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 regard the existence and impact of seasonality, our expectations regarding the sales growth of our intra-oral scanner sales in international markets, our expectations regarding the productivity impact additional sales representatives will have on our sales, 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 8.5 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 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:
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•New Products, Feature Enhancements and Technology. We believe product
innovation to treat a wide range of cases from simple to complex drives greater
treatment predictability, clinical applicability and ease of use for the dental
professionals we serve which supports 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. It therefore comprises
an important component of our digital approach.
?Invisalign: Since 2018, we have launched or announced various new offerings
including our Invisalign treatment with Mandibular Advancement, Invisalign Go,
Invisalign First and Invisalign Moderate. 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 or announced several
new aspects of our intraoral digital scanning solutions 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.
The approval of the iTero Element 5D Imaging system opens the U.S. markets for
sales of this unique solution that combines 3D data, intra-oral 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 solutions and paves the way for new, seamless
cross-disciplinary 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 practices to the digital age, we
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. We believe that over the long term,
clinical solutions, treatment tools and virtual solutions will increase adoption
of clear aligners, sales of our intraoral scanners and integration of exocad
CAD/CAM solutions chairside and in dental workflows; however, it is difficult to
predict the rate and success of adoption or each and all of these products and
solutions, which may vary by region and channel.
•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." Although we believe the closure, reduced operations and
slow reopening of many dental and orthodontic practices in the first and second
quarters of 2020 negatively impacted the number of patients seen and orders for
clear aligners submitted, the use of iTero and other digital scanners for
Invisalign case submissions in place of PVS impressions continues to be a
positive catalyst for Invisalign utilization.
For the second quarter of 2020, total Invisalign cases submitted with a digital
scanner in the Americas increased to 85.8%, up from 80.5% in the first quarter
of 2020, including 95.9% of all cases submitted in the second quarter of 2020 by
North American orthodontists. International scans increased to 72.0%, up from
68.7% in the first quarter of 2020. Our quarterly utilization rates for the last
five quarters are as follows:
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* Invisalign utilization rates are calculated by the # of cases shipped divided
by the # of doctors to whom cases were shipped. Our International region
includes
•Total utilization rate in the second quarter of 2020 decreased to 4.6 cases per doctor compared to 6.2 cases per doctor in the second quarter of 2019.
?North America : Utilization rate among our North American orthodontist customers decreased to 11.0 cases per doctor in the second quarter of 2020 compared to 18.9 cases per doctor in the second quarter of 2019 and the utilization rate among our North American GP customers decreased to 2.5 cases per doctor in the second quarter of 2020 compared to 3.6 cases per doctor in the second quarter of 2019. The decrease in utilization rates for the second quarter of 2020 is due primarily to COVID-19 related practice closures. ?International: International doctor utilization rate was 4.7 cases per doctor in the second quarter of 2020 compared to 5.7 cases in the second quarter of 2019. We expect global utilization rates to continue to recover from COVID-19 practice closure related decreases absent additional or more restrictive practice closures and thereafter to steadily improve as doctors' clinical confidence in the use of Invisalign clear aligners increases with advancements in products and technology and as COVID-19 restrictions create demand for treatments that reduce or minimize the need for physical interactions between dental professionals and their patients. 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 our utilization rates to improve. Our utilization rates, however, may fluctuate from period to period due to a variety of factors beyond the impact of COVID-19 pandemic-related preventative measures, including seasonal trends in our business 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 six months endedJune 30, 2020 , we trained 8,125 new Invisalign doctors of which 3,175 were trained in theAmericas region and 4,950 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 in the first quarter of 2020, the outbreak of COVID-19 caused significant disruption and uncertainty to our business, employees, doctors' practices, their patients and consumers beginning inChina and spreading globally thereafter. While the negative impact of COVID-19 on sales decreased as the second quarter of 2020 progressed, we remain prepared to react should the 30 -------------------------------------------------------------------------------- Table of Contents localized spread of the virus result in additional preventative measures that adversely impact us or our customers. 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, beginning in the second quarter of 2019, we experienced slower growth rates than prior periods inChina primarily due to theU.S. -China trade war and resulting economic 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 wires and bracket manufacturers and 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. Given increased awareness for direct to consumer clear aligners and heavy advertising spend from direct to consumer companies, case starts may be shifting away from traditional practices. We also believe that doctors are sampling alternative products and/or taking 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 increased investment in consumer demand with a new advertising campaign forNorth America and in the second half of 2020 are looking at further investments to create additional demand for Invisalign treatment and to drive teens and parents to dental professionals for those treatments. In addition, we launched new sales tools and professional marketing materials and we also expect to see increased productivity from sales representatives we added in theU.S. in 2019 and those more recently added in APAC in 2020. 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
