates in the first and second quarter of 2023.

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

Three Months Ended

2023 2022 Change

June 30, Six Months Ended

2023 2022 Change 2023 2022 Change

Other income (expense), net $ (4.8) $ (14.8) $ 10.1 $ (6.0) $ (26.1) $ 20.1

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

For the three months ended March 31, 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.

For the three and six months ended June 30, 2023, other income (expense), net increased compared to the same periods in 2022 primarily due to the favorable impact of foreign exchange rates and miscellaneous charges.

Provision for income taxes (in millions):

Three Months Ended

2023 2022 Change

June 30, Six Months Ended

2023 2022 Change 2023 2022 Change

Provision for income taxes $ 59.8 $ 60.8 $ (1.0) $ 106.6 $ 114.0 $ (7.4)

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Certain tables may not sum or recalculate due to rounding.

Our effective tax rate differs from the statutory federal income tax rate of 21% for 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.

Our effective tax rate differs from the statutory federal income tax rate of 21% for both the three and six month periods ended June 30, 2023 and 2022 primarily due to the recognition of additional tax expense resulting from U.S.

taxes on foreign earnings, foreign income taxed at different rates, state income taxes, and non-deductible expenses in the U.S.

The decrease in our effective tax rate for the three months ended June 30, 2023 compared to the same period in 2022 is primarily attributable to the change in our jurisdictional mix of income, foreign income taxed at different rates, partially offset by higher excess tax benefits from stock-based compensation and remeasurement of Switzerland deferred tax asset due to Swiss tax rate change.

The increase in our effective tax rate for the six months ended June 30, 2023 compared to the same period in 2022 is primarily attributable to the 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 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

As of June 30, 2023 and December 31, 2022, we had the following cash and cash equivalents and short-term and long-term marketable securities (in thousands):

June 30, 2023 December 31, 2022

Cash and cash equivalents $ 951,956 $ 942,050

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Total $ 1,033,784 $ 1,041,562

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.

As of June 30, 2023 and December 31, 2022, approximately $719.5 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.

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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 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.

As of June 30, 2023, cash and cash equivalents domiciled in Russia, which is required to fund their current operating requirements, represent approximately 1.4% of our total cash, cash equivalents and marketable securities.

Our material cash requirements are as follows:

• For 2023, we expect our investments in capital expenditures to exceed $200.0 million.

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

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

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

This includes our investment in an aligner fabrication facility in Wroclaw, Poland which

began serving doctors during the second quarter of 2022 as a part of our strategy to bring operational facilities closer to customers.

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

• 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.

• During the six months ended June 30, 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.

The May 2021 Repurchase Program was completed 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.

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Sources and Uses of Cash

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

Three Months Ended

The following table summarizes our condensed consolidated cash flows for the six months ended June 30, 2023 and 2022 (in thousands):

Six Months Ended

Net cash flow provided by (used in):

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Operating Activities

For the three months ended March 31, 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:

For the six months ended June 30, 2023, cash flows from operations of $451.7 million resulted primarily from our net income of approximately $199.6 million as well as the following:

Significant adjustments to net income

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• Deferred taxes of $36.7 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.

• Non-cash operating lease costs of $15.5 million related to lease amortization;

• Other non-cash operating of $21.9 million majority related to amortization of deferred commissions.

Significant changes in working capital

• Increase of $140.3 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 $24.0 million in inventories primarily due our efforts to manage stock at appropriate levels as required.

• Decrease of $73.7 million in accounts receivable due to timing of collections and partially offset by increased revenues;

• Increase of $56.7 million in deferred revenues due to the deferral of revenue on shipments;

• Increase of $19.1 million in inventories primarily due to our purchase of long lead components to meet expected demand.

Investing Activities

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.

Net cash used in investing activities was $178.3 million for the six months ended June 30, 2023 and primarily consisted of purchases of property, plant and equipment of $122.7 million which included a building acquisition for $24.5 million, an equity

method investment of $75.0 million and purchases of marketable securities of $2.4 million, partially offset by sales and maturities of our marketable securities of $21.6 million.

Financing Activities

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.

Net cash used in financing activities was $259.9 million for the six months ended June 30, 2023 and consisted of common stock repurchases net of $252.4 million and payroll taxes paid for equity awards through share withholdings of $21.8 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

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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