Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
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 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. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in particular, the risks discussed below in Part II, Item 1A “Risk Factors.” We undertake no obligation to revise or update these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the Securities and Exchange Commission (the “SEC”).
Executive Overview of Results
Trends and Uncertainties
Our business strategic priorities remain focused on four principal pillars for growth: (i) international expansion; (ii) general practitioner dentists (“GPs”) adoption; (iii) patient demand and conversion; and (iv) orthodontic utilization. Our growth strategy depends on our ability to facilitate the digital transformation of dentistry happening around the world, our continuous focus on innovation, and expansion to meet and exceed evolving customer expectations as the array of products and services available to them increases. Below is a discussion of the significant trends and uncertainties that could impact our operations:
25
Table of Contents
Macroeconomic Challenges and Military Conflict in Ukraine
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 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 half 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.
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
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 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.
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. 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.”
Key Financial and Operating Metrics
We measure our performance against these strategic priorities by the achievement of key financial and operating metrics.
For the three months ended June 30, 2023, our business operations reflect the following:
26
Table of Contents
• 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 $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;
• Income from operations of $171.9 million and operating margin of 17.2%;
• Effective tax rate of 34.8%;
• Net income of $111.8 million with diluted net income per share of $1.46;
• 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; and
• 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 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 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 26.4 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 6.6 cases per doctor in the second quarter of 2023 compared to 6.4 cases per doctor in the second quarter of 2022.
27
Table of Contents
* Invisalign utilization rates are calculated by the number of cases shipped divided by the number of doctors to whom cases were shipped. Our International region includes Europe, Middle East and Africa ( “ EMEA ” ) and Asia Pacific ( “ APAC ” ). Latin America ( “ LATAM ” ) is excluded from the International region based on its immateriality to the quarter; however is included in the Total utilization.
Results of Operations
Net Revenues by Reportable Segment
We group our operations into two reportable segments: Clear Aligner segment and Systems and Services segment.
• Our Clear Aligner segment consists of Comprehensive Products, Non-Comprehensive Products and Non-Case revenues as defined below:
▪ Comprehensive Products include, but are not limited to, Invisalign Comprehensive and Invisalign First.
▪ Non-Comprehensive Products include, but are not limited to, Invisalign Moderate, Lite and Express packages and Invisalign Go 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 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., 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.
• 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, leases, pay per scan services, as well as exocad ’ s CAD/CAM software solutions that integrate workflows to dental labs and dental practices.
28
Table of Contents
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
June 30, Six Months Ended
June 30,
Net Revenues 2023 2022 Change 2023 2022 Change
Clear Aligner net revenues:
Americas $ 375.3 $ 385.2 $ (9.9) (2.6) % $ 736.6 $ 761.4 $ (24.9) (3.3) %
International 378.4 346.2 32.2 9.3 % 732.6 717.3 15.3 2.1 %
Non-case 79.0 67.0 12.0 17.9 % 153.3 129.4 23.9 18.5 %
Total Clear Aligner net revenues $ 832.7 $ 798.4 $ 34.3 4.3 % $ 1,622.5 $ 1,608.1 $ 14.4 0.9 %
Systems and Services net revenues 169.5 171.2 (1.7) (1.0) % 322.8 334.7 (11.8) (3.5) %
Total net revenues $ 1,002.2 $ 969.6 $ 32.6 3.4 % $ 1,945.3 $ 1,942.8 $ 2.5 0.1 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Case volume data which represents Clear Aligner case shipments for the three and six months ended June 30, 2023 and 2022 is as follows (in thousands):
Three Months Ended
June 30, Six Months Ended
June 30,
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) %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
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 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 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
29
Table of Contents
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 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 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
June 30, Six Months Ended
June 30,
2023 2022 Change 2023 2022 Change
Clear Aligner
Cost of net revenues $ 229.4 $ 213.2 $ 16.3 $ 453.1 $ 417.2 $ 35.9
% of net segment revenues 27.6 % 26.7 % 27.9 % 25.9 %
Gross profit $ 603.3 $ 585.2 $ 18.0 $ 1,169.4 $ 1,190.9 $ (21.6)
Gross margin % 72.4 % 73.3 % 72.1 % 74.1 %
Systems and Services
Cost of net revenues $ 59.1 $ 68.8 $ (9.7) $ 118.0 $ 128.7 $ (10.7)
% of net segment revenues 34.9 % 40.2 % 36.5 % 38.5 %
Gross profit $ 110.4 $ 102.3 $ 8.0 $ 204.9 $ 206.0 $ (1.1)
Gross margin % 65.1 % 59.8 % 63.5 % 61.5 %
Total cost of net revenues $ 288.6 $ 282.0 $ 6.6 $ 571.1 $ 545.9 $ 25.2
% of net revenues 28.8 % 29.1 % 29.4 % 28.1 %
Gross profit $ 713.6 $ 687.6 $ 26.1 $ 1,374.3 $ 1,396.9 $ (22.6)
Gross margin % 71.2 % 70.9 % 70.6 % 71.9 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Cost of net revenues includes personnel-related costs including payroll and stock-based compensation for staff involved in the production process, the cost of materials, packaging, freight and shipping related costs, depreciation on capital equipment and facilities used in the production process, amortization of acquired intangible assets and training costs.
