ALIGN TECHNOLOGY, INC. 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 and Section 21E of the Securities Exchange Act of 1934. These statements include, among other things, our expectations and intentions regarding our strategic objectives and the means to achieve them, our beliefs regarding the impact of technological innovation in general, and in our solutions and products in particular, on target markets, our beliefs regarding digital dentistry and its potential to impact our business, our expectations for the impact of the exocad acquisition, our beliefs regarding the potential for clinical solutions and their utilization to increase sales of our Invisalign system as well as the complementary products and solutions themselves, our expectations regarding product mix and product adoption, our expectations regarding the utilization rates for our products, including the impact of marketing on those rates and causes for periodic fluctuations of the rates, our expectations regarding the existence and impact of seasonality, our expectations regarding the sales growth of our intraoral scanner sales in international markets, our expectations regarding the productivity impact additional sales representatives will have on our sales and the impact of specialization of those representatives in sales channels, our expectations regarding the continued expansion of our international markets, including our expectation that international revenues will grow at a faster rate thanAmericas for the foreseeable future, our expectation regarding customer and consumer purchasing behavior, including expectations related to the consumer demand environment inChina especially forU.S. based products and services, our expectations regarding competition, our expectations regarding the implications of the COVID-19 pandemic and the health, safety and economic recovery from it, on the global economy, the businesses of our customers, and us, including our preparedness to react to changing circumstances and overall on our revenues, results of operations and financial condition, our expectations for our expenses and capital expenditures in particular, the actions we will take 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 balances and borrowing capacity, our expectations regarding potential additional litigation withSDC Financial LLC and certain affiliates regarding the "capital account" balance and other matters, the level of our operating expenses and gross margins and other factors beyond our control, as well as other statements regarding our future operations, financial condition and prospects and business strategies. These statements may contain words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," or other words indicating future results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations," and in particular, the risks discussed below in Part 2, 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 endedDecember 31, 2019 as filed with theSecurities and Exchange Commission .
Overview
Align Technology, Inc. ("We", "Our", "Align") is a global medical device company engaged in the design, manufacture and marketing of Invisalign® clear aligners, iTero® intraoral scanners and services for orthodontics, and restorative and aesthetic dentistry, and exocad® computer-aided design and computer-aided manufacturing ("CAD/CAM") software for dental laboratories and dental practitioners. Align's products are intended primarily for the treatment of malocclusion or the misalignment of teeth and are designed to help dental professionals achieve the clinical outcomes that they expect and the results patients desire. Our goal is to establish clear aligners as the principal solution for the treatment of malocclusions and our Invisalign clear aligners as the treatment solution of choice by orthodontists, general dental practitioners and patients globally. To date, over 9.0 million people worldwide have been treated with our Invisalign System. To encourage consumers to treat malocclusions with clear aligners under the direction and supervision of licensed dental professionals, we bring to market solutions that we believe will strengthen our digital dental platform for doctors, labs and partners, including establishing the iTero intraoral scanner and related services as the preferred 3D digital scanning solution and integrating newly acquired CAD/CAM solutions and workflows into the markets for clear aligner orthodontics and dental restorative treatments. We intend to continue focusing on these efforts through execution of our strategic growth drivers. For a further description of our strategic growth drivers, please review the Business Strategy section of our Annual Report on Form 10-K filed with theSecurities and Exchange Commission onFebruary 28, 2020 .
The successful execution of our business strategy may be affected by a number of factors including:
28
--------------------------------------------------------------------------------
Table of Contents
•New Technology, Products, and Feature Enhancements. We believe technological
innovations allowing dental professionals to more quickly and accurately
diagnose, plan and treat a wide range of cases from simple to complex combined
with new and improved products drives greater treatment predictability, clinical
applicability and ease of use for the dental professionals we serve; thereby
supporting adoption of Invisalign treatment in their practices. Furthermore, we
believe the digital revolution in dentistry is an important aspect of the
experience for our customers and their patients, encouraging the utilization of
our Invisalign solution and therefore comprising an important component of our
digital approach.
?Invisalign clear aligners: Since 2018, we have expanded our product portfolio
and launched or announced various new offerings including our Invisalign
treatment with Mandibular Advancement, Invisalign Go, Invisalign First and
Invisalign Moderate. We also continue to increase the clinical efficacy and
applicability of our products as exemplified most recently in the announcement
of Invisalign G8 with SmartForce Aligner Activation. In each instance, we have
broadened and strengthened our reach into key markets and demographics central
to our strategic plans.
?iTero Scanner: Over the last two years, we have expanded our intraoral digital
scanning solutions and launched or announced several new offerings including the
iTero Element, iTero Element Foundation and the iTero Element 5D Imaging system,
for which we announced in March 2020 that we had obtained U.S. FDA 501(K)
clearance and which we continue to release in additional countries, most
recently Mexico . The clearance of the iTero Element 5D Imaging system in the
U.S. markets and its release in other countries allows us to sell this unique
solution that combines 3D data, intraoral color photos and NIRI images into a
single, integrated scan improving doctor experiences and improving engagement
opportunities and communications with their patients. The iTero Element 5D aids
in the detection and monitoring of interproximal caries lesions above the
gingiva without using harmful radiation.
•exocad: On April 1, 2020 , we completed the acquisition of privately-held exocad
Global Holdings GmbH ("exocad"), a German dental CAD/CAM software company that
offers fully integrated workflows to dental labs and dental practices. We
believe the acquisition strengthens our digital platform by adding exocad's
expertise in restorative dentistry, implantology, guided surgery, and smile
design to extend our digital dental solutions and broadens the Align digital
platform towards fully interdisciplinary end-to-end workflows dentistry in lab
and at chairside. exocad also broadens our reach in digital dentistry with close
to 200 partners and more than 35,000 licenses installed worldwide.
To further the transformation of dental and orthodontic practices from outdated
manual and analog practices to end-to-end digital workflows, we recently
introduced virtual solutions such as Invisalign® Virtual Appointment and
Invisalign® Virtual Care; solutions that facilitate the safe, effective and
successful treatment of patients by conveniently connecting doctors and their
patients throughout their treatment plans.
•Invisalign Adoption. Our goal is to establish Invisalign clear aligners as the
treatment of choice for treating malocclusion, ultimately driving increased
product adoption and frequency of use by dental professionals, also known as
"utilization rates."
•For the third quarter of 2020, total Invisalign cases submitted with a digital
scanner in the Americas increased to 83.2%, up from 78.8% in the third quarter
of 2019 and international scans increased to 72.1%, up from 62.6% in the third
quarter of 2019. For the third quarter of 2020, 94.9% of Invisalign cases
submitted by North American orthodontists were submitted digitally. Our
quarterly utilization rates for the last five quarters are as follows:
29--------------------------------------------------------------------------------
Table of Contents
[[Image Removed: algn-20200930_g1.jpg]]
* 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 above chart based on its
immateriality to the quarter.
•Total utilization rate in the third quarter of 2020 increased to 7.1 cases per doctor compared to 6.1 cases per doctor in the third quarter of 2019.
?North America : Utilization rate among our North American orthodontist customers increased to 24.1 cases per doctor in the third quarter of 2020 compared to 19.1 cases per doctor in the third quarter of 2019 and the utilization rate among our North American GP customers increased to 4.2 cases per doctor in the third quarter of 2020 compared to 3.5 cases per doctor in the third quarter of 2019.
?International: International doctor utilization rate was 6.4 cases per doctor in the third quarter of 2020 compared to 5.5 cases in the third quarter of 2019.
We expect global utilization rates to steadily improve as doctors' clinical confidence in the use of Invisalign clear aligners increases with advancements in products and technology and as patient and doctor demands for treatments that emphasize convenience and safety through fewer in office visits and less invasive and quicker treatments rise. In addition, the teenage and younger market makes up 75% of the approximately 12 million total orthodontic case starts each year, and as we continue to drive adoption by teenage and younger patients through sales and marketing programs, we expect utilization rates to improve. However, our utilization rates will fluctuate from period to period due to a variety of factors, which may include seasonal trends in our business, COVID-19-related preventative measures and adoption rates for new products and features. •Number of New Invisalign Doctors Trained. We continue to expand our Invisalign customer base through the training of new doctors. During the nine months endedSeptember 30, 2020 , we trained 14,650 new Invisalign doctors of which 6,525 were trained in theAmericas region and 8,125 in the International region. In 2019, we trained a total of 22,275 new Invisalign doctors, of which 9,765 were trained in theAmericas region and 12,510 in the International region. •International Invisalign Growth. Our future growth is dependent upon the continued penetration and expansion of Invisalign product usage in international markets. Accordingly, we continue to focus our efforts towards increasing Invisalign clear aligner adoption by dental professionals internationally. Starting with the outbreak and spread of COVID-19 in the first quarter of 2020, we experienced significant disruption and uncertainty to our business, employees, doctors' practices, and the patterns and habits of their patients and consumers. While the most significant disruptions continued into the second quarter of 2020, their severity began to diminish in more recent months although significant uncertainties continue. For a further discussion of COVID-19 and its impact on our business, see the section entitled "COVID-19 Update" below. Prior to the impact of COVID-19, we experienced slower growth rates than prior periods inChina which we believe were primarily due to theU.S. -China trade war and resulting economic 30 -------------------------------------------------------------------------------- Table of Contents uncertainty which caused headwind for consumer demand especially for consumption of luxury goods and considered purchases. We also believe there has been increased competitive activity from clear aligner suppliers. Notwithstanding these issues inChina , we continue to see growth opportunities with international orthodontists and GP customers, particularly with adopters of digital dentistry platforms and as we continue to segment our sales and marketing resources and programs specifically around each customer channel. We continue to expand in our existing markets through targeted investments in sales coverage and professional marketing and education programs, along with consumer marketing in select country markets. For instance, we increased our sales presence in APAC in the first half of 2020 and will continue to strategically invest in regions as we deem appropriate for long-term success. We expect International revenues to grow at a faster rate than theAmericas for the foreseeable future due to our continued investment in international market expansion, the size of the market opportunities and our relatively low market penetration of these regions. •Increasing Competition. Starting in the second quarter of 2019, we began experiencing slower adult case growth from North American orthodontists, reflecting a more competitive environment especially for the young adult demographic. Additionally, increased awareness of direct to consumer clear aligners and heavy advertising spend by those companies may have shifted business away from traditional dental practices. We also believe that doctors may choose to sample alternative products and/or take advantage of wires and brackets bundles that essentially give clear aligners away for free or at low prices. In the third quarter of 2019 we began increasing our investments with the goal of generating greater consumer demand starting with a new advertising campaign forNorth America . During the third quarter of 2020, our marketing and consumer engagement included social media campaigns targeting teens and mothers through social media influencers, becoming the Official Clear Aligner Sponsor of theNational Football League and introducing Invisalign Stickables which patients can apply to their aligners as a fun and simple way to distinguish themselves and our products from the competition. We expect to make further investments to create additional demand for Invisalign treatment; driving more consumers to dental professionals for those treatments. We also believe that investing in our sales teams is important to our success. The addition of sales representatives in APAC in 2020 follows other additions in theU.S. in 2019. We believe the realignment of our sales teams to focus on the channels they serve allows us to partner with doctors in more meaningful ways; allowing us to assess their specific needs and tailor plans for post-pandemic success that encourage increased adoption and engagement of a variety of products and services.
If, however, we are unable to compete effectively with existing products or respond effectively to any products developed by new or existing competitors, our business could be harmed.
COVID-19 Update Since the first quarter of fiscal year 2020, our sales and results of operations have been markedly impacted first by the preventative measures implemented to slow the spread of COVID-19, including the complete closure or significantly reduced operations of dental practices and, more recently, the inconsistent pace and scale of recovery in various markets. By the end of the second quarter of 2020, dental practices across every region had largely reopened and were seeing patients, although at varying capacities as compared to pre-pandemic, with recovery in the Orthodontic channel leading the GP channel. As of the end of the third quarter of 2020, dental practices continued to recover although at capacities less than pre-pandemic levels. Additionally, in virtually all practices the effects of COVID-19 persist, typically in the form of additional preventative safety measures such as added sterilization requirements, increased costs for personal protective equipment and staggered patient visits intended to reduce the risks of cross contamination, each of which contribute to fewer patient visits per day. To help doctors through the pandemic and to stimulate demand for our products and services during the recovery, we modified existing programs and implemented new promotions starting in the second quarter of 2020, some of which continued into all or part of the third quarter of 2020 and may currently remain in effect. For instance, to aid doctors during closures and to accelerate recovery as they began to reopen, we temporarily suspended certain subscription usage fees related to our iTero scanners, did not implement annual price increases on our various clear aligner products, encouraged doctors with patients in wires and brackets to switch to our Invisalign clear aligners, delayed accounts receivable collection efforts, allowed doctors to maintain their promotional status levels notwithstanding declining sales, increased advertising and launched new media campaigns, implemented new promotions and modified others, all in an effort to help our customers and accelerate our mutual return to normal operations. As a result of these efforts, for the nine months endedSeptember 30, 2020 , we recorded net revenues of$1.6 billion , a decrease of 6.8% compared to the same period in 2019. For the three months endedSeptember 30, 2020 , clear aligner case volume was 496.1 thousand, an increase of 28.7% compared to the same period in 2019 and for the three months endedSeptember 30, 2020 , Systems and Services net revenues increased by 24.5% compared to the same period in 2019. 31 -------------------------------------------------------------------------------- Table of Contents In the short term, our business remains susceptible to the impact of the COVID-19 pandemic. On the one hand, our products may be viewed as discretionary purchases and therefore more susceptible to any global or regional recessions that may occur if unemployment or decreased consumer demand impacts specific industries or economies in general. Moreover, concerns about additional outbreaks of the virus and any efforts to slow or prevent a recurrence of its spread are likely to continue causing disruption and uncertainties in the markets, adversely impacting our customers and their patients for an indeterminate period of time. This in turn could impact our operations as purchasing decisions are delayed or lost, logistics complexities related to uneven or rapid changes in demand, sales and marketing efforts are postponed or prove ineffective, and inefficiencies in manufacturing operations as a consequence of fluctuating or unpredictable sales. On the other hand, we believe the pandemic emphasizes the benefits of digital dentistry and virtual appointments over traditional practice methods that require more frequent in office patient visits like manual adjustments of wires and brackets. We further believe that this will in turn motivate doctors to use more digital solutions such as Align's products and services including the iTero scanner and Invisalign system. As we assess the possible future short- and long-term impacts to our revenues, operations and financial condition from the COVID-19 pandemic, we are continually evaluating macroeconomic as well as industry-specific factors. For instance, among the many factors we continue to monitor are governmental and societal reactions to the virus, global and regional economic activity, unemployment and its potential impact on discretionary spending and health insurance coverage, patient reluctance or fear of exposure as a result of orthodontic or dental office visits, travel restrictions on employees, suppliers, customers and their patients and other external factors related to COVID-19 that are beyond our control. Furthermore, if the threat of further spread of COVID-19 occurs or the pace of recovery by dental practices is haphazard or inconsistent, there may be a substantial impact on our employees or suppliers, our operations, including our ability to timely obtain the materials needed to manufacture our products and manufacture and deliver those products to customers; any of which may cause our results of operations, financial condition and overall financial performance to be harmed. Furthermore, if our employees or their families are sickened by COVID-19, our ability to respond or mitigate the impact of COVID-19 may be adversely impacted. Moreover, many of the measures we implemented to protect our employees from the spread of the virus remain in effect. For instance, many of our offices across the globe (including our corporate headquarters) remain underutilized as employees continue to work from home. We are also screening our employees, providing them with personal protective equipment, and altering work environments to facilitate social distancing, which has in the past and may in the future harm productivity. Furthermore, our efforts to mitigate the impact of social distancing on our customers and their patients continue. These include moving most of our clinical education program critical to doctor engagement online, launching our Invisalign Virtual Appointment tool and launching the Invisalign Virtual Care Program. The COVID-19 pandemic continues to impact our employees, customers and the global economy in unprecedented ways. We believe the markets we serve will continue to recover from the COVID-19 preventative measures at differing rates and times corresponding with regional outbreaks and recoveries. However, the strategic re-implementation of preventative COVID-19 measures in one or more of our principal markets, unemployment, the threat to domestic and international economies and other events beyond our control remains. Should any one or more events or circumstances previously mentioned or others occur or materially adversely increase or other unknown circumstances arise, they could materially impact our business and results of operations in the fourth quarter of 2020 and beyond.
Please refer to "Risk Factors" for further discussion of the impact of the COVID-19 pandemic on our business.
2020 Expenses
Overall, we expect expenses in 2020 to increase over 2019 levels; however, as a result of the financial impacts of COVID-19, we expect to control our discretionary spending, such as travel and meeting related expenses, and focus investments in the following key areas: •Manufacturing capacity and facilities to enhance our regional capabilities; ?Sales and marketing, including additional direct sales force personnel and consumer marketing; and ?Product and technology innovation to enhance product efficiency and operational productivity.
We believe that these investments will position us to take advantage of a recovering market, increasing our revenues and growing our market share over the long term, but they could negatively impact our results of operations, particularly in the near term.
32
--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Net Revenues by Reportable Segment
We group our operations into two reportable segments: Clear Aligner segment and Imaging Systems and CAD/CAM Services ("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.
?Non-Case includes, but is not limited to, Vivera retainers along with our training and ancillary products for treating malocclusion.
•Our Systems and Services segment consists of our iTero intraoral scanning systems, which includes a single hardware platform and restorative or orthodontic software options, OrthoCAD services and ancillary products, as well as exocad's CAD/CAM software solution that integrates 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 endedSeptember 30, 2020 and 2019 are as follows (in millions): Three Months Ended Nine Months Ended September 30, September 30, Net % Net % Net Revenues 2020 2019 Change Change 2020 2019 Change Change Clear Aligner revenues: Americas$ 304.1 $ 259.8 $ 44.4 17.1 %$ 683.0 $ 753.6 $ (70.6) (9.4) % International 281.2 226.0 55.2 24.4 % 632.3 637.4 (5.1) (0.8) % Non-case 35.4 30.5 4.9 16.2 % 85.4 91.2 (5.8) (6.3) %
Total Clear Aligner net revenues
20.2 % $ 1,400.7 $ 1,482.2 $ (81.5) (5.5) %
Systems and Services net revenues 113.4 91.1 22.3 24.5 % 236.7 274.8 (38.1) (13.9) %
Total net revenues $ 734.1 $ 607.3 $ 126.8 20.9 % $ 1,637.4 $ 1,757.0 $ (119.6) (6.8) %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Clear Aligner Case Volume by Region
Case volume data which represents Clear Aligner case shipments by region for the three and nine months endedSeptember 30, 2020 and 2019 is as follows (in thousands): Three Months Ended Nine Months Ended September 30, September 30, Net % Net % Region 2020 2019 Change Change 2020 2019 Change Change Americas 269.0 215.4 53.5 24.8 % 583.5 641.3 (57.8) (9.0) % International 227.1 170.0 57.1 33.6 % 493.9 482.0 11.9 2.5 % Total case volume 496.1 385.4 110.6 28.7 % 1,077.4 1,123.3 (46.0) (4.1) %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
For the three months endedSeptember 30, 2020 , total net revenues increased by$126.8 million compared to the same period in 2019 primarily as a result of higher Clear Aligner and Systems and Services volumes across all regions. For the nine months endedSeptember 30, 2020 , total net revenues decreased by$119.6 million as compared to the same periods in 2019 primarily as a result of lower Clear Aligner volumes in theAmericas region and lower Systems and Services net revenues in most regions. Clear Aligner -Americas 33
--------------------------------------------------------------------------------
Table of Contents
For the three months endedSeptember 30, 2020 ,Americas net revenues increased by$44.4 million as compared to the same period in 2019 primarily due to higher Clear Aligner volume which increased net revenues by$64.6 million . The volume increase was partially offset by lower ASP which decreased net revenues by$20.2 million . Lower ASP was primarily a result of higher promotional discounts which decreased net revenues by$9.0 million and unfavorable foreign exchange rates which lowered net revenues by$5.4 million in addition to higher net deferrals and unfavorable product mix shift to lower priced products. For the nine months endedSeptember 30, 2020 ,Americas net revenues decreased by$70.6 million as compared to the same period in 2019 primarily due to lower Clear Aligner volume that decreased net revenues by$68.0 million in addition to slightly lower ASP. The ASP was slightly lower as a result of higher promotional discounts which reduced net revenues by$28.8 million and unfavorable foreign exchange rates reduced net revenues by$9.4 million ; however, these were mostly offset by theJuly 2019 price increases which contributed$18.7 million to net revenues in addition to lower net deferrals and a product mix shift towards products with higher ASP, primarily driven by decreased SDC revenues which carried a lower ASP.
Clear Aligner - International
For the three months endedSeptember 30, 2020 , International net revenues increased by$55.2 million as compared to the same period in 2019 primarily due to increased Clear Aligner volume which increased revenues by$75.9 million . The volume increase was partially offset by lower ASP, which decreased revenues by$20.7 million . Lower ASP was as a result of higher promotional discounts which reduced net revenues by$21.5 million , higher net deferrals which decreased net revenues by$7.2 million along with a product mix shift towards lower priced products. The reductions in net revenues were partially offset by favorable foreign exchange rates which increased net revenues by$6.7 million and theJuly 2019 price increases across most products which increased net revenues. For the nine months endedSeptember 30, 2020 , International net revenues decreased by$5.1 million as compared to the same period in 2019 primarily due to lower ASP which reduced net revenues by$20.7 million . Lower ASP was the result of higher promotional discounts that reduced net revenues by$37.8 million along with a product mix shift towards lower priced products; however, these reductions were partially offset byJuly 2019 price increases across most products along with a benefit from going direct in several additional countries and therefore we now recognize direct sales at full ASP rather than the discounted distributor ASP, which increased net revenues by$18.3 million . The reduction in net revenues due to lower ASP was partially offset by higher Clear Aligner volume which increased net revenue by$15.7 million .
