What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-02 compared with 2024-05-03 · 126 added, 84 removed, 202 unchanged (51% of the section changed)

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Macroeconomic Challenges and Military Conflicts in Ukraine and the Middle East

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.

Our revenues are susceptible to fluctuations caused by macroeconomic conditions, inflation, changes to currency exchange rates, higher 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 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.

During the first half of 2024, we believe sales of our products were impacted by macroeconomic conditions that adversely impacted disposable income and consumer demand and we believe this trend could continue in the second half of 2024.

We also 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.

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.

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

dollar strengthened against major currencies, which negatively impacted our financial condition and results of operations for the quarter.

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 ongoing conflict in the Middle East may further exacerbate general and regional macroeconomic instability, particularly if fighting spreads to other locations, create shipping and logistical challenges or cost increases, or lead to sanctions or boycotts.

Our iTero business is headquartered in Israel.

In the second quarter of 2024, the timing and cost of shipping our products was not materially impacted and we have put measures in place to help reduce the risk of experiencing significant delays in the future.

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, but we are not currently being materially impacted.

While, there have been export and import restrictions imposed against Israel, we are not currently being materially impacted by any trade sanctions.

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

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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.

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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.

Specifically, we are managing financial impacts through strategic product innovations, introductions and pricing actions, implementing cost saving measures and evaluating hiring needs.

As an example, there was significant adoption of the Invisalign Comprehensive 3in3 product after it was introduced in 2023 that has continued 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.

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

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

For the three months ended June 30, 2024, our business operations reflect the following:

• Revenues of $1,028.5 million, an increase of 2.6% year-over-year;

• Clear Aligner revenues of $817.3 million, an increase of 3.5% year-over-year;

◦ Americas Clear Aligner revenues of $372.3 million, an increase of 1.6% year-over-year;

• Clear Aligner revenues of $831.7 million, a decrease of 0.1% year-over-year;

◦ Americas Clear Aligner revenues of $371.8 million, a decrease of 2.4% year-over-year;

◦ International Clear Aligner revenues of $383.0 million, an increase of 1.2% 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;

◦ Clear Aligner case volume increased 3.2% year-over-year and Clear Aligner case volume for teenage patients increased 8.0% year-over-year;

• Imaging Systems and CAD/CAM Services revenues of $196.8 million, an increase of 16.1% year-over-year;

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• Net income of $96.6 million with diluted net income per share of $1.28;

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

• Operating cash flow of $28.7 million;

• Cash, cash equivalents and marketable securities of $782.1 million as of June 30, 2024;

• Cash provided by operating activities of $159.8 million;

• Capital expenditures of $53.5 million, predominantly related to increases in our manufacturing capacity and facilities;

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

• Number of employees was 21,805 as of June 30, 2024, a decrease of 4.8% year-over-year.

Other Statistical Data and Trends

• As of March 31, 2024, approximately 17.6 million people worldwide have been treated with our Invisalign system.

• As of June 30, 2024, approximately 18.2 million people worldwide have been treated with our Invisalign system.

Management measures these results by comparing to the millions of people who can benefit from straighter teeth and uses this data to target opportunities to expand the market for orthodontics by educating consumers about the benefits of straighter teeth using the Invisalign system.

• For the first quarter of 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.

• For the second quarter of 2024, total Invisalign cases submitted with a digital scanner in the Americas increased to 95.9%, up from 94.2% * in the second quarter of 2023 and international scans increased to 89.8%, up from 87.9% * in the second quarter of 2023.

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

• The total utilization rate in the second quarter of 2024 remained flat at 7.5 cases per doctor compared to the second 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 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.

The utilization rate among our North American orthodontist customers decreased to 28.8 cases per doctor in the second quarter of 2024 compared to 29.2 * cases per doctor in the second quarter of 2023 and the utilization rate among our North American GP customers increased to 5.3 cases per doctor in the second quarter of 2024 compared to 5.2 cases per doctor in the second quarter of 2023.

▪ International:

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.

International doctor utilization rate was 6.7 cases per doctor in the second quarter of 2024 compared to 6.6 cases per doctor in the second 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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▪ 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.

▪ In the U.S., Canada, and EMEA, we also offer 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.

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▪ 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):

Net revenues for our Clear Aligner and Systems and Services segments by region for the three and six months ended June 30, 2024 and 2023 are as follows (in millions):

Three Months Ended

Net Revenues 2024 2023 Change

June 30, Six Months Ended

Net Revenues 2024 2023 Change 2024 2023 Change

Clear Aligner net revenues:

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Total net revenues $ 1,028.5 $ 1,002.2 $ 26.3 2.6 % $ 2,025.9 $ 1,945.3 $ 80.6 4.1 %

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 months ended March 31, 2024 and 2023 is as follows (in thousands):

Case volume data which represents Clear Aligner case shipments for the three and six months ended June 30, 2024 and 2023 is as follows (in thousands):

Three Months Ended

2024 2023 Change

June 30, Six Months Ended

2024 2023 Change 2024 2023 Change

Total case volume 642.7 622.6 20.1 3.2 % 1,247.8 1,213.6 34.2 2.8 %

Changes and percentages are based on actual values.

Certain tables may not sum or recalculate due to rounding.

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.

For the three months ended June 30, 2024, total net revenues increased by $26.3 million as compared to the same period in 2023, primarily due to an increase in Systems and Services net revenue from higher scanner average selling price ("ASP") and non-system sales and Clear Aligner net revenues from an increase in volume partially offset by lower ASP.

For the six months ended June 30, 2024, total net revenues increased by $80.6 million as compared to the same period in 2023, primarily due to an increase in Systems and Services net revenues from higher scanner ASP and non-system sales and Clear Aligner volume, partially offset by lower Clear Aligner ASP.

Clear Aligner - Americas

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.

For the three months ended June 30, 2024, Americas net revenues decreased by $9.3 million as compared to the same period in 2023, primarily due to a 2.6% decrease in ASP, resulting in a decrease of net revenues of $10.0 million.

The decrease in ASP was primarily driven by a product mix shift to lower priced products which reduced net revenues by $25.3 million and higher promotional discounts which decreased net revenues by $19.1 million.

These decreases were partially offset by lower net deferrals which increased net revenues by $29.5 million and price changes which increased net revenues by $5.1 million.

For the six months ended June 30, 2024, Americas net revenues decreased by $3.5 million as compared to the same period in 2023, primarily due to a 0.5% decrease in ASP, resulting in a decrease of net revenues of $4.1 million.

The decrease in ASP was primarily driven by a product mix shift to lower priced products which reduced net revenues by $47.7 million and higher promotional discounts which decreased net revenues by $34.3 million.

These decreases were partially offset by lower net deferrals which increased net revenues by $65.4 million and price changes which increased net revenues by $11.1 million.

Clear Aligner - International

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.

For the three months ended June 30, 2024, International net revenues increased by $4.6 million as compared to the same period in 2023, primarily due to a 6.8% increase in case volumes, resulting in increased net revenues by $25.6 million, partially offset by slightly lower ASP which decreased net revenues by $20.9 million.

Lower ASP was largely due to higher promotional discounts which reduced net revenues by $29.4 million, a product mix shift to lower priced products reduced net revenues by $15.1 million, and unfavorable foreign exchange rates decreased net revenues by $13.9 million.

The decreases in ASP were partially offset by lower net deferrals and price changes which increased net revenues by $26.1 million and $11.8 million, respectively.

For the six months ended June 30, 2024, International net revenues increased by $21.1 million as compared to the same period in 2023, primarily due to a 6.0% increase in case volumes, resulting in increased net revenues by $44.3 million, partially offset by slightly lower ASP which decreased net revenues by $23.2 million.

Lower ASP was largely due to higher promotional discounts which reduced net revenues by $51.2 million, a product mix shift to lower priced products reduced net revenues by $32.6 million, and unfavorable foreign exchange rates decreased net revenues by $20.4 million.

The decreases in ASP were partially offset by lower net deferrals and price changes which increased net revenues by $53.7 million and $25.0 million, respectively.

Clear Aligner - Non-Case

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.

For the three and six months ended June 30, 2024, non-case net revenues increased by $3.7 million and $8.9 million, respectively 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 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.

For the three months ended June 30, 2024, Systems and Services net revenues increased by $27.3 million as compared to the same period in 2023 primarily due to higher scanner ASP which increased net revenues by $11.7 million, an increase in sales of upgrade scanner systems which increased net revenues by $11.1 million, and higher services revenues which increased net revenues by $3.3 million.

For the six months ended June 30, 2024, Systems and Services net revenues increased by $54.1 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 $20.7 million, higher scanner ASP which increased net revenues by $13.8 million, higher services revenue which increased net revenues by $8.9 million and higher scanner volume which increased net revenues by $8.9 million.

Additionally, CAD/CAM software revenues increased net revenues by $4.5 million.

These increases were partially offset by lower sales of pre-owned scanner systems which decreased net revenues by $5.5 million.

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

Three Months Ended

2024 2023 Change

June 30, Six Months Ended

2024 2023 Change 2024 2023 Change

Clear Aligner

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Clear Aligner

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.

For the three months ended June 30, 2024, our gross margin percentage decreased as compared to the same period in 2023 primarily due to lower ASPs and increased manufacturing spend.

For the six months ended June 30, 2024, our gross margin percentage decreased as compared to the same period in 2023 primarily due to lower ASPs and increased manufacturing spend.

Systems and Services

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.

For the three and six months ended June 30, 2024, our gross margin percentage increased as compared to the same periods in 2023 primarily due to higher ASPs, partially offset by higher manufacturing variances.

Selling, general and administrative (in millions):

Three Months Ended

2024 2023 Change

June 30, Six Months Ended

2024 2023 Change 2024 2023 Change

Selling, general and administrative $ 452.3 $ 453.2 $ (0.9) $ 904.1 $ 892.9 $ 11.2

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Selling, general and administrative expense generally includes personnel-related costs, including payroll, stock-based compensation and commissions for our sales force, marketing and advertising expenses including media, clinical education, marketing materials, trade shows and industry events, legal and outside service costs, equipment, software and maintenance costs, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and Information Technology (“IT”).

For the three months ended March 31, 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.

For the three months ended June 30, 2024, selling, general and administrative expense was flat compared to the same period in 2023 primarily due to lower outside services and marketing spend partially offset by higher employee costs, including higher stock-based compensation and bonus.

For the six months ended June 30, 2024, selling, general and administrative expense increased compared to the same period in 2023 primarily due to higher employee costs, including higher fringe benefits, stock-based compensation and bonus partially offset by lower outside services and marketing expense.

Research and development (in millions):

Three Months Ended

2024 2023 Change

June 30, Six Months Ended

2024 2023 Change 2024 2023 Change

Research and development $ 92.2 $ 88.5 $ 3.7 $ 184.1 $ 175.9 $ 8.1

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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 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.

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

For the three months ended June 30, 2024, research and development expense increased compared to the same period in 2023 primarily due to higher employee costs, including salaries, fringe benefits and stock-based compensation, net of capitalized labor costs related to internal use software, partially offset by lower outside services expense.

For the six months ended June 30, 2024, research and development expense increased compared to the same period in 2023 primarily due to higher employee costs, including salaries, fringe benefits and stock-based compensation, net of capitalized labor costs related to internal use software, partially offset by lower outside services expense.

Legal settlement loss (in millions):

Three Months Ended

June 30, Six Months Ended

2024 2023 Change 2024 2023 Change

Legal settlement loss

$ 31.1 $ — $ 31.1 $ 31.1 $ — $ 31.1

% of net revenues 3.0 % — % 1.5 % — %

Changes and percentages are based on actual values.

Certain tables may not sum or recalculate due to rounding.

For the three and six months ended June 30, 2024, we recorded a loss of $31.1 million due to legal settlements, primarily related to the Misty Snow Antitrust Class Action.

Refer to Note 7 “ Legal Proceedings ” of the Notes to Condensed Consolidated Financial Statements for more information.

Income from operations (in millions):

Three Months Ended

2024 2023 Change

June 30, Six Months Ended

2024 2023 Change 2024 2023 Change

Clear Aligner

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1 Refer to Note 14 “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.

For the three and six months ended June 30, 2024, our operating margin percentage decreased compared to the same periods in 2023 primarily due to legal settlement losses.

Refer to Note 7 “ Legal Proceedings ” of the Notes to Condensed Consolidated Financial Statements for more information.

Clear Aligner

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.

For the three and six months ended June 30, 2024, our operating margin percentage decreased compared to the same periods in 2023 primarily due to a decrease in gross margin which was partially offset by operating leverage.

Systems and Services

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.

For the three and six months ended June 30, 2024, our operating margin percentage increased compared to the same periods in 2023 primarily due to higher gross margin.

Interest income (in millions):

Three Months Ended

2024 2023 Change

June 30, Six Months Ended

2024 2023 Change 2024 2023 Change

Interest income $ 3.3 $ 4.4 $ (1.1) $ 7.7 $ 6.8 $ 0.9

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

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.

For the three months ended June 30, 2024, interest income decreased compared to the same period in 2023 primarily due to lower cash and cash equivalents, partially offset by higher interest rates.

For the six months ended June 30, 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

2024 2023 Change

June 30, Six Months Ended

2024 2023 Change 2024 2023 Change

Other income (expense), net $ (6.5) $ (4.8) $ (1.7) $ (6.6) $ (6.0) $ (0.6)

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

For the three months ended March 31, 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.

For the three months ended June 30, 2024, other income (expense), net decreased compared to the same period in 2023 primarily due to the unfavorable impact of foreign exchange rates.

For the six months ended June 30, 2024, other income (expense), net decreased compared to the same period in 2023 primarily due to the unfavorable impact of foreign exchange rates, partially offset by a gain recorded on our equity investments.

Provision for income taxes (in millions):

Three Months Ended

2024 2023 Change

June 30, Six Months Ended

2024 2023 Change 2024 2023 Change

Provision for income taxes $ 47.3 $ 59.8 $ (12.5) $ 100.7 $ 106.6 $ (5.9)

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Certain tables may not sum or recalculate due to rounding.

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

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, 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.

The decrease in our effective tax rate for the three months ended June 30, 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, partially offset by remeasurement of Switzerland deferred tax asset due to Swiss tax rate change.

The decrease in our effective tax rate for the six months ended June 30, 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, partially offset by lower tax deduction from stock-based compensation.

Liquidity and Capital Resources

Liquidity and Trends

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

As of June 30, 2024 and December 31, 2023, we had the following cash and cash equivalents and short-term and long-term marketable securities (in thousands):

June 30, 2024 December 31, 2023

Cash and cash equivalents $ 761,429 $ 937,438

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Total $ 782,111 $ 980,764

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.

As of June 30, 2024 and December 31, 2023, approximately $642.1 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 do not expect to incur significant additional costs upon repatriation of these foreign

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

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• 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.

There have been no material changes to our purchase commitments for goods and services during the six months ended June 30, 2024 as compared to the year ended December 31, 2023 .

• There have been no material changes to our future operating lease payments during the six months ended June 30, 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.

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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.

• In January 2023, our Board of Directors authorized a plan to repurchase up to $1.0 billion of our common stock, $500.0 million of which had been utilized as of June 30, 2024.

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

Refer to Note 10 “Common Stock Repurchase Program” of the Notes to Condensed Consolidated Financial Statements for details on our stock repurchase programs.

• 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.

• As of June 30, 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.

• As of June 30, 2024, we agreed, in principle, to settle legal matters for a total of $31.1 million.

We expect to seek final court or administrative approvals, as applicable, in the second half of fiscal year 2024.

Settlement payments will be made in accordance with the terms and conditions as set forth in the settlement agreements and/or court approvals.

Refer to Note 7 “ Legal Proceedings ” of the Notes to Condensed Consolidated Financial Statements for more information.

Sources and Uses of Cash

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

Three Months Ended

The following table summarizes our condensed consolidated cash flows for the six months ended June 30, 2024 and 2023 (in thousands):

Six Months Ended

Net cash flow provided by (used in):

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Operating Activities

For the three months ended March 31, 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:

For the six months ended June 30, 2024, cash flows from operations of $188.5 million resulted primarily from our net income of approximately $201.6 million as well as the following:

Significant adjustments to net income

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

• Deferred taxes of $9.5 million related to a decrease in long term deferred tax position;

• Depreciation and amortization of $69.1 million related to our investments in property, plant and equipment and intangible assets;

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• Non-cash operating lease costs of $19.0 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.

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

Significant changes in working capital

• Net outflow of $146.9 million in accounts receivable due to timing of collections and increased revenues;

• Net outflow of $80.9 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 $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.

Net cash used in investing activities was $192.1 million for the six months ended June 30, 2024 and primarily consisted of a $77.1 million outflow for the Cubicure Acquisition, an outflow of $75.0 million for our investment in Heartland and purchases of property, plant and equipment in the amount of $62.8 million.

Financing Activities

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.

Net cash used in financing activities was $163.3 million for the six months ended June 30, 2024 and primarily consisted of an outflow of $150.0 million for share repurchases and payroll taxes paid for equity awards through share withholdings of $27.6 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 and legal proceedings and litigation.

We evaluate our estimates on an ongoing 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.

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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.

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.

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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