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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-02-28 · 285 added, 223 removed, 215 unchanged (70% of the section changed)

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 “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

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 2020 compared to fiscal 2019 is presented under Results of Operations of this Form 10-K.

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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, 2019, filed with the SEC on February 28, 2020, which is available without charge on the SEC's website at www.sec.gov and on our investor relations website at investor.aligntech.com.

Our goals are to establish Invisalign clear aligners as the standard method for treating malocclusion which, to date, over 8 million people worldwide have been treated with our Invisalign System, and to establish the iTero intraoral scanner as the preferred scanning device for 3D digital scans, ultimately driving increased clear aligner and other product adoption by dental professionals.

We intend to achieve these goals by continued focus and execution of our strategic growth drivers set forth in the Business Strategy section of this Annual Report on Form 10-K.

The successful execution of our business strategy in 2020 and beyond may be affected by a number of factors including:

New Invisalign Products and Feature Enhancements .

We believe product innovation drives greater treatment predictability, clinical applicability and ease of use for the dental professionals we serve customers which supports adoption of Invisalign treatment in their practices.

Our focus is to develop solutions and features to treat a wide range of cases from simple to complex.

We rolled out Invisalign treatment with Mandibular Advancement, the first clear aligner solution for Class II correction in growing tween and teen patients in multiple regions and countries throughout 2018.

This offering combines the benefits of our clear aligner system with features for moving the lower jaw forward while simultaneously aligning the teeth without the need for elastics typically used to treat teen Class II patients.

In April 2018, we announced Invisalign Go product with more user-friendly iTero digital chairside experience and greater flexibility to treat a wider range of mild to moderate cases.

Invisalign Go also incorporates new data-driven clinical protocols for predictable tooth movement and automated case assessments that leverages our Invisalign patients treated to date.

These improvements make it easier for general practitioner (“GP”) dentists to tailor their treatment plans to the individual needs of each patient.

In July 2018, we announced Invisalign First clear aligners which are a treatment option designed with features specifically for younger patients with early mixed dentition with a mixture of primary/baby and permanent teeth.

Phase 1 treatment is an early interceptive orthodontic treatment for young patients, traditionally done through arch expanders, or partial metal braces, before all permanent teeth have erupted, typically at ages seven through ten years.

Invisalign First clear aligners are designed specifically to address a broad range of younger patients’ malocclusions, including shorter clinical crowns, management of erupting dentition and predictable dental arch expansion.

In October 2019, we launched the Invisalign Moderate Package for the treatment of mild to moderate malocclusion.

The Invisalign Moderate treatment includes all the features of Invisalign treatment, plus additional features that address the orthodontic needs of teenage patients such as compliance indicators and compensation for tooth eruption.

New iTero Products and Technology Innovation.

The iTero scanner is an important component to our customer experience and is central to a digital approach as well as overall customer utilization of Invisalign.

In April 2018, we expanded the iTero Element portfolio with the launch of the iTero Element 2 and the iTero Element Flex scanners, building on the existing high precision, full-color imaging and fast scan times of the iTero Element portfolio while streamlining orthodontic and restorative workflows.

The next-generation iTero Element 2 is designed for greater performance with 2X faster start-up and 25% faster scan processing time compared to the iTero Element.

The new iTero Element Flex wand-only configuration is a portable scanner for easy transport from office to office.

As we continue to expand our global presence, we expect to seek regulatory approvals to offer our iTero portfolio products in more countries, thereby tapping potential growth opportunities in underserved markets

In February 2019, we announced the launch of iTero Element 5D Imaging System for comprehensive, preventative and restorative oral care.

The iTero Element 5D Imaging System provides a new comprehensive approach to clinical applications, workflows and user experience that expands the suite of existing high-precision, full color imaging and fast scan times of the iTero Element portfolio.

The iTero Element 5D Imaging System is available in the majority of EMEA and select APAC countries.

The iTero Element 5D Imaging System is pending regulatory approval and is not yet available in the U.S.

or LATAM countries.

In June 2019, we announced the launch of iTero Element Foundation intraoral scanner with restorative software.

The iTero Element Foundation extends Align’s portfolio of intraoral scanners with powerful 3D visualization to better meet the needs of doctors, labs and patients.

The iTero Element Foundation is available in North America and will also be available in other select countries in 2020.

We believe that over the longterm, clinical solutions and treatment tools will increase adoption of Invisalign and increase sales of our intraoral scanners;

however, it is difficult to predict the rate of adoption which may vary by region and channel.

The use of iTero and other digital scanners for Invisalign case submission in place of PVS impressions continues to grow and remains a positive catalyst for Invisalign utilization.

For the fourth quarter of 2019, total Invisalign cases submitted with a digital scanner in the Americas increased to 79.5%, up slightly from 78.8% in the third quarter of 2019.

International scans increased to 64.7%, up from 62.6% in the third quarter of 2019.

We believe that over the longterm, technology innovation and added features and functionality of our iTero scanners will increase adoption of Invisalign and increase sales of our intraoral scanners;

however, it is difficult to predict the rate of adoption which may vary by region and channel.

Our purpose is to transform smiles and change lives, and we are accomplishing this goal by establishing clear aligners as the principal solution for the treatment of malocclusions and our Invisalign clear aligners as the treatment solution of choice by orthodontists, general dental practitioners and patients globally.

To date, over 9.6 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 have developed a business strategy designed to bring to market solutions that we believe 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 computer-aided design and computer-aided manufacturing (“CAD/CAM”) solutions and workflows into the markets for clear aligner orthodontics and dental restorative treatments.

Our business strategic priorities are currently based on four principal pillars of growth:

(i) International expansion;

(ii) GP adoption;

(iii) Patient demand & conversion;

and (iv) Orthodontic utilization.

For a further description of our strategic growth drivers, please see the Business - Business Strategy section of this Annual Report on Form 10-K.

We strive to deliver on each of our strategic growth drivers through a variety of interrelated enterprise-wide efforts including:

• New Technology, Products, and Feature Enhancements.

We believe technological innovations allowing dental professionals to more quickly and accurately diagnose, plan and treat a wide range of cases from simple to complex combined with new and improved products drives greater treatment predictability, clinical applicability, ease of use and confidence for the dental professionals we serve;

thereby supporting adoption of Invisalign treatment in their practices.

Furthermore, we believe the digital revolution in dentistry is an important aspect of the experience for our customers and their patients, encouraging the utilization of our Invisalign solution and therefore comprising an important component of our digital approach.

▪ Invisalign clear aligners:

Our product portfolio includes Invisalign treatment with Mandibular Advancement, Invisalign Go, Invisalign First and Invisalign Moderate.

We also continue to increase the clinical efficacy and applicability of our products as exemplified most recently in the announcement of Invisalign G8 with SmartForce Aligner Activation, and our ClinCheck Pro 6.0 3D treatment planning software.

Each of these advancements broadens and strengthens our reach into key markets and demographics central to our strategic plans.

▪ iTero Scanner:

We continue to expand our intraoral digital scanning solutions;

periodically launching or announcing new offerings including most recently the iTero Element ® Plus Series of scanner solutions and previously the iTero Element 2, iTero Element Flex and the iTero Element 5D Imaging System, for which we announced in March 2020 that we had obtained U.S.

FDA 501(K) clearance and which we continue to release in additional countries.

The clearance of the iTero Element 5D Imaging system in the U.S.

markets and its release in other countries allows us to sell this first integrated dental imaging system that simultaneously records 3D, intra-oral color and near-infrared (“NIRI”) images into a single, integrated scan that enables comparison over time using the iTero TimeLapse technology;

thereby 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.

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 practices.

We believe the acquisition strengthens our digital platform by adding exocad’s expertise in restorative dentistry, implantology, guided surgery, and smile design to extend our digital dental solutions and broadens the Align digital platform towards fully interdisciplinary end-to-end workflows dentistry in lab and at chairside.

exocad also broadens our reach in digital dentistry with over 200 partners and more than 40,000 licenses installed worldwide.

To further the transformation of dental and orthodontic practices from outdated manual and analog practices to end-to-end digital workflows, in 2020 we introduced virtual solutions such as Invisalign® Virtual Appointment and Invisalign® Virtual Care;

solutions that facilitate the safe, effective and successful continuity of treatment of patients by conveniently connecting doctors and their patients throughout their treatment plans.

• Invisalign Adoption.

Our goal is to establish Invisalign 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.” Our annual utilization rates for the last three fiscal years are as follows:

* Invisalign utilization rates are calculated by the # of cases shipped divided by the # of doctors to whom cases were shipped.

Our International region includes EMEA and APAC.

LATAM is excluded from the above chart as it is immaterial.

Total utilization in 2019 increased to 15.9 cases per doctor compared to 15.7 cases in 2018.

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, which we refer to as “utilization rates.”

• For the fourth quarter of 2020, total Invisalign cases submitted with a digital scanner in the Americas increased to 84.0%, up from 79.5% in the fourth quarter of 2019 and international scans increased to 73.7%, up from 64.7% in the fourth quarter of 2019.

For the fourth quarter of 2020, 94.8% of Invisalign cases submitted by North American orthodontists were submitted digitally.

Our annual utilization rates for the last three fiscal years are as follows:

* Invisalign utilization rates are calculated by dividing the number of cases shipped by the number of doctors to whom cases were shipped.

Our International region includes Europe, Middle East and Africa ( “ EMEA ” ) and Asia Pacific ( “ APAC ” ).

Latin America ( “ LATAM ” ) is excluded from the above chart based on its immateriality.

• Total utilization rate in 2020 increased to 16.1 cases per doctor compared to 15.9 cases per doctor in 2019 and 15.7 cases per doctor in 2018.

• North America:

Utilization for both our North American orthodontist and GP customers increased in 2019 to 65.0 and 9.5 cases per doctor compared to 56.7 cases and 9.1 cases per doctor in 2018, respectively.

The increase in utilization in 2019 reflects improvements in product and technology which continues to strengthen

our doctors’ clinical confidence such that they now utilize Invisalign more often and on more complex cases, including their teenage patients.

Utilization rate among our North American orthodontist customers increased to 67.3 cases per doctor in 2020 compared to 65.0 cases per doctor in 2019 and 56.7 cases per doctor in 2018 and the utilization rate among our North American GP customers increased to 9.6 cases per doctor in 2020 compared to 9.5 cases per doctor in 2019 and 9.1 cases per doctor in 2018.

• International:

International doctor utilization remained relatively flat at 13.8 cases per doctor in 2019 compared to 13.9 cases in 2018.

We expect our utilization rates to gradually improve as a result of advancements in product and technology, which continue to strengthen our doctors’ clinical confidence in the use of Invisalign clear aligners.

In addition, since 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 of 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, including seasonal trends in our business along with adoption rates of new products and features.

Number of New Invisalign Doctors Trained.

We continue to expand our Invisalign customer base through the training of new doctors.

In 2019, we trained 22,270 new Invisalign doctors of which 9,765 were trained in the Americas region and 12,505 in the International region.

International doctor utilization rate was 14.5 cases per doctor in 2020 compared to 13.8 cases in 2019 and 13.9 cases per doctor in 2018.

We expect global utilization rates to steadily improve as doctors’ clinical confidence in the use of Invisalign clear aligners increases with advancements in products and technology and as patient and doctor demands for treatments that emphasize convenience and safety through fewer in office visits and less invasive and quicker treatments rise.

In addition, the teenage and younger market makes up 75% of the approximately 15 million total orthodontic case starts each year, and as we continue to drive adoption by teenage and younger patients through sales and marketing programs, we expect utilization rates to imp rove.

However, our utilization rates will fluctuate from period to period due to a variety of factors, which may include seasonal trends in our business, COVID-19-related preventative measures and adoption rates for new products and features.

• Invisalign Doctor Training.

We believe our training and education efforts are an important aspect of each of our strategic growth drivers and, accordingly, we continue to expand our Invisalign customer base through the training of new doctors.

During 2020, we trained 21,100 new Invisalign doctors of which 9,075 were trained in the Americas region and 12,025 in the International region.

In 2019, we trained a total of 22,275 new Invisalign doctors, of which 9,765 were trained in the Americas region and 12,510 in the International region.

• International Invisalign Growth.

We continue to focus our efforts towards increasing Invisalign clear aligner adoption by dental professionals in the EMEA and APAC markets.

On a year-over-year basis, our International Invisalign volume increased 34.0% driven primarily by increased adoption as well as expansion of our customer base in both the EMEA and APAC regions.

However, beginning in the second quarter of 2019, we experienced slower growth rates than prior periods in China primarily due to the US-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.

In addition, in the first quarter of 2020, the outbreak of the Novel Coronavirus (2019 NCov) in China has caused increased uncertainty and disruption to our employees, doctors’ practices, their patients and consumers.

We expect the impact of the Novel Coronavirus and related efforts by the Chinese government to contain its spread, including travel restrictions, extension of the Lunar New Year and discouraging non-essential medical and dental procedures to adversely impact sales and operations in China for a currently indeterminate period of time.

Notwithstanding these current issues in China, we continue to see growth from our international orthodontists and GP customers and are seeing more positive traction in the GP channel as we continue to segment our sales and marketing resources and programs specifically around each customer channel.

In 2019, we continued 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.

We expect International revenues to continue to grow at a faster rate than the Americas 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.

Our future growth is dependent upon the continued growth of Invisalign adoption and international market penetration.

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.

In 2020, the COVID-19 pandemic caused unprecedented disruptions in our business as we, our customers, and suppliers experienced varying degrees of business and facilities closures and restrictions at various times that differed by geography and conditions and significant uncertainties remain.

For a further discussion of COVID-19 and its impact on our business, see the section entitled "COVID-19 Update" below.

Moreover, even under ideal circumstances the difficulties and intricacies of international sales and operations can be difficult to manage and we expect to periodically experience fluctuations in growth rates in emerging markets for reasons ranging from regional and macroeconomic conditions, geopolitical tensions and competition among others.

For a description of the risks related our international growth efforts, please see the Risk Factors section of this Annual Report on Form 10-K.

For instance, prior to the impact of COVID-19, we experienced slower growth rates than prior periods in China which we believe were primarily due to the U.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 in China from clear aligner suppliers.

Notwithstanding these uncertainties, 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.

Furthermore, 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 also intend to continue expanding our manufacturing and treatment planning operations to meet local and regional demand.

Overall, we expect International revenues to grow at a faster rate than Americas' revenues 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 for North America and expanding marketing programs such as our Concierge Service, which connects potential patients with Invisalign doctors increasing conversion and loyalty.

In addition, we launched new sales tools and professional marketing materials and we also expect to see increased productivity from the approximate 100 sales representatives we added in the first quarter of 2019.

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 .

Establish Regional Order Acquisition, Treatment Planning and Manufacturing Operations.

We expect to continue establishing and expanding additional order acquisition, treatment planning and manufacturing operations closer to our international customers in order to improve our operational efficiency and increase doctors' confidence in Invisalign clear aligners.

In the fourth quarter of 2018, we began fabricating our aligners in our manufacturing facility in Ziyang, China, our first aligner fabrication facility outside of Juarez, Mexico.

