Align Technology 10-Q 2022-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2022

or

For the transition period from to

Commission file number: 000-32259

ALIGN TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

410 North Scottsdale Road, Suite 1300

Tempe, Arizona 85288

(Address of principal executive offices, including zip code)

(602) 742-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares outstanding of the registrant’s Common Stock, $0.0001 par value, as of October 28, 2022 was 78,112,351.

ALIGN TECHNOLOGY, INC.

TABLE OF CONTENTS

Invisalign, Align, the Invisalign logo, ClinCheck, Invisalign Assist, Invisalign Teen, Invisalign Go, Vivera, SmartForce, SmartTrack, SmartStage, SmileView, iTero, iTero Element, Orthocad, iCast, iRecord and exocad, among others, are trademarks and/or service marks of Align Technology, Inc. or one of its subsidiaries or affiliated companies and may be registered in the United States and/or other countries.

PART I—FINANCIAL INFORMATION

ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

Showing the first 8K of 102K characters. Open the full section

Forward-Looking Statements

In addition to historical information, this quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include, among other things, our expectations and intentions regarding our strategic objectives and the means to achieve them, our beliefs and expectations regarding macroeconomic conditions, including inflation, fluctuations in currency exchange rates, rising interest rates, supply chain challenges, implications and impacts of trends in consumer confidence, consumer sentiment and demand, market volatility, weakness in general economic conditions and recession concerns, our expectations regarding the impact of the military conflict in Ukraine generally and specifically regarding our operations and assets in Russia, including the potential ramifications of sanctions and regarding relations with other countries and impact on our workforce located in Russia, our expectations regarding the near and long-term implications of the COVID-19 pandemic on the global and regional economies, our marketing and efforts to build our brand awareness, our beliefs regarding digital dentistry and its potential to impact our business, our intentions regarding expanding our business, 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 expectation regarding customer and consumer purchasing behavior, including expectations related to consumer demand for digital solutions, 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, results of operations and financial condition, 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 judgments we make related to our tax obligations, our predicted level of operating expenses and gross margins and other factors beyond our control, 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, as well as other statements regarding our future operations, financial condition and prospects and business strategies. These statements may contain words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or other words indicating future results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in particular, the risks discussed below in Part II, Item 1A “Risk Factors.” We undertake no obligation to revise or update these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the Securities and Exchange Commission (the “SEC”).

Executive Overview of Results

Trends and Uncertainties

Our business strategic priorities remain focused on four principal pillars of growth: (i) international expansion; (ii) general practitioner dentists (“GPs”) adoption; (iii) patient demand and conversion; and (iv) orthodontic utilization. Our growth strategy depends on our ability to facilitate the digital transformation of dentistry happening around the world, our continuous focus on innovation, and expansion to meet and exceed evolving customer expectations as the array of products and services available to them increases. Below is a discussion of the significant trends and uncertainties that could impact to our operations:

Macroeconomic Challenges and Military Conflict in Ukraine

Our revenues are susceptible to fluctuations in macroeconomic conditions, in line with factors such as inflation, rising interest rates, recession concerns, supply chain challenges, market volatility, and wars and military actions, each of which are impacting customer confidence, consumer sentiment and demand. Many of these same factors are further impacting our costs through increases in raw material prices, transportation costs, labor costs, supply and distribution operations and the operations of our suppliers. Additionally, many of our international operations are denominated in currencies other than the U.S. dollar and are being impacted by macroeconomic slowing or contraction causing weakening against the U.S. dollar, which is negatively impacting our financial condition and results of operations. We expect the dollar to remain strong or strengthen further against

many of these currencies. The nature and extent of the impact of these factors varies by time and region and remain uncertain and unpredictable.

The military conflict between Russia and Ukraine has continued to increase the unpredictability of the already uncertain macroeconomic conditions. We remain deeply concerned about the devastating events that have and continue to unfold in Ukraine and the significant humanitarian, economic and societal tragedy unfolding there. We continue to employ a significant number of research and development personnel in Russia as well as sales, marketing and administrative personnel. We do not have employees in Ukraine. Our top priority continues to be the safety and security of our employees and their families, particularly those most directly impacted by the hostilities and the resulting sanctions, retaliatory sanctions and recently the military conscription of hundreds of thousands of people. We have taken efforts to support our team members in the region, including helping them financially and working to maintain their safety and security. We furthermore accelerated programs underway before the conflict began aimed at maintaining and growing our research and development operations over the long run that includes diversifying the facilities at which our personnel are located.

Although immaterial to our consolidated financial statements, our commercial business operations in Russia have been significantly impacted by the conflict. We remain committed to providing continuity of care consistent with our values and ethical responsibility to patients who are in Invisalign treatment. In doing so, we remain diligent managing compliance with global sanctions applicable to our business, including significant restrictions imposed by countries on both sides of the conflict targeting business entities, persons and certain activities. The pace at which sanctions are being imposed and the expanding number and breadth of the sanctions enacted continue to create global and regional economic challenges that have caused and are expected to continue to cause significant uncertainty and unpredictability to our operations. In September 2022, Russia announced a partial mobilization of reserve military personnel creating additional operational impacts for us, including reduced operational activities and prompting the relocation or departure of some of our employees that has continued into the fourth quarter of 2022. This has caused and is expected to continue to cause significant uncertainty, unpredictability and difficulties with staffing and operations.

Our Board of Directors and its applicable committees receive regular updates from management regarding the military conflict between Russia and Ukraine and continue to provide oversight of the risks to our personnel, operations and other areas of strategic importance. Our management continues to closely monitor the situation and evaluate additional ways in which we can support our employees and operations.

COVID-19 Pandemic Update

Although there remains significant uncertainty surrounding the COVID-19 pandemic for global and regional economies, its overall impact is gradually declining. During the third quarter of 2022, we experienced the impacts of the COVID-19 pandemic primarily in the Asia Pacific region, particularly in China where continued lockdowns decreased economic activity generally; however, in other regions, we observed that most dental practices are substantially functioning at pre-pandemic levels.

Our top priority remains the health and safety of our employees and their families, our customers and their staff. In 2022, we have gradually reopened many of our offices and adopted a flexible hybrid schedule that allows many of our employees the opportunity to collaborate and connect with others in our offices three days per week while having the option to work remotely other days. We believe that this added flexibility benefits employees and Align overall.

In general, we expect the challenges and risks discussed above to persist, although to a lesser extent than those experienced over the last few years. In turn, we expect the uncertainties and unpredictability that have impacted consumers, global and regional economies as well as our business and the businesses of our customers and suppliers to continue but to a lesser degree. Nevertheless, comparing our financial results for the reporting periods of 2022 to the same reporting periods of 2021 or earlier may not be a useful means by which to evaluate the health of our business and our results of operations due to volatility in business environment caused by the pandemic.

Changing Product Preferences

As the markets for clear aligners continue to mature, we anticipate customer demands will evolve. We expect to meet customer preferences with innovative treatment options that may include more choices to address a wider scope of treatment goals and budgets based on our existing and new products. This has and may continue to result in larger variations in product mix and selling prices regionally and globally. The implications of variations in product mix on our financial statements and business operations remains uncertain.

We strive to manage the challenges from the macroeconomic conditions, the conflict in Ukraine, COVID-19 and the evolution of our 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 have also sought to address supply chain shortages and delays by proactively communicating with our suppliers and distributors and modifying our purchase order commitments to mitigate the risks of production interruptions and maintaining inventory levels as appropriate. We also continue to innovate and introduce new and enhanced products that augment our doctor customer experiences. Additionally, we have also increased our cybersecurity efforts to detect, protect against potential incidents and recover from actual incidents and events.

Further discussion of the impact of these challenges on our business may be found in Part II, Item 1A of this Quarterly Report on Form 10-Q under the heading “Risk Factors.”

Key Financial and Operating Metrics

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

For the three months ended September 30, 2022, our business operations reflect the following:

• Revenues of $890.3 million, a decrease of 12.4% year-over-year;

• Clear Aligner revenues of $732.8 million, a decrease of 12.5% year-over-year;

◦Americas Clear Aligner revenues of $352.0 million, a decrease of 13.8% year-over-year;

◦International Clear Aligner revenues of $312.7 million, a decrease of 16.7% year-over-year;

◦Clear Aligner case volume decrease of 11.9% year-over-year and Clear Aligner case volume decrease for teenage patients of 2.9% year-over-year;

• Imaging Systems and CAD/CAM Services revenues of $157.5 million, a decrease of 11.7% year-over-year;

• Income from operations of $143.7 million and operating margin of 16.1%;

• Effective tax rate of 40.7%;

• Net income of $72.7 million with diluted net income per share of $0.93;

• Cash, cash equivalents and marketable securities of $1,141.0 million as of September 30, 2022;

• Operating cash flow of $266.5 million;

• Capital expenditures of $75.3 million, predominantly related to increases in our manufacturing capacity and facilities; and

• Number of employees was 23,800 as of September 30, 2022, an increase of 10.2% year-over-year.

