What changed in this filing

/stocks — the workspaceLOADING

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-02-26 compared with 2020-02-28 · 554 added, 464 removed, 848 unchanged (55% of the section changed)

1 unchanged sentence

In the normal course of business, we are exposed to foreign currency exchange rate and interest rate risks that could impact our financial position and results of operations.

In addition, we are subject to the broad market risk that is created by the global market disruptions and uncertainties resulting from the COVID-19 pandemic.

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” for further discussion of the impact of the COVID-19 pandemic on our business.

Interest Rate Risk

2 unchanged sentences

Fixed-rate securities may have their fair market value adversely impacted due to a rise in interest rates, and, as a result, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates.

As of December 31, 2019 , we had approximately $318.2 million invested in available-for-sale marketable securities.

As of December 31, 2020, we had no investments in available-for-sale marketable securities.

An immediate 10% change in interest rates would not have a material adverse impact on our future operating results and cash flows.

6 unchanged sentences

Regardless of this natural hedging, our results of operations may be adversely impacted by exchange rate fluctuations.

We enter into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations on cash and certain trade and intercompany receivables and payables.

We primarily enter into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations on cash and certain trade and intercompany receivables and payables.

These forward contracts are not designated as hedging instruments and do not subject us to material balance sheet risk due to fluctuations in foreign currency exchange rates.

1 unchanged sentence

These instruments are marked to market through earnings every period and generally are one month in original maturity.

Prior to the closing of the exocad acquisition on April 1, 2020, we entered into a Euro foreign currency forward contract with a notional contract amount of €376.0 million.

During the year ended December 31, 2020 , we recognized a loss of $10.2 million within other income (expense), net in our Consolidated Statement of Operation.

We do not enter into foreign currency forward contracts for trading or speculative purposes.

1 unchanged sentence

It is difficult to predict the impact forward contracts could have on our results of operations.

The fair value of foreign exchange forward contracts outstanding as of December 31, 2019 was not material.

Although we will continue to monitor our exposure to currency fluctuations, and, where appropriate, may use forward contracts to minimize the effect of these fluctuations, the impact of an aggregate change of 10% in foreign currency exchange rates relative to the U.S.

1 unchanged sentence

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Quarterly Results of Operations

Three Months Ended

December 31, 2019

September 30, 2019

June 30, 2019

March 31, 2019

December 31, 2018

September 30, 2018

June 30, 2018

March 31, 2018

(in thousands, except per share data)

Income from operations

Net income per share:

Shares used in computing net income per share:

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

52 unchanged sentences

A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (iii) provide

reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

1 unchanged sentence

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition – Determination of Standalone Selling Price of Distinct Performance Obligations in Clear Aligner Contracts

7 unchanged sentences

Management’s process for estimating usage rates requires significant judgment and evaluation of inputs, including historical usage data by region, country and channel.

The principal considerations for our determination that performing procedures related to revenue recognition and the determination of standalone selling price of distinct performance obligations in Clear Aligner contracts is a critical audit matter are there was significant judgment by management in determining the standalone selling price, which includes significant assumptions related to usage rates for each distinct performance obligation.

This in turn led to significant judgment, subjectivity, and effort in applying audit procedures to evaluate the judgments made by management in determining the estimates of standalone selling price and usage rates for each distinct performance obligation.

The principal considerations for our determination that performing procedures related to revenue recognition and the determination of standalone selling price of distinct performance obligations in Clear Aligner contracts is a critical audit matter are the significant judgment by management in determining the estimate of standalone selling price, which includes significant assumptions related to usage rates for each distinct performance obligation.

This in turn led to significant auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s determination of the estimates of standalone selling price and usage rates for each distinct performance obligation.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to revenue recognition, including controls over the determination of standalone selling price for each distinct performance obligation in the Company’s Clear Aligner contracts.

These procedures also included, among others, (i) testing management’s process for determining the estimate of standalone selling price, which included testing the completeness and accuracy of inputs used and evaluating the reasonableness of factors considered by management, such as historical sales, usage rates, costs, and gross margin, and (ii) testing management’s process for estimating usage rates, which included evaluating the reasonableness of inputs evaluated by management, including historical usage data by region, country and channel.

These procedures also included, among others, (i) testing management’s process for determining the estimate of standalone selling price, which included testing the completeness and accuracy of inputs used and evaluating the reasonableness of factors considered by management related to historical sales, usage rates, costs, and gross margin, and (ii) testing management’s process for estimating usage rates, which included evaluating the reasonableness of inputs evaluated by management related to historical usage data by region, country and channel.

Deferred Tax Asset – Valuation of Intellectual Property Rights

As described in Notes 1 and 15 to the consolidated financial statements, during the year ended December 31, 2020, the Company completed an intra-entity transfer of certain intellectual property rights to it’s Swiss subsidiary.

The transfer of intellectual property rights resulted 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, the transaction resulted in the recognition of a deferred tax asset and related one-time tax benefit of $1.5 billion.

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

The principal considerations for our determination that performing procedures relating to the deferred tax asset, specifically the valuation of intellectual property rights, is a critical audit matter are the significant judgment by management when estimating the fair value of the intellectual property rights intangible assets.

This in turn led to significant auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the growth rates in revenue, margins and future cash flows.

Also, the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls over management’s valuation of intellectual property rights, including controls over the development of the growth rates in revenue, margins and future cash flows.

These procedures also included, among others, (i) reading the intellectual property license agreement, (ii) testing management’s process for estimating the fair value of intellectual property rights intangible assets transferred, which included evaluating the appropriateness of the valuation method, (iii) testing the completeness, accuracy, and relevance of data used in the method, and (iv) evaluating the reasonableness of management’s significant assumptions related to growth rates in revenue, margins and future cash flows.

Evaluating the reasonableness of the growth rates in revenue, margins and future cash flows involved considering current and past performance of the business.