In the third quarter of 2019, we opened our new order acquisition and treatment facility in Wroclaw, Poland and new treatment facility in Yokohama, Japan.

Corporate Structure Reorganization.

In January 2020, we reorganized our corporate structure and intercompany relationships to more closely align with the international nature of our business activities with the goal of achieving financial and operational efficiencies.

As part of this corporate structure reorganization, our EMEA regional headquarters

was moved from Amsterdam, the Netherlands to Rotkreuz, Switzerland.

As a result, we will continue to incur expenses in the near term and expect to realize the related benefits in subsequent years.

The implementation of this reorganization plan has been disruptive to our business, and may not ultimately be more efficient or effective.

Moreover, our reorganization activities, including any related expenses and the impact from affected employees, could have a material adverse effect on our business, operating results, financial condition and effective tax rates.

We expect expenses to increase in 2020 due in part to:

Investments in manufacturing capacity and facilities to enhance our regional capabilities;

Investments in international expansion;

Investments in expansion of number of direct sales force personnel;

Increase in sales, marketing and customer support resources including our new advertising campaign;

Our primary competition for the sale of our clear aligners remains traditional wires and brackets although the number of clear aligner competitors, primarily targeting the young adult demographic, continues to increase.

We also have competitors in the markets for other products and services, including intraoral scanners and CAD/CAM software.

We believe our continued investments in product improvements and operational efficiencies make our products more compelling for our customers and their patients and we intend to maintain these efforts.

Additionally, we believe that well-designed, targeted sales and marketing promotions help us build on our strong brand awareness and differentiate us from traditional and emerging competitors.

Accordingly, we continue to increase investments intended to grow consumer demand.

During 2020, our marketing and consumer engagement included

social media campaigns targeting teens and mothers through social media influencers, becoming the Official Clear Aligner Sponsor of the National Football League and introducing Invisalign Stickables which patients can apply to their aligners as a fun and simple way to distinguish themselves and our products from the competition.

We expect to make further investments to create additional demand for Invisalign System treatment;

driving more consumers to dental professionals for those treatments.

We also believe that investing in our sales teams is important to our success.

The addition of sales representatives in APAC in 2020 follows increases in the U.S.

We believe the realignment of our sales teams to focus on the channels they serve, allows us to partner with doctors in more meaningful ways;

assessing their specific needs and helping to tailor their practices for success while encouraging increased adoption and engagement of a variety of our products and services.

COVID-19 Update

The COVID-19 pandemic disrupted our business and the businesses and lives of our customers, their patients and our suppliers in unprecedented ways;

requiring us to reevaluate priorities, adapt to new ways of doing business and developing new strategies and plans quickly and revising them frequently as conditions evolved.

By the end of the fourth quarter of 2020, many dental practices had resumed operations although often at capacities less than pre-pandemic levels.

Additionally, in virtually all practices the effects of COVID-19 persist, typically in the form of additional preventative safety measures such as added sterilization requirements, increased costs for personal protective equipment and staggered patient visits intended to reduce the risks of cross contamination, each of which contribute to fewer patient visits per day.

To help doctors through the pandemic and to stimulate demand for our products and services during the recovery, we modified existing programs and implemented new promotions in 2020, some of which remain in effect.

For instance, we did not implement annual price increases on our various clear aligner products in 2020, offered promotions to encourage doctors with patients in wires and brackets to switch to our Invisalign clear aligners, allowed doctors to maintain their promotional status levels notwithstanding declining sales, increased advertising and launched new media campaigns, implemented new promotions and modified others, all in an effort to help our customers and accelerate our mutual return to normal operations.

As a result of these efforts, during the year ended December 31, 2020, we recorded net revenues of $2.5 billion, an increase of 2.7% compared to the same period in 2019.

During the year ended December 31, 2020, clear aligner case volume was 1.6 million, an increase of 7.0% compared to the same period in 2019 and Systems and Services net revenues decreased by 2.8% compared to the same period in 2019.

In the short term, our business remains susceptible to the COVID-19 pandemic.

Concerns about additional outbreaks of the virus, the spread of new variants of the virus and the efficacy of vaccines against those variants, and efforts to slow or prevent a recurrence of its spread are likely to continue causing disruption and uncertainties in the markets, adversely impacting our customers and their patients for an indeterminate period of time.

This in turn could impact our operations as purchasing decisions are delayed or lost, create logistics complexities related to uneven or rapid changes in demand, and sales and marketing efforts are postponed or prove ineffective.

Conversely, we believe the pandemic emphasizes the benefits of digital dentistry and virtual appointments over traditional practice methods that require frequent in office patient visits to manually adjust wires and brackets.

We further believe that this will in turn motivate doctors to use more digital solutions, including our iTero scanner, exocad CAD/CAM software and the Invisalign System.

As we assess the possible future short- and long-term impacts to our revenues, operations and financial condition from the COVID-19 pandemic, we are continually evaluating macroeconomic as well as industry-specific factors.

For instance, among the many factors we continue to monitor are governmental and societal reactions to the virus, global and regional economic activity, unemployment and its potential impact on discretionary spending and health insurance coverage, patient reluctance or fear of exposure as a result of orthodontic or dental office visits, travel restrictions on employees, suppliers, customers and their patients and other external factors beyond our control.

Furthermore, if the threat of further spread of COVID-19 occurs or the pace of recovery by dental practices is haphazard or inconsistent, there may be a substantial impact on our employees or suppliers, our operations, including our ability to timely obtain the materials needed to manufacture our products and manufacture and deliver those products to customers;

any of which may harm our results of operations, financial condition and overall financial performance.

Moreover, many of the measures we implemented to protect our employees from the spread of the virus remain in effect.

For instance, many of our offices across the globe remain underutilized as employees continue to work from home.

We are also screening our employees, providing them with personal protective equipment, and altering work environments to facilitate social distancing, which has in the past and may in the future harm productivity.

Furthermore, 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.

Ultimately, we believe the markets we serve will continue to recover from the COVID-19 preventative measures at differing rates and times corresponding with regional outbreaks and recoveries.

Should any one or more events or circumstances previously mentioned or others occur or materially adversely increase or other unknown circumstances arise, they could materially impact our business and results of operations in 2021 and beyond.

Further discussion of the impact of the COVID-19 pandemic on our business may be found in Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.”

2021 Expenses

Overall, we expect expenses in 2021 to increase over 2020 levels;

however, as a result of the financial impacts of COVID-19, we expect to continue controlling our discretionary spending, such as travel and meeting related expenses, and focus investments in the following key areas:

▪ Manufacturing capacity and facilities to enhance our regional capabilities;

▪ Sales and marketing, including additional direct sales force personnel and consumer marketing;

▪ Product and technology innovation to enhance product efficiency and operational productivity.

We believe that these investments will position us to increase our revenues and continue to grow our market share, but will negatively impact results of operations, particularly in the near term.

Stock Repurchases.

During the year ended December 31, 2019 , we repurchased $200.0 million of our common stock on the open market at an average price of $264.93 per share.

We also entered into an accelerated stock repurchase agreement to repurchase $200.0 million of our common stock and received a total of 1.1 million shares for an average share price of $176.61 .

As of December 31, 2019 , we have $100.0 million available for repurchase under the $600.0 million repurchase program authorized by our Board of Directors in May 2018 (Refer to Note 12 “Common Stock Repurchase Programs” of the Notes to Consolidated Financial Statements for details on our stock repurchase programs).

We believe these investments position us to take advantage of a recovering market and thereafter once markets return to greater normalcy, 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.

Relocating Headquarters

Effective January 1, 2021, we moved our corporate headquarters from San Jose, California to Tempe, Arizona which offers a favorable corporate operating environment along with long-term operating efficiencies.

The San Jose office will remain our hub for global innovation, product, and market organization and home to our new Digital Innovation Center.

There were no layoffs associated with this move.

Results of Operations

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We group our operations into two reportable segments:

Clear Aligner segment and Scanner segment.

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 Invisalign Comprehensive and Invisalign First.

Non-Comprehensive Products include, but are not limited to, Invisalign Moderate, Lite and Express packages and Invisalign Go, in addition to revenues from the sale of aligners to SmileDirectClub (“SDC”) under our supply agreement that expired on December 31, 2019.

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

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

• Non-Case includes, but is not limited to, Vivera retainers along with our training and ancillary products for treating malocclusion.

Our Scanner segment consists of intraoral scanning systems, which includes a single hardware platform and restorative or orthodontic software options, additional services and ancillary products.

This segment includes our iTero scanner and OrthoCAD services.

Net revenues for our Clear Aligner and Scanner segments by region for the year ended December 31, 2019 , 2018 and 2017 are as follows (in millions):

Year Ended December 31,

• Our Systems and Services segment consists of our iTero intraoral scanning systems, which includes a single hardware platform and restorative or orthodontic software options, OrthoCAD services and ancillary products, as well as exocad’s CAD/CAM software solution that integrates workflows to dental labs and dental practices.

Net revenues for our Clear Aligner and Systems and Services segments by region for the year ended December 31, 2020, 2019 and 2018 are as follows (in millions):

Year Ended December 31, Year Ended December 31,

Net Revenues 2020 2019 Change 2019 2018 Change

Clear Aligner revenues:

Americas $ 1,010.2 $ 1,022.1 $ (11.9) (1.2) % $ 1,022.1 $ 903.3 $ 118.8 13.2 %

International 965.4 881.4 84.1 9.5 % 881.4 684.2 197.2 28.8 %

Non-case 125.8 122.3 3.5 2.9 % 122.3 104.0 18.3 17.6 %

Total Clear Aligner net revenues

Scanner net revenues

$ 2,101.5 $ 2,025.8 $ 75.7 3.7 % $ 2,025.8 $ 1,691.5 $ 334.3 19.8 %

Systems and Services net revenues 370.5 381.0 (10.6) (2.8) % 381.0 275.0 106.0 38.5 %

Total net revenues $ 2,471.9 $ 2,406.8 $ 65.1 2.7 % $ 2,406.8 $ 1,966.5 $ 440.3 22.4 %

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Case volume data which represents Clear Aligner case shipments by region for the year ended December 31, 2020, 2019 and 2018 is as follows (in thousands):

Year Ended December 31,

Year Ended December 31, Year Ended December 31,

Region 2020 2019 Change 2019 2018 Change

Americas 886.5 867.3 19.2 2.2 % 867.3 780.7 86.6 11.1 %

International 758.9 669.8 89.0 13.3 % 669.8 499.9 169.9 34.0 %

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Certain tables may not sum or recalculate due to rounding.

Total net revenues increased by $440.3 million in 2019 as compared to 2018 primarily as a result of Invisalign case and scanner volume growth across all regions.

Total net revenues increased by $65.1 million in 2020 as compared to 2019 primarily as a result of higher Clear Aligner volumes in the International region partially offset by lower average selling prices (“ASP”) in the Americas region and lower Systems and Services net revenues in most regions.

Clear Aligner - Americas

Americas net revenues increased by $118.8 million in 2019 as compared to 2018 due to Invisalign case volume growth across all channels and products which contributed to the net revenue growth by $100.2 million and higher average selling prices ("ASP") which increased net revenues by $18.7 million.

Higher ASP was mainly the result of price increases across most products which increased net revenues by $35.1 million and $23.4 million increase in net revenues driven by a product mix shift towards Comprehensive products and less SDC revenues, which carry a lower ASP.

We no longer manufacture aligners for SDC as our supply agreement with SDC expired by its terms on December 31, 2019.

These ASP increases were partially offset by a reduction in net revenues of $23.1 million from higher promotional discounts and $17.6 million reduction in net revenues as a result of higher net revenue deferrals and unfavorable foreign exchange rates.

Americas net revenues decreased by $11.9 million in 2020 as compared to 2019 primarily due to lower Clear Aligner ASP that decreased net revenues by $34.6 million.

The lower ASP was as a result of higher promotional discounts which reduced net revenues by $44.6 million and unfavorable foreign exchange rates reduced net revenues by $15.2 million;

however, these were partially offset by July 2019 price increases which contributed $23.3 million to net revenues.

The reduction in net revenues due to lower ASP was partially offset by higher Clear Aligner volume which increased net revenues by $16.1 million.

Clear Aligner - International

International net revenues increased by $197.2 million in 2019 as compared to 2018 primarily driven by case volume growth across all channels and products which increased net revenues by $232.5 million.

This increase was partially offset by lower ASP that reduced net revenues by $35.3 million.

The ASP decline was mainly the result of higher promotional discounts which reduced net revenues by $45.0 million, unfavorable foreign exchange rates lowered net revenues by $37.2 million, and a product mix shift towards Non-comprehensive products reduced net revenues by $19.0 million.

These ASP decreases were partially offset by a $47.8 million improvement in net revenues related to price increases across most products along with a benefit from going direct in several additional countries, and lower net revenue deferrals and sales credits that increased net revenues by $18.1 million.

International net revenues increased by $84.1 million in 2020 as compared to 2019 primarily due to higher Clear Aligner volume which increased net revenues by $117.2 million partially offset by lower ASP which reduced net revenues by $33.1 million.

Lower ASP was the result of higher promotional discounts that reduced net revenues by $44.3 million, higher net deferrals that reduced net revenues by $19.3 million and a product mix shift towards lower priced products.

These reductions were partially offset by July 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 combined, increased net revenues by $20.9 million and favorable foreign exchange rates increased net revenues by $14.5 million.

Clear Aligner - Non-Case

Non-case net revenues, consisting of Vivera Retainers, training fees and other product revenues, increased by $18.3 million in 2019 compared to 2018 due to increased Vivera volume across all regions.

Scanner and services net revenues increased by $106.0 million in 2019 as compared to 2018 .

This increase is primarily a result of scanner volume growth which increased net revenues by $58.4 million, and higher CAD/CAM services that increased net revenues by $37.7 million primarily due to a larger install base and increased scanner subscription services.

Additionally, net revenues increased by $10.0 million due to an improvement in the scanner ASP mainly attributable to price increases in several regions.

Non-case net revenues increased by $3.5 million in 2020 compared to 2019 due to increased Vivera volume across all regions.

Systems and Services

Systems and services net revenues decreased by $10.6 million in 2020 as compared to 2019 due to a lower number of scanners recognized which decreased net revenues by $31.7 million and a lower scanner ASP which decreased net revenues by $21.2 million.

The ASP decrease was mostly due to higher promotional discounts partially offset by product mix shift to higher priced scanners.

These decreases were partially offset by higher iTero service revenues mostly due to a larger scanner install base and the addition of exocad’s CAD/CAM revenues from our acquisition which combined increased net revenues by $42.3 million.