Clear Aligner - Non-Case
For the three months endedSeptember 30, 2020 , non-case net revenues increased by$4.9 million as compared to the same period in 2019 primarily due to increased Vivera volume across all regions. For the nine months endedSeptember 30, 2020 , non-case net revenues decreased by$5.8 million as compared to the same period in 2019 primarily due to decreased training revenues across all regions. Systems and Services For the three months endedSeptember 30, 2020 , Systems and Services net revenues increased by$22.3 million as compared to the same period in 2019 primarily due to a higher number of scanners recognized which increased net revenues by$16.6 million , partially offset by lower scanner ASP decreasing net revenues by$10.1 million . The ASP decrease was mostly due to higher promotional discounts and an increase in the number of scanner contracts that included multiple years of service. The ASP decreases were partially offset by a product mix shift to higher priced scanners. In addition, iTero service revenues and the addition of exocad's CAD/CAM revenues from our acquisition increased net revenues by$15.8 million . For the nine months endedSeptember 30, 2020 , Systems and Services net revenues decreased by$38.1 million as compared to the same period in 2019 primarily due to a lower number of scanners recognized which decreased net revenues by$45.3 million and a lower scanner ASP which decreased net revenues by$16.6 million . The ASP decrease was mostly due to higher promotional discounts partially offset by product mix shift to higher priced scanners. These decreases were partially offset by higher iTero service revenues mostly due to a larger scanner install base and the addition of exocad's CAD/CAM revenues from our acquisition which combined, increased net revenues by$23.8 million . 34 -------------------------------------------------------------------------------- Table of Contents Cost of net revenues and gross profit (in millions): Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 Change 2020 2019 Change Clear Aligner Cost of net revenues$ 157.0 $ 137.1 $ 20.0 $ 393.1 $ 385.5 $ 7.6 % of net segment revenues 25.3 % 26.5 % 28.1 % 26.0 % Gross profit$ 463.7 $ 379.2 $ 84.5 $ 1,007.6 $ 1,096.7 $ (89.1) Gross margin % 74.7 % 73.5 % 71.9 % 74.0 % Systems and Services Cost of net revenues$ 43.0 $ 32.7 $ 10.3 $ 91.5 $ 99.6 $ (8.1) % of net segment revenues 38.0 % 35.9 % 38.7 % 36.2 % Gross profit$ 70.3 $ 58.4 $ 12.0 $ 145.2 $ 175.2 $ (30.1) Gross margin % 62.0 % 64.1 % 61.3 % 63.8 % Total cost of net revenues$ 200.1 $ 169.8 $ 30.3 $ 484.6 $ 485.1 $ (0.4) % of net revenues 27.3 % 28.0 % 29.6 % 27.6 % Gross profit$ 534.1 $ 437.6 $ 96.5 $ 1,152.8 $ 1,271.9 $ (119.2) Gross margin % 72.7 % 72.0 % 70.4 % 72.4 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Cost of net revenues for our Clear Aligner and Systems and Services segments includes personnel-related costs including payroll and stock-based compensation for staff involved in the production process, the cost of materials, packaging, shipping 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 endedSeptember 30, 2020 , our gross margin percentage increased as compared to the same period in 2019 primarily due to manufacturing efficiencies resulting in lower costs per case and higher training margins which was offset in part by lower ASP. For the nine months endedSeptember 30, 2020 , our gross margin percentage decreased as compared to the same period in 2019 primarily due to an increase in aligners per case driven by additional aligners, higher manufacturing spend partially driven by operational expansion activities and lower ASP which was offset in part by manufacturing efficiencies.
Systems and Services
For the three months ended
For the nine months endedSeptember 30, 2020 , our gross margin percentage decreased compared to the same period in 2019 primarily driven by lower ASP and a decrease in manufacturing volumes which was offset in part by higher service revenues.
Selling, general and administrative (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 Change 2020 2019 Change
Selling, general and administrative $ 312.5 $ 277.5 $ 35.0 $ 852.4 $ 792.6 $ 59.8
% of net revenues 42.6 % 45.7 % 52.1 % 45.1 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Selling, general and administrative expense includes personnel-related costs
including payroll, commissions and stock-based compensation for our sales force,
marketing and administration in addition to media and advertising expenses,
clinical education, trade shows and industry events, product marketing,
equipment and maintenance costs, legal and outside service
35--------------------------------------------------------------------------------
Table of Contents costs, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and Information Technology ("IT").
For the three months endedSeptember 30, 2020 , selling, general and administrative expense increased compared to the same period in 2019 primarily due to higher compensation related costs of$34.2 million mainly from increased headcount resulting in higher salaries expense, fringe benefits and incentive compensation, in addition to higher equipment, software and maintenance expenses of$6.4 million and higher advertising and marketing costs of$5.9 million . These increases were partially offset by a decrease in travel related costs of$8.0 million due to the impact of COVID-19 and lower legal and outside service costs of$3.5 million . For the nine months endedSeptember 30, 2020 , selling, general and administrative expense increased compared to the same period in 2019 primarily due to higher compensation related costs of$43.8 million mainly from increased headcount resulting in higher salaries expense, fringe benefits and stock-based compensation partially offset by lower incentive compensation. We also incurred higher equipment, software and maintenance costs of$19.7 million , higher advertising and marketing costs of$6.6 million and higher legal and outside service costs of$6.0 million which included transaction costs related to our acquisition of exocad. These increases were partially offset by a decrease in travel related costs of$17.5 million due to the impact of COVID-19.