Professionals with specialized skill and knowledge were used to assist in the evaluation of the valuation method and the future cash flows significant assumptions.

Acquisition of exocad Global Holdings GmbH – Valuation of Existing Technology Intangible Asset

As described in Notes 1 and 5 to the consolidated financial statements, the Company completed the acquisition of exocad Global Holdings GmbH for total purchase consideration of $430 million on April 1, 2020, which resulted in $119 million of intangible assets being recorded on the acquisition date.

Intangible assets recorded by the Company in connection with the acquisition primarily included existing technology of $87 million.

Management valued the existing technology using the multi-period excess earnings method under the income approach.

Management is required to make certain estimates and assumptions with respect to the fair value of intangible assets acquired.

The estimates and assumptions used in valuing the existing technology intangible asset 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.

The principal considerations for our determination that performing procedures relating to the valuation of the existing technology intangible asset recorded in the acquisition of exocad Global Holdings GmbH is a critical audit matter are the significant judgment by management when estimating the fair value of the existing technology intangible asset.

This in turn led to significant auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to forecasted revenues.

Also, the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the existing technology intangible asset and controls over development of the significant assumptions related to forecasted revenues.

These procedures also included, among others, (i) reading the purchase agreement and (ii) testing management’s process for estimating the fair value of existing technology intangible asset, which included evaluating the appropriateness of the valuation method, (iii) testing the completeness and accuracy of data provided by management used in the method, and (iv) evaluating the reasonableness of management’s significant assumption related to forecasted revenue.

Evaluating the reasonableness of forecasted revenues involved gaining an understanding of management’s plans to integrate the existing technology into the Company’s business, as well as past performance of the business related to the existing technology.

Professionals with specialized skill and knowledge were used to assist in the evaluation of the valuation method and the forecasted revenues significant assumption.

/s/ PricewaterhouseCoopers LLP

7 unchanged sentences

Year Ended December 31,

2020 2019 2018

Net revenues $ 2,471,941 $ 2,406,796 $ 1,966,492

Cost of net revenues 708,706 662,899 518,625

Gross profit 1,763,235 1,743,897 1,447,867

Operating expenses:

1 unchanged sentence

Research and development 175,307 157,361 128,899

Impairments and other (gains) charges

Impairments and other charges (gains), net — 22,990 —

Litigation settlement gain — ( 51,000 ) —

1 unchanged sentence

Income from operations 387,171 542,493 466,564

Interest income and other income (expense), net:

Interest income 3,125 12,482 8,576

Other income (expense), net ( 11,347 ) 7,676 ( 8,489 )

Net income before provision for income taxes and equity in losses of investee

Provision for income taxes

Total interest income and other income (expense), net ( 8,222 ) 20,158 87

Net income before provision for (benefit from) income taxes and equity in losses of investee 378,949 562,651 466,651

Provision for (benefit from) income taxes ( 1,396,939 ) 112,347 57,723

Equity in losses of investee, net of tax — 7,528 8,693

Net income $ 1,775,888 $ 442,776 $ 400,235

Net income per share:

Basic $ 22.55 $ 5.57 $ 5.00

Diluted $ 22.41 $ 5.53 $ 4.92

Shares used in computing net income per share:

Basic 78,760 79,424 80,064

Diluted 79,230 80,100 81,357

The accompanying notes are an integral part of these consolidated financial statements.

4 unchanged sentences

Year Ended December 31,

Net change in foreign currency translation adjustment

2020 2019 2018

Net income $ 1,775,888 $ 442,776 $ 400,235

Change in foreign currency translation adjustment, net of tax 44,383 1,787 ( 3,631 )

Change in unrealized gains (losses) on investments, net of tax ( 194 ) 299 286

10 unchanged sentences

Accounts receivable, net of allowance for doubtful accounts of $ 10,239 and $ 6,756 , respectively

657,704 550,291

Inventories 139,237 112,051

Prepaid expenses and other current assets 91,754 102,450

Total current assets 1,849,538 1,633,419

Marketable securities, long-term

Property, plant and equipment, net 734,721 631,730

Operating lease right-of-use assets, net 82,553 56,244

Equity method investments

Goodwill and intangible assets, net

Goodwill 444,817 63,924

Intangible assets, net 130,072 11,768

Deferred tax assets 1,552,831 64,007

Other assets 35,151 39,610

Total assets $ 4,829,683 $ 2,500,702

LIABILITIES AND STOCKHOLDERS’ EQUITY

23 unchanged sentences

(in thousands)

Common Stock Additional

Capital Accumulated

Comprehensive

Income (Loss), Net

Retained Earnings

Balances at December 31, 2016

Cumulative effect adjustment from adoption of ASU 2016-16

Income (Loss), Net Retained Earnings Total

Shares Amount

Balance as of December 31, 2017 80,040 $ 8 $ 886,435 $ 571 $ 267,274 $ 1,154,288

Net income — — — — 400,235 400,235

Net change in unrealized gains (losses) from investments — — — 286 — 286

4 unchanged sentences

Stock-based compensation — — 70,763 — — 70,763

Balances at December 31, 2017

Other — — — — 384 384

Balance as of December 31, 2018 79,778 8 877,514 ( 2,774 ) 378,143 1,252,891

Net income — — — — 442,776 442,776

Net change in unrealized gains (losses) from investments — — — 299 — 299

Net change in foreign currency translation adjustment

— — — 1,787 — 1,787

Issuance of common stock relating to employee equity compensation plans 542 — 17,907 — — 17,907

2 unchanged sentences

Stock-based compensation — — 88,184 — — 88,184

Balances at December 31, 2018

Balance as of December 31, 2019 78,433 8 906,937 ( 688 ) 439,912 1,346,169

Net income — — — — 1,775,888 1,775,888

Net change in unrealized gains (losses) from investments — — — ( 194 ) — ( 194 )

2 unchanged sentences

Tax withholdings related to net share settlements of equity awards — — ( 51,122 ) — — ( 51,122 )

Common stock repurchased and retired

Stock-based compensation — — 98,427 — — 98,427

Balances at December 31, 2019

Balance as of December 31, 2020 78,860 $ 8 $ 974,556 $ 43,501 $ 2,215,800 $ 3,233,865

The accompanying notes are an integral part of these consolidated financial statements.