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

Year Ended December 31,

Year Ended December 31, Year Ended December 31,

2020 2019 Change 2019 2018 Change

Clear Aligner

1 unchanged sentence

% of net segment revenues 27.1 % 26.0 % 26.0 % 24.3 %

Gross profit $ 1,532.1 $ 1,499.7 $ 32.4 $ 1,499.7 $ 1,280.5 $ 219.2

Gross margin % 72.9 % 74.0 % 74.0 % 75.7 %

Systems and Services

Cost of net revenues $ 139.4 $ 136.9 $ 2.5 $ 136.9 $ 107.7 $ 29.2

% of net segment revenues 37.6 % 35.9 % 35.9 % 39.1 %

Gross profit $ 231.1 $ 244.2 $ (13.1) $ 244.2 $ 167.4 $ 76.8

Gross margin % 62.4 % 64.1 % 64.1 % 60.9 %

1 unchanged sentence

% of net revenues 28.7 % 27.5 % 27.5 % 26.4 %

Gross profit $ 1,763.2 $ 1,743.9 $ 19.3 $ 1,743.9 $ 1,447.9 $ 296.0

Gross margin % 71.3 % 72.5 % 72.5 % 73.6 %

1 unchanged sentence

Certain tables may not sum or recalculate due to rounding.

Cost of net revenues for our Clear Aligner and Scanner 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.

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, shipping costs, depreciation on capital equipment and facilities used in the production process, amortization of acquired intangible assets and training costs.

Clear Aligner

The gross margin percentage decreased in 2019 compared to 2018 primarily due to an increase in aligners per case driven by additional aligners.

The gross margin percentage increased in 2019 compared to 2018 primarily driven by higher ASP and manufacturing efficiencies.

The gross margin percentage decreased in 2020 compared to 2019 primarily due to lower ASP, higher manufacturing spend partially driven by operational expansion activities and an increase in aligners per case driven by additional aligners which was offset in part by manufacturing efficiencies.

Systems and Services

The gross margin percentage decreased in 2020 compared to 2019 primarily driven by lower ASP and manufacturing inefficiencies due to lower volumes which was offset in part by higher service revenues.

Selling, general and administrative (in millions):

Year Ended December 31,

Year Ended December 31, Year Ended December 31,

2020 2019 Change 2019 2018 Change

Selling, general and administrative $ 1,200.8 $ 1,072.1 $ 128.7 $ 1,072.1 $ 852.4 $ 219.7

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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”).

Selling, general and administrative expense increased in 2019 compared to 2018 primarily due to higher compensation related costs of $121.2 million mainly from increased headcount resulting in higher salaries expense, incentive bonuses, fringe benefits, and stock-based compensation partially due to investments in sales coverage and international expansion.

We also incurred higher expenses from advertising and marketing costs of $40.1 million, legal and outside service costs of $31.7 million, equipment, software and maintenance costs of $18.1 million and depreciation and amortization costs of $12.4 million.

Selling, general and administrative expense includes personnel-related costs including payroll, stock-based compensation and commissions for our sales force, marketing and advertising expenses including media, clinical education, trade shows and

industry events, legal and outside service costs, equipment 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 2020 compared to 2019 primarily due to higher compensation related costs of $86.5 million mainly from an approximate 21% increase in headcount resulting in higher salaries expense, fringe benefits, commissions and stock-based compensation partially offset by lower incentive bonuses.

Additionally, we also incurred higher expenses on equipment, software and maintenance costs of $30.3 million, advertising and marketing costs of $24.2 million and legal and outside service costs of $19.1 million which included transaction costs related to our acquisition of exocad.

These increases were partially offset by a decrease in travel related costs of $26.7 million due to the impact of COVID-19.

Research and development (in millions):

Year Ended December 31,

Year Ended December 31, Year Ended December 31,

2020 2019 Change 2019 2018 Change

Research and development $ 175.3 $ 157.4 $ 17.9 $ 157.4 $ 128.9 $ 28.5

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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 information technology.

Research and development expense increased in 2019 compared to 2018 primarily due to higher compensation costs mainly from increased headcount resulting in higher salaries expense, stock-based compensation, incentive bonuses and fringe benefits.

Impairments and other (gains) charges (in millions):

Year Ended December 31,

Impairments and other (gains) charges

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

Research and development expense increased in 2020 compared to 2019 primarily due to higher compensation, equipment and material costs.

Higher compensation costs, including fringe benefits and stock-based compensation, was mainly from an approximate 27% increase in headcount which was partially offset by lower incentive bonuses as well as a decrease in travel related costs due to the impact of COVID-19.

Impairments and other charges (gains), net (in millions):

Year Ended December 31, Year Ended December 31,

2020 2019 Change 2019 2018 Change

Impairments and other charges (gains), net $ — $ 23.0 $ (23.0) $ 23.0 $ — $ 23.0

% of net revenues — % 1.0 % 1.0 % — %

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Certain tables may not sum or recalculate due to rounding.

In 2019 , we recorded impairments and other (gains) charges of $23.0 million which are comprised of operating lease right-of-use assets impairments of $14.2 million, store leasehold improvement and other fixed asset impairments of $14.3 million, and employee severance and other expenses of $1.3 million, partially offset by Invisalign store lease termination gains of $6.8 million (Refer to Note 8“Impairments and Other (Gains) Charges” and Note 9 “Legal Proceedings” of the Notes to Consolidated Financial Statements for more information).

In 2019, we recorded impairments and other charges (gains), net of $23.0 million which are comprised of operating lease right-of-use assets impairments of $14.2 million, store leasehold improvement and other fixed asset impairments of $14.3 million, and employee severance and other expenses of $1.3 million, partially offset by the Invisalign store lease termination gains of $6.8 million (Refer to Note 9“Impairments and Other Charges (Gains), net” for more information).

Litigation settlement gain (in millions):

Year Ended December 31,

Year Ended December 31, Year Ended December 31,

2020 2019 Change 2019 2018 Change

Litigation settlement gain $ — $ (51.0) $ 51.0 $ (51.0) $ — $ (51.0)

2 unchanged sentences

Certain tables may not sum or recalculate due to rounding.

In 2019 , we recorded a gain of $51.0 million due to the litigation settlement with Straumann ( Refer to Note 9 “Legal Proceedings” of the Notes to Consolidated Financial Statements for more information).

In 2019, we recorded a gain of $51.0 million due to the litigation settlement with Straumann Group.

Income from operations (in millions):

Year Ended December 31,

Year Ended December 31, Year Ended December 31,

2020 2019 Change 2019 2018 Change

Clear Aligner

1 unchanged sentence

Operating margin % 36.5 % 41.3 % 41.3 % 42.1 %

Systems and Services

Income from operations $ 96.1 $ 137.7 $ (41.7) $ 137.7 $ 99.0 $ 38.7

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Total income from operations 1

$ 387.2 $ 542.5 $ (155.3) $ 542.5 $ 466.6 $ 75.9

Operating margin % 15.7 % 22.5 % 22.5 % 23.7 %

3 unchanged sentences

Clear Aligner

Operating margin percentage decreased in 2019 compared to 2018 primarily due to lower Clear Aligner gross margin percentage as a result of an increase in aligners per case combined with impairment charges on operating lease right-of-use assets, store leasehold improvement and other fixed assets.

These decreases were partially offset by a gain recognized from the litigation settlement with Straumann.

Operating margin percentage remained flat in 2019 compared to 2018 primarily due to manufacturing efficiencies and higher ASP partially offset by higher operating expenses.

Operating margin percentage decreased in 2020 compared to 2019 primarily due to a $51.0 million gain recognized from the litigation settlement with Straumann during 2019 as well as a lower gross margin.

These decreases were offset in part by a net impairment charge of $23.0 million recognized in 2019 related to the Invisalign store closures.

Systems and Services

Operating margin percentage decreased in 2020 compared to 2019 primarily due to higher operating expenses, primarily from compensation, material, equipment, software and maintenance costs, in addition to a lower gross margin.

Interest income (in millions):

Year Ended December 31,

Year Ended December 31, Year Ended December 31,

2020 2019 Change 2019 2018 Change

Interest income $ 3.1 $ 12.5 $ (9.4) $ 12.5 $ 8.6 $ 3.9

% of net revenues 0.1 % 0.5 % 0.5 % 0.4 %

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 and investment balances.

