Segments and Geographical Information

9 Months Ended

Sep. 30, 2017

Notes To Financial Statements [Abstract]

Segments and Geographical Information

Segments and Geographical Information

Segment Information

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is our Chief Executive Officer. We report segment information based on the management approach. The management approach designates the internal reporting used by CODM for decision making and performance assessment as the basis for determining our reportable segments. The performance measures of our reportable segments include net revenues and gross profit. In the fourth quarter of 2016, management decided to change the way it internally assesses the performance of our reportable segments by including income from operations measure in the performance metrics. Income from operations for each segment includes all geographic revenues, related cost of net revenues and operating expenses directly attributable to the segment. Certain operating expenses are attributable to operating segments and each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Costs not specifically allocated to segment income from operations include various corporate expenses such as stock-based compensation and costs related to IT, facilities, human resources and accounting and finance, legal and regulatory, and other separately managed general and administrative costs outside the operating segments. We have included the new performance measure in the prior period presentation to conform to the current year's presentation.

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

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

◦ Comprehensive Products include our Invisalign Full, Teen and Assist products.

◦ Non-Comprehensive Products include our Express/Lite products in addition to revenues from the sale of aligners to SmileDirectClub (“SDC”) under our supply agreement, which commenced in the fourth quarter of 2016.  Revenue from SDC is recorded after eliminating outstanding intercompany transactions.

◦ Non-Case includes our Vivera retainers along with our training and ancillary products for treating malocclusion. 

• Our Scanner segment consists of intraoral scanning systems and additional services available with the intraoral scanners that provide digital alternatives to the traditional cast models. This segment includes our iTero scanner and OrthoCAD services.

These reportable operating segments are based on how our CODM views and evaluates our operations as well as allocation of resources. The following information relates to these segments (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
Net revenues	2017			2016			2017			2016
Clear Aligner	$	341,611		$	243,668		$	945,046		$	706,802
Scanner	43,656			34,921			107,044			79,869
Total net revenues	$	385,267		$	278,589		$	1,052,090		$	786,671
Gross profit
Clear Aligner	$	266,285		$	189,270		$	737,046		$	552,663
Scanner	26,203			19,932			61,984			42,382
Total gross profit	$	292,488		$	209,202		$	799,030		$	595,045
Income from operations
Clear Aligner	$	154,614		$	102,431		$	403,264		$	306,789
Scanner	13,525			11,977			28,324			20,333
Unallocated corporate expenses	(69,376		)	(52,329		)	(187,583		)	(146,573		)
Total income from operations	$	98,763		$	62,079		$	244,005		$	180,549
Depreciation and amortization
Clear Aligner	$	5,643		$	3,541		$	15,607		$	10,163
Scanner	1,130			761			3,248			2,853
Unallocated corporate expenses	3,199			2,599			7,860			3,770
Total depreciation and amortization	$	9,972		$	6,901		$	26,715		$	16,786

The following table reconciles total segment income from operations in the table above to net income before provision for income taxes and equity losses of investee (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Total segment income from operations	$	168,139		$	114,408		$	431,588		$	327,122
Unallocated corporate expenses	(69,376		)	(52,329		)	(187,583		)	(146,573		)
Total income from operations	98,763			62,079			244,005			180,549
Interest and other income (expense), net	3,750			1,463			8,607			1,161
Net income before provision for income taxes and equity in losses of investee	$	102,513		$	63,542		$	252,612		$	181,710

Geographical Information

Net revenues are presented below by geographic area (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Net revenues(1):
United States (2)	$	217,758	$	168,501	$	608,052	$	516,924
The Netherlands (2)	127,307		87,051		357,278		191,049
Other International	40,202		23,037		86,760		78,698
Total net revenues	$	385,267	$	278,589	$	1,052,090	$	786,671

⁽¹⁾Net revenues are attributed to countries based on location of where revenue is recognized.

⁽²⁾ Effective July 2016, we implemented a new international corporate structure. This changed the structure of our international procurement and sales operations.

Tangible long-lived assets are presented below by geographic area (in thousands):

	September 30, 2017		December 31, 2016
Long-lived assets(1):
The Netherlands	$	142,591	$	111,515
United States	125,172		43,278
Mexico	21,537		17,918
Other International	6,601		2,456
Total long-lived assets	$	295,901	$	175,167

⁽¹⁾Long-lived assets are attributed to countries based on entity that owns the assets.