Beginning in the first quarter of fiscal year 2020 and continuing into the second quarter, our sales and results of operations were markedly impacted by the COVID-19 pandemic. As a result, we began to experience a sudden downturn in sales initially inAsia ,China in particular, starting in January. As the virus spread beyondChina and intoEurope and thereafter theAmericas in early March, a rapid deceleration of all sales commenced shortly thereafter as the practices of many of our customers were severely curtailed or completely closed. By the end of the second quarter of 2020, dental practices across every region had largely reopened and were seeing patients, with recovery in the Orthodontic channel leading the GP channel. For the six months endedJune 30, 2020 , we recorded net revenues of$903.3 million , a decrease of 21.4% compared to the same period in 2019. For the three months endedJune 30, 2020 , clear aligner case volume was 221.9 thousand, a decrease of 41.4% compared to the same period in 2019 and for the three months endedJune 30, 2020 , Systems and Services net revenues decreased by 48.1% compared to the same period in 2019. In the short term, our business may be particularly susceptible to the impact of the COVID-19 pandemic. On the one hand, all or a material portion of our products may be viewed as discretionary purchases and therefore more susceptible to any global or regional recession that may result from efforts to prevent or delay the spread of the virus. Moreover, efforts to slow or prevent a recurrence of the spread of the virus are likely to continue causing disruption and uncertainties in the markets resulting in curtailed operations by 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 as a result of closed customer offices, sales and marketing efforts are postponed, and manufacturing operations are curtailed to adjust to declining sales. On the other hand, COVID-19 has also demonstrated the benefits of digital dentistry and virtual appointments, which may 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 revenue, 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, the potential impacts of delays in the restarting of global and regional economic activities, the impact of unemployment on discretionary spending and health insurance coverage, patient reluctance or fear of exposure as a result of orthodontic or dental office visits and other external factors related to COVID-19 that are beyond our control. For example, many jurisdictions have imposed a wide range of 31 -------------------------------------------------------------------------------- Table of Contents restrictions on the physical movement of our employees and vendors to limit the spread of COVID-19. Furthermore, if the COVID-19 pandemic or the speed and timeframe in which dental practices reopen and demand for our products increases has a substantial impact on our employees or suppliers, our operations, including our ability to obtain the materials needed to manufacture our products and to actually manufacture and deliver our products to customers, may suffer, and in turn our results of operations, financial condition and overall financial performance may 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, we are continuing to provide certain help and take further actions to respond to changes in our environment, including the COVID-19 pandemic, quickly and effectively. As a result of the COVID-19 pandemic, we instructed employees at many of our offices across the globe (including our corporate headquarters) to work from home on a temporary basis. We have also taken additional measures in response to the COVID-19 pandemic including screening our employees, providing them with personal protective equipment, and altering work environments to facilitate social distancing. Furthermore, we are working to mitigate the impact of social distancing for our customers and their patients. These efforts 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. Moreover, as it relates to our products we have provided advice regarding the safety and efficacy of various treatment options doctors are considering as their practices adapt to patient concerns and governmental requirements limiting or reducing the frequency of in-patient appointments, we have purchased equipment to manufacture personal protective equipment and distributed the equipment to doctors and hospitals, and we have redirected shipments to optimize patient care, as needed. Our support to doctors also extends to the financial challenges they may encounter, including providing the assistance of industry experts and helping as they consider strategic relationships with lenders that can help improve their cash flow. The COVID-19 pandemic continues to impact our employees, customers and the global economy in unprecedented ways. At this time, we believe the markets we serve are recovering from 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 remains possible and could materially impact our business and results of operations in the third 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 slightly increase over 2019 levels; however, as a result of the financial impacts of COVID-19, we expect to control our discretionary spend, 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.