Interest income increased in 2019 compared to 2018 mainly due to a larger investment portfolio.

Interest income includes interest earned on cash, cash equivalents, investment balances and our unsecured promissory note.

Interest income decreased in 2020 compared to 2019 mainly due to the divestiture of our marketable securities portfolio during the first quarter of 2020 and lower interest rates earned on our cash and cash equivalents.

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

Year Ended December 31,

Year Ended December 31, Year Ended December 31,

2020 2019 Change 2019 2018 Change

Other income (expense), net $ (11.3) $ 7.7 $ (19.0) $ 7.7 $ (8.5) $ 16.2

% of net revenues (0.5) % 0.3 % 0.3 % (0.4) %

Changes and percentages are based on actual values.

1 unchanged sentence

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.

Other income (expense), net, increased in 2019 compared to 2018 primarily due to a $15.8 million gain from the sale of our investment in SDC.

This increase was partially offset by a $4.0 million impairment of our equity investment in a privately held company along with foreign exchange losses (Refer to Note 9 “Legal Proceedings” of the Notes to Consolidated Financial Statements for details on SDC legal proceedings discussion).

Other income (expense), net, decreased in 2020 compared to 2019 primarily due to a $15.8 million gain from the sale of our investment in SDC recorded in 2019 and a $10.2 million loss on a foreign currency forward contract related to the exocad

acquisition recorded in 2020.

These decreases were partially offset by net foreign exchange gains in 2020 as compared to net foreign exchange losses in 2019.

Equity in losses of investee, net of tax (in millions):

Year Ended December 31,

Year Ended December 31, Year Ended December 31,

2020 2019 Change 2019 2018 Change

Equity in losses of investee, net of tax $ — $ 7.5 $ (7.5) $ 7.5 $ 8.7 $ (1.2)

% of net revenues — % 0.3 % 0.3 % 0.4 %

Changes and percentages are based on actual values.

Certain tables may not sum or recalculate due to rounding.

Equity in losses of investee, net of tax decreased in 2019 compared to 2018 since we tendered our SDC equity interest on April 3, 2019, and thus, we no longer record our share of SDC's losses (Refer to Note 5 “Equity Method Investments” of the Notes to Consolidated Financial Statements for details on equity method investments).

Provision for income taxes (in millions):

Year Ended December 31,

Provision for income taxes

For 2020, there were no equity in losses of investee, net of tax.

After the second quarter of 2019, we no longer incurred equity in losses of investee, net of tax related to SDC as we tendered our SDC equity interest on April 3, 2019 (Refer to Note 7 “Equity Method Investments” of the Notes to Consolidated Financial Statements for details on equity method investments).

Provision for (benefit from) income taxes (in millions):

Year Ended December 31, Year Ended December 31,

2020 2019 Change 2019 2018 Change

Provision for (benefit from) income taxes $ (1,396.9) $ 112.3 $ (1,509.3) $ 112.3 $ 57.7 $ 54.6

Effective tax rates (368.6) % 20.0 % 20.0 % 12.4 %

1 unchanged sentence

Certain tables may not sum or recalculate due to rounding.

The increase in effective tax rate for the year ended December 31, 2019 compared to the same period in 2018 is primarily attributable to tax benefits recorded last year as a result of expiration of statute limitations that did not recur in 2019 and reduced excess tax benefits from stock-based compensation mainly due to non-deductible officers’ compensation.

For the year ended December 31, 2019 and December 31, 2018, we recognized tax benefits in our provision for income taxes of $1.6 million and $22.5 million, respectively, related to expiration of statute of limitations and $13.4 million and $26.5 million, respectively, related to stock-based compensation.

Effective January 1, 2020, as a result of the relocation of our EMEA regional headquarters from Amsterdam, the Netherlands to Rotkreuz, Switzerland, our tax rate for the first quarter of 2020 and for the rest of the year, will reflect a significant one-time tax benefit of up to $1.6 billion associated with the recognition of a deferred tax asset related to the intra-entity transfer of certain intellectual property rights.

We continue to assess the realizability of this deferred tax asset as we take into account new information, including the profitability of our Swiss headquarters and ongoing communication with the Swiss tax authorities.

During 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 beginning January 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 year ended December 31, 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.

The amortization of this deferred tax asset depends on the profitability of our Swiss headquarters and the recognition of this tax benefit is allowed for a maximum recovery period of 15 years.

The decrease in our effective tax rate for the year ended December 31, 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 year ended December 31, 2020.

Liquidity and Capital Resources

We fund our operations from product sales.

As of December 31, 2019 and 2018 , we had the following cash and cash equivalents, and short-term and long-term marketable securities (in thousands):

Year Ended December 31,

As of December 31, 2020 and 2019, we had the following cash and cash equivalents and short-term marketable securities (in thousands):

Cash and cash equivalents $ 960,843 $ 550,425

Marketable securities, short-term — 318,202

Marketable securities, long-term

As of December 31, 2019 , we had $868.6 million in cash, cash equivalents, and marketable securities.

Cash equivalents and marketable securities are comprised of money market funds and highly liquid debt instruments which primarily include commercial paper, corporate bonds, U.S.

government agency bonds, U.S.

government treasury bonds, and certificates of deposit.

As of December 31, 2019 , approximately $278.5 million of cash, cash equivalents and marketable securities was held by our foreign subsidiaries.

We repatriated $350.0 million to the U.S.

during the year ended December 31, 2019 under the Global Intangible Low-Taxed Income (“GILTI”) provisions of the U.S.

Tax Cuts and Jobs Act (the “TCJA”) and substantially all of the earnings previously determined to be not indefinitely reinvested have been repatriated.

Total $ 960,843 $ 868,627

Cash equivalents and marketable securities are comprised of money market funds and highly liquid debt instruments which primarily include corporate bonds, U.S.

government treasury bonds, U.S.

government agency bonds, commercial paper and certificates of deposit.

As of December 31, 2020 and 2019, approximately $412.5 million and $278.5 million, respectively, of cash and cash equivalents was held by our foreign subsidiaries.

Our intent is to permanently reinvest our earnings from our international operations going forward, and our current plans do not require us to repatriate them to fund our U.S.

operations as we generate sufficient domestic operating cash flow and have access to external funding under our current revolving line of credit.

operations as we generate sufficient domestic operating cash flow and have access to external funding under our revolving line of credit.

We believe that

our current cash balances and the borrowing capacity under our credit facility, if necessary, will be sufficient to fund our business for at least the next 12 months.

Our business was materially adversely affected in 2020 by the COVID-19 pandemic and the global and regional efforts by governments to mitigate its spread.

While these impacts lessened in the third and fourth quarters of 2020, we could experience further adverse impacts to our business.

In addition, as a result of the COVID-19 pandemic, we could experience reduced cash flow from operations as a result of decreased revenues and slower collections on our accounts receivable.

Additional information regarding the impact of COVID-19 on our liquidity and capital resources may be found in Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors” .

Cash flows (in thousands):

Year Ended December 31,

2020 2019 2018

Net cash provided by (used in):

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Effects of foreign exchange rate changes on cash, cash equivalents, and restricted cash 10,480 2,282 (4,733)

Net increase in cash, cash equivalents, and restricted cash

Net increase (decrease) in cash, cash equivalents, and restricted cash

$ 410,340 $ (86,432) $ 187,441

Operating Activities

For the year ended December 31, 2019 , cash flows from operations of $747.3 million was primarily comprised of our net income of approximately $442.8 million as well as the following:

For the year ended December 31, 2020, cash flows from operations of $662.2 million was primarily comprised of our net income of approximately $1.8 billion as well as the following:

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 $98.4 million related to equity awards granted to employees and directors;

• Depreciation and amortization of $93.5 million related to our investments in property, plant and equipment and intangible assets;

Impairment charges of $28.5 million related to decreases in the fair value of certain assets related to the closure of our Invisalign stores;

• Non-cash operating lease costs of $22.5 million;

Gain from the sale of equity method investment of $15.8 million .

