What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-03 compared with 2023-11-03 · 110 added, 162 removed, 176 unchanged (61% 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 product mix and product adoption, our expectations regarding competition and our ability to compete in our target markets, our expectations regarding the sales growth of our intraoral scanner sales, 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 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 expectations regarding the impact of the military conflicts in the Middle East and Ukraine and our operations and assets in Israel and Russia, our expectations regarding the near and long-term implications of the COVID-19 pandemic on the global and regional economies, 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 product mix and product adoption, our expectations regarding competition and our ability to compete in our target markets, our expectations regarding the sales growth of our intraoral scanners, clear aligners and other products, our expectations regarding the impact of the military conflicts in the Middle East and Ukraine and our operations and assets in Israel and Russia, 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 productivity impact 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 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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Trends and Uncertainties

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

Our business strategic priorities focus on four principal pillars for growth:

(i) international expansion;

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

(iii) patient demand and conversion;

(ii) general dental practitioners (“GP”) treatment;

(iii) patient demand;

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.

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:

Macroeconomic Challenges and Military Conflicts in Ukraine and the Middle East

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

Our revenues are susceptible to fluctuations caused by macroeconomic conditions, inflation, changes to currency exchange rates, rising interest rates, actual and threatened wars and military actions, threats of or actual recessions, supply chain challenges, market volatility, and other factors, each of which impacts 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.

In 2023, we have experienced negative impacts on the demand for our products which we believe are primarily due to the macroeconomic conditions that ultimately adversely impact disposable income and consumer demand.

In particular, dental practices and industry research firms reported deteriorating orthodontic trends for the third quarter of 2023, including decreased patient visits and increased patient appointment cancellations, along with fewer case starts overall, especially among adult patients.

The impacts of these trends vary by time and region, making operational results uncertain and difficult to predict.

In 2023, we believe that sales of our products were primarily harmed by macroeconomic conditions that ultimately adversely impacted disposable income and consumer demand and this trend could continue in 2024.

Additionally, for 2024, we expect the military conflict between Russia and Ukraine to continue to create market uncertainties and dampen consumer sentiment and demand, particularly in Europe.

The impact of declining demand may vary by time and region, making operational results uncertain and difficult to predict.

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 third quarter of 2023, the U.S.

dollar has strengthened against a number of other currencies, negatively impacting our financial condition and results of operations as compared to the second quarter of 2022.

The strengthening or weakening of the U.S.

dollar remains uncertain and unpredictable.

Moreover, the military conflict between Russia and Ukraine increased the unpredictability of the volatile macroeconomic conditions in 2022 and has continued doing so in 2023.

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

Similarly, the recent conflict in the Middle East may further exacerbate general and regional macroeconomic instability, particularly if fighting is prolonged or spreads to other locations.

Our iTero business is headquartered near Tel Aviv, Israel in Petach Tikv, which is close to areas affected by ongoing violence and military action.

Additionally, we have employees and consultants in Israel that have been called for service in the current conflict in the Middle East and such persons may be absent for an unknown period of time.

We continue to monitor the potential for violence and military actions that may directly or indirectly impact our personnel, manufacturing, supply chain, and sales in unpredictable ways.

Evolving Product Offerings

As the markets for clear aligners, intraoral scanners 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.

We further expect competition with other clear aligner suppliers that supplant traditional bracket and wires and with other intraoral scanner manufacturers to continue to increase.

To succeed in these evolving markets, we believe we need to continue meeting 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, selling prices, and sales volumes, 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.

The impacts of the COVID-19 pandemic have decreased compared to 2022.

Accordingly, 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 conflicts in Ukraine and the Middle East, the evolution of our product offerings and 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.

In the first quarter of 2024, the U.S.

dollar weakened against major currencies on a sequential basis, which favorably impacted our financial condition and results of operations for the quarter.

However, on a year-over-year basis, the net impact from foreign exchange volatility was unfavorable to our financial condition and results of operations for the quarter.

Foreign exchange volatility and the subsequent strengthening or weakening of the U.S dollar against other currencies remains uncertain and unpredictable.

The recent conflict in the Middle East may further exacerbate general and regional macroeconomic instability, particularly if fighting is prolonged, it spreads to other locations, creates shipping and logistical challenges or cost increases, or leads to sanctions or boycotts.

Our iTero business is headquartered in Israel and the timing and cost of shipping our products has been impacted.

Additionally, we have employees and consultants in Israel that have been called for military service and they may be unavailable for an unknown period of time.

The conflict may continue to spread to other areas which may further impact our business.

We continue to monitor the potential for violence and military actions that may directly or indirectly impact our personnel, manufacturing, supply chain, and sales.

Changing Product Preferences

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.

We expect 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.

This may result in larger and unpredictable variations in geographic and product mix and selling prices with uncertain implications on our financial statements and business operations.

We strive to manage the challenges from the trends and uncertainties, including the macroeconomic conditions, military conflicts 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, implementing cost saving measures and slowing hiring.

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

For instance, in 2023, there was significant adoption of the Invisalign Comprehensive 3in3 product and we anticipate continued adoption in 2024.

The 3in3 configuration offers doctors Invisalign Comprehensive treatment with a three-year treatment expiration date and three additional clear aligners included prior to the treatment expiration date.

The 3in3 product allows us to recognize more revenue up front but is offered at a lower price as compared to our traditional Invisalign comprehensive product that has a five-year treatment expiration date with unlimited additional clear aligners prior to the treatment end date.

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.”

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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 September 30, 2023, our business operations reflect the following:

For the three months ended March 31, 2024, our business operations reflect the following:

• Revenues of $997.4 million, an increase of 5.8% year-over-year;

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◦ International Clear Aligner revenues of $370.6 million, an increase of 4.6% year-over-year;

◦ Clear Aligner case volume increase of 2.3% year-over-year and Clear Aligner case volume increase for teenage patients of 8.4% year-over-year;

◦ Clear Aligner case volume increased 2.4% year-over-year and Clear Aligner case volume increase for teenage patients of 5.8% year-over-year;

• Imaging Systems and CAD/CAM Services revenues of $180.2 million, an increase of 17.5% year-over-year;

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• Net income of $105.0 million with diluted net income per share of $1.39;

• Cash, cash equivalents and marketable securities of $1,301.9 million as of September 30, 2023;

• Cash, cash equivalents and marketable securities of $902.5 million as of March 31, 2024;

• Operating cash flow of $28.7 million;

• Capital expenditures of $9.4 million, predominantly related to increases in our manufacturing capacity and facilities;

• Number of employees was 22,680 as of September 30, 2023, a decrease of 4.7% year-over-year.

• Number of employees was 21,670 as of March 31, 2024, a decrease of 5.9% year-over-year.

Other Statistical Data and Trends

• As of September 30, 2023, approximately 16.4 million people worldwide have been treated with our Invisalign system.

• As of March 31, 2024, approximately 17.6 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 third quarter of 2023, total Invisalign cases submitted with a digital scanner in the Americas increased to 94.6%, up from 92.3% in the third quarter of 2022 and international scans increased to 87.6%, up from 84.3% in the third quarter of 2022.

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

• The total utilization rate in the third quarter of 2023 increased to 7.1 cases per doctor compared to 7.0 cases per doctor in the third quarter of 2022.

• For the first quarter of 2024, total Invisalign cases submitted with a digital scanner in the Americas increased to 95.6%, up from 93.4%* in the first quarter of 2023 and international scans increased to 88.9%, up from 86.9%* in the first quarter of 2023.

For the first quarter of 2024, 98.2% of Invisalign cases submitted by North American orthodontists were submitted digitally.

• The total utilization rate in the first quarter of 2024 increased to 7.2 cases per doctor compared to 7.1 cases per doctor in the first quarter of 2023.

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

▪ North America:

The utilization rate among our North American orthodontist customers increased to 28.8 cases per doctor in the third quarter of 2023 compared to 27.6 cases per doctor in the third quarter of 2022 and the utilization rate among our North American GP customers increased to 4.9 cases per doctor in the third quarter of 2023 compared to 4.8 cases per doctor in the third quarter of 2022.

The utilization rate among our North American orthodontist customers decreased to 28.2 cases per doctor in the first quarter of 2024 compared to 28.7 * cases per doctor in the first quarter of 2023 and the utilization rate among our North American GP customers remained flat at 4.9 cases per doctor in the first quarter of 2024 compared to the first quarter of 2023.

▪ International:

International doctor utilization rate was 6.1 cases per doctor in the third quarter of 2023 compared to 6.0 cases per doctor in the third quarter of 2022.

International doctor utilization rate was 6.3 cases per doctor in the first quarter of 2024 compared to 6.2 cases per doctor in the first quarter of 2023.

* 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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▪ 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.

▪ 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.

▪ Non-Comprehensive Products include, but are not limited to, Invisalign Moderate, Lite and Express packages and Invisalign Go and Invisalign Go Plus and Invisalign Palatal Expander.

▪ We also offer in the U.S., Canada, and EMEA, a Doctor Subscription Program which is our monthly subscription-based clear aligner program.

The program allows doctors the flexibility to order retainers and low-stage “touch-up” clear 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.

The low-stage aligners, the Touch up product, are included as a Non-Comprehensive Product.

▪ Non-Case products include, but are not limited to, retention products including retention aligners ordered through the Doctor Subscription Program, 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.

▪ 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.

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

▪ Our Systems and Services segment consists of sales related to our iTero intraoral scanning systems, which includes a single hardware platform and restorative or orthodontic software options, upgrades and leases of scanner systems, sales of pre-owned scanner systems, subscription software, disposables, 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, 2024 and 2023 are as follows (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30,

Net Revenues 2023 2022 Change 2023 2022 Change

Net Revenues 2024 2023 Change

Clear Aligner net revenues:

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Total net revenues $ 997.4 $ 943.1 $ 54.3 5.8 %

During the third quarter of 2023, we began including Touch Up case revenues in Americas and/or International net revenues that was previously included in Non-Case revenues and recast the nine months ended September 30, 2023 and the three months and nine months ended revenues September 30, 2022, respectively.

During the third quarter of 2023, we began including Touch Up case revenues in Americas and/or International net revenues that were previously included in Non-Case revenues and recast the three months ended March 31, 2023.

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 nine months ended September 30, 2023 and 2022 is as follows (in thousands):

Case volume data which represents Clear Aligner case shipments for the three months ended March 31, 2024 and 2023 is as follows (in thousands):

Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 Change 2023 2022 Change

2024 2023 Change

Total case volume 605.1 590.9 14.1 2.4 %

During the third quarter of 2023, we began including Touch Up case volumes in Total case volumes and recast the nine months ended September 30, 2023 and the three months and nine months ended revenues September 30, 2022, respectively.

Changes and percentages are based on actual values.

Certain tables may not sum or recalculate due to rounding.

For the three months ended September 30, 2023, total net revenues increased by $69.9 million as compared to the same period in 2022, primarily due to increases in Clear Aligner ASP's and scanner and Clear Aligner case volumes, partially offset by unfavorable scanner ASP's.

For the nine months ended September 30, 2023, total net revenues increased by $72.4 million as compared to the same period in 2022, primarily due to an increase in Clear Aligner ASP ’ s, non-case revenue, and Clear Aligner case volumes partially offset by a decrease in both scanner volumes and ASP ’ s.

For the three months ended March 31, 2024, total net revenues increased by $54.3 million as compared to the same period in 2023, primarily due to an increase in Clear Aligner volume and increases in System and Services net revenues from non-system sales, increased service revenue, and higher scanner volume.

Clear Aligner - Americas

For the three months ended September 30, 2023, Americas net revenues increased by $10.8 million as compared to the same period in 2022 mostly due to higher ASP which increased net revenues $12.0 million.

Higher ASP reflects price increases driving increased net revenues by $16.4 million along with higher additional aligners which increased net revenues by $10.9 million.

The increases in ASP were partially offset by unfavorable promotional discounts reducing net revenues by $8.6 million and a product mix shift to lower priced products which reduced net revenues by $7.9 million.

For the nine months ended September 30, 2023, Americas net revenues decreased by $8.3 million as compared to the same period in 2022 due to a 1.4% decrease in case volumes, resulting in a reduction of net revenues of $15.4 million, partially offset by a $7.1 million increase due to higher ASP.

Higher ASP includes price increases which increased net revenues by $54.8 million along with higher additional aligners which increased net revenues by $22.9 million.

The increases in ASP were partially offset by unfavorable promotional discounts reducing net revenues by $37.6 million and a product mix shift to lower priced products reducing net revenues by $30.1 million.

For the three months ended March 31, 2024, Americas net revenues increased by $5.8 million as compared to the same period in 2023, primarily due to a 1.6% increase in ASP, resulting in an increase of net revenues of $5.9 million.

Higher additional aligners increased net revenues by $27.2 million and price changes increased net revenues by $8.5 million.

These increases were partially offset by a product mix shift to lower priced products which reduced net revenues by $22.3 million and higher promotional discounts which decreased net revenues by $9.8 million.

Clear Aligner - International

For the three months ended September 30, 2023, International net revenues increased by $42.6 million as compared to the same period in 2022, due to a 5.5% increase in case volumes which resulted in an increased net revenues of $17.3 million, in addition to a $25.3 million increase due to higher ASP.

Higher ASP reflects higher additional aligners increasing net revenues by $25.3 million and price changes on most products increased net revenues by $23.1 million.

The increases in ASP were

partially offset by a product mix shift to lower priced products reducing net revenues by $19.8 million, and unfavorable promotional discounts which reduced net revenues by $7.3 million.

For the nine months ended September 30, 2023, International net revenues increased by $57.9 million as compared to the same period in 2022, due to a 3.3% increase in case volumes, resulting in an increase of net revenues by $34.4 million, and higher ASP increasing net revenues by $23.5 million.

Higher ASP was largely due to higher additional aligners increasing net revenues by $83.1 million, price increases on most products which increased net revenues by $80.1 million, and processing fees which increased net revenues by $8.5 million.

The increases in ASP were partially offset by a product mix shift to lower priced products reducing net revenues by $84.3 million, unfavorable foreign exchange rates which decreased net revenues by $36.0 million, and unfavorable promotional discounts which reduced net revenues by $25.1 million.

For the three months ended March 31, 2024, International net revenues increased by $16.4 million as compared to the same period in 2023, primarily due to a 5.3% increase in case volumes, resulting in increased net revenues by $18.7 million, partially offset by slightly lower ASP which decreased net revenues by $2.2 million.

Lower ASP was largely due to higher promotional discounts which reduced net revenues by $19.9 million, a product mix shift to lower priced products reducing net revenues by $17.1 million, and unfavorable foreign exchange rates which decreased net revenues by $6.5 million.

The decreases in ASP were partially offset by higher additional aligners and price changes which increased net revenues by $24.9 million and $13.9 million, respectively.

Clear Aligner - Non-Case

For the three and nine months ended September 30, 2023, non-case net revenues increased by $8.7 million and $26.8 million, respectively, as compared to the same periods in 2022 mainly due to increased volume of Vivera retainers across all regions.

For the three months ended March 31, 2024, non-case net revenues increased by $5.2 million as compared to the same period in 2023 mainly due to increased volume of Vivera retainers which includes retention aligners ordered through our Doctor Subscription Program.

Systems and Services

For the three months ended September 30, 2023, Systems and Services net revenue increased by $7.8 million as compared to the same period in 2022 mostly due to higher services revenues of $7.3 million.

A higher number of scanners sold increased net revenues by $17.1 million which was offset by lower scanner ASP which reduced net revenues by $18.9 million.

The increased scanner volumes reflect a larger number of trade-ins/upgrades from a DSO customer with a lower ASP.