30
Table of Contents
Clear Aligner
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 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
June 30, Six Months Ended
June 30,
2023 2022 Change 2023 2022 Change
Selling, general and administrative $ 453.2 $ 426.4 $ 26.8 $ 892.9 $ 865.9 $ 27.0
% of net revenues 45.2 % 44.0 % 45.9 % 44.6 %
Changes and percentages are based on actual values. 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, 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 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
June 30, Six Months Ended
June 30,
2023 2022 Change 2023 2022 Change
Research and development $ 88.5 $ 73.0 $ 15.5 $ 175.9 $ 144.8 $ 31.2
% of net revenues 8.8 % 7.5 % 9.0 % 7.5 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Research and development expense generally includes personnel-related costs, including payroll and stock-based compensation, outside service costs associated with the research and development of new products and enhancements to existing products, software, equipment, material and maintenance costs, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and IT.
For the three and six months ended June 30, 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.
31
Table of Contents
Income from operations (in millions):
Three Months Ended
June 30, Six Months Ended
June 30,
2023 2022 Change 2023 2022 Change
Clear Aligner
Income from operations $ 306.1 $ 307.2 $ (1.1) $ 583.6 $ 619.9 $ (36.3)
Operating margin % 36.8 % 38.5 % 36.0 % 38.6 %
Systems and Services
Income from operations $ 52.0 $ 45.6 $ 6.5 $ 87.6 $ 96.4 $ (8.8)
Operating margin % 30.7 % 26.6 % 27.1 % 28.8 %
Total income from operations 1
$ 171.9 $ 188.2 $ (16.3) $ 305.4 $ 386.3 $ (80.8)
Operating margin % 17.2 % 19.4 % 15.7 % 19.9 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
1 Refer to Note 13 “Segments and Geographical Information” of the Notes to Condensed Consolidated Financial Statements for details on unallocated corporate expenses and the reconciliation to Condensed Consolidated Income from Operations.
Clear Aligner
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 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
June 30, Six Months Ended
June 30,
2023 2022 Change 2023 2022 Change
Interest income $ 4.4 $ 0.2 $ 4.2 $ 6.8 $ 0.9 $ 5.8
% of net revenues 0.4 % — % 0.3 % — %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Interest income generally includes interest earned on cash, cash equivalents and investment balances.
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
June 30, Six Months Ended
June 30,
2023 2022 Change 2023 2022 Change
Other income (expense), net $ (4.8) $ (14.8) $ 10.1 $ (6.0) $ (26.1) $ 20.1
% of net revenues (0.5) % (1.5) % (0.3) % (1.3) %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
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.
32
Table of Contents
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
June 30, Six Months Ended
June 30,
2023 2022 Change 2023 2022 Change
Provision for income taxes $ 59.8 $ 60.8 $ (1.0) $ 106.6 $ 114.0 $ (7.4)
Effective tax rates 34.8 % 35.0 % 34.8 % 31.6 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Our effective tax rate differs from the statutory federal income tax rate of 21% for both the three and six 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 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
Marketable securities, short-term 55,805 57,534
Marketable securities, long-term 26,023 41,978
Total $ 1,033,784 $ 1,041,562
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. 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 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 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
33
Table of Contents
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 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. 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 June 30, 2023. Refer to Note 9 “Common Stock Repurchase Program” of the Notes to Condensed Consolidated Financial Statements for details on our stock repurchase programs.
• 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 six months ended June 30, 2023 and 2022 (in thousands):
Six Months Ended
June 30,
2023 2022
Net cash flow provided by (used in):
Operating activities $ 451,672 $ 157,543
Investing activities (178,314) (72,078)
Financing activities (259,892) (312,396)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash (3,523) 4,978
Net (decrease) increase in cash, cash equivalents, and restricted cash $ 9,943 $ (221,953)
Operating Activities
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
• Stock-based compensation of $75.6 million related to equity awards granted to employees and directors;
• Depreciation and amortization of $71.6 million related to our investments in property, plant and equipment and intangible assets;
• Deferred taxes of $36.7 million related to increase in long term deferred tax position;
• Non-cash operating lease costs of $15.5 million related to lease amortization; and
• 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 $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; and
• 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 $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
34
Table of Contents
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 $259.9 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
Management’s discussion and analysis of our financial condition and results of operations is based upon our Condensed Consolidated Financial Statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures at the date of the financial statements. We evaluate our estimates on an on-going basis, including those related to revenue recognition, goodwill and finite-lived acquired intangible assets, income taxes, legal proceedings and litigations. We use authoritative pronouncements, historical experience and other assumptions as the basis for making the estimates. Actual results could differ from those estimates.
Revenue Recognition
Our revenues are derived primarily from the sale of aligners, scanners, and services from our Clear Aligner and Systems and Services segments. We enter into sales contracts that may consist of multiple distinct performance obligations where certain performance obligations of the sales contract are not delivered in one reporting period. We measure and allocate revenues according to ASC 606-10, “Revenues from Contracts with Customers.”
Determining the standalone selling price (“SSP”) in order to allocate consideration from the contract to the individual performance obligations is the result of various factors, such as changing trends and market conditions, historical prices, costs, and gross margins. While changes in the allocation of the SSP between performance obligations will not affect the amount of total revenues recognized for a particular contract, any material changes could impact the timing of revenue recognition, which would have a material effect on our financial position and result of operations. This is because the contract consideration is allocated to each performance obligation, delivered or undelivered, at the inception of the contract based on the SSP of each distinct performance obligation.
We allocate revenues for each clear aligner treatment plan based on each unit’s SSP. Management considers a variety of factors such as same or similar product historical sales, costs, and gross margin, which may vary over time depending upon the unique facts and circumstances related to each performance obligation in making these estimates. In addition to historical data, we take into consideration changing trends and market conditions. For treatment plans with multiple 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.
We estimate the SSP of each element in a scanner system and services sale taking into consideration same or similar product historical prices as well as our discounting strategies.
Recent Accounting Pronouncements
See Note 1 “ Summary of Significant Accounting Policies ” of the Notes to Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements.