Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.A discussion regarding our financial condition and results of operations for fiscal 2023 compared to fiscal 2022 is presented under Results of Operations of this Form 10-K. Discussions regarding our financial condition and results of operations for fiscal 2022 compared to 2021 have been omitted from this Annual Report on Form 10-K, but can be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 27, 2023, which is available without charge on the SEC's website at www.sec.gov and on our investor relations website at investor.aligntech.com.Executive Overview of ResultsTrends and Uncertainties Our business strategic priorities focus on four principal pillars for growth: (i) international expansion; (ii) GP dentist treatment; (iii) patient demand; and (iv) orthodontic utilization. Our growth strategy depends on our ability to facilitate the digital transformation of dentistry happening around the world, our continuous focus on innovation, and expansion to meet and exceed evolving customer expectations as the array of products and services available to them increases.We strive to deliver on each of our strategic growth drivers through a variety of interrelated enterprise-wide efforts including:•Continuing penetration and adoption of Invisalign products, intraoral scanners and CAD/CAM solutions in international markets by investing in manufacturing operations, research and development, clinical treatment planning, sales and marketing and building our quality and regulatory capabilities in existing and emerging markets globally. For instance, in 2022, we opened a new aligner fabrication facility in Wroclaw, Poland as a part of our strategy to bring operational facilities closer to customers to serve them more quickly and respond to their needs more effectively as well as new treatment planning operations in targeted regional geographies. We have also diversified our research and development activities throughout Europe, which has created a longer term, more stable environment for consistent hiring, retention and innovation in a variety of high technology sectors. We are in over 100 markets and have 13 fabrication and treatment locations throughout the world. 38•Targeting growth opportunities with international orthodontists and GP customers, particularly with adopters of digital dentistry platforms by tailoring our sales and marketing strategies, manufacturing operations and resources around the unique needs of each customer channel. As we continue growing, we intend to opportunistically expand our research, development, manufacturing, treatment planning, and sales and marketing operations to meet local and regional demand thoughtfully and deliberately. Over the longer-term, we expect international revenues to grow faster than Americas' revenues as a result of growing international demand, our continued investment in international market expansion, the size of the market opportunities and our relatively low market penetration in these regions.•Building confidence within the GP and orthodontic communities through training and education efforts to increase their adoption and utilization of digital dental practice transformation and clear aligner treatment. We continue to expand our clear aligner customer base by educating new doctors on the benefits of digital dentistry through the Invisalign system. We furthermore demonstrate to GPs and orthodontists how the iTero portfolio of intraoral scanners and CAD/CAM restorative services and workflows can increase revenues and profitability for their dental practices by enhancing patient experiences and creating operational practice efficiencies.•Investing in research and development that allows us to innovate, develop and bring to market products and solutions that deliver the ever-increasing clinical precision and predictability that doctors expect with the speed and convenience their patients require.•Creating demand and enabling patient conversion through targeted investments in advertising and public relations through social media, influencers and other forms of digital communications to encourage treatment by Invisalign trained doctors. We believe that well-designed, targeted sales and marketing promotions that build on our strong brand awareness allow us to differentiate our products and solutions from traditional and emerging competitors. To increase awareness and educate young adults, parents and teens about the benefits of the Invisalign brand, in 2023 we continued to invest in and create campaigns across markets in media platforms such as TikTok, Instagram, YouTube, SnapChat, WeChat, and Douyin. We expect to make further investments to create additional demand for Invisalign system treatment driving more consumers to dental professionals for those treatments.•Pursuing new product lines that complement our doctor-prescribed principal products currently available in certain e-commerce and retail channels in the U.S. Similarly, in 2023, we continued our focus on our doctor subscription plan and grew our underpenetrated share of the retainer business through strategic marketing campaigns focused on driving adoption and increasing market share in the U.S., Canada, Iberia and the Nordics.•Increasing global orthodontic utilization rates as doctors’ clinical confidence in the efficacy and predictability of the Invisalign system increases with advancements in products and technology and as patients and doctors demand treatments that emphasize convenience and safety through fewer visits and less invasive and quicker treatments. In addition, the teenage and younger market makes up about 70% of the approximately 22 million total annual global orthodontic case starts. We continue to emphasize the benefits of the Invisalign system for teenage and younger patient treatments through education, training and sales and marketing programs. In 2023, we had record shipments to teenage and younger patients. We expect utilization rates to continue to rise. However, our utilization rates will fluctuate from period to period due to a variety of factors, which may include seasonal trends in our business, consumer demand due to macroeconomic factors, and adoption rates for new products and features. Macroeconomic Challenges and Military Conflict in Ukraine and the Middle East Our revenues are susceptible to fluctuations caused by macroeconomic conditions, inflation, changes to currency exchange rates, rising interest rates, actual and threatened wars and military actions, threats of or actual recessions, supply chain challenges, market volatility, and other factors, each of which impacts customer confidence, consumer sentiment and demand. Many of these same factors also impact our costs and those of our suppliers through higher raw material prices, transportation costs, labor costs, supply and distribution operations. In 2023, we believe that sales of our products were primarily harmed by macroeconomic conditions that ultimately adversely impacted disposable income and consumer demand. In particular, dental practices and industry research firms reported deteriorating orthodontic trends for the third and fourth quarters of 2023, including decreased patient visits and increased patient appointment cancellations, along with fewer case starts overall, especially among adult patients. The impact of declining demand varied by time and region, making operational results uncertain and difficult to predict.Additionally, many of our international operations are denominated in currencies other than the U.S. dollar. In 2023, the macroeconomic slowing or contraction resulted in foreign exchange volatility causing the U.S dollar to strengthen against other currencies. This negatively impacted our financial condition and results of operation compared to 2022. Foreign exchange 39volatility and the subsequent strengthening or weakening of the U.S dollar against other currencies remains uncertain and unpredictable.Moreover, military conflicts increase the unpredictability of the volatile macroeconomic conditions. While the military conflict between Russia and Ukraine did not materially impact our 2023 financial condition and results of operations, we expect the conflict will continue to create market uncertainties and dampen consumer sentiment and demand, particularly in Europe.Similarly, the recent conflict in the Middle East may further exacerbate general and regional macroeconomic instability, particularly if fighting is prolonged, it spreads to other locations, creates shipping and logistical challenges or cost increases, or leads to sanctions or boycotts. Our iTero business is headquartered in Israel and the timing and cost of shipping our products has been impacted. Additionally, we have employees and consultants in Israel that have been called for military service and they may be unavailable for an unknown period of time. The conflict may continue to spread to other areas which may further impact our business. We continue to monitor the potential for violence and military actions that may directly or indirectly impact our personnel, manufacturing, supply chain, and sales. Changing Product PreferencesAs the markets for clear aligners and digital processes and workflows used to transform the practice of dentistry continue to mature, we anticipate customer and patient expectations and demands will evolve. We expect to meet customer demands with innovative treatment options that include more choices to address a wider scope of treatment goals and budgets based on our existing and new products. This may result in larger and unpredictable variations in geographic and product mix and selling prices with uncertain implications on our financial statements and business operations.We strive to manage the challenges from the trends and uncertainties, including the macroeconomic conditions, military conflict and the evolution of our target markets, by focusing on improving our operations, building flexibility and efficiencies in our processes, adjusting our business models to changing circumstances and offering products that meet market demand. Specifically, we are managing cost impacts through pricing actions, implementing cost saving measures and slowing hiring. We also continue to innovate and introduce new and enhanced products that augment our doctor customer and patient experiences. For instance, in the first quarter of 2023, we successfully launched the Invisalign Comprehensive 3in3 product. The 3in3 configuration offers doctors Invisalign Comprehensive treatment with a three-year treatment expiration date and three additional clear aligners included prior to the treatment expiration date. We anticipate adoption of the Invisalign Comprehensive 3in3 product will continue to increase in 2024. The 3in3 product allows us to recognize more revenue up front but is offered at a lower price as compared to our traditional Invisalign comprehensive product that has a five-year treatment expiration date with unlimited additional clear aligner prior to the treatment end date.Further discussion of the impact of these challenges on our business may be found in Part I, Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.”Key Financial and Operating MetricsWe measure our performance against these strategic priorities by the achievement of key financial and operating metrics. For the year ended December 31, 2023, our business operations reflect the following:◦Revenues of $3,862.3 million, an increase of 3.4% year-over-year;◦Clear Aligner revenues of $3,199.3 million, an increase of 4.1% year-over-year;▪Americas Clear Aligner case revenues of $1,463.0 million, a decrease of 0.6% year-over-year;▪International Clear Aligner case revenues of $1,449.5 million, an increase of 7.4% year-over-year;▪Clear Aligner volume increase of 0.4% year-over-year and Clear Aligner volume increase for teenage patients of 7.8% year-over-year;◦Imaging Systems and