For the nine months ended September 30, 2023, Systems and Services net revenues decreased by $4.1 million as compared to the same period in 2022 primarily due to a lower number of scanners sold which lowered net revenues by $25.1 million and lower scanner ASP which reduced net revenues by $18.4 million.

The decrease in scanner net revenues was mostly offset by higher service revenues of $23.8 million and other revenues which increased $15.7 million primarily due to revenue from sales of certified pre-owned scanners, CAD/CAM software, and scanner rentals.

For the three months ended March 31, 2024, Systems and Services net revenues increased by $26.8 million as compared to the same period in 2023 primarily due to an increase in sales of upgrade scanner systems which increased net revenues by $9.5 million, higher scanner volume which increased net revenues by $7.4 million and services revenue which increased net revenues by $8.7 million.

Additionally, Systems and Services net revenues increased due to higher scanner ASP which increased net revenues by $2.0 million.

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

Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 Change 2023 2022 Change

2024 2023 Change

Clear Aligner

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Clear Aligner

For the three and nine months ended September 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's.

For the three months ended March 31, 2024, our gross margin percentage decreased as compared to the same period in 2023 primarily due to increased manufacturing spend partially offset by higher net revenues.

Systems and Services

For the three months ended September 30, 2023, our gross margin percentage decreased as compared to the same periods in 2022 primarily due to lower ASP offset by lower service and freight costs and manufacturing efficiencies.

For the nine months ended September 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.

For the three months ended March 31, 2024, our gross margin percentage increased as compared to the same period in 2023 primarily due to higher net revenues and lower service and manufacturing costs.

Selling, general and administrative (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 Change 2023 2022 Change

2024 2023 Change

Selling, general and administrative $ 451.8 $ 439.7 $ 12.1

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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 and nine months ended September 30, 2023, selling, general and administrative expense increased compared to the same periods in 2022 primarily due to higher salaries expense, fringe benefits and stock-based and incentive compensation, offset by lower advertising and marketing costs.

For the three months ended March 31, 2024, selling, general and administrative expense increased compared to the same period in 2023 primarily due to higher employee costs, including higher salaries expense, fringe benefits and bonus payments.

Research and development (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 Change 2023 2022 Change

2024 2023 Change

Research and development $ 91.9 $ 87.4 $ 4.4

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

For the three and nine months ended September 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.

For the three months ended March 31, 2024, research and development expense increased compared to the same period in 2023 primarily due to higher employee costs, including salaries expense, fringe benefits and stock-based compensation as we continue to focus on our investments in innovation and research, partially offset by lower outside service provider spend.

Income from operations (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 Change 2023 2022 Change

2024 2023 Change

Clear Aligner

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Clear Aligner

For the three months ended September 30, 2023, our operating margin percentage increased compared to the same period in 2022 primarily due to improved operating leverage.

For the nine months ended September 30, 2023, our operating margin percentage decreased compared to the same period in 2022 primarily due to higher operating expenses and lower gross margin.

For the three months ended March 31, 2024, our operating margin percentage remained relatively flat compared to the same period in 2023 primarily due to a decrease in gross margin which was offset by operating leverage.

Systems and Services

For the three months ended September 30, 2023, our operating margin percentage decreased compared to the same period in 2022 primarily due to lower gross margin.

For the nine months ended September 30, 2023, our operating margin percentage decreased compared to the same period in 2022 primarily due to higher operating expenses partially offset by slightly higher gross margin.

For the three months ended March 31, 2024, our operating margin percentage increased compared to the same period in 2023 primarily due to higher gross margin.

Interest income (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 Change 2023 2022 Change

2024 2023 Change

Interest income $ 4.4 $ 2.3 $ 2.1

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

For the three and nine months ended September 30, 2023, interest income increased compared to the same periods in 2022 primarily due to higher interest rates during the first three quarters of 2023.

For the three months ended March 31, 2024, interest income increased compared to the same period in 2023 primarily due to higher interest rates partially offset by lower cash and cash equivalents.

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

Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 Change 2023 2022 Change

2024 2023 Change

Other income (expense), net $ (0.1) $ (1.2) $ 1.1

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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 and nine months ended September 30, 2023, other income (expense), net increased compared to the same periods in 2022 primarily due to the favorable impact of foreign exchange rates.