Research and development (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 Change 2020 2019 Change
Research and development $ 44.5 $ 39.7 $ 4.8 $ 126.4 $ 116.0 $ 10.4
% of net revenues 6.1 % 6.5 % 7.7 % 6.6 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Research and development expense includes the personnel-related costs including payroll and stock-based compensation and outside consulting expenses associated with the research and development of new products and enhancements to existing products and allocations of corporate overhead expenses including facilities and IT. For the three months endedSeptember 30, 2020 , research and development expense increased compared to the same period in 2019 primarily due to higher compensation costs mainly from increased headcount resulting in higher salaries expense and fringe benefits in addition to higher equipment and material costs. For the nine months endedSeptember 30, 2020 , research and development expense increased compared to the same period in 2019 primarily due to higher compensation costs mainly from increased headcount resulting in higher salaries expense and fringe benefits, which was partially offset by lower incentive compensation. We also incurred higher equipment and material costs.
Impairments and other (gains) charges (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 Change 2020 2019 Change
Impairments and other (gains) charges $ - $ (6.8) $ 6.8 $ - $ 23.0 $ (23.0)
% of net revenues - % (1.1) % - % 1.3 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
For the three months ended
For the nine months endedSeptember 30, 2019 , we recorded impairments and other (gains) charges of$23.0 million which are comprised of operating lease right-of-use assets impairments of$14.2 million , store leasehold improvement and other fixed asset impairments of$14.3 million , and employee severance and other expenses of$1.3 million , partially offset by the Invisalign store lease termination gains of$6.8 million (Refer to Note 8 "Impairments and Other (Gains) Charges" and Note 9 "Legal Proceedings" of the Notes to Condensed Consolidated Financial Statements for more information). 36 -------------------------------------------------------------------------------- Table of Contents Litigation settlement gain (in millions): Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 Change 2020 2019 Change Litigation settlement gain $ - $ - $ - $ -$ (51.0) $ 51.0 % of net revenues - % - % - % (2.9) %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
For the nine months ended
Income from operations (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 Change 2020 2019 Change
Clear Aligner
Income from operations $ 261.8 $ 212.0 $ 49.8 $ 467.1 $ 614.6 $ (147.5)
Operating margin % 42.2 % 41.1 % 33.3 % 41.5 %
Systems and Services
Income from operations $ 34.9 $ 32.8 $ 2.2 $ 52.2 $ 100.3 $ (48.1)
Operating margin % 30.8 % 36.0 % 22.1 % 36.5 %
Total income from operations 1 $ 177.1 $ 127.2 $ 49.9 $ 174.0 $ 391.3 $ (217.4)
Operating margin % 24.1 % 20.9 % 10.6 % 22.3 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
1 Refer to Note 16 "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 months endedSeptember 30, 2020 , our operating margin percentage increased compared to the same period in 2019 primarily due to a higher Clear Aligner gross margin. For the nine months endedSeptember 30, 2020 , our operating margin percentage decreased compared to the same period in 2019 primarily due to a lower Clear Aligner gross margin and a$51.0 million gain recognized from the litigation settlement with Straumann during the prior year period. These decreases were offset in part by a net impairment charge of$23.0 million recognized during the nine months endedSeptember 30, 2019 related to the Invisalign store closures.
Systems and Services
For the three and nine months endedSeptember 30, 2020 , our operating margin percentage decreased compared to the same periods in 2019 primarily driven by a lower gross margin.
Interest income (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 Change 2020 2019 Change
Interest income $ 0.3 $ 3.5 $ (3.1) $ 2.8 $ 9.6 $ (6.8)
% of net revenues - % 0.6 % 0.2 % 0.5 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Interest income includes interest earned on cash, cash equivalents, investment balances and our unsecured promissory note.
For the three and nine months endedSeptember 30, 2020 , interest income decreased compared to the same periods in 2019 mainly due to the divestiture of our marketable securities portfolio during the first quarter of 2020 and lower interest rates. 37
--------------------------------------------------------------------------------
Table of Contents
Other income (expense), net (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 Change 2020 2019 Change
Other income (expense), net $ 7.1 $ (2.2) $ 9.4 $ (12.4) $ 5.9 $ (18.3)
% of net revenues 1.0 % (0.4) % (0.8) % 0.3 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Other income (expense), net, 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
For the nine months endedSeptember 30, 2020 , other income (expense), net decreased compared to the same period in 2019 primarily due to the$15.8 million gain from the sale of our investment in SDC that was recorded during the nine months endedSeptember 30, 2019 and a$10.2 million loss on a foreign currency forward contract related to the exocad acquisition that was recorded during the current period. These decreases were partially offset by net foreign exchange gains in the nine months endedSeptember 30, 2020 as compared to net foreign exchange losses in the same period in 2019.
Equity in losses of investee, net of tax (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 Change 2020 2019 Change
Equity in losses of investee, net of tax $ - $ - $ - $ - $ 7.5 $ (7.5)
% of net revenues - % - % - % 0.4 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
For the three and nine months endedSeptember 30, 2020 , there were no equity in losses of investee, net of tax. After the second quarter of 2019, we no longer incur equity in losses of investee, net of tax related to SDC as we tendered our SDC equity interest onApril 3, 2019 (Refer to Note 6 "Equity Method Investments" of the Notes to Condensed Consolidated Financial Statements for details on equity method investments).
Provision for (benefit from) income taxes (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 Change 2020 2019 Change
Provision for (benefit from) income
taxes $ 45.2 $ 25.9
24.5 % 20.2 % (883.5) % 19.1 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
During the nine months endedSeptember 30, 2020 , we completed an intra-entity transfer of certain intellectual property rights and fixed assets to our Swiss subsidiary, where our EMEA regional headquarters is located beginningJanuary 1, 2020 . The transfer of intellectual property rights did not result in a taxable gain; however, it did result in a step-up of the Swiss tax deductible basis in the transferred assets, and accordingly, created a temporary difference between the book basis and the tax basis of such intellectual property rights. Consequently, this transaction resulted in the recognition of a deferred tax asset and related one-time tax benefit of approximately$1,493.5 million during the nine months endedSeptember 30, 2020 , which is the net impact of the deferred tax asset recognized as a result of the additional Swiss tax deductible basis in the transferred assets and certain costs related to the transfer of fixed assets and inventory. Our provision for income taxes was$45.2 million and$25.9 million for the three months endedSeptember 30, 2020 and 2019, representing effective tax rates of 24.5% and 20.2%, respectively. Our benefit from income taxes was$1,452.5 million for the nine months endedSeptember 30, 2020 and our provision for income taxes was$77.8 million for the nine months endedSeptember 30, 2019 , representing effective tax rates of (883.5)% and 19.1%, respectively. Our effective tax rate differs from the 38 -------------------------------------------------------------------------------- Table of Contents statutory federal income tax rate of 21% for the three months endedSeptember 30, 2020 primarily due to the recognition of additional tax expense resulting from state tax and non-deductible expenses in theU.S , partially offset by the recognition of a tax benefit for the release of certain unrecognized tax benefits following the settlement of an Internal Revenue Service ("IRS") income tax audit for years 2015 and 2016. Our effective tax rate differs from the statutory federal income tax rate of 21% for the nine months endedSeptember 30, 2020 mainly as a result of the recognition of tax benefits related to the intra-entity transfer of certain intellectual property rights and fixed assets mentioned above. Our effective tax rate differs from the statutory federal income tax rate of 21% for the three and nine months endedSeptember 30, 2019 mainly as a result of certain foreign earnings, primarily fromthe Netherlands andCosta Rica , being taxed at lower tax rates and the recognition of excess tax benefits related to stock-based compensation, partially offset by non-deductible officers' compensation. The increase in our effective tax rate for the three months endedSeptember 30, 2020 compared to the same period in 2019 is primarily attributable to reduced tax benefit of certain foreign earnings being taxed at lower tax rates and tax benefits recorded last year related to certain statute of limitations expirations and adjustments for prior years that did not recur in 2020, offset in part by a tax benefit recorded this quarter for the release of certain unrecognized tax benefits following the settlement of anIRS income tax audit for years 2015 and 2016. The decrease in our effective tax rate for the nine months endedSeptember 30, 2020 compared to the same period in 2019 is primarily attributable to the recognition of a deferred tax asset related to the intra-entity transfer of certain intellectual property rights during the nine months endedSeptember 30, 2020 .
Liquidity and Capital Resources
We fund our operations from product sales. As of
September 30, December 31,
2020 2019
Cash and cash equivalents $ 615,532 $ 550,425
Marketable securities, short-term - 318,202
Total $ 615,532 $ 868,627
Cash equivalents and marketable securities are comprised of money market funds
and highly liquid debt instruments which primarily include commercial paper,
corporate bonds, U.S. government agency bonds, U.S. government treasury bonds
and certificates of deposit.
As of September 30, 2020 , approximately $316.7 million of cash and cash
equivalents was held by our foreign subsidiaries. Our intent is to permanently
reinvest our earnings from our international operations going forward, and our
current plans do not require us to repatriate them to fund our U.S. operations
as we generate sufficient domestic operating cash flow and have access to
external funding under our revolving line of credit.
On
Beginning in the first quarter of 2020, our business has been materially
adversely affected by the COVID-19 pandemic and the global and regional efforts
by governments to mitigate its spread. While these impacts lessened in the third
quarter of 2020, we could continue to experience further adverse impacts to our
business. 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. In addition, as a result of the COVID-19
pandemic, we could experience reduced cash flow from operations as a result of
decreased revenues and slower collections on our accounts receivable. For
additional information regarding the impact of COVID-19 on our liquidity and
capital resources, refer to Item 1A "Risk Factors."
39--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