Other Statistical Data and Trends

• As of September 30, 2022, approximately 13.9 million people worldwide have been treated with our Invisalign system, approximately 81,000 iTero scanners have been sold and approximately 52,000 exocad software licenses have been installed. Management measures these results by comparing to the millions of people who can benefit from straighter teeth and dental practices that could use intraoral scanners 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, dental professionals and/or labs and service providers to use iTero intraoral scanners, and dental labs and practitioners to install exocad CAD/CAM software.

• For the third quarter of 2022, total Invisalign cases submitted with a digital scanner in the Americas increased to 92.1%, up from 87.9% in the third quarter of 2021 and international scans increased to 84.3%, up from 79.3% in the third quarter of 2021. For the third quarter of 2022, 97.3% of Invisalign cases submitted by North American orthodontists were submitted digitally.

• Total utilization rate in the third quarter of 2022 decreased to 6.8 cases per doctor compared to 7.7 cases per doctor in the third quarter of 2021. Utilization rates in North America and our International locations were as follows:

▪North America: Utilization rate among our North American orthodontist customers decreased to 25.9 cases per doctor in the third quarter of 2022 compared to 29.7 cases per doctor in the third quarter of 2021 and the utilization rate among our North American GP customers decreased to 4.8 cases per doctor in the third quarter of 2022 compared to 5.0 cases per doctor in the third quarter of 2021.

▪International: International doctor utilization rate was 6.0 cases per doctor in the third quarter of 2022 compared to 6.5 cases per doctor in the third quarter of 2021.

***** Invisalign utilization rates are calculated by the number of cases shipped divided by the number of doctors to whom cases were shipped. Our International region includes Europe, Middle East and Africa (“EMEA”) and Asia Pacific (“APAC”). Latin America (“LATAM”) is excluded from the International region based on its immateriality to the quarter; however is included in the Total utilization.

Results of Operations

Net Revenues by Reportable Segment

We group our operations into two reportable segments: Clear Aligner segment and Systems and Services segment.

• Our Clear Aligner segment consists of Comprehensive Products, Non-Comprehensive Products and Non-Case revenues as defined below:

▪Comprehensive Products include, but are not limited to, Invisalign Comprehensive and Invisalign First.

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

▪Non-Case products include, but are not limited to, retention products, Invisalign training, adjusting tools used by dental professionals during the course of treatment and Consumer Products that are complementary to our doctor-prescribed principal products such as aligner cases (clamshells), teeth whitening products, cleaning solutions (crystals, foam and other material) and other oral health products available in certain e-commerce channels in select markets. We also offer in the U.S. and Canada, a Doctor Subscription Program which is a monthly subscription program based on the doctor’s monthly need for retention or limited treatment. The program allows doctors the flexibility to order both “touch-up” or retention aligners within their subscribed tier and is designed for a segment of experienced Invisalign trained doctors who are currently not regularly using our retainers or low-stage aligners.

• Our Systems and Services segment consists of our iTero intraoral scanning systems, which includes a single hardware platform and restorative or orthodontic software options. Our services include subscription software, disposables, rentals, pay per scan services, as well as exocad’s CAD/CAM software solutions that integrate workflows to dental labs and dental practices.

Net revenues for our Clear Aligner and Systems and Services segments by region for the three and nine months ended September 30, 2022 and 2021 are as follows (in millions):

Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.

Case volume data which represents Clear Aligner case shipments for the three and nine months ended September 30, 2022 and 2021 is as follows (in thousands):

Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.

For the three months ended September 30, 2022, total net revenues decreased $125.6 million as compared to the same period in 2021, primarily due to a decrease in Clear Aligner case volumes, unfavorable foreign exchange rates, and a decrease in scanner volumes, partially offset by favorable Clear Aligner net deferrals.

For the nine months ended September 30, 2022, total net revenues decreased $88.4 million as compared to the same period in 2021, primarily due to decreases in Clear Aligner case volumes and scanner volumes, and unfavorable foreign exchange rates, partially offset by increases in Clear Aligner non-case revenues, service revenues and an increase in Clear Aligner average selling price (“ASP”).

Clear Aligner - Americas

For the three months ended September 30, 2022, Americas net revenues decreased by $56.4 million as compared to the same period in 2021, primarily due to a 15.5% decrease in case volumes, which reduced net revenues by $63.1 million, which was partially offset by an increase in ASP which increased net revenues by $6.7 million. Higher ASP was mainly due to lower net deferrals which increased net revenues by $12.0 million, processing fees charged on most shipments and price increases in certain markets which increased revenues by $11.7 million. The ASP increase was partially offset by unfavorable promotional discounts which decreased net revenues $11.6 million.

For the nine months ended September 30, 2022, Americas net revenues decreased by $52.9 million as compared to the same period in 2021, primarily due to a decrease in case volumes of 9.2% which reduced net revenues by $107.7 million, partially offset by an increase in ASP which increased net revenues by $54.8 million. Higher ASP was mainly due to processing fees charged on most shipments and price increases in certain markets which increased revenues by $40.1 million along with lower net deferrals which increased net revenues by $28.9 million. The increase in ASP were partially offset by unfavorable promotional discounts which reduced net revenues by $8.3 million.

Clear Aligner - International

For the three months ended September 30, 2022, International net revenues decreased by $62.8 million as compared to the same period in 2021, primarily due to lower ASP, which decreased net revenues by $35.1 million and a 7.4% decrease in case volumes which also reduced net revenues by $27.7 million. Lower ASP was largely driven by unfavorable foreign exchange rates which decreased net revenues by $42.7 million and a product mix shift to lower priced products which decreased net revenues by $26.4 million. The decrease in ASP was partially offset by lower net deferrals, which increased net revenues by $27.7 million, and processing fees charged on most shipments, which increased net revenues by $17.0 million.

For the nine months ended September 30, 2022, International net revenues decreased by $88.5 million as compared to the same period in 2021 due to a 5.1% decrease in case volumes, which decreased net revenues by $57.1 million, and lower ASP, which decreased net revenues by $31.4 million. Lower ASP was largely due to unfavorable foreign exchange rates which resulted in lower net revenues of $99.0 million, a product mix shift to lower priced products which decreased net revenues by $38.6 million, and unfavorable promotional discounts which decreased net revenues $25.6 million. The decrease in ASP was partially offset by lower net deferrals which increased net revenues by $70.5 million, and processing fees charged on most shipments, which increased net revenues by $59.6 million.

Clear Aligner - Non-Case

For the three and nine months ended September 30, 2022, non-case net revenues increased by $14.5 million and $50.6 million as compared to the same periods in 2021 mainly due to increased volume for retention products across most regions primarily driven by Vivera retainers.

Systems and Services

For the three months ended September 30, 2022, Systems and Services net revenues decreased by $20.8 million as compared to the same period in 2021 primarily due to by a lower number of scanners sold, which decreased net revenues $33.8 million, in addition to a lower scanner ASP. These decreases were partially offset by higher service and other revenues which increased $13.8 million, mostly due to a larger installed base.

For the nine months ended September 30, 2022, Systems and Services net revenues increased by $2.5 million as compared to the same period in 2021 primarily due to higher service and other revenues, which increased $49.1 million, mostly due to a larger installed base mostly offset by a lower number of scanners sold, which decreased net revenues by $43.2 million, and lower scanner ASP.

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

Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.

Cost of net revenues includes personnel-related costs including payroll and stock-based compensation for staff involved in the production process, the cost of materials, packaging, freight and shipping related costs, depreciation on capital equipment and facilities used in the production process, amortization of acquired intangible assets and training costs.

Clear Aligner

For the three months ended September 30, 2022, our gross margin percentage decreased as compared to the same period in 2021 primarily due to increased manufacturing spend as we continue to ramp our new manufacturing facility in Poland,

higher freight costs, lower ASP and a higher mix of additional aligners.

For the nine months ended September 30, 2022, our gross margin percentage decreased as compared to the same period in 2021 primarily due to increased manufacturing spend as we continue to ramp our new manufacturing facility in Poland, higher freight costs in addition to a higher mix of additional aligners. These factors were partially offset by higher ASP.

Systems and Services

For the three and nine months ended September 30, 2022, our gross margin percentage decreased as compared to the same periods in 2021 primarily due to manufacturing inefficiencies from lower production volumes and higher component costs in addition to lower ASP. These factors were partially offset by higher service revenues.

Selling, general and administrative (in millions):

Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.

Selling, general and administrative expense generally includes personnel-related costs, including payroll, stock-based compensation and commissions for our sales force, marketing and advertising expenses including media, market research, marketing materials, clinical education, 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 September 30, 2022, selling, general and administrative expense decreased compared to the same period in 2021 primarily due to lower advertising and marketing costs and lower incentive compensation. These decreases were partially offset by higher salaries expense, fringe benefits and stock-based compensation from increased headcount along with higher equipment, software and material costs.

For the nine months ended September 30, 2022, selling, general and administrative expense increased compared to the same period in 2021 primarily due to higher salaries expense, fringe benefits and stock-based compensation from increased headcount, higher equipment, software and maintenance costs in addition to increased travel and expense related costs. These increases were offset by lower incentive compensation and lower advertising and marketing costs.

Research and development (in millions):

Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.

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

For the three and nine months ended September 30, 2022, research and development expense increased compared to the same periods in 2021 primarily due to higher salaries expense, fringe benefits and stock-based compensation driven mainly by increased headcount as we continue to focus our investments in innovation and research. These increases were partially offset by lower incentive compensation.

Income from operations (in millions):

Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.

1 Refer to Note 13 “Segments and Geographical Information” of the Notes to Condensed Consolidated Financial Statements for details on unallocated corporate expenses and the reconciliation to Condensed Consolidated Income from Operations.

Clear Aligner

For the three and nine months ended September 30, 2022, our operating margin percentage decreased compared to the same periods in 2021 primarily due to lower gross margin as well as higher operating expenses as a percentage of net revenues.

Systems and Services

For the three and nine months ended September 30, 2022, our operating margin percentage decreased compared to the same periods in 2021 primarily due to higher operating expenses as a percentage of net revenues as well as lower gross margin.

Interest income (in millions):

Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.

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

For the three months ended September 30, 2022, interest income increased compared to the same period in 2021 primarily due to higher interest rates during 2022.

For the nine months ended September 30, 2022, interest income increased marginally compared to the same period in 2021 primarily due to higher interest rates during 2022, which was partially offset by the interest earned from the arbitration award related to our investment in SmileDirectClub in the first quarter of 2021.

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

Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.

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

For the three months ended September 30, 2022, other income (expense), net decreased compared to the same period in 2021 primarily due to larger net foreign exchange losses from the weakening of international currencies against the U.S. dollar in the three months ended September 30, 2022 as compared to the same period in 2021.

For the nine months ended September 30, 2022, other income (expense), net decreased compared to the same period in 2021 primarily due to a $43.4 million gain associated to the arbitration award related to our investment in SmileDirectClub recognized in the first quarter of 2021 as well as larger net foreign exchange losses from the weakening of international currencies against the U.S. dollar in the nine months ended September 30, 2022 as compared to the same period in 2021.

Provision for income taxes (in millions):

Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.

Our effective tax rate differs from the statutory federal income tax rate of 21% for both the three and nine months ended September 30, 2022 and 2021 primarily due to the recognition of additional tax expense resulting from foreign income taxed at different rates, state income taxes, and non-deductible expenses in the U.S. partially offset by the recognition of excess tax benefits related to stock-based compensation. Additionally, a change in U.S. tax laws effective January 1, 2022 which requires capitalization and amortization of research and development expenses incurred after December 31, 2021 increased our effective tax rate for the three and nine months ended September 30, 2022.

The increase in our effective tax rate for the three and nine months ended September 30, 2022 compared to the same periods in 2021 is primarily attributable to the decrease and change in our jurisdictional mix of income, foreign income taxed at different rates, capitalization and amortization of research and development expenses in 2022 and lower excess tax benefits from stock-based compensation.

The U.S. Inflation Reduction Act of 2022 (“IRA”) was enacted in the United States on August 16, 2022. The IRA imposes a 15% alternative minimum tax on the financial statement income of certain corporations which is effective for tax years beginning after December 31, 2022, as well as a 1% excise tax on the net fair market value of stock repurchases made after December 31, 2022. Based upon our analysis of the IRA, we have determined there is no impact to our tax provision for the three and nine months ended September 30, 2022. We will continue to evaluate the impact of these tax law changes on future periods.

Liquidity and Capital Resources

Liquidity and Trends

As of September 30, 2022 and December 31, 2021, we had the following cash and cash equivalents and short-term and long-term marketable securities (in thousands):

As of September 30, 2022 and December 31, 2021, approximately $669.6 million and $713.8 million, respectively, of cash, cash equivalents and marketable securities were held by our foreign subsidiaries. Our intent is to permanently reinvest the earnings from our international operations going forward, and our current plans do not require us to repatriate these earnings to fund our U.S. operations as we generate sufficient domestic operating cash flow and have access to external funding under our $300.0 million revolving line of credit. We believe that our current cash balances and the borrowing capacity under our credit facility, if necessary, will be sufficient to fund our business for at least the next 12 months.

The sanctions against Russian banks or international bank messaging systems due to the military conflict between Ukraine and Russia could impact our ability to access our cash in Russia but would not materially impact our liquidity position. As of September 30, 2022, cash and cash equivalents domiciled in Russia, which is required to fund their current operating requirements, represent approximately 3.9% of our total cash, cash equivalents and marketable securities.

Our material cash requirements are as follows:

• For 2022, we expect our investments in capital expenditures to exceed $300.0 million. Capital expenditures primarily relate to building construction and improvements as well as additional manufacturing capacity to support our international expansion. This includes our investment in an aligner fabrication facility in Wroclaw, Poland which began serving doctors during the second quarter of 2022 as a part of our strategy to bring operational facilities closer to customers. As we continue growing, we intend to expand our investments in research and development, manufacturing, treatment planning, sales and marketing operations to meet actual and anticipated local and regional demands.

• As of September 30, 2022, we have $449.9 million available for repurchase under the stock repurchase program authorized by our Board of Directors in May 2021. Refer to Note 9 “Common Stock Repurchase Program” of the Notes to Condensed Consolidated Financial Statements for details on our stock repurchase programs. Subsequent to the third quarter, on October 28, 2022 we entered into an accelerated stock repurchase agreement to repurchase $200.0 million under the program.

• There have been no material changes to our purchase commitments for goods and services and future operating lease payments during the periods covered by this 10-Q outside the normal course of business compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021.

Sources and Uses of Cash

The following table summarizes our condensed consolidated cash flows for the nine months ended September 30, 2022 and 2021 (in thousands):

Operating Activities

For the nine months ended September 30, 2022, cash flows from operations of $424.0 million resulted primarily from our net income of approximately $319.8 million as well as the following:

Significant adjustments to net income

• Stock-based compensation of $98.7 million related to equity awards granted to employees and directors;

• Depreciation and amortization of $92.1 million related to our investments in property, plant and equipment and intangible assets; and

• Non-cash operating lease costs of $22.8 million.

Significant changes in working capital

• Decrease of $213.4 million in accrued and other long-term liabilities primarily due to lower incentive accruals for 2022 in addition to the payment of our 2021 corporate bonus, as well as timing of payment of other activities;

• Increase of $197.9 million in deferred revenues due to the deferral of revenue on shipments over the period as well as timing of revenue recognition; and

• Increase of $108.5 million in inventories primarily due to lower shipment volumes over the period in addition to our efforts to manage stock at appropriate levels as required.

Investing Activities

Net cash used in investing activities was $157.5 million for the nine months ended September 30, 2022 which primarily consisted of purchases of property, plant and equipment of $238.7 million, purchases of marketable securities of $20.5 million and $12.3 million cash paid relating to a business acquisition. These outflows were partially offset by sales and maturities of our marketable securities of $116.1 million.

Financing Activities

Net cash used in financing activities was $301.5 million for the nine months ended September 30, 2022 which consisted of common stock repurchases of $275.0 million and payroll taxes paid for equity awards through share withholdings of $52.6 million which were partially offset by $26.1 million of proceeds from the issuance of common stock under our employee stock purchase plan.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations is based upon our Condensed Consolidated Financial Statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures at the date of the financial statements. We evaluate our estimates on an on-going basis, including those related to revenue recognition, goodwill and finite-lived acquired intangible assets, income taxes, legal proceedings and litigations. We use authoritative pronouncements, historical experience and other assumptions as the basis for making the estimates. Actual results could differ from those estimates.

Revenue Recognition

Our revenues are derived primarily from the sale of aligners, scanners, and services from our Clear Aligner and Systems and Services segments. We enter into sales contracts that may consist of multiple distinct performance obligations where certain performance obligations of the sales contract are not delivered in one reporting period. We measure and allocate revenues according to ASC 606-10, “Revenues from Contracts with Customers.”

Determining the standalone selling price (“SSP”) in order to allocate consideration from the contract to the individual performance obligations is the result of various factors, such as changing trends and market conditions, historical prices, costs, and gross margins. While changes in the allocation of the SSP between performance obligations will not affect the amount of total revenues recognized for a particular contract, any material changes could impact the timing of revenue recognition, which would have a material effect on our financial position and result of operations. This is because the contract consideration is allocated to each performance obligation, delivered or undelivered, at the inception of the contract based on the SSP of each distinct performance obligation.

We allocate revenues for each clear aligner treatment plan based on each unit’s SSP. Management considers a variety of factors such as same or similar product historical sales, costs, and gross margin, which may vary over time depending upon the unique facts and circumstances related to each performance obligation in making these estimates. In addition to historical data, we take into consideration changing trends and market conditions. For treatment plans with multiple future performance obligations, we also consider usage rates, which is the number of times a customer is expected to order more aligners after the initial shipment. Our process for estimating usage rates requires significant judgment and evaluation of inputs, including historical usage data by region, country and channel.

We estimate the SSP of each element in a scanner system and services sale taking into consideration same or similar product historical prices as well as our discounting strategies.

Recent Accounting Pronouncements

See Note 1 “Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements.

In the normal course of business, we are exposed to interest rate, foreign currency exchange and inflation risks that could impact our financial position and results of operations. In addition, we are subject to the broad market risk that is created by the global market disruptions and uncertainties resulting from macroeconomic challenges, the military conflict between Russia and Ukraine and the COVID-19 pandemic. Further discussion on these risks may be found in Item 1A of this is Quarterly Report on Form 10-Q under the heading “Risk Factors.”

Interest Rate Risk

Changes in interest rates could impact our anticipated interest income on our cash equivalents and investments in marketable securities. Our investments are fixed-rate short-term and long-term securities. Fixed-rate securities may have their fair market value adversely impacted due to a rise in interest rates, and, as a result, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. As of September 30, 2022, we had approximately $96.5 million invested in available-for-sale marketable securities. An immediate 10% change in interest rates would not have a material adverse impact on our future operating results and cash flows.

We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. As of September 30, 2022, we are not subject to risks from immediate interest rate increases on our unsecured revolving line of credit facility.

Currency Rate Risk

As a result of our international business activities, our financial results have been affected by factors such as changes in foreign currency exchange rates as well as economic conditions in foreign markets, and there is no assurance that exchange rate fluctuations will not harm our business in the future. We generally sell our products in the local currency of the respective countries. This provides some natural hedging because most of the subsidiaries’ operating expenses are generally denominated in their local currencies. Regardless of this natural hedging, our results of operations may be adversely impacted by exchange rate fluctuations.

We enter into foreign currency forward contracts for currencies where we have exposures, primarily the Euro, Chinese Yuan, Polish Zloty, Canadian Dollar and Brazilian Real, to minimize the short-term impact of foreign currency exchange rate fluctuations on cash and certain trade and intercompany receivables and payables. These forward contracts are not designated as hedging instruments and do not subject us to material balance sheet risk due to fluctuations in foreign currency exchange rates. The gains and losses on these forward contracts are intended to offset the gains and losses in the underlying foreign currency denominated monetary assets and liabilities being economically hedged. These instruments are generally one month in original maturity and are marked to market through earnings every period. We do not enter into foreign currency forward contracts for trading or speculative purposes. As our international operations grow, we will continue to reassess our approach to managing the risks relating to fluctuations in currency rates. It is difficult to predict the impact forward contracts could have on our results of operations.

Although we will continue to monitor our exposure to currency fluctuations, and, where appropriate, may use forward contracts to minimize the effect of these fluctuations, the impact of an aggregate change of 10% in foreign currency exchange rates relative to the U.S. dollar on our results of operations and financial position could be material.

Military Conflict in Ukraine

The U.S. and other nations have imposed sanctions on various sectors of the Russian economy and on transactions with certain Russian nationals and entities. Russia has also announced economic sanctions against the U.S. and other nations that include a ban on imports of certain products. Further beginning September 2022, Russia started partial mobilization of reserve military personnel, creating staffing and operational challenges for us; however, as of September 30, 2022, we do not expect these events to have any material impact on our operations. Our Russia net revenues as a percentage of our consolidated net revenues and our assets domiciled in Russia, including cash and cash equivalents, as a percentage of our total assets, are immaterial.

Inflation Risk

The economy has been impacted by certain macroeconomic challenges which have contributed to a rising inflationary trend that have impacted both our revenues and costs globally, and which we expect will continue into the foreseeable future. If our costs become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. There can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future.

Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of September 30, 2022, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

Changes in internal control over financial reporting.

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

For a discussion of legal proceedings, refer to Note 6 “Legal Proceedings” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q*.*

The following discussion is divided into two sections. The first, entitled “Risks Relating to our Business Operations and Strategy,” discusses some of the risks that may affect our business, results of operations and financial condition. The second, captioned “General Risk Factors,” discusses some of the risks that apply generally to companies and to owning our common stock, in particular. You should carefully review both sections, as well as our condensed consolidated financial statements and notes thereto and other information appearing in this Quarterly Report on Form 10-Q, for important information regarding these and other risks that may affect us. The order we have chosen to list the risks below or the sections in which we have identified them should not be interpreted to mean we deem any risks to be more or less important or likely to occur or, if any do occur, that their impact may be any less significant than others. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this report because they could cause our actual results and conditions to differ materially from those statements. Before you invest in Align, you should know that investing involves risks, including those described below. The risks below are not the only ones we face. If any of the risks actually occur, our business, financial condition and results of operations could be negatively affected, the trading price of our common stock could decline, and you may lose all or part of your investment.

Summary of Risk Factors

The following is a summary of the risks that are more fully described below in this “Risk Factors” section:

Risks Relating to our Business Operations and Strategy

• Inflation, fluctuations in currency exchange rates, consumer confidence and demand, weakness in general economic conditions and recessions could negatively affect our financial condition and results of operations.

• Our results of operations have been materially adversely affected by global and regional efforts to mitigate the spread of COVID-19 and we expect this will continue in as yet unknown ways and to varying degrees as the virus evolves and circumstances dictate.

• The military conflict between Russia and Ukraine has created a humanitarian crisis, materially impacted economic activities and may materially impact our global and regional operations.

• Our net revenues are dependent primarily on our Invisalign system and iTero scanners and any decline in sales or average selling price of these products, for any reason, may adversely affect net revenues, gross margin and net income.

• Competition in the markets for our products is increasing and we expect aggressive competition from existing competitors, other companies that may introduce new technologies in the future and customers who alone or with others create orthodontic appliances and solutions or other products or services that compete with us.

• A large portion of our total revenues are derived from international sales and we are dependent on our international operations, which exposes us to foreign operational, political, military and other risks that may harm our business.

• Our success depends on our ability to develop, successfully introduce, achieve market acceptance of, and manage new products and services.

• As we continue to grow, we are subject to growth related risks, including risks related to excess or constrained capacity and operational inefficiencies at our manufacturing and treat facilities.

• Our products and information technology systems are critical to our business. Issues with product development or enhancements, IT system integration, implementation, updates and upgrades along with security and data protection risks have previously and could again in the future disrupt our operations, which could have a material adverse impact on our business and operating results.

• If we are unable or fail to protect our customer, patient, employee or other protected health or personal information or if we are unable to comply with applicable privacy, security and data protection laws, our operations may be severely adversely impacted, patient care could suffer, we could be liable for related damages, and our business, operations and reputation could be harmed.

• Demand for our products may not increase as rapidly as we anticipate or may decrease due to resistance to non-traditional treatment methods, which could have a material adverse impact on our business and operating results.

• Our operating results have and will continue to fluctuate in the future, which makes predicting the timing and amount of our revenues, costs and expenditures difficult.

• A disruption in the operations of a primary freight carrier, higher shipping costs or shipping delays could disrupt our supply chain and cause a decline in our net revenues or a reduction in our earnings.

• If we fail to accurately predict our volume growth, hire too many or too few technicians, or manufacture too many or too few products, the delivery time for our products could be delayed or our costs may exceed our revenues, each of which could adversely affect our results of operations.

• We are dependent on our marketing activities to deepen our market penetration and raise awareness of our brand and products, which may not prove successful or may become less effective or more costly to maintain in the long term.

• Our success depends in part on our proprietary technology, and if we fail to successfully obtain or enforce our intellectual property (“IP”) rights, our competitive position may be harmed. Litigating claims of this type are costly and could distract our management and cause a decline in our results of operations and adversely impact our reputation.

• If we or any vendors on whose products or services we rely for our products and services infringe the patents or IP rights of other parties or are subject to a patent infringement claim, our ability to grow our business may be severely limited.

• Obtaining approvals and complying with governmental regulations, particularly those related to personal healthcare information, financial information, quality systems, competition, anti-trust, data governance, data privacy and cybersecurity are expensive and time-consuming, and any failure to obtain or maintain approvals or comply with regulations regarding our products or services or the products and services of our suppliers or customers could materially harm our sales, result in substantial penalties and fines and cause harm to our reputation.

• We are highly dependent on third-party suppliers, some of whom are sole source suppliers, for certain key machines, components and materials, and our business and operating results could be harmed if supply is restricted or ends or the price of raw materials used in our manufacturing process increases.

• We rely on highly skilled personnel and, if we fail to attract, motivate, train or retain highly skilled personnel, it may be more difficult to grow effectively and pursue our strategic priorities.

• We use distributors for a portion of the importation, marketing and sales efforts related to our products and services, which exposes us to risks that may be harmful to our sales and operations, including the risk that these distributors do not comply with applicable laws or our internal procedures.

• Our business exposes us to potential liability for the quality and safety of our products and services, how we advertise and market those products and services and how and to whom we sell them, and we may incur substantial expenses or be found liable for substantial damages or penalties if we are subject to claims or litigation.

• Increased focus on compliance with current or future ESG laws and increased scrutiny of our ESG policies and practices may materially increase our costs, expose us to potential liability, may adversely impact our reputa

Showing the first 8K of 132K characters. Open the full section

None

(a) Exhibits:

† The certifications attached as Exhibit 32.1 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the SEC and are not to be incorporated by reference into any filing of the Registrant under the Securities Act or the Exchange Act, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.