CAD/CAM Services revenues of $662.9 million, an increase of 0.1% year-over-year;◦Income from operations of $643.3 million and operating margin of 16.7%;◦Effective tax rate of 30.6%;◦Net income of $445.1 million with diluted net income per share of $5.81;◦Cash, cash equivalents and marketable securities of $980.8 million as of December 31, 2023;◦Operating cash flow of $785.8 million;◦Capital expenditures of $177.7 million, predominantly related to purchases of property, plant and equipment; and◦Number of employees was 21,610 as of December 31, 2023, a decrease of 6.7% year-over-year. Other Statistical Data and Trends40•As of December 31, 2023, 17 million people worldwide have been treated with our Invisalign system. Management measures these results by comparing to the millions of people who can benefit from straighter teeth and uses this data to target opportunities to expand the market for orthodontics by educating consumers about the benefits of straighter teeth using the Invisalign system.•For the fourth quarter of 2023, total Invisalign cases submitted with a digital scanner in the Americas increased to 95.1%, up from 92.7%* in the fourth quarter of 2022 and international scans increased to 88.1%, up from 86.8% in the fourth quarter of 2022. For the fourth quarter of 2023, 98.0% of Invisalign cases submitted by North American orthodontists were submitted digitally. •The total utilization rate in 2023 was 19.1 cases per doctor compared to 19.3* cases per doctor in 2022 and 20.9* cases per doctor in 2021. Our utilization rates have declined in 2023 due to the macroeconomic conditions and other factors as described in the Trends and Uncertainties section above. In general, we expect utilization rates to rise over time although they are likely to fluctuate from period to period.•North America: The utilization rate among our North American orthodontist customers was 94.5 cases per doctor in 2023 compared to 94.9* cases per doctor in 2022 and 99.7* cases per doctor in 2021 and the utilization rate among our North American GP customers was 14.0 cases per doctor in 2023 compared to 13.9 cases per doctor in 2022 and 14.3 cases per doctor in 2021. •International: International doctor utilization rate was 16.3 cases per doctor in 2023 compared to 16.2 cases per doctor in 2022 and 17.5 cases per doctor in 2021.* Invisalign utilization rates are calculated by the number of cases shipped divided by the number of doctors to whom cases were shipped. Our International region includes Europe, Middle East and Africa (“EMEA”) and Asia Pacific (“APAC”). Latin America (“LATAM”) is excluded from the International region based on its immateriality to the year; however is included in the Total utilization.During the third quarter of 2023, we began including Touch Up case revenues in Americas and/or International net revenues that were previously included in Non-Case revenues and have recast business metrics for the periods presented above accordingly. Results of Operations41Net Revenues by Reportable Segment We group our operations into two reportable segments: Clear Aligner segment and Systems and Services segment.•Our Clear Aligner segment consists of Comprehensive Products, Non-Comprehensive Products and Non-Case revenues as defined below:•Comprehensive Products include, but are not limited to, Invisalign Comprehensive and Invisalign First. •Non-Comprehensive Products include, but are not limited to, Invisalign Moderate, Lite and Express packages and Invisalign Go and Invisalign Go Plus. •We also offer in the U.S., Canada, and EMEA, a Doctor Subscription Program which is our monthly subscription-based clear aligner program. The program allows doctors the flexibility to order retainers and low-stage “touch-up” clear aligners within their subscribed tier and is designed for a segment of experienced Invisalign trained doctors who are currently not regularly using our retainers or low-stage aligners. The low-stage aligners, the Touch up product, are included as a Non-Comprehensive Product.•Non-Case products include, but are not limited to, retention products including retention aligners ordered through the Doctor Subscription Program, Invisalign training, adjusting tools used by dental professionals during the course of treatment and Invisalign Accessory Products that are complementary to our doctor-prescribed principal products such as aligner cases (clamshells), teeth whitening products, cleaning solutions (crystals, foam and other material) and other oral health products available in certain commerce channels in select markets.•Our Systems and Services segment consists of our iTero intraoral scanning systems, which includes a single hardware platform and restorative or orthodontic software options. Our services include subscription software, disposables, rentals, leases, pay per scan services, as well as exocad’s CAD/CAM software solutions that integrate workflows to dental labs and dental practices.Net revenues for our Clear Aligner and Systems and Services segments by region for the year ended December 31, 2023, 2022 and 2021 are as follows (in millions): Year Ended December 31,Year Ended December 31,Net Revenues20232022Change20222021ChangeClear Aligner revenues: Americas$1,463.0 $1,471.9 $(9.0)(0.6)%$1,471.9 $1,548.8 $(76.9)(5.0)% International1,449.5 1,349.0 100.5 7.4 %1,349.0 1,498.7 (149.7)(10.0)% Non-case 286.9 251.7 35.2 14.0 %251.7 199.6 52.1 26.1 %Total Clear Aligner net revenues $3,199.3 $3,072.6 $126.7 4.1 %$3,072.6 $3,247.1 $(174.5)(5.4)%Systems and Services net revenues662.9 662.1 0.9 0.1 %662.1 705.5 (43.5)(6.2)%Total net revenues$3,862.3 $3,734.6 $127.6 3.4 %$3,734.6 $3,952.6 $(217.9)(5.5)%During 2023, we began including Touch Up case revenues in Americas and/or International net revenues. Touch Up case revenues were previously recorded in Non-case revenues. We have recast the year ended December 31, 2022 and 2021 to reflect this change. Amount and percentage changes are based on recast amounts. Certain tables may not sum or recalculate due to rounding.42Clear Aligner Case VolumeCase volume data which represents Clear Aligner case shipments for the year ended December 31, 2023, 2022 and 2021 is as follows (in thousands): Year Ended December 31,Year Ended December 31,20232022Change20222021ChangeTotal case volume2,408.5 2,398.4 10.2 0.4 %2,398.4 2,559.6 (161.3)(6.3)%During 2023, we began including Touch Up case revenues in Americas and/or International net revenues. Touch Up case revenues were previously recorded in Non-case revenues. We have recast the year ended December 31, 2022 and 2021 to reflect this change. Amount and percentage changes are based recast amounts. Certain tables may not sum or recalculate due to rounding.Total net revenues increased by $127.6 million in 2023 as compared to 2022, primarily due to an increase in Clear Aligner average selling price (“ASP”), an increase in Clear Aligner non-case revenue and higher Systems and Services services mix, partially offset by a decrease in both scanner volumes and ASP’s.Clear Aligner - AmericasAmericas net revenues decreased by $9.0 million in 2023 as compared to 2022, primarily due to a 2.1% decrease in case volumes, resulting in a reduction of net revenues of $31.4 million, partially offset by a $22.4 million increase due to higher ASP. Higher ASP includes price increases which increased net revenues by $68.6 million along with higher additional aligners which increased net revenues by $43.9 million. The increases in ASP were partially offset by higher promotional discounts which decreased net revenues by $44.3 million, a product mix shift to lower priced products which reduced net revenues by $37.6 million and higher sales credits which lowered net revenues $11.5 million.Clear Aligner - InternationalInternational net revenues increased by $100.5 million in 2023 as compared to 2022 due to a 3.5% increase in case volumes, resulting in an increase of net revenues by $46.9 million, and higher ASP increasing net revenues by $53.6 million. Higher ASP was largely due to higher additional aligners increasing net revenues by $100.8 million and price increases on most products which increased net revenues by $96.9 million. The increases in ASP were partially offset by a product mix shift to lower priced products reducing net revenues by $68.2 million, higher promotional discounts which reduced net revenues by $52.5 million, and unfavorable foreign exchange rates which decreased net revenues by $27.2 million. Clear Aligner - Non-CaseNon-case net revenues increased by $35.2 million in 2023 compared to 2022 mainly due to increased volume of Vivera retainers across all regions which includes retention aligners ordered through our Doctor Subscription Program. Systems and ServicesSystems and Services net revenues decreased by $0.9 million in 2023 as compared to 2022 primarily due to a lower number of scanners sold which lowered net revenues by $26.1 million and lower scanner ASP which reduced net revenues by $23.9 million. The decrease in scanner net revenues was mostly offset by higher service revenues of $31.8 million and other revenues which increased $19.1 million primarily due to revenue from sales of certified pre-owned scanners, CAD/CAM software, and scanner rentals.43Cost of net revenues and gross profit (in millions): Year Ended December 31,Year Ended December 31, 20232022Change20222021ChangeClear AlignerCost of net revenues$911.3 $844.4 $66.9 $844.4 $772.7 $71.7 % of net segment revenues28.5 %27.5 %27.5 %23.8 %Gross profit$2,288.0 $2,228.2 $59.9 $2,228.2 $2,474.4 $(246.2)Gross margin %71.5 %72.5 %72.5 %76.2 %Systems and ServicesCost of net revenues$244.1 $256.4 $(12.3)$256.4 $244.5 $11.9 % of net segment revenues36.8 %38.7 %38.7 %34.7 %Gross profit$418.8 $405.6 $13.2 $405.6 $461.0 $(55.4)Gross margin %63.2 %61.3 %61.3 %65.3 %Total cost of net revenues$1,155.4 $1,100.9 $54.5 $1,100.9 $1,017.2 $83.6 % of net revenues29.9 %29.5 %29.5 %25.7 %Gross profit$2,706.9 $2,633.8 $73.1 $2,633.8 $2,935.4 $(301.6)Gross margin %70.1 %70.5 %70.5 %74.3 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Cost of net revenues includes personnel-related costs including payroll and stock-based compensation for staff involved in the production process, the cost of materials, packaging, freight and shipping related costs, depreciation on capital equipment and facilities used in the production process, amortization of acquired intangible assets and training costs.Clear AlignerThe gross margin percentage decreased in 2023 as compared to 2022 primarily due to a increased manufacturing spend offset by higher ASP.Systems and ServicesThe gross margin percentage increased in 2023 as compared to 2022 primarily due to lower purchase price variance and higher service revenue mix, partially offset by lower ASP.Selling, general and administrative (in millions): Year Ended December 31,Year Ended December 31, 20232022Change20222021ChangeSelling, general and administrative$1,703.4 $1,674.5 $28.9 $1,674.5 $1,708.6 $(34.2)% of net revenues44.1 %44.8 %44.8 %43.2 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Selling, general and administrative expense generally includes personnel-related costs, including payroll, stock-based compensation and commissions for our sales force, marketing and advertising expenses including media, market research, marketing materials, clinical education, trade shows and industry events, legal and outside service costs, equipment, software and maintenance costs, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and Information Technology (“IT”).Selling, general and administrative expense increased in 2023 compared to 2022 primarily due to higher employee costs, including higher salaries expense, fringe benefits, stock-based compensation and bonus, offset by lower advertising and marketing and outside service provider costs. 44Research and development (in millions): Year Ended December 31,Year Ended December 31, 20232022Change20222021ChangeResearch and development$346.8 $305.3 $41.6 $305.3 $250.3 $54.9 % of net revenues9.0 %8.2 %8.2 %6.3 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Research and development expense generally includes personnel-related costs, including payroll and stock-based compensation, outside service costs associated with the research and development of new products and enhancements to existing products, software, equipment, material and maintenance costs, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and IT.Research and development expense increased in 2023 compared to 2022 primarily due to higher employee costs, including higher salaries expense, fringe benefits, stock-based compensation and bonus as we continue to focus our investments in innovation and research.Restructuring and other charges (in millions): Year Ended December 31,Year Ended December 31, 20232022Change20222021ChangeRestructuring and other charges$13.3 $11.5 $1.9 $11.5 $— $11.5 % of net revenues0.3 %0.3 %0.3 %— %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Restructuring and other charges incurred during 2023 was primarily related to post employment benefits, including employee severance. Income from operations (in millions): Year Ended December 31,Year Ended December 31, 20232022Change20222021ChangeClear AlignerIncome from operations$1,182.3 $1,134.4 $47.8 $1,134.4 $1,325.9 $(191.4)Operating margin %37.0 %36.9 %36.9 %40.8 %Systems and ServicesIncome from operations$191.4 $179.8 $11.6 $179.8 $259.1 $(79.4)Operating margin %28.9 %27.2 %27.2 %36.7 %Total income from operations 1$643.3 $642.6 $0.7 $642.6 $976.4 $(333.8)Operating margin %16.7 %17.2 %17.2 %24.7 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.1 Refer to Note 15 “Segments and Geographical Information” of the Notes to Consolidated Financial Statements for details on unallocated corporate expenses and the reconciliation to Consolidated Income from Operations.Clear AlignerOperating margin percentage remained relatively flat in 2023 compared to 2022 primarily due to a decrease in gross margin which was offset by operating leverage. Systems and ServicesOperating margin percentage increased in 2023 compared to 2022 primarily due to higher gross margin. Interest income (in millions):45 Year Ended December 31,Year Ended December 31, 20232022Change20222021ChangeInterest income$17.3 $5.4 $11.9 $5.4 $3.1 $2.3 % of net revenues0.4 %0.1 %0.1 %0.1 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Interest income generally includes interest earned on cash, cash equivalents and investment balances.Interest income increased in 2023 compared to 2022 primarily due to higher interest rates during 2023.Other income (expense), net (in millions): Year Ended December 31,Year Ended December 31, 20232022Change20222021ChangeOther income (expense), net$(19.4)$(48.9)$29.5 $(48.9)$32.9 $(81.8)% of net revenues(0.5)%(1.3)%(1.3)%0.8 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Other income (expense), net, generally includes foreign exchange gains and losses, gains and losses on foreign currency forward contracts, interest expense, gains and losses on equity investments and other miscellaneous charges.Other income (expense), net decreased in 2023 compared to 2022 primarily due to the favorable impact of foreign exchange rates offset slightly by losses in investments in private companies.Provision for (benefit from) income taxes (in millions): Year Ended December 31,Year Ended December 31, 20232022Change20222021ChangeProvision for (benefit from) income taxes$196.2 $237.5 $(41.3)$237.5 $240.4 $(2.9)Effective tax rates30.6 %39.6 %39.6 %23.7 %Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.The decrease in our effective tax rate for the year ended December 31, 2023 compared to the same period in 2022 is primarily attributable to the application of newly issued tax guidance, including IRS Notice 2023-55 and a change in our jurisdictional mix of income.Liquidity and Capital ResourcesLiquidity and TrendsAs of December 31, 2023 and 2022, we had the following cash and cash equivalents and short-term and long-term marketable securities (in thousands):December 31, 20232022Cash and cash equivalents$937,438 $942,050 Marketable securities, short-term 35,304 57,534 Marketable securities, long-term8,022 41,978 Total$980,764 $1,041,562 As of December 31, 2023 and 2022, approximately $784.7 million and $653.7 million, respectively, of cash, cash equivalents and marketable securities were held by our foreign subsidiaries. We intend to reinvest our foreign subsidiary earnings indefinitely outside of the U.S. and do not expect to incur significant additional costs upon repatriation of these foreign earnings. We generate sufficient domestic operating cash flow and have access to $300.0 million under our revolving line of 46credit. 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.Our material cash requirements as of December 31, 2023 are as below:•Our purchase commitments consist primarily of open purchase orders for goods and services, including manufacturing inventory, supplies and services, sales and marketing, research and development services and technological services, issued in the normal course of business. Our purchase commitments totaled $1,234.5 million. We anticipate a majority, an estimated $861.5 million, will be payable within the next 12 months. These purchase commitments exclude capital expenditures. •We expect our investments in capital expenditures to be approximately $100.0 million for the next 12 months. Capital expenditures primarily relate to building construction and improvements as well as additional manufacturing capacity due to international expansion. Despite the challenging market conditions, we intend to expand our investments in research and development, manufacturing, treatment planning, sales and marketing operations to meet actual and anticipated local and regional demands. •We have future operating lease payments of $153.5 million, which includes $13.3 million for leases that have not yet commenced as of December 31, 2023. Refer to Note 4 “Leases” of the Notes to Consolidated Financial Statements for details on the lease payments. •We have approximately $650.0 million available for repurchases of our common stock under the stock repurchase program authorized by our Board of Directors in January 2023 (“January 2023 Repurchase Program”). Our stock repurchase program is subject to periodic evaluations to determine when and if repurchases are in the best interests of our stockholders, taking into account prevailing market conditions. Refer to Note 10 “Common Stock Repurchase Programs” of the Notes to Consolidated Financial Statements for details on our stock repurchase programs. Beginning in fiscal year 2023 our stock repurchases, net of certain issuances, were subject to a 1% excise tax. This excise tax is not expected to have a material impact on our liquidity or capital resources.•On January 2, 2024 we completed the acquisition of the remaining interest in privately held Cubicure GmbH for total purchase consideration of approximately $87 million. We paid approximately $79 million in cash, which represents the total purchase consideration less credit for our previously owned interest.•As of December 31, 2023, we had no material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material impact on our liquidity or capital resources. Sources and Use of Cash The following table summarizes our Consolidated Statements of Cash Flows for the year ended December 31, 2023, 2022 and 2021 (in thousands): Year Ended December 31, 202320222021Net cash provided by (used in):Operating activities$785,776 $568,732 $1,172,544 Investing activities(195,943)(213,316)(563,430)Financing activities(598,340)(501,686)(458,332)Effects of foreign exchange rate changes on cash, cash equivalents, and restricted cash 4,671 (11,514)(12,117)Net (decrease) increase in cash, cash equivalents, and restricted cash$(3,836)$(157,784)$138,665 Operating ActivitiesFor the year ended December 31, 2023, cash flows from operations of $785.8 million resulted primarily from our net income of approximately $445.1 million as well as the following:Significant adjustments to net income•Stock-based compensation of $154.0 million related to equity awards granted to employees and directors; and47•Depreciation and amortization of $142.4 million related to our investments in property, plant and equipment and intangible assets.Significant changes in working capital •Inflow of $46.3 million, net from accrued and other long-term liabilities primarily due to higher incentive accruals for 2023, as well as timing of payments of other activities;•Inflow of $86.7 million, net from deferred revenues due to the deferral of revenue on shipments;•Inflow of $30.2 million, net from inventories primarily due to lower purchases of materials used in manufacturing; and•Outflow of $104.6 million, net from accounts receivable due to timing of collections and increased revenues.For the year ended December 31, 2022, cash flows from operations of $568.7 million resulted primarily from our net income of approximately $361.6 million as well as the following:Significant adjustments to net income•Stock-based compensation of $133.4 million related to equity awards granted to employees and directors;•Depreciation and amortization of $125.8 million related to our investments in property, plant and equipment and intangible assets; andSignificant changes in working capital•Inflow of $241.9 million, net from deferred revenues due to the deferral of revenue on shipments over the period as well as timing of revenue recognition;•Outflow of $130.1 million, net from inventories primarily due to lower shipment volumes over the period in addition to our efforts to manage stock at appropriate levels as required; and •Outflow of $121.9 million, net from accrued and other long-term liabilities primarily due to the payment of our 2021 corporate bonus as well as timing payment of other activities.Investing ActivitiesNet cash used in investing activities was $195.9 million for the year ended December 31, 2023 which primarily consisted of purchases of property, plant and equipment of $177.7 million which included a building acquisition for $24.5 million, an investment in the equity of a privately held company of $77.0 million and purchases of marketable securities of $2.9 million, partially offset by sales and maturities of marketable securities of $61.4 million. Net cash used in investing activities was $213.3 million for the year ended December 31, 2022 which primarily consisted of purchases of property, plant and equipment of $291.9 million, purchases of marketable securities of $28.0 million and $12.3 million cash paid relating to a business acquisition. These outflows were partially offset by sales and maturities of marketable securities of $121.1 million.Financing ActivitiesNet cash used in financing activities was $598.3 million for the year ended December 31, 2023 which consisted of payments to repurchase shares of our common stock of $602.4 million and payroll taxes paid for equity awards through share withholdings of $22.6 million, which were partially offset by $26.6 million of proceeds from the issuance of common stock. Net cash used in financing activities was $501.7 million for the year ended December 31, 2022 which consisted of payments to repurchase shares of our common stock of $475.0 million and payroll taxes paid for equity awards through share withholdings of $52.8 million, which were partially offset by $26.1 million of proceeds from the issuance of common stock.Critical Accounting Estimates Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures at the date of the financial statements. We 48evaluate our estimates on an on-going basis and use authoritative pronouncements, historical experience and other assumptions as the basis for making the estimates. Actual results could differ from those estimates.We believe the following critical accounting estimates affect our more significant judgments used in the preparation of our consolidated financial statements. For further information on all of our significant accounting policies, see Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements.Revenue RecognitionOur revenues are derived primarily from the sale of aligners, scanners, and services from our Clear Aligner and Systems and Services segments. We enter into sales contracts that may consist of multiple distinct performance obligations where certain performance obligations of the sales contract are not delivered in one reporting period. We measure and allocate revenues according to ASC 606-10, “Revenues from Contracts with Customers.”Determining the standalone selling price (“SSP”) in order to allocate consideration from the contract to the individual performance obligations is the result of various factors, such as historical prices, changing trends and market conditions, costs, and gross margins. While changes in the allocation of the SSP between performance obligations will not affect the amount of total revenues recognized for a particular contract, any material changes could impact the timing of revenue recognition, which would have a material effect on our financial position and result of operations. This is because the contract consideration is allocated to each performance obligation, delivered or undelivered, at the inception of the contract based on the SSP of each distinct performance obligation.We allocate consideration for each clear aligner treatment plan based on each unit’s SSP. Management considers a variety of factors such as same or similar product historical sales, costs, and gross margin, which may vary over time depending upon the unique facts and circumstances related to each performance obligation in making these estimates. In addition to historical data, we take into consideration changing trends and market conditions. For treatment plans with multiple options, we also consider usage rates, which is the number of times a customer is expected to order more aligners after the initial shipment. Our process for estimating usage rates requires significant judgment and evaluation of inputs, including historical usage data by region, country and channel.We estimate the SSP of each element in a scanner system and services sale taking into consideration same or similar product historical prices as well as our discounting strategies. For CAD/CAM services, we estimate the SSP of each element, including the initial software license and maintenance and support, using data such as historical prices.Unfulfilled Performance Obligations for Clear Aligners and ScannersOur unfulfilled performance obligations, including deferred revenues and backlog, and the estimated revenues expected to be recognized in the future related to these performance obligations are $1,578.3 million and $1,515.4 million as of December 31, 2023 and 2022, respectively. This includes performance obligations from the Clear Aligner reportable segment, primarily the shipment of additional aligners, which are fulfilled over six months to five years. This also includes performance obligations from our Systems and Services reportable segment, primarily services and support, which are fulfilled over one to five years, and contracted deliveries of additional scanners. The estimate includes both product and service unfulfilled performance obligations and the time range reflects our best estimate of when we will transfer control to the customer and may change based on customer usage patterns, timing of shipments, readiness of customers' facilities for installation, and manufacturing availability.Impairment of Goodwill and Finite-Lived Intangible AssetsGoodwillWe evaluate goodwill for impairment at least annually on November 30th or more frequently if indicators of impairment are identified between annual testing dates. Goodwill is tested for impairment between annual testing dates when events or circumstances indicate that the fair value of a reporting unit has been reduced below its carrying value. When an indicator of impairment is identified we perform a quantitative impairment assessment in which we determine the fair value of a reporting unit and compare it to the carrying value of the respective reporting unit. We generally determine the fair value of a reporting unit via a discounted cash flow analysis and allocate the net assets of the Company to each reporting unit to determine carrying value. We will record an impairment charge when our quantitative impairment analysis indicates that the carrying value of a reporting unit exceeds its fair value. Both the determination of fair value and carrying value of a reporting unit require management to exercise significant judgement related to operating assumptions and estimates and allocation methodologies. 49Finite-Lived Intangible AssetsFinite-lived intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value of an asset (asset group) may not be recoverable. When an impairment indicator is identified, we perform a recoverability test, in which the estimated, undiscounted future cash flows expected to result from the use and eventual disposition of the asset (asset group) are compared to the carrying value of the asset (asset group). When our recoverability test results in undiscounted cash flows more than carrying value, no impairment is recorded. However, when our recoverability test results in undiscounted cash flows that are less than carrying value, we determine the fair value of the asset (asset group) and reduce the carrying amount of the asset (asset group), through an impairment charge, to its fair value. The process of identifying impairment indicators, preparing an undiscounted cash flow and determining the fair value of the asset (asset group) require management to exercise significant judgement related to various assumptions and estimates.If we were to have impairments to goodwill or finite-lived intangible assets, it could adversely affect our operating results. During the years ended 2023 and 2022, we did not have any impairment charges related to our goodwill or finite-lived intangible assets. Accounting for Income Taxes We are subject to income taxes in the U.S. and numerous foreign jurisdictions. The evaluation of our uncertain tax positions involves significant judgment in the interpretation and application of U.S. GAAP and complex domestic and international tax laws related to the allocation of international taxation rights between countries. We are also required to evaluate the realizability of our deferred tax assets on an ongoing basis in accordance with U.S. GAAP, which requires the assessment of both of our historical and future performance as well as other relevant factors. Realization of our deferred tax assets is dependent on our ability to generate future taxable income which is determined based on assumptions such as estimated growth rates in revenues, gross margins, future cash flows and discount rates. The accuracy of these estimates could be affected by unforeseen events or actual results, and the sustainability of our future tax benefits is dependent upon the acceptance of these valuation estimates and assumptions by the taxing authorities. Accounting for Legal Proceedings and LitigationEstimates of probable losses resulting from litigation are inherently difficult to make, particularly when the matters are in early procedural stages with incomplete facts and information. The final outcome of legal proceedings is dependent on many variables difficult to predict and, therefore, the ultimate cost to entirely resolve such matters may be materially different than the amount of current estimates. Consequently, new information or changes in judgments and estimates could have a material adverse effect on our business, financial condition, and results of operations or cash flows.Recent Accounting PronouncementsSee Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on results of operations and financial condition, which is incorporated herein.Item 7A. Quantitative and Qualitative Disclosures About Market Risk.In the normal course of business, we are exposed to interest rate, foreign currency exchange and inflation risks that could impact our financial position and results of operations. In addition, we are subject to the broad market risk that is created by the global market disruptions and uncertainties resulting from macroeconomic challenges, various military conflicts and consumer confidence. Further discussion on these risks may be found in Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors”.Interest Rate RiskChanges in interest rates could impact our anticipated interest income on our cash and cash equivalents and investments in marketable securities. Our investments are fixed-rate short-term and long-term securities. Fixed-rate securities may have their fair market value adversely impacted due to a rise in interest rates, and, as a result, our future investment income may fall short of expectations or we may suffer losses in principal if forced to sell securities which have declined in market value due. As of December 31, 2023, we had approximately $43.3 million invested in available-for-sale marketable securities. An immediate 10% change in interest rates would not have a material adverse impact on our future operating results and cash flows.50We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. As of December 31, 2023, we are not subject to risks from immediate interest rate increases on our unsecured revolving line of credit facility.Currency Rate RiskAs a result of our international business activities, our financial results have been affected by factors such as changes in foreign currency exchange rates as well as economic conditions in foreign markets, and there is no assurance that exchange rate fluctuations will not harm our business in the future. We generally sell our products in the local currency of the respective countries. This provides some natural hedging because most of the subsidiaries’ operating expenses are generally denominated in their local currencies. We enter into foreign currency forward contracts for currencies where we have exposures, primarily the Euro, British Pound, Chinese Yuan, Polish Zloty and Canadian Dollar, to minimize the short-term impact of foreign currency exchange rate fluctuations on cash and certain trade and intercompany receivables and payables. These forward contracts are not designated as hedging instruments and are generally one month in original maturity and are marked to market through earnings every period. The gains and losses on these forward contracts are intended to offset the gains and losses in the underlying foreign currency denominated monetary assets and liabilities being economically hedged. We do not enter into foreign currency forward contracts for trading or speculative purposes. As our international operations grow, we will continue to reassess our approach to managing the risks relating to fluctuations in currency rates. It is difficult to predict the impact forward contracts could have on our results of operations.Although we will continue to monitor our exposure to currency fluctuations, and, where appropriate, may use forward contracts to minimize the effect of these fluctuations, the impact of an aggregate change of 10% in foreign currency exchange rates relative to the U.S. dollar on our results of operations and financial position could be material. Inflation RiskThe economy has been impacted by certain macroeconomic challenges which have contributed to a rising inflationary trend that have impacted both our revenues and costs globally, and which we expect will continue into the foreseeable future. If our costs become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. There can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future.51