• Allowance for doubtful accounts provisions of $12.1 million related to slower collections and other impacts as a result of COVID-19;

• Impairment charges of $5.9 million related to our equity investments in privately held companies.

Significant changes in working capital

Increase of $189.1 million in deferred revenues corresponding to the increase in case volume;

Increase of $121.0 million in accounts receivable which is primarily a result of the increase in net revenues;

Increase of $60.2 million in accrued and other long-term liabilities due to timing of payment and activities.

For the year ended December 31, 2018 , cash flows from operations of $554.7 million resulted primarily from our net income of approximately $400.2 million as well as the following:

• Increase of $228.1 million in deferred revenues primarily related to increased case volumes and timing of revenue recognition;

• Increase of $139.8 million in accounts receivable which is primarily a result of the increase and timing in our sales;

• Increase of $52.2 million in accounts payable due to timing of certain invoice payments.

For the year ended December 31, 2019, cash flows from operations of $747.3 million was primarily comprised of our net income of approximately $442.8 million as well as the following:

Significant non-cash activities

1 unchanged sentence

• Depreciation and amortization of $79.0 million related to our investments in property, plant and equipment and intangible assets;

Net change in deferred tax assets of $15.7 million .

• Impairment charges of $28.5 million related to decreases in the fair value of certain assets related to the closure of our Invisalign stores;

• Non-cash operating lease costs of $18.5 million;

• Gain from the sale of equity method investment of $15.8 million.

Significant changes in working capital

• Increase of $189.1 million in deferred revenues corresponding to the increase in case volume;

Increase of $109.2 million in accounts receivable which is primarily a result of the increase in net revenues;

Decrease of $36.5 million in long-term income tax payable due to timing of payments made to IRS.

• Increase of $121.0 million in accounts receivable which is primarily a result of the increase in our sales;

• Increase of $60.2 million in accrued and other long-term liabilities due to timing of payment and activities.

Investing Activities

Net cash used in investing activities was $231.5 million for the year ended December 31, 2020, which primarily consisted of cash paid for the acquisition of exocad of $420.8 million, net of cash acquired and purchases of property, plant and equipment of $154.9 million.

These outflows were partially offset by maturities and sales of marketable securities of $321.5 million and $26.9 million received from payments on an unsecured promissory note issued by SDC in exchange for tendering our shares to them.

For 2021, we expect to invest approximately $400.0 million in capital expenditures related to building construction and improvements as well as additional manufacturing capacity to support our international expansion.

Net cash used in investing activities was $350.4 million for the year ended December 31, 2019, which primarily consisted of purchases of marketable securities of $693.3 million, purchases of property, plant and equipment of $149.7 million and other investing activities of $14.7 million.

These outflows were partially offset by maturities and sales of marketable securities of $485.4 million and payments of $21.8 million received on an unsecured promissory note issued by SDC in exchange for tendering our shares to them.

For 2020 , we expect to invest $180 million to $200 million in capital expenditures related to building purchases and improvements as well as additional manufacturing capacity to support our international expansion.

Although we believe our current investment portfolio has little risk of impairment, we cannot predict future market conditions or market liquidity and can provide

no assurance that our investment portfolio will remain unimpaired (Refer to Note 10 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements for details on the purchases of buildings in Petach Tivka, Israel and San Jose, California).

Net cash provided by investing activities was $6.9 million for the year ended December 31, 2018 , which primarily consisted of maturities and sales of our marketable securities of $384.7 million and loan repayment from equity investee of $30.0 million .

These inflows were partially offset by purchases property, plant and equipment of $223.3 million , purchases of marketable securities of $180.2 million and purchases of investments in privately held companies of $5.0 million .

Financing Activities

Net cash used in financing activities was $30.8 million for the year ended December 31, 2020 consisted of payroll taxes paid for equity awards through share withholdings of $51.1 million which was partially offset by $20.3 million of proceeds from the issuance of common stock.

Net cash used in financing activities was $485.5 million for the year ended December 31, 2019 primarily consisted of common stock repurchases of $400.0 million, payroll taxes paid for equity awards through share withholdings of $57.7 million and the purchase of a building that we previously leased under a finance lease of $45.8 million.

These outflows were offset in part by $17.9 million proceeds from the issuance of common stock.

Net cash used in financing activities was $369.4 million for the year ended December 31, 2018 primarily consisted of common stock repurchases of $300.0 million and payroll taxes of $86.1 million paid for vesting of RSUs through share withholdings.

These outflows were offset in part by $16.6 million from proceeds from the issuance of common stock.

Common Stock Repurchases

Refer to Note 12 "Common Stock Repurchase Programs" of the Notes to Consolidated Financial Statements for details.

April 2016 Repurchase Program.

In 2018, we repurchased approximately $200.0 million of our common stock on the open market, completing the April 2016 Repurchase Program.

May 2018 Repurchase Program .

In May 2018, we announced that our Board of Directors had authorized a plan to repurchase up to $600.0 million of our common stock.

We repurchased $100.0 million and $400.0 million of our common stock in 2018 and 2019, respectively, and as of December 31, 2019, we have $100.0 million remaining under this program.

We believe that our current cash, cash equivalents and marketable securities combined with our existing borrowing capacity will be sufficient to fund our operations for at least the next 12 months.

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.

Refer to Note 13 “ Common Stock Repurchase Programs ” of the Notes to Consolidated Financial Statements for details on our stock repurchase programs.

Credit Facility

On February 27, 2018, we entered into a new credit facility for a $200.0 million revolving line of credit, with a $50.0 million letter of credit sublimit, and a maturity date of February 27, 2021.

On July 21, 2020, we entered into a new credit facility for a $300.0 million unsecured revolving line of credit, with a $50.0 million letter of credit sublimit, and a maturity date of July 21, 2023 (“2020 Credit Facility”), replacing our previous credit facility which provided for a $200.0 million revolving line of credit with a $50.0 million letter of credit.

As of December 31, 2020, we had no outstanding borrowings under this credit facility (Refer to Note 8 "Credit Facility" of the Notes to Consolidated Financial Statements for details of the credit facility) .

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Payments Due by Period

Total Less than

Years More than

Operating leases obligations $ 100,520 $ 25,358 $ 34,388 $ 11,494 $ 29,280

1 unchanged sentence

Total contractual cash obligations $ 805,481 $ 499,562 $ 238,365 $ 38,274 $ 29,280

1 Sublease income is not material and excluded from the table above.

Our contractual obligations table above excludes approximately $47.5 million of non-current uncertain tax benefits which are included in other long-term obligations and deferred tax assets on our balance sheet as of December 31, 2020.

We have not included this amount because we cannot make a reasonably reliable estimate regarding the timing of settlements with taxing authorities, if any.

As of December 31, 2019 , we had additional operating leases that have not yet commenced of $7.9 million.

These operating leases will commence between 2020 through 2021 with lease terms of 2 years to 4 years.

As of December 31, 2020, we had additional operating leases that have not yet commenced with future lease payments of $18.1 million.

These operating leases will commence during 2021 with non-cancelable lease terms of one to seven years.

We had no material off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4) as of December 31, 2020 other than certain items disclosed in Note 11 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements .

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The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures at the date of the financial statements.

We evaluate our estimates on an on-going basis, including those related to revenue recognition, stock-based compensation, goodwill and finite-lived assets and related impairment, and income taxes.