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.
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Table of Contents ?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 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 six months endedJune 30, 2020 and 2019 are as follows (in millions): Three Months Ended Six Months Ended June 30, June 30, Net % Net % Net Revenues 2020 2019 Change Change 2020 2019 Change Change Clear Aligner revenues: Americas$ 123.3 $ 248.5 $ (125.3) (50.4) %$ 378.9 $ 493.9 $ (115.0) (23.3) % International 155.2 216.5 (61.2) (28.3) % 351.1 411.3 (60.3) (14.7) % Non-case 19.8 31.7 (11.9) (37.5) % 50.0 60.7 (10.7) (17.6) %
Total Clear Aligner net revenues
(39.9) % $ 780.0 $ 965.9 $ (186.0) (19.3) %
Systems and Services net revenues 54.0 104.0 (50.0) (48.1) % 123.3 183.8 (60.4) (32.9) %
Total net revenues $ 352.3 $ 600.7 $ (248.4) (41.3) % $ 903.3 $ 1,149.7 $ (246.4) (21.4) %
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 six months endedJune 30, 2020 and 2019 is as follows (in thousands): Three Months Ended Six Months EndedJune 30 ,June 30 , Net % Net % Region 2020 2019 Change Change 2020 2019 Change Change Americas 101.0 212.7 (111.7) (52.5) % 314.5 425.9 (111.4) (26.2) % International 120.9 165.8 (44.9) (27.1) % 266.8 312.0 (45.2) (14.5) % Total case volume 221.9 378.5 (156.6) (41.4) % 581.3 737.9 (156.6) (21.2) %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
For the three and six months endedJune 30, 2020 , total net revenues decreased by$248.4 million and$246.4 million as compared to the same periods in 2019 primarily as a result of lower Clear Aligner volumes and lower Systems and Services net revenues in most regions.
Clear Aligner -
For the three months endedJune 30, 2020 ,Americas net revenues decreased by$125.3 million as compared to the same period in 2019 primarily due to lower Clear Aligner volume which decreased revenues by$130.5 million . The volume decrease was slightly offset by higher ASP, which increased net revenues by$5.3 million . Higher ASP was a result of lower net deferrals which increased net revenues by$6.7 million , in addition toJuly 2019 price increases across most products and higher revenues from other case revenues contributed$5.4 million to the revenue growth. The ASP increases were partially offset by higher promotional discounts and unfavorable foreign exchange rates that reduced net revenues by$7.3 million . For the six months endedJune 30, 2020 ,Americas net revenues decreased by$115.0 million as compared to the same period in 2019 primarily due to lower Clear Aligner volume that decreased revenues by$129.0 million . The volume decrease was partially offset by higher ASP which increased net revenues by$14.2 million as a result ofJuly 2019 price increases across most products which contributed$18.4 million to the revenue growth, and lower net deferrals which increased net revenues by$11.5 million . In addition, net revenues increased slightly due to a product mix shift towards products with higher ASP, 33 -------------------------------------------------------------------------------- Table of Contents primarily driven by decreased SDC revenues which carried a lower ASP. The ASP increases were partially offset by higher promotional discounts that reduced net revenues by$17.9 million in addition to unfavorable foreign exchange rates.
Clear Aligner - International
For the three months endedJune 30, 2020 , International net revenues decreased by$61.2 million as compared to the same period in 2019 primarily due to decreased Clear Aligner volume which decreased revenues by$58.6 million . In addition, Clear Aligner ASP decreased slightly as a result of higher promotional discounts and unfavorable foreign exchange rates that reduced net revenues by$15.0 million partially offset byJuly 2019 price increases across most products which increased revenues by$6.8 million and lower net deferrals and increased other case revenues which increased net revenues by$6.2 million . For the six months endedJune 30, 2020 , International net revenues decreased by$60.3 million as compared to the same period in 2019 primarily due to lower Clear Aligner volume which decreased net revenues by$59.6 million . In addition, we had lower ASP which was a result of higher promotional discounts that reduced net revenues by$15.8 million , unfavorable foreign exchange rates and a product mix shift towards lower priced products that combined reduced net revenues by$11.9 million . The ASP decreases were mostly 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$16.5 million , and lower net deferrals that increased net revenues by$9.3 million . Clear Aligner - Non-Case For the three and six months endedJune 30, 2020 , non-case net revenues, consisting of Vivera Retainers, training fees and other product revenues, decreased by$11.9 million and$10.7 million as compared to the same periods in 2019. This was primarily due to decreased Vivera volume and training revenues across all regions. Systems and Services For the three months endedJune 30, 2020 , Systems and Services net revenues decreased by$50.0 million as compared to the same period in 2019 primarily due to a lower number of scanners recognized decreasing net revenues by$46.8 million , lower scanner ASP decreasing net revenues by$4.2 million and lower iTero service revenues. These decreases were slightly offset by the addition of exocad revenues from our acquisition. For the six months endedJune 30, 2020 , Systems and Services net revenues decreased by$60.4 million as compared to the same period in 2019 primarily due to a lower number of scanners recognized which decreased net revenues by$46.8 million and a lower scanner ASP which decreased net revenues by$21.7 million . The ASP decrease was mostly due to higher promotional discounts and a product mix shift to lower priced scanners. These decreases were partially offset by higher services revenues which increased net revenues by$8.1 million mostly due to a larger scanner install base and the addition of exocad revenues from our acquisition. 34 -------------------------------------------------------------------------------- Table of Contents Cost of net revenues and gross profit (in millions): Three Months Ended Six Months Ended June 30, June 30, 2020 2019 Change 2020 2019 Change Clear Aligner Cost of net revenues$ 106.0 $ 130.6
35.5 % 26.3 % 30.3 % 25.7 %
Gross profit $ 192.4 $ 366.1 $ (173.8) $ 543.9 $ 717.5 $ (173.6)
Gross margin % 64.5 % 73.7 % 69.7 % 74.3 %
Systems and Services
Cost of net revenues $ 22.0 $ 37.8
40.8 % 36.4 % 39.3 % 36.4 %
Gross profit $ 32.0 $ 66.1 $ (34.2) $ 74.8 $ 116.9 $ (42.1)
Gross margin % 59.2 % 63.6 % 60.7 % 63.6 %
Total cost of net revenues $ 128.0 $ 168.4 $ (40.4) $ 284.6 $ 315.3 $ (30.7)
% of net revenues 36.3 % 28.0 % 31.5 % 27.4 %
Gross profit $ 224.3 $ 432.3 $ (208.0) $ 618.7 $ 834.4 $ (215.7)
Gross margin % 63.7 % 72.0 % 68.5 % 72.6 %
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 and six months ended
Systems and Services
For the three and six months endedJune 30, 2020 , our gross margin decreased compared to the same periods in 2019 primarily driven by a decrease in manufacturing volumes and lower ASP. These factors were offset in part by lower service support costs.
Selling, general and administrative (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change 2020 2019 Change
Selling, general and administrative $ 257.0 $ 267.9 $ (11.0) $ 539.9 $ 515.1 $ 24.8
% of net revenues 72.9 % 44.6 % 59.8 % 44.8 %
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 costs, depreciation
and amortization expense and allocations of corporate overhead expenses
including facilities and Information Technology ("IT").
For the three months ended June 30, 2020 , selling, general and administrative
expense decreased compared to the same period in 2019 primarily due to a
decrease in advertising and marketing costs of $12.6 million and a decrease in
travel related costs of $11.3 million due to the impact of COVID-19. These
decreases were partially offset by higher equipment, software and maintenance
expenses of $7.7 million and legal and outside service costs of $5.9 million
including transaction costs related to our acquisition of exocad.
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For the six months ended June 30, 2020 , selling, general and administrative
expense increased compared to the same period in 2019 primarily due to higher
expenses from equipment, software and maintenance costs of $13.3 million , legal
and outside service costs of $9.5 million including transaction costs related to
our acquisition of exocad and higher compensation related costs of $9.6 million
mainly from increased headcount resulting in higher salaries expense, fringe
benefits and stock-based compensation partially offset by lower incentive
compensation. These increases were offset in part by a decrease in travel
related costs of $9.5 million due to the impact of COVID-19.
Research and development (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change 2020 2019 ChangeResearch and development$ 40.4 $ 38.9 $ 1.5 $ 81.9 $ 76.4 $ 5.5 % of net revenues 11.5 % 6.5 % 9.1 % 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 and six months endedJune 30, 2020 , research and development expense increased compared to the same period in 2019 primarily due to higher equipment and material costs in addition to higher compensation costs mainly from increased headcount resulting in higher salaries expense, fringe benefits and stock-based compensation which was partially offset by lower incentive compensation.
Impairments and other charges (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change 2020 2019 ChangeImpairments and other charges $ - $ - $ - $ -$ 29.8 $ (29.8) % of net revenues - % - % - % 2.6 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
During the six months endedJune 30, 2019 , we recorded impairments and other charges of$29.8 million due to costs related to the Invisalign store closures. The impairments and other charges 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 (Refer to Note 8 "Impairments and Other Charges" and Note 9 "Legal Proceedings" of the Notes to Condensed Consolidated Financial Statements for more information).
Litigation settlement gain (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change 2020 2019 Change
Litigation settlement gain $ -
$ (51.0) $ 51.0 % of net revenues - % (8.5) % - % (4.4) %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
For the three and six months ended
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Income (loss) from operations (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change 2020 2019 Change
Clear Aligner
Income from operations $ 38.9 $ 244.0 $ (205.1) $ 205.3 $ 402.7 $ (197.4)
Operating margin % 13.0 % 49.1 % 26.3 % 41.7 %
Systems and Services
Income from operations $ 2.9 $ 39.3 $ (36.4) $ 17.3 $ 67.5 $ (50.2)
Operating margin % 5.4 % 37.8 % 14.0 % 36.7 %
Total income (loss) from operations 1 $ (73.0) $ 176.5 $ (249.5) $ (3.1) $ 264.2 $ (267.3)
Operating margin % (20.7) % 29.4 % (0.3) % 23.0 %
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 ended
For the six months endedJune 30, 2020 , our operating margin decreased compared to the same period in 2019 primarily due to a lower Clear Aligner gross margin due to decreased volumes and a gain recognized from the litigation settlement with Straumann during the second quarter of 2019. These decreases were offset in part by costs recognized in the first quarter of 2019 related to the Invisalign store closures. Systems and Services For the three and six months endedJune 30, 2020 , our operating margin decreased compared to the same periods in 2019 primarily driven by a lower Systems and Services gross margin primarily due to a lower number of scanners recognized.
Interest income (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change 2020 2019 ChangeInterest income$ 0.5 $ 3.5 $ (3.0) $ 2.5 $ 6.1 $ (3.6) % of net revenues 0.1 % 0.6 % 0.3 % 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 six months ended
Other income (expense), net (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change 2020 2019 ChangeOther income (expense), net$ (1.0) $ 13.9 $ (14.9) $ (19.5) $ 8.1 $ (27.7) % of net revenues (0.3) % 2.3 % (2.2) % 0.7 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
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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 June 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 three months
ended June 30, 2019 . This decrease was partially offset by net foreign exchange
gains in the three months ended June 30, 2020 as compared to net foreign
exchange losses in the same period in 2019.
For the six months ended June 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 six months ended
June 30, 2019 and higher losses in the current period including a $10.2 million
loss on a foreign currency forward contract related to the exocad acquisition in
addition to foreign exchange net losses.
Equity in losses of investee, net of tax (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 Change 2020 2019 Change
Equity in losses of investee, net of tax $ -
$ (3.6) $ -$ 7.5 $ (7.5) % of net revenues - % 0.6 % - % 0.7 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
For the three and six months endedJune 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 Six Months Ended
June 30, June 30,
2020 2019 Change 2020 2019 Change
Provision for (benefit from) income taxes
$ (76.0) $ (1,497.7) $ 51.9 $ (1,549.6) Effective tax rates 44.8 % 22.2 % 7,437.0 % 18.6 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
During the six months endedJune 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 six months endedJune 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 benefit from income taxes was$32.9 million for the three months endedJune 30, 2020 and our provision for income taxes was$43.1 million for the three months endedJune 30, 2019 , representing effective tax rates of 44.8% and 22.2%, respectively. Our benefit from income taxes was$1,497.7 million for the six months endedJune 30, 2020 and our provision for income taxes was$51.9 million for the six months endedJune 30, 2019 , representing effective tax rates of 7,437.0% and 18.6%, respectively. Our effective tax rate differs from the statutory federal income tax rate of 21% for the three months endedJune 30, 2020 primarily due to the recognition of additional tax benefits resulting from changes in annual effective tax rate caused by a shift in jurisdictional mix of forecasted annual income. Our effective tax rate differs from the statutory federal income tax rate of 21% for the six months endedJune 30, 2020 mainly as a result of the aforementioned intra-entity transfer and the recognition of excess tax benefits related to stock-based compensation, partially offset by unrecognized tax benefits associated with certain foreign payments. Our effective tax rate differs from the statutory federal income tax rate of 21% for the three and six months endedJune 30, 2019 mainly as a result of the recognition of excess tax benefits related to stock-based compensation and certain foreign earnings, primarily fromthe Netherlands andCosta Rica , being taxed at lower tax rates. 38 -------------------------------------------------------------------------------- Table of Contents The increase in our effective tax rate for the three months endedJune 30, 2020 compared to the same period in 2019 is primarily attributable to the tax impact of a higher annual forecasted effective tax rate driven by changes in the jurisdictional mix of forecasted income. The increase in our effective tax rate for the six months endedJune 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 six months endedJune 30, 2020 . While the recognition of a deferred tax asset would normally cause a reduction in tax rate, due to our net loss before tax for the six months endedJune 30, 2020 , it has the effect of increasing the effective tax rate.
Liquidity and Capital Resources
We fund our operations from product sales. As ofJune 30, 2020 andDecember 31, 2019 , we had the following cash and cash equivalents and short-term marketable securities (in thousands): June 30, December 31, 2020 2019 Cash and cash equivalents$ 404,359 $ 550,425 Marketable securities, short-term - 318,202 Total$ 404,359 $ 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 ofJune 30, 2020 , approximately$244.2 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 ourU.S. operations as we generate sufficient domestic operating cash flow and have access to external funding under our revolving line of credit.
On
Our business has been materially adversely affected by the COVID-19 pandemic and
the global and regional efforts by governments to mitigate its spread, and we
expect the adverse impacts to our business to continue. 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. However, as a result of the COVID-19 pandemic, we expect to 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."
Cash flows (in thousands):
Six Months Ended
June 30,
2020 2019
Net cash flow provided by (used in):
Operating activities $ 69,684 $ 294,561
Investing activities (172,326) (321,020)
Financing activities (36,376) (188,381)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(7,172) 1,467
Net decrease in cash, cash equivalents, and restricted cash Operating Activities
For the six months ended
Significant non-cash activities
•Deferred taxes of$1.5 billion related to the one-time tax benefit associated with the intra-entity sale of certain intellectual property rights; •Stock-based compensation of$47.9 million related to equity awards granted to employees and directors; 39 -------------------------------------------------------------------------------- Table of Contents •Depreciation and amortization of$44.3 million related to our investments in property, plant and equipment and intangible assets; •Allowance for doubtful accounts of$12.6 million related to slower collections; and •Non-cash operating lease cost of$11.1 million .
Significant changes in working capital
•Decrease of$106.6 million in accrued and other long-term liabilities due to timing of payment and activities; •Decrease of$64.6 million in accounts receivable which is primarily a result of the decrease in net revenues due to the impact of COVID-19; •Increase of$40.9 million in deferred revenues corresponding primarily to cases eligible under our additional aligner policy and timing of revenue recognition; and •Increase of$31.1 million in prepaid expenses and other assets due to the timing of payments and activities.
Investing Activities
Net cash used in investing activities was$172.3 million for the six months endedJune 30, 2020 which primarily consisted of cash paid for the acquisition of exocad of$420.8 million , net of cash acquired, purchases of property and plant and equipment purchases of$80.5 million and purchases of marketable securities of$5.3 million . These outflows were partially offset by maturities and sales of marketable securities of$321.5 million and payments of$11.1 million received on an unsecured promissory note issued by SDC in exchange for tendering our shares to them.
For the remainder of 2020 we expect to invest an additional
Financing Activities Net cash used in financing activities was$36.4 million for the six months endedJune 30, 2020 which consisted of payroll taxes paid for equity awards through share withholdings of$47.0 million which was partially offset by$10.7 million of proceeds from the issuance of common stock.
Common Stock Repurchases
As ofJune 30, 2020 , we have$100.0 million available for repurchase under the$600.0 million repurchase program authorized by our Board of Directors inMay 2018 (Refer to Note 12 "Common Stock Repurchase Programs" of the Notes to Condensed Consolidated Financial Statements for details on our stock repurchase programs). Contractual Obligations Our contractual obligations have not significantly changed sinceDecember 31, 2019 as disclosed in our Annual Report on Form 10-K, other than obligations described in the Form 10-Q herein, including items disclosed in Note 10 "Commitments and Contingencies" of the Notes to Condensed Consolidated Financial Statements. 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. However, as a result of the COVID-19 pandemic, we expect to experience reduced cash flow from operations as a result of decreased revenues and slower collections on our accounts receivable. If we are unable to generate adequate operating cash flows and need more funds beyond our available liquid investments and those available under our credit facility, we may need to suspend our stock repurchase programs or seek additional sources of capital through equity or debt financing, collaborative or other arrangements with other companies, bank financing and other sources in order to realize our objectives and to continue our operations. There can be no assurance that we will be able to obtain additional debt or equity financing on terms acceptable to us, or at all. If adequate funds are not available, we may need to make business decisions that could adversely affect our operating results such as modifications to our pricing policy, business structure or operations. Accordingly, the failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our business, results of operations and financial condition.
Off-Balance Sheet Arrangements
As ofJune 30, 2020 , we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources other than certain items disclosed in Note 10 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K. 40 -------------------------------------------------------------------------------- Table of Contents 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 theU.S. The preparation of condensed consolidated 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, stock-based compensation, goodwill and finite-lived assets and related impairment, and income taxes. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates. Other than the addition of the Business Combinations policy and the amendment of the Systems and Services (formerly named "Scanner") Revenue Recognition policy, there have been no material changes to our critical accounting policies and estimates from the information provided in the "Critical Accounting Policies and Estimates" section of our Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . The addition of the Business Combinations policy and the amendment of the Systems and Services Revenue Recognition policy are discussed in Note 1 "Summary of Significant Accounting Policies" of the Notes to Condensed Consolidated Financial Statements.
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.
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