For the three months ended March 31, 2024, other income (expense), net increased compared to the same period in 2023 primarily due to a gain recorded on our equity investments, partially offset by the unfavorable impact of foreign exchange rates.

Provision for income taxes (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 Change 2023 2022 Change

2024 2023 Change

Provision for income taxes $ 53.4 $ 46.8 $ 6.5

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Certain tables may not sum or recalculate due to rounding.

Our effective tax rate differs from the statutory federal income tax rate of 21% for both the three and nine month periods ended September 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 September 30, 2023 compared to the same period in 2022 is primarily attributable to the application of newly issued tax guidance, change in our jurisdictional mix of income, partially offset by higher U.S.

taxes on foreign earnings and the remeasurement of Switzerland deferred tax asset due to Swiss tax rate change.

The decrease in our effective tax rate for the nine months ended September 30, 2023 compared to the same period in 2022 is primarily attributable to the application of newly issued tax guidance, change in our jurisdictional mix of income, partially offset by higher U.S.

Our effective tax rate differs from the statutory federal income tax rate of 21% for both the three month periods ended March 31, 2024 and 2023 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 expense in the U.S.

The decrease in our effective tax rate for the three months ended March 31, 2024 compared to the same period in 2023 is primarily attributable to the change in our jurisdictional mix of income and a decrease in U.S.

taxes on foreign earnings.

On July 21, 2023, the IRS issued Notice 2023-55 which specifically delayed the application of certain U.S.

foreign tax credit regulations that had previously limited the Company’s ability to claim credits on certain foreign taxes for the fiscal year ended December 31, 2022.

As a result of this new guidance, the Company recognized a one-time tax benefit related to prior year tax positions in the three and nine months ended September 30, 2023.

Liquidity and Capital Resources

Liquidity and Trends

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

September 30, 2023 December 31, 2022

As of March 31, 2024 and December 31, 2023, we had the following cash and cash equivalents and short-term and long-term marketable securities (in thousands):

March 31, 2024 December 31, 2023

Cash and cash equivalents $ 865,805 $ 937,438

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Total $ 902,525 $ 980,764

As of September 30, 2023 and December 31, 2022, approximately $920.6 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;

however, we may repatriate cash from time to time and expect the repatriation costs not to be significant.

As of March 31, 2024 and December 31, 2023, approximately $685.0 million and $784.7 million, respectively, of cash, cash equivalents and marketable securities were held by our foreign subsidiaries.

We continue to evaluate opportunities to repatriate our foreign earnings if or when needed.

We do not expect to incur significant additional costs upon repatriation of these foreign earnings.

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, 2023, cash and cash equivalents domiciled in Russia, which is required to fund their current operating requirements, represent approximately 0.9% 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 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 nine months ended September 30, 2023, we entered into or completed ASR's 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 September 30, 2023.

• Our purchase commitments consist primarily of open purchase orders for goods and services, including manufacturing inventory, supplies and services, sales and marketing, research and development services and technological services, issued in the normal course of business.

There have been no material changes to our purchase commitments for goods and services during the three months ended March 31, 2024 as compared to the year ended December 31, 2023 .

• There have been no material changes to our future operating lease payments during the three months ended March 31, 2024 as compared to the year ended December 31, 2023.

• For 2024, we expect our investments in capital expenditures to be approximately $100.0 million.

Capital expenditures primarily relate to building construction and improvements as well as manufacturing capacity in support of our continued expansion.

Despite the challenging market conditions, 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.

• In January 2023, our Board of Directors authorized a plan to repurchase up to $1.0 billion of our common stock, $350.0 million of which had been utilized as of March 31, 2024.

We continually evaluate opportunities to repurchase shares of our common stock depending on various factors including share price and liquidity.

Refer to Note 10 “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 26, 2023 we entered into an accelerated stock repurchase agreement to repurchase $250.0 million of our common stock under the January 2023 Repurchase 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.

• On September 6, 2023, we entered into a definitive agreement to acquire privately held Cubicure GmbH.

The purchase price for the transaction will be approximately €79 million subject to customary closing adjustments and adjustments for Align’s existing ownership of capital stock of Cubicure.

The acquisition is expected to close in the fourth quarter of 2023 or early 2024.

• As of March 31, 2024, we had no material off-balance sheet arrangements that have or are reasonably likely to have, a current or future material impact on our liquidity or capital resources.

• On April 22, 2024, we invested $75 million to purchase an additional equity interest in the equity of Heartland pursuant to the April 2024 Subscription Agreement.

Sources and Uses of Cash

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

Nine Months Ended

September 30,

The following table summarizes our condensed consolidated cash flows for the three months ended March 31, 2024 and 2023 (in thousands):

Three Months Ended

Net cash flow provided by (used in):

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Operating Activities

For the nine months ended September 30, 2023, cash flows from operations of $738.9 million resulted primarily from our net income of approximately $321.0 million as well as the following:

For the three months ended March 31, 2024, cash flows from operations of $28.7 million resulted primarily from our net income of approximately $105.0 million as well as the following:

Significant adjustments to net income

• Stock-based compensation of $115.2 million related to equity awards granted to employees and directors;

• Depreciation and amortization of $108.7 million related to our investments in property, plant and equipment and intangible assets;

• Other non-cash operating of $28.4 million million majority related to amortization of deferred commissions;

• Non-cash operating lease costs of $24.0 million related to lease amortization;

• Deferred taxes of $18.0 million related to increase in long term deferred tax position;

• Depreciation and amortization of $32.9 million related to our investments in property, plant and equipment and intangible assets;

• Stock-based compensation of $38.8 million related to equity awards granted to employees and directors;

• Non-cash operating lease costs of $9.6 million related to operating lease cost;

• Other non-cash operating activities of $(2.4) million primarily related to a gain recorded on our equity investment.

Significant changes in working capital

• Increase of $156.0 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 $80.3 million in accounts receivable due to timing of collections and partially offset by increased revenues;

• Increase of $82.9 million in deferred revenues due to the deferral of revenue on shipments;

• Increase of $31.6 million in inventories primarily due to our purchase of long lead components to meet expected demand.

• Net outflow of $79.2 million in prepaid expenses and other assets primarily due to the payment of UK VAT assessments related to prior periods, refer to Note 8.

Commitments and Contingencies ;

• Net outflow of $69.6 million in accounts receivable due to timing of collections, partially offset by increased revenues;

• Net outflow of $34.5 million in accrued and other long-term liabilities primarily due to payments on operating lease liabilities and higher incentive accruals for 2024, as well as timing of payment of other activities.

Investing Activities

Net cash used in investing activities was $182.6 million for the nine months ended September 30, 2023 and primarily consisted of purchases of property, plant and equipment of $144.3 million which included a building acquisition for $24.5 million, an equity method investments of $77.0 million and purchases of marketable securities of $2.4 million, partially offset by sales and maturities of our marketable securities of $40.9 million.

Net cash used in investing activities was $79.6 million for the three months ended March 31, 2024 and primarily consisted of the Cubicure acquisition of $77.1 million and purchases of property, plant and equipment of $9.4 million.

Financing Activities

Net cash used in financing activities was $248.1 million for the nine months ended September 30, 2023 and consisted of common stock repurchases net of $252.4 million and payroll taxes paid for equity awards through share withholdings of $22.3 million which were partially offset by $26.6 million of proceeds from the issuance of common stock under our employee stock purchase plan.

Net cash used in financing activities was $11.7 million for the three months ended March 31, 2024 and consisted of payroll taxes paid for equity awards through share withholdings of $26.1 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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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.

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

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

Actual results could differ from those estimates.

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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.

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 historical prices, changing trends and market conditions, costs, and gross margins.

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.

We allocate consideration 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.

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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.

For CAD/CAM services, we estimate the SSP of each element, including the initial software license and maintenance and support, using data such as historical prices.

Recent Accounting Pronouncements

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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