We evaluate our estimates on an on-going basis, including those related to revenue recognition, goodwill and finite-lived assets and related impairment, business combinations and income taxes.

We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates.

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Revenue Recognition

Our revenues are derived primarily from the sale of aligners, scanners, and services from our Clear Aligner and Scanner 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.

Our revenues are derived primarily from the sale of aligners, scanners, and services from our Clear Aligner and Systems and Services segments.

We enter into sales contracts that may consist of multiple distinct performance obligations where certain

performance obligations of the sales contract are not delivered in one reporting period.

We measure and allocate revenues according to ASC 606-10, “ Revenues from Contracts with Customers.

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however, as the delivery of the performance obligations are at the customer’s discretion, we conclude that no significant financing component exists.

Systems and Services

We sell intraoral scanners and CAD/CAM services through both our direct sales force and distribution partners.

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The customer may also select, for additional fees, extended warranty and unlimited scanning services for periods beyond the initial year.

When intraoral scanners are sold with an unlimited scanning service agreement and/or extended warranty, we allocate revenues based on the respective SSPs of the scanner and the subscription service.

When intraoral scanners are sold with an unlimited scanning service agreement and/or extended warranty, we allocate revenues based on the respective SSP of the scanner and the subscription service.

We estimate the SSP of each element, taking into consideration historical prices as well as our discounting strategies.

Revenues are then recognized over time as the monthly services are rendered and upon shipment of the scanner, as that is when we deem the customer to have obtained control.

Most consideration is collected upfront and in cases where there are payment plans, consideration is collected by the one year mark and, therefore, there are no significant financing components.

CAD/CAM services, where sold separately, include the initial software license and maintenance and support.

We allocate revenues based upon the respective SSPs of the software license and the maintenance and support.

We estimate the SSP of each element using historical prices.

Revenues related to the software license are recognized upfront and revenues related to the maintenance and support are recognized over time.

For both scanner and service sales, most consideration is collected upfront and in cases where there are payment plans, consideration is collected within one year and, therefore, there are no significant financing components.

Volume Discounts

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Unfulfilled Performance Obligations for Clear Aligners and Scanners

Our unfilled performance obligations, including deferred revenues and backlog, as of December 31, 2019 and the estimated revenues expected to be recognized in the future related to these performance obligations are $610.3 million.

Our unfulfilled performance obligations, including deferred revenues and backlog, as of December 31, 2020 and the estimated revenues expected to be recognized in the future related to these performance obligations are $873.4 million.

This includes performance obligations from the Clear Aligner segment, primarily the shipment of additional aligners, which are fulfilled over six months to five years.

Also included are the performance obligations from the iTero scanner segment, primarily services and support, which are fulfilled over one to five years, and contracted deliveries of additional scanners.

Also included are the performance obligations from the Systems and Services 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.

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If, after assessing the totality of relevant events and circumstances, we determine that it is more likely than not that the fair value of the reporting unit exceeds its carrying value and there is no indication of impairment, no further testing is performed;

however, if we conclude otherwise, the first step of the two-step impairment test is performed by estimating the fair value of the reporting unit and comparing it with its carrying value, including goodwill.

however, if we conclude otherwise, then we will perform the quantitative impairment test which compares the estimated fair value of the reporting unit to its carrying value, including goodwill.

If the carrying amount of the reporting unit is in excess of its fair value, an impairment loss would be recorded in the Consolidated Statement of Operations.

Refer to Note 6 "Goodwill and Intangible Assets" of Notes to Consolidated Financial Statements for details on goodwill.

Finite-Lived Intangible Assets and Long-Lived Assets

Our intangible assets primarily consist of intangible assets acquired as part of acquisitions and are amortized using the straight-line method over their estimated useful lives, reflecting the period in which the economic benefits of the assets are expected to be realized.

Finite-Lived Acquired Intangible Assets and Long-Lived Assets

Our intangible assets primarily consist of intangible assets acquired as part of our acquisitions.

These assets are amortized using the straight-line method over their estimated useful lives ranging from one to fifteen years, reflecting the period in which the economic benefits of the assets are expected to be realized.

We evaluate long-lived assets (including finite-lived intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable.

An asset or asset group is considered impaired if its carrying amount exceeds the future undiscounted net cash flows the asset or asset group is expected to generate.

If an asset or asset group is considered to be impaired, the impairment to be recognized is calculated as the amount by which the carrying amount of the asset or asset group exceeds its fair market value.

Our estimates of future cash flows attributable to our long-lived assets require significant judgment based on our historical and anticipated results and are subject to many factors.

An asset or asset group is considered impaired if its carrying amount exceeds the future undiscounted net cash flows that the asset or asset group is expected to generate.

Factors we consider important which could trigger an impairment review include significant negative industry or economic trends, significant loss of customers and changes in the competitive environment.

The estimation of fair value utilizing a discounted cash flow approach includes numerous uncertainties which require our significant judgment when making assumptions of expected growth rates and the selection of discount rates, as well as assumptions regarding general economic and business conditions, and the structure that would yield the highest economic value, among other factors.

Refer to Note 6 "Goodwill and Intangible Assets" of Notes to Consolidated Financial Statements for details of the impairment analysis.

Our estimates of future cash flows attributable to our long-lived assets require significant judgment based on our historical and anticipated results and are subject to many assumptions.

The estimation of fair value utilizing a discounted cash flow approach includes numerous uncertainties which require our significant judgment when

making assumptions of expected growth rates and the selection of discount rates, as well as assumptions regarding general economic and business conditions, and the structure that would yield the highest economic value, among other factors.

Refer to Note 6 "Goodwill and Intangible Assets" of Notes to Consolidated Financial Statements for details on intangible assets.

Business Combination

We allocate the fair value of the purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date.

When determining the fair value of assets acquired and liabilities assumed, management is required to make certain estimates and assumptions, especially with respect to intangible assets.

The estimates and assumptions used in valuing intangible assets include, but are not limited to, the amount and timing of projected future cash flows including forecasted revenues, the discount rate used to determine the present value of these cash flows, and the determination of the assets’ life cycle.

Amounts recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available.

Accounting for Income Taxes

We make certain estimates and judgments in determining income tax expense for financial statement purposes.

These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.

These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenues and expenses for tax and financial statement purposes.

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate.

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The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.

We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit or refinement of estimates due to new

We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit or refinement of estimates due to new information.

To the extent that the final outcome of these matters is different than the amounts recorded, such differences will impact our tax provision in our Consolidated Statement of Operation in the period in which such determination is made.

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We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance.

If it is more likely than not that we will not realize our deferred tax assets, we will increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be realized.

During fiscal 2020, we completed an intra-entity transfer of certain intellectual property rights and fixed assets to our Swiss subsidiary, which resulted in the recognition of deferred tax assets and related tax benefits.

Refer to Note 15 “Income Taxes” of Notes to Consolidated Financial Statements for more information.

The establishment of deferred tax assets from the intra-entity transfer of intangible assets required us to make significant estimates and assumptions to determine the fair value of intellectual property rights transferred which include, but are not limited to, our expectations of growth rates in revenue, 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.

Tax Cuts and Jobs Act includes provisions for certain foreign-sourced earnings referred to as Global Intangible Low-Taxed Income (“GILTI”) which imposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations.

We have made the election to record GILTI tax using the period cost method.

Accounting for Legal Proceedings and Litigations

We are involved in legal proceedings on an ongoing basis.

If we believe that a loss arising from such matters is probable and can be reasonably estimated, we accrue the estimated loss in our consolidated financial statements.

If only a range of

estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome;

if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range.

Estimates 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 Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis