What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-05 compared with 2024-08-02 · 111 added, 95 removed, 233 unchanged (47% 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 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 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, higher 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 expectations regarding our tax positions and the judgements we make related to our tax obligations, 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 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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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.

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.

During 2024, we believe sales of our products have been impacted by macroeconomic conditions that adversely impacted disposable income and consumer demand and we believe this trend will continue for the remainder 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.

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Additionally, many of our international operations are denominated in currencies other than the U.S.

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.

In the third quarter of 2024, on a sequential basis, there was no significant impact from foreign exchange on our financial condition.

However, the U.S.

dollar remained strong against major currencies on a year-over-year basis, which negatively impacted 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 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.

The ongoing conflict in the Middle East may further exacerbate general and regional macroeconomic instability, particularly if fighting continues to spread to other locations, create shipping and logistical challenges or cost increases, lead to sanctions or boycotts, or otherwise may materially impact our operations.

For instance, our iTero business is headquartered in Israel.

To date in 2024, the timing and cost of shipping our products has not been materially impacted and we have put measures in place to help reduce the risk of experiencing significant delays in the future.

Additionally, although our operations have not thus far been materially impacted by employee absences, we have employees and consultants in Israel that have been called for military service and may be unavailable for an unknown period of time.

Furthermore, while there have been export and import restrictions imposed against Israel, we have not been materially impacted by any trade sanctions yet.

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

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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.”

Further discussion of the impact of these challenges on our business may be found in Part II, Item 1A “Risk Factors.”

Key Financial and Operating Metrics

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

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

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

• Revenues of $977.9 million, an increase of 1.8% year-over-year;

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◦ Clear Aligner case volume increased 2.5% year-over-year and Clear Aligner case volume for teenage patients increased 6.7% year-over-year;

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

• Imaging Systems and computer-aided design and computer-aided manufacturing (“CAD/CAM”) Services revenues of $191.0 million, an increase of 15.6% year-over-year;

• Income from operations of $162.3 million and operating margin of 16.6%;

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• Net income of $116.0 million with diluted net income per share of $1.55;

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

• Cash and cash equivalents of $1,041.9 million as of September 30, 2024;

• Cash provided by operating activities of $263.7 million;

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

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

• Capital expenditures of $29.8 million, primarily related to investments in our manufacturing capacity and facilities;

• Number of employees was 21,690 as of September 30, 2024, a decrease of 4.4% year-over-year.

Other Statistical Data and Trends

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

• As of September 30, 2024, approximately 18.9 million people worldwide have been treated with our Invisalign system.

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

• For the second quarter of 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.

• For the third quarter of 2024, total Invisalign cases submitted with a digital scanner in the Americas increased to 96.1%, up from 94.6% in the third quarter of 2023 and international scans increased to 89.3%, up from 87.6% in the third quarter of 2023.

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

• The total utilization rate in the third quarter of 2024 remained flat at 7.1 cases per doctor compared to the third 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 28.8 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.

The utilization rate among our North American orthodontist customers decreased to 28.3 cases per doctor in the third quarter of 2024 compared to 28.8 cases per doctor in the third quarter of 2023 and the utilization rate among our North American GP customers increased to 5.0 cases per doctor in the third quarter of 2024 compared to 4.9 cases per doctor in the third quarter of 2023.

▪ International:

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.

International doctor utilization rate was 6.2 cases per doctor in the third quarter of 2024 compared to 6.1 cases per doctor in the third 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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however is included in the Total utilization.

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 have recast business metrics for the periods presented above accordingly.

Results of Operations

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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 and Invisalign Palatal Expander.

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

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

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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 and six months ended June 30, 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 nine months ended September 30, 2024 and 2023 are as follows (in millions):

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June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

Net Revenues 2024 2023 Change 2024 2023 Change

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Total net revenues $ 977.9 $ 960.2 $ 17.7 1.8 % $ 3,003.8 $ 2,905.5 $ 98.3 3.4 %

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 and six months ended June 30, 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 six months ended June 30, 2024 and 2023 is as follows (in thousands):

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

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September 30,

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Total case volume 617.2 602.3 14.9 2.5 % 1,865.0 1,815.9 49.1 2.7 %

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 and six months ended June 30, 2023.

Changes and percentages are based on actual values.

Certain tables may not sum or recalculate due to rounding.

For the three months ended June 30, 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.

For the three months ended September 30, 2024, total net revenues increased by $18 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"), increase in non-system sales, and Clear Aligner net revenues from an increase in volume partially offset lower Clear Aligner ASP.

For the nine months ended September 30, 2024, total net revenues increased by $98 million as compared to the same period in 2023, primarily due to an increase in Systems and Services net revenues from higher scanner ASP, increase in non-system sales and services revenue and Clear Aligner net revenues from an increase in volume, partially offset by lower Clear Aligner ASP.

Clear Aligner - Americas

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.

For the three months ended September 30, 2024, Americas net revenues decreased by $17 million as compared to the same period in 2023, primarily due to a 3.9% decrease in ASP, resulting in a decrease of net revenues of $14 million.

The decrease in ASP was driven by unfavorable foreign exchange rates that decreased net revenues by $6 million , a mix shift to lower priced products and countries which reduced net revenues by $23 million and higher promotional discounts which decreased net revenues by $14 million.

These decreases were partially offset by lower net deferrals which increased net revenues by $23 million and price changes which increased net revenues by $6 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.

For the nine months ended September 30, 2024, Americas net revenues decreased by $21 million as compared to the same period in 2023, primarily due to a 1.6% decrease in ASP, resulting in a decrease of net revenues of $18 million.

The decrease in ASP was primarily driven by a mix shift to lower priced products and countries which reduced net revenues by $71 million and higher promotional discounts which decreased net revenues by $49 million.

These decreases were partially offset by lower net deferrals which increased net revenues by $86 million and price changes which increased net revenues by $16 million.

Clear Aligner - International

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.

For the three months ended September 30, 2024, International net revenues increased by $6 million as compared to the same period in 2023, primarily due to a 6.3% increase in case volumes, resulting in increased net revenues by $22 million.

This increase was partially offset by a decrease of 4.3% in ASP which decreased net revenues by $16 million.

Lower ASP was due to unfavorable foreign exchange rates that decreased net revenues by $5 million and a price reduction we took in the United Kingdom (“UK”) to offset VAT on our sales into the UK, which decreased net revenues by $8 million.

ASP was also negatively impacted by a mix shift to lower priced products and countries, which reduced net revenues by $15 million and

higher promotional discounts which reduced net revenues by $31 million.

The decreases in ASP were partially offset by lower net deferrals and price changes which increased net revenues by $26 million and $15 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.

For the nine months ended September 30, 2024, International net revenues increased by $27 million as compared to the same period in 2023, primarily due to a 6.1% increase in case volumes, resulting in increased net revenues by $67 million.

This increase was partially offset by a decrease of 3.4% in ASP which decreased net revenues by $39 million.

Lower ASP was due to unfavorable foreign exchange rates that decreased net revenues by $25 million, a price reduction we took in the UK to offset VAT on our sales into the UK, which decreased net revenues by $23 million, a mix shift to lower priced products and countries which reduced net revenues by $47 million and higher promotional discounts which reduced net revenues by $83 million.

The decreases in ASP were partially offset by lower net deferrals and price changes which increased net revenues by $80 million and $55 million, respectively.

Clear Aligner - Non-Case

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.

For the three and nine months ended September 30, 2024, non-case net revenues increased by $3 million and $12 million, respectively as compared to the same period in 2023 primarily 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 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.

For the three months ended September 30, 2024, Systems and Services net revenues increased by $26 million as compared to the same period in 2023 primarily due to higher scanner ASP which increased net revenues by $20 million, an increase in sales of upgrade scanner systems which increased net revenues by $7 million, and higher services revenues which increased net revenues by $7 million.

These increases were partially offset by lower volume and unfavorable foreign exchange rates which decreased net revenues by $10 million and $3 million, respectively.

For the nine months ended September 30, 2024, Systems and Services net revenues increased by $80 million as compared to the same period in 2023 primarily due to higher scanner ASP which increased net revenues by $38 million, an increase in sales of upgrade scanner systems which increased net revenues by $30 million, and higher services revenue which increased net revenues by $18 million.

Additionally, CAD/CAM software revenues increased net revenues by $6 million.

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

These increases were partially offset by lower volume and unfavorable foreign exchange rates which decreased net revenues by $3 million and $7 million, respectively.

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

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Clear Aligner

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.

For the three and nine months ended September 30, 2024, our gross margin percentage decreased as compared to the same periods in 2023 primarily due to lower ASPs.

Systems and Services

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.

For the three months ended September 30, 2024, our gross margin percentage increased as compared to the same period in 2023 primarily due to higher ASPs, partially offset by higher service and freight costs.

For the nine months ended September 30, 2024, our gross margin percentage increased as compared to the same period in 2023 primarily due to higher ASPs, partially offset by lower service revenue mix.

Selling, general and administrative (in millions):

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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 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.

For the three months ended September 30, 2024, selling, general and administrative expense increased compared to the same period in 2023 primarily due to higher employee costs, including higher salary, fringe benefits, stock-based compensation and bonus.

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

Research and development (in millions):

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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.

For the three months ended September 30, 2024, research and development expense decreased compared to the same period in 2023 primarily due to capitalization of labor costs related to internal use software, partially offset by higher employee costs.

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

Legal settlement loss (in millions):

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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.

For the three and nine months ended September 30, 2024, we recorded losses of $0.1 million and $31 million, respectively, due to legal settlements.

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

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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.

For the three months ended September 30, 2024, our operating margin percentage decreased compared to the same periods in 2023 primarily due to increased employee costs .

For the nine months ended September 30, 2024, our operating margin percentage decreased compared to the same periods in 2023 primarily due to increased employee costs and 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 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.

For the three and nine months ended September 30, 2024, our operating margin percentage decreased compared to the same periods in 2023 primarily due to a decrease in gross margin and increased employee costs.

Systems and Services

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.

For the three and nine months ended September 30, 2024, our operating margin percentage increased compared to the same periods in 2023 primarily due to higher gross margin, partially offset by increased employee costs.

Interest income (in millions):

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

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.

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

For the nine months ended September 30, 2024, interest income decreased compared to the same period in 2023 primarily due to lower cash and cash equivalents.

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

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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 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.

For the three months ended September 30, 2024, other income (expense), net increased compared to the same period in 2023 primarily due to the favorable impact of foreign exchange rates and losses on equity investments.

For the nine months ended September 30, 2024, other income (expense), net increased compared to the same period in 2023 primarily due to a gain recorded on our equity investments and the favorable impact of foreign exchange rates.

Provision for income taxes (in millions):

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2024 2023 Change 2024 2023 Change

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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 six month periods ended June 30, 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 nine month periods ended September 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 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.

The increases in our effective tax rate for the three and nine months ended September 30, 2024 compared to the same periods in 2023 are primarily attributable to the change in our jurisdictional mix of income, recognizing a one-time tax benefit related to the application of tax guidance issued during the three months ended September 30, 2023 , partially offset by a decrease in U.S.

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

Liquidity and Capital Resources

Liquidity and Trends

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

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

September 30, 2024 December 31, 2023

Cash and cash equivalents $ 1,041,935 $ 937,438

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Total $ 1,041,935 $ 980,764

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.

As of September 30, 2024 and December 31, 2023, approximately $756.5 million and $784.7 million, respectively, of cash, cash equivalents 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

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.

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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 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.

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

• For 2024, we expect our investments in capital expenditures to be above $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, $500.0 million of which had been utilized as of June 30, 2024.

• 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 September 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 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.

On October 25, 2024, we announced a plan to repurchase $275.0 million of our common stock through open market repurchases beginning in the fourth quarter of 2024 and continuing through the first quarter of 2025.

Refer to Note 16 “Subsequent Event” of the Notes to Condensed Consolidated Financial Statements for details on this common stock repurchase.

• As of September 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 September 30, 2024, we agreed, in principle, to settle certain legal matters for a total of $31.2 million.

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

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

• On October 23, 2024, we announced a restructuring plan to reduce costs by adjusting headcount for the existing business environment.

We expect to incur between approximately $25.0 million and $30.0 million of restructuring charges, primarily related to severance and other one-time post-employment benefits.

Sources and Uses of Cash

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

Six Months Ended

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

Nine Months Ended

September 30,

Net cash flow provided by (used in):

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Operating Activities

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:

For the nine months ended September 30, 2024, cash flows from operations of $452.2 million resulted primarily from our net income of approximately $317.6 million as well as the following:

Significant adjustments to net income

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• Non-cash operating lease costs of $28.6 million related to operating lease cost;

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

• Other non-cash operating activities of $6.9 million primarily related to an increase in our bad debt allowance and accounts receivable factoring.

Significant changes in working capital

• Net outflow of $135.2 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 inflow of $47.6 million in accrued and other long-term liabilities primarily due to timing of payments.

• Net outflow of $60.2 million in deferred revenue.

Investing Activities

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.

Net cash used in investing activities was $201.0 million for the nine months ended September 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 $92.6 million.

Partially offsetting the cash outflows, is $43.9 million in proceeds from marketable securities.

Financing Activities

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

Net cash used in financing activities was $152.7 million for the nine months ended September 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 $28.0 million which were partially offset by $25.3 million of proceeds from the issuance of common stock under our employee stock purchase plan.

Critical Accounting 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 U.S.

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.

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 ongoing basis, including those related to revenue recognition, goodwill and finite-lived acquired intangible assets, income taxes and legal proceedings and litigation.

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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