4 unchanged sentences

Year Ended December 31,

2020 2019 2018

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 1,775,888 $ 442,776 $ 400,235

Adjustments to reconcile net income to net cash provided by operating activities:

2 unchanged sentences

Stock-based compensation

98,427 88,184 70,763

Non-cash operating lease cost 22,467 18,475 —

Allowance for doubtful accounts provisions 12,073 5,853 870

Impairments on equity investments 5,887 3,975 —

Impairments on long-lived assets — 28,498 —

3 unchanged sentences

Other non-cash operating activities 15,783 20,032 16,382

Changes in assets and liabilities, net of effects of acquisitions:

Changes in assets and liabilities, net of effects of acquisition:

Accounts receivable ( 139,777 ) ( 121,014 ) ( 109,224 )

Inventories ( 29,110 ) ( 58,269 ) ( 24,109 )

Prepaid expenses and other assets ( 21,130 ) ( 31,529 ) ( 9,122 )

5 unchanged sentences

CASH FLOWS FROM INVESTING ACTIVITIES:

Acquisition, net of cash acquired ( 420,788 ) — —

Purchase of property, plant and equipment ( 154,916 ) ( 149,707 ) ( 223,312 )

3 unchanged sentences

Repayment on unsecured promissory note 26,925 21,820 —

Purchases of investments in privately held companies

Loan advances to equity investee

Purchase of investment in privately held company — — ( 5,000 )

Loan repayment from equity investee — — 30,000

Acquisition, net of cash acquired

Other investing activities 1,156 ( 14,704 ) 765

Net cash provided by (used in) investing activities

Net cash (used in) provided by investing activities ( 231,506 ) ( 350,444 ) 6,927

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of common stock 20,314 17,907 16,635

Common stock repurchases

Payroll taxes paid upon the vesting of equity awards ( 51,122 ) ( 57,675 ) ( 86,067 )

Common stock repurchases — ( 399,999 ) ( 300,002 )

Purchase of finance lease — ( 45,773 ) —

12 unchanged sentences

(“We”, “Our”, or “Align”) was incorporated in April 1997 in Delaware.

Align is a global medical device company engaged in the design, manufacture and marketing of Invisalign® clear aligners and iTero® intraoral scanners and services for orthodontics and restorative and aesthetic dentistry.

Align’s products are intended primarily for the treatment of malocclusion or the misalignment of teeth and are designed to help dental professionals achieve the clinical outcomes that they expect.

We are headquartered in San Jose, California with offices worldwide.

Align is a global medical device company engaged in the design, manufacture and marketing of Invisalign® clear aligners, iTero® intraoral scanners, services for orthodontics, restorative and aesthetic dentistry and exocad® computer-aided design and computer-aided manufacturing (“CAD/CAM”) software for dental laboratories and dental practitioners.

Align’s products are intended primarily for the treatment of malocclusion or the misalignment of teeth and are designed to help dental professionals achieve the clinical outcomes that they expect and the results patients desire.

Our corporate headquarters is in Tempe, Arizona, which moved from San Jose, California effective January 1, 2021 and we have offices worldwide.

Our Americas regional headquarters is located in Raleigh, North Carolina;

our European, Middle East and Africa ("EMEA") regional headquarters is located in Rotkreuz, Switzerland, which moved from Amsterdam, the Netherlands in January 2020;

our European, Middle East and Africa (“EMEA”) regional headquarters is located in Rotkreuz, Switzerland;

and our Asia Pacific (“APAC”) regional headquarters is located in Singapore.

We have two operating segments:

(1) Clear Aligner, known as the Invisalign System, and (2) Scanners and Services ("Scanner"), known as the iTero intraoral scanner and OrthoCAD services.

(1) Clear Aligner, known as the Invisalign System, and (2) Imaging Systems and CAD/CAM services (“Systems and Services”), known as the iTero intraoral scanner and CAD/CAM services.

Basis of Presentation and Preparation

The consolidated financial statements include the accounts of Align and our wholly-owned subsidiaries after elimination of intercompany transactions and balances.

During fiscal year 2018, we adopted Accounting Standards Codification (“ASC”) 606, “ Revenues from Contracts with Customers, ” using the full retrospective method and ASU 2016-18, “ Statement of Cash Flows - Restricted Cash, ” on a retrospective basis.

The Consolidated Statement of Cash Flow for the year ended December 31, 2017 and Consolidated Statement of Stockholders' Equity for the year ended December 31, 2017 have been recast to comply with the adoption of these standards.

Out of Period Adjustment

In fiscal 2020, we recorded an out of period correction that resulted in a tax benefit of $ 12.7 million.

We do not believe the out of period adjustment is material to the interim or annual consolidated financial statements for the fiscal year ended December 31, 2020 or to any prior periods.

Use of Estimates

38 unchanged sentences

Investments in privately held companies in which we can exercise significant influence but do not own a majority equity interest or otherwise control are accounted for under ASC 323, “ Investments -Equity Method and Joint Ventures .

” Equity securities qualified as equity method investments are reported on our Consolidated Balance Sheet as a single amount, and we record our share of their operating results within equity in losses of investee, net of tax, in our Consolidated Statement of Operations.

” We record our share of their operating results within equity in losses of investee, net of tax, in our Consolidated Statement of Operations.

Investments in privately held companies in which we cannot exercise significant influence and do not own a majority equity interest or otherwise control are accounted for under ASC 321, “ Investments -Equity Securities .

6 unchanged sentences

These forward contracts are not designated as hedging instruments and do not subject us to material balance sheet risk due to fluctuations in foreign currency exchange rates.

The gains and losses on these forward contracts are intended to offset the gains and losses in the underlying foreign currency denominated monetary assets and liabilities being economically hedged.

The gains and losses on

these forward contracts are intended to offset the gains and losses in the underlying foreign currency denominated monetary assets and liabilities being economically hedged.

We do not enter into foreign currency forward contracts for trading or speculative purposes.

4 unchanged sentences

dollar reporting currency are recorded as a separate component of accumulated other comprehensive income (loss), net in the stockholders’ equity section of the Consolidated Balance Sheet.

This foreign currency translation adjustment reflects the translation of the balance sheet at period end exchange rates, and the income statement at an average exchange rate in effect during the period.

This foreign currency translation adjustment reflects the translation of the balance sheet at period end exchange rates, and the income statement at the transaction date or average exchange rate in effect during the period.

The foreign currency revaluation that are derived from monetary assets and liabilities stated in a currency other than functional currency are included in other income (expense), net.

4 unchanged sentences

Our inability to successfully develop and market our products as a result of competition or other factors would have a material adverse effect on our business, financial condition and results of operations.

Our cash and investments are held primarily by three financial institutions.

Our cash and investments are held primarily by four financial institutions.

Financial instruments which potentially expose us to concentrations of credit risk consist primarily of cash equivalents and marketable securities.

12 unchanged sentences

If we were denied approval or clearance or such approval was delayed, it may have a material adverse impact on us.

We have manufacturing facilities located in Juarez, Mexico, where we conduct our aligner fabrication, distribution, repair of our iTero scanners and perform our CAD/CAM services.

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

We have manufacturing facilities located in Juarez, Mexico, where we conduct our aligner fabrication, distribution, repair of our iTero scanners and perform certain CAD/CAM services and in Ziyang, China, where we fabricate aligners primarily for the China and APAC markets.

In addition, we produce our handheld intraoral scanner wand, perform final scanner assembly and repair our scanners at our facilities in Or Yehuda, Israel and Ziyang, China.

13 unchanged sentences

The inability of any supplier or manufacturer to fulfill our supply requirements could materially and adversely impact our future operating results.

Due to the COVID-19 pandemic, we are subject to a greater degree of uncertainty than normal in making the judgments and estimates needed to apply our significant accounting policies.

As the COVID-19 pandemic continues to be a global issue, we may make changes to these estimates and judgments, which could result in meaningful impacts to our financial statements in future periods.

The extent and duration of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict and the response to the pandemic is rapidly evolving.

The severity of the impact of the COVID-19 pandemic on our business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on our customers, all of which are uncertain and cannot be predicted.

Our future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions or limitations, changes in manufacturing efficiency and capacity constraints caused by uneven or rapid changes in demand, and the impact of any initiatives or programs that we may undertake to address financial and operations challenges faced by us or our customers.

Additionally, the uncertainty of future results and cash flows may impact our significant assumptions and estimates including the collectability of accounts and other receivables and realization of our deferred tax assets.

The extent to which the COVID-19 pandemic may continue to materially impact our financial condition, liquidity, or results of operations is uncertain for all of the foregoing reasons stated above and many others directly and indirectly related to the virus and efforts to contain its spread.

Inventories are valued at the lower of cost or net realizable value, with cost computed using standard cost which approximates actual cost on a first-in-first-out basis.

8 unchanged sentences

We lease office and retail spaces, vehicles and office equipment with original lease periods of up to 10 years.

We determine if an arrangement is a lease at inception under ASC 842.

We determine if an arrangement is a lease at inception under ASC 842, which we adopted in 2019.

Operating lease right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.

5 unchanged sentences

Leases with an initial term of 12 months or less are not recorded on the balance sheet.

Payments under our lease arrangements are primarily fixed, however, certain lease agreements contain variable payments, which are expensed as incurred and not included in the operating lease right-of-use assets and liabilities.

Business Combinations

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.

Goodwill and Finite-Lived Acquired Intangible Assets

4 unchanged sentences

We evaluate goodwill for impairment at least annually on November 30th or more frequently if indicators are present, an event occurs or changes in circumstances suggest an impairment may exist and that it would more likely than not reduce the fair value of a reporting unit below its carrying amount.

The allocation of goodwill to the respective reporting units is based on relative synergies generated as a result of an acquisition.

The allocation of goodwill to the respective reporting unit is based on relative synergies generated as a result of an acquisition.

We perform an initial assessment of qualitative factors to determine whether the existence of events and circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

3 unchanged sentences

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, 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.

Step one of the goodwill impairment test consists of a comparison of the fair value of a reporting unit against its carrying amount, including the goodwill allocated to each reporting unit.

If the carrying amount of the reporting unit is in excess of its fair value, step two requires the comparison of the implied fair value of the reporting unit’s goodwill against the carrying amount of the reporting unit’s goodwill.

Any excess of the carrying value of the reporting unit’s goodwill over the implied fair value of the reporting unit’s goodwill is recorded as an impairment loss in the Consolidated Statement of Operations.

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.

Finite-Lived Intangible Assets and Long-Lived Assets

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 that the asset or asset group is expected to

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.

2 unchanged sentences

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 the Notes of Consolidated Financial Statements for details on intangible long -lived assets .

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

Development Costs for Internal Use Software

10 unchanged sentences

We accrue for warranty costs in cost of net revenues upon shipment of products which is primarily based on historical experience as to product failures as well as current information on replacement costs.

Scanners and Services

Systems and Services

We warrant our intraoral scanners for a period of one year , which include materials and labor.

1 unchanged sentence

An extended warranty may be purchased for additional fees.

Actual warranty costs could differ materially from the estimated amounts.

We warrant our CAD/CAM software for a one year period to perform in accordance with agreed product specifications.

As we have not historically incurred any material warranty costs, we do not accrue for these software warranties.

We regularly review our warranty liability and update these balances based on historical warranty cost trends.

Actual warranty costs incurred have not materially differed from those accrued;

however future actual warranty costs could differ from the estimated amounts.

Allowance for Doubtful Accounts

3 unchanged sentences

Revenue Recognition

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

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.

3 unchanged sentences

Determining the standalone selling price (“SSP”), allocation of consideration from the contract to the individual performance obligations and the appropriate timing of revenue recognition is the result of significant qualitative and quantitative judgments.

While changes in the

allocation of the SSP between performance obligations will not affect the amount of total revenues recognized for a particular contract, any material changes could impact the timing of revenue recognition, which would have a material effect on our financial position and result of operations.

While changes in the allocation of the SSP between performance obligations will not affect the amount of total revenues recognized for a particular contract, any material changes could impact the timing of revenue recognition, which would have a material effect on our financial position and result of operations.

This is because the contract consideration is allocated to each performance obligation, delivered or undelivered, at the inception of the contract based on the SSP of each distinct performance obligation.

12 unchanged sentences

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.

1 unchanged sentence

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

10 unchanged sentences

To match the costs to obtain a contract to the associated revenues, we evaluate the individual components and capitalize the eligible components, recognizing the costs over the treatment period.

The costs to obtain contracts were $ 22.8 million and $ 15.1 million as of December 31, 2020 and 2019, respectively, and are included in other assets in our Consolidated Balance Sheets.

We recognized amortization on our costs to obtain a contract of $ 10.1 million, $ 7.2 million, and $ 5.4 million during the year ended December 31, 2020, 2019, and 2018, respectively, which is included in selling, general and administrative expenses in our Consolidated Statements of Operations.

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.

1 unchanged sentence

The timing of revenue recognition results in deferred revenues being recognized on our Consolidated Balance Sheet.

For both aligners and scanners, we usually collect the total consideration owed prior to all performance obligations being performed with payment terms generally varying from net 30 to net 180 days.

For both aligners and scanners, we usually collect the total consideration owed prior to all performance obligations being performed

with payment terms generally varying from net 30 to net 180 days.

Contract liabilities are recorded as deferred revenue balances, which are generated based upon timing of invoices and recognition patterns, not payments.

10 unchanged sentences

Research and development costs are expensed as incurred and includes the costs associated with the research and development of new products and enhancements to existing products.

These costs primarily include personnel-related costs, including payroll and stock-based compensation, outside consulting expenses and allocations of corporate overhead expenses including facilities and information technology (“IT”).

These costs primarily include personnel-related costs, including payroll and stock-based compensation, equipment, material and maintenance costs, outside consulting expenses, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and information technology (“IT”).

Advertising Costs

13 unchanged sentences

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 information.

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.

We assess the likelihood that we will be able to realize our deferred tax assets.

Should there be a change in our ability to realize our deferred tax assets, our tax provision would increase in the period in which we determine that it is more likely than not that we cannot realize our deferred tax assets.

Should there be a change in our ability to realize our deferred tax assets, our tax provision would increase in the period in which we determine that it is more likely than

not that we cannot realize our deferred tax assets.

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 realizable.

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.

3 unchanged sentences

We use the Black-Scholes option pricing model to determine the fair value of stock awards and employee stock purchase plan shares.

We estimate the fair value of market-performance based restricted stock units using a Monte Carlo simulation model which requires the input of assumptions, including expected term, stock price volatility and the risk-free rate of return.

We use a Monte Carlo simulation model to estimate the fair value of market-performance based restricted stock units ("MSUs") which requires the input of assumptions, including expected term, stock price volatility and the risk-free rate of return.

In addition, judgment is also required in estimating the number of stock-based awards that are expected to be forfeited.

6 unchanged sentences

(i) New Accounting Updates Recently Adopted

In May 2014, FASB released ASU 2014-09, “ Revenue from Contracts with Customers, ” (Topic 606) to supersede nearly all existing revenue recognition guidance under GAAP.

The core principle of the standard is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for the goods or services.

We adopted the guidance in the first quarter of fiscal year 2018 by applying the full retrospective method.

The impact of adoption was primarily related to the Clear Aligner segment.

Our disaggregation of revenues can be found in Note 16 “Segments and Geographical Information.” We elected to take the practical expedient to exclude from the transaction price all taxes assessed by a governmental authority.

Prior period presentation for fiscal year 2017 has been retrospectively adjusted.

The adoption of ASU 2014-09 did not have a material impact on our Consolidated Statement of Operations, Consolidated Statement of Comprehensive Income or Consolidated Statement of Cash Flows.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “ Leases ” (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.

The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years.

In July 2018, the FASB issued ASU 2018-11, “ Leases-Targeted Improvements, ” which p rovides an additional transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings.

We adopted the guidance in the first quarter of fiscal year 2019 by electing the transition method issued in ASU 2018-11 and the package of practical expedients available in the standard.

The standard had a material impact on our Consolidated Balance Sheet as we recognized assets and liabilities related to our leases.

The adoption did not have an impact to prior periods.

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which gives entities the option to

reclassify to retained earnings the tax effects resulting from the U.S.

Tax Cuts and Jobs Act (the “TCJA”) related to items in accumulated other comprehensive income.

The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2018 on a retrospective basis and early adoption is permitted.

We adopted the standard in the first quarter of fiscal year 2019 which did not have a material impact on our consolidated financial statements and related disclosures.

The TCJA did not affect our accumulated other comprehensive income (loss), net, and therefore we did not reclassify any income tax effects from accumulated other comprehensive income (loss), net to our retained earnings.

(ii) Recent Accounting Updates Not Yet Effective

In June 2016, the FASB issued ASU 2016-13, “ Financial Instruments - Credit Losses ” (Topic 326) to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

In June 2016, the Financial Accounting Standards Board ( “FASB”) issued ASU 2016-13, “ Financial Instruments - Credit Losses ” (Topic 326) to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

The amendments in this update replace the existing guidance of incurred loss impairment methodology with an approach that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

1 unchanged sentence

The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years.

We will adopt this standard in the first quarter of fiscal 2020 and do not expect the adoption of this standard to have a material impact on our consolidated financial statements and related disclosures.

We adopted this standard in the first quarter of fiscal year 2020 which did not have a material impact on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, “ Intangibles—Goodwill and Other (Topic 350):

2 unchanged sentences

The updated guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2019 on a prospective basis.

We will adopt this standard in the first quarter of fiscal 2020 and do not expect the adoption of this standard to have any impact on our consolidated financial statements and related disclosures.

We adopted this standard in the first quarter of fiscal year 2020 which did not have any impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820):

1 unchanged sentence

The updated guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2019 on a prospective basis.

We will adopt this standard in the first quarter of fiscal 2020 and do not expect the adoption of this standard to have any impact on our consolidated financial statements and related disclosures.

We adopted this standard in the first quarter of fiscal year 2020 which did not have any impact on our consolidated financial statements and related disclosures .

In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” to clarify the guidance on the costs of implementing a cloud computing hosting arrangement that is a service contract.

Under the amendments in this update, the entity is required to follow the guidance in Subtopic 350-40, Internal-Use Software , to determine which implementation costs under the service contract to be capitalized as an asset and which costs to expense.

The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2019 either on a retrospective or prospective basis early adoption is permitted.

We will adopt this standard in the first quarter of fiscal 2020 on a prospective basis beginning and do not expect the adoption of this standard to have any impact on our consolidated financial statements and related disclosures.

The updated guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2019 either on a retrospective or prospective basis.

We adopted this standard in the first quarter of fiscal year 2020 on a prospective basis which did not have any impact on our consolidated financial statements and related disclosures.

(ii) Recent Accounting Updates Not Yet Effective

In December 2019, the FASB issued ASU 2019-12, “ Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes, ” to enhance and simplify various aspects of the income tax accounting guidance.

1 unchanged sentence

The amendments are effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020.

We are currently evaluating the impact of this guidance on our consolidated financial statements and related disclosures;

however, we anticipate the adoption of the guidance will not have a material impact to our consolidated financial statements and related disclosures.

We will adopt this standard in the first quarter of fiscal year 2021 and do not expect the adoption of this standard to have a material impact on our consolidated financial statements and related disclosures.

Investments and Fair Value Measurements

As of December 31, 2019 and 2018 , the estimated fair value of our short-term and long-term marketable securities, classified as available for sale, are as follows (in thousands):

December 31, 2019

Marketable Securities

We have no short-term or long-term marketable securities as of December 31, 2020 .

As of December 31, 2019 , the carrying value which approximates the estimated fair value of our short-term marketable securities, classified as available for sale, are as follows (in thousands):

December 31, 2019 Amortized

Losses Fair Value

Corporate bonds $ 210,891 $ 142 $ ( 27 ) $ 211,006

government treasury bonds

government agency bonds

Commercial paper

Certificates of deposit

Total marketable securities, short-term

December 31, 2018

Corporate bonds

70,587 65 ( 2 ) 70,650

government agency bonds 22,085 17 ( 1 ) 22,101

Commercial paper 14,426 — — 14,426

government treasury bonds

Certificates of deposit 19 — — 19

Total marketable securities, short-term $ 318,008 $ 224 $ ( 30 ) $ 318,202

December 31, 2018

Corporate bonds

government agency bonds

government treasury bonds

Certificates of deposit

Total marketable securities, long-term

We have no long-term marketable securities as of December 31, 2019 .

Cash equivalents are not included in the tables above as the gross unrealized gains and losses are not material.

We have no short-term or long-term marketable securities that have been in a continuous material unrealized loss position for greater than twelve months as of December 31, 2019 and 2018 .

We had no long-term marketable securities as of December 31, 2019.

Cash equivalents are not included in the table above as the gross unrealized gains and losses are not material.

We had no short-term marketable securities that have been in a continuous material unrealized loss position for greater than twelve months as of December 31, 2019.

Amounts reclassified to earnings from accumulated other comprehensive income (loss), net related to unrealized gains or losses were not material in 2020, 2019 and 2018.

For the year ended December 31, 2020, 2019 and 2018, realized gains or losses were not material.

Our fixed-income securities investment portfolio consists of investments that can have a maximum effective maturity of up to 40 months on any individual security.

Our fixed-income securities investment portfolio allows for investments with a maximum effective maturity of up to 40 months on any individual security.

The securities that we invest in are generally deemed to be low risk based on their credit ratings from the major rating agencies.

The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields.

As interest rates increase, those securities purchased at a lower yield show a mark-to-market unrealized loss.

The unrealized losses are primarily due to changes in interest rates and credit spreads.

We expect to realize the full value of all these investments upon maturity or sale.

The weighted average remaining duration of these securities was approximately seven months and four months as of December 31, 2019 and 2018 , respectively.

As the carrying value approximates the fair value for our short-term and long-term marketable securities shown in the tables above, the following table summarizes the fair value of our short-term and long-term marketable securities classified by contractual maturity as of December 31, 2019 and 2018 (in thousands):

Maturities within one year

Due in greater than one year

Total available for sale short-term and long-term marketable securities

Investments in Privately Held Companies

Our investments in privately held companies as of December 31, 2019 and 2018 are as follows (in thousands):

Equity securities under the equity method investment 1

Equity securities without readily determinable fair values 2

Refer to Note 5 “Equity Method Investments” of the Notes to Consolidated Financial Statements for more information

The equity securities are reported within other assets in our Consolidated Balance Sheet and valued on a nonrecurring basis.

During the year ended December 31, 2019 , we recorded a $ 4.0 million of impairment loss resulting from an observable price change.

As interest rates increase, those securities purchased at a lower yield show a mark-to-market unrealized loss which are primarily due to changes in interest rates and credit spreads.

We realized the full value of all these investments upon maturity or sale.

The weighted average remaining duration of these securities was approximately seven months as of December 31, 2019.

Fair Value Measurements

The following tables summarize our financial assets measured at fair value on a recurring basis as of December 31, 2020 and 2019 (in thousands):

Balance as of December 31, 2019

Description Balance as of December 31, 2020 Level 1

Cash equivalents:

Money market funds $ 519,228 $ 519,228 $ — $ —

Short-term investments:

Corporate bonds

Commercial paper

government agency bonds

government treasury bonds

Certificates of deposit

Prepaid expenses and other current assets:

1 unchanged sentence

Current unsecured promissory note 5,408 — — 5,408

Other Assets:

Long term unsecured promissory note

Balance as of December 31, 2018

$ 528,136 $ 519,228 $ 3,500 $ 5,408

Description Balance as of December 31, 2019

Level 2 Level 3

Cash equivalents:

Money market funds $ 236,923 $ 236,923 $ — $ —

Commercial paper

Corporate bonds

government treasury bonds

Short-term investments:

1 unchanged sentence

Commercial paper 14,426 — 14,426 —

government agency bonds

government treasury bonds 70,650 70,650 — —

Certificates of deposit

Long-term investments:

Corporate bonds

government agency bonds 22,101 — 22,101 —

government treasury bonds

Certificates of deposit 19 — 19 —

1 unchanged sentence

Israeli funds 3,226 — 3,226 —

Our investments in equity securities is considered Level 3 in the fair value hierarchy since the investments are in private companies without quoted market prices and we adjust the carrying value based on observable price changes.

The unsecured promissory note that was entered into in 2019 is classified as Level 3 in our fair value hierarchy as financial information of third parties may not be timely available and consequently we estimate the fair value based on the best available information at the measurement date.

The original amount of the note was $54.2 million which decreased over 2019 due to payments received.

Current unsecured promissory note 25,005 — — 25,005

Other Assets:

Long-term unsecured promissory note 7,328 — — 7,328

$ 590,684 $ 307,573 $ 250,778 $ 32,333

The unsecured promissory note that was entered into in 2019 with SmileDirectClub, LLC (“SDC”) is classified as Level 3 in our fair value hierarchy as financial information of third parties may not be timely available and consequently we estimate the fair value based on the best available information at the measurement date.

The original amount of the note was $ 54.2 million which has decreased due to payments received.

Refer to Note 7 “Equity Method Investments” of the Notes to Consolidated Financial Statements for more information.

Derivative Financial Instruments

Investments in Privately Held Companies

As of December 31, 2020, we had fully impaired our investments in equity securities of privately held companies without readily determinable fair value.

As of December 31, 2019, our investments in equity securities of privately held companies without readily determinable fair value were $ 5.9 million and are reported as nonrecurring investments within other assets in our Consolidated Balance Sheet.

Our investments in equity securities were considered Level 3 in the fair value hierarchy since the investments were in private companies without quoted market prices and we adjust the carrying value based on observable price changes.

During the year ended December 31, 2020 and 2019, we recorded impairment losses of $ 5.9 million and $ 4.0 million, respectively, resulting from observable price changes.

Derivatives Not Designated as Hedging Instruments

Recurring foreign currency forward contracts

We enter into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations on certain trade and intercompany receivables and payables.

These forward contracts are classified within Level 2 of the fair value hierarchy.

The net gain from the settlement of foreign currency forward contracts during the year ended December 31, 2019 and 2018 was $ 3.2 million and $ 9.9 million , respectively.

As a result of the settlement of foreign currency forward contracts, during the year ended December 31, 2020, 2019 and 2018, we recognized a net loss of $ 22.1 million, a net gain of $ 3.2 million, and a net gain of

$ 9.9 million, respectively.

As of December 31, 2020 and 2019, the fair value of foreign exchange forward contracts outstanding was not material.

1 unchanged sentence

December 31, 2020

Local Currency Amount

Notional Contract Amount (USD)

Canadian Dollar

Israeli Shekel

Local Currency Amount Notional Contract Amount (USD)

Euro € 126,300 $ 155,125

Chinese Yuan ¥ 936,000 143,393

Canadian Dollar C$ 65,000 50,791

British Pound £ 32,300 43,879

Brazilian Real

Australian Dollar

Japanese Yen ¥ 4,249,000 41,222

Brazilian Real R$ 142,000 27,264

Israeli Shekel ILS 74,000 23,094

Mexican Peso M$ 140,000 7,002

Australian Dollar A$ 5,800 4,447

Swiss Franc CHF 3,700 4,191

December 31, 2019

Local Currency Amount

Notional Contract Amount (USD)

Brazilian Real

Canadian Dollar

Local Currency Amount Notional Contract Amount (USD)

Euro € 97,000 $ 108,870

Chinese Yuan ¥ 431,000 60,702

Canadian Dollar C$ 52,000 39,802

British Pound £ 28,000 36,770

Australian Dollar

Brazilian Real R$ 130,000 32,185

Japanese Yen ¥ 3,000,000 27,604

Israeli Shekel ILS 63,700 18,439

Mexican Peso M$ 140,000 7,398

Australian Dollar A$ 3,000 2,101

Other foreign currency forward contract

Prior to the closing of the exocad Global Holdings GmbH (“exocad”) acquisition on April 1, 2020, we entered into a Euro foreign currency forward contract with a notional contract amount of € 376.0 million.

As a result of this contract, d uring the year ended December 31, 2020, we recognized a $ 10.2 million loss within other income (expense), net in our Consolidated Statement of Operations.

Balance Sheet Components

1 unchanged sentence

Raw materials $ 76,404 $ 54,947

Work in process

Work in progress 31,393 30,974

Finished goods 31,440 26,130

Total inventories $ 139,237 $ 112,051

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in thousands):

Tax related receivables $ 45,243 $ 41,252

Current promissory note 1

Other prepaid expenses and current assets

Prepaid property tax and insurance 14,047 4,648

Prepaid software and maintenance 6,070 7,128

Other current receivables

Current unsecured promissory note 1

Others 20,986 24,417

Total prepaid expenses and other current assets $ 91,754 $ 102,450

1 Refer to Note 7“Equity Method Investments” of the Notes to Consolidated Financial Statements for more information

Property, Plant and Equipment, Net

Property, plant and equipment consist of the following (in thousands):

Generally Used Estimated Useful Life 2020 2019

Clinical and manufacturing equipment

Up to 10 years

Computer software

Leasehold improvements

Clinical and manufacturing equipment Up to 10 years

$ 372,077 $ 309,809

Building 20 years

244,166 209,643

Leasehold improvements Lease term 1

63,541 53,327

Computer software 3 years

62,466 61,722

Furniture and fixtures

50,031 44,373

Computer hardware

Accumulated depreciation and amortization and impairment charges

45,602 39,199

Land — 34,598 26,422

CIP — 163,492 116,751

Total 1,035,973 861,246

Accumulated depreciation and impairment charges ( 301,252 ) ( 229,516 )

Total property, plant and equipment, net $ 734,721 $ 631,730

1 Shorter of the remaining lease term or the estimated useful lives of the assets

Depreciation and amortization was $ 79.0 million , $ 54.7 million and $ 37.7 million for the year ended December 31, 2019 , 2018 and 2017 , respectively.

Depreciation was $ 80.1 million, $ 73.1 million and $ 48.7 million for the year ended December 31, 2020, 2019 and 2018, respectively.

In the first quarter of 2019, we recorded impairment losses of $ 14.3 million related to leasehold improvements and other fixed assets.

Refer to Note 8“Impairments and Other (Gains) Charges” of the Notes to Consolidated Financial Statements for more information.

On September 26, 2019, we entered into a Purchase and Sale Agreement to purchase a building located in San Jose, California for $ 21.3 million .

The remaining and substantial portion of the purchase price will be paid on or before the closing date, which is expected to occur in the first quarter of 2020.

Accrued Liabilities

Refer to Note 9 “Impairments and Other Charges (Gains), net” of the Notes to Consolidated Financial Statements for more information.

Accrued liabilities consist of the following (in thousands):

1 unchanged sentence

Accrued expenses 77,024 55,529

Current operating lease liabilities

Accrued income taxes 30,130 14,130

Accrued sales rebate

Accrued property, plant and equipment 27,692 9,167

Current operating lease liabilities 21,735 15,737

Others 78,895 62,909

Total accrued liabilities $ 405,582 $ 319,958

We regularly review the balance for accrued warranty and update based on historical warranty trends.

Actual warranty costs incurred have not materially differed from those accrued;

however, future actual warranty costs could differ from the estimated amounts.

Warranty accrual as of December 31, 2019 and 2018 consists of the following activity (in thousands):

Accrued warranty as of December 31, 2020 and 2019, which is included in the “Others” category of the accrued liabilities table above, consists of the following activity (in thousands):

Accrued warranty as of December 31, 2018 $ 8,551

5 unchanged sentences

Accrued warranty as of December 31, 2020 $ 12,615

Deferred Revenues

Deferred revenues consist of the following (in thousands):

1 unchanged sentence

Deferred revenues - long-term 1

62,551 35,503

1 Included in Other long-term liabilities within our Consolidated Balance Sheet

1 unchanged sentence

We have operating leases for office and retail spaces, vehicles and office equipment.

The supplemental balance sheet information for our operating leases consist of following (in thousands):

Balance Sheet Caption

December 31, 2019

Operating lease right-of-use assets, net

Accrued liabilities

Operating lease liabilities

Total operating lease liabilities

The components of lease expenses consist of following (in thousands):

December 31, 2019

Year Ended December 31,

Lease Cost 2020 2019

Operating lease cost 1

$ 27,825 $ 22,778

Variable lease cost 1,429 1,899

3 unchanged sentences

Remaining Lease Term and Discount Rate 2020 2019

December 31, 2019

Weighted average remaining lease term (in years) 7.4 5.7

Weighted average discount rate 4.2 % 4.1 %

Maturities of operating lease liabilities as of December 31, 2019 are as follows (in thousands):

Fiscal Year Ending December 31,

Operating Leases

As of December 31, 2020, the future payments related to our operating lease liabilities are as follows (in thousands):

Fiscal Year Ending December 31, Operating Leases

2021 $ 25,358

Thereafter 29,280

Total lease payments 100,520

Imputed interest ( 14,340 )

Total lease liabilities $ 86,180

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.

Minimum future lease payments previously disclosed under ASC 840 in our Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 are as follows (in thousands):

Fiscal Year Ending December 31,

Operating Leases

Total minimum lease payments

In April 2019, as part of the $56.0 million purchase of a building located in Raleigh, North Carolina, we assumed an existing lease with a third-party for one floor of the building which is classified as an operating lease.

As of December 31, 2020, we had additional operating leases that have not yet commenced with future lease payments of $ 18.1 million, which includes a lease for office space in Tempe, Arizona which was designated as our new corporate headquarters effective January 1, 2021.

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

In 2019, as part of the $ 56.0 million purchase of a building located in Raleigh, North Carolina, we assumed an existing lease with a third-party for one floor of the building which is classified as an operating lease.

The lease has annual escalating payments and expires in August 2029 in accordance with the terms and conditions of the existing agreement.

Lease payments due to Align as of December 31, 2020 are as follows (in thousands):

Fiscal Year Ending December 31,

Operating Lease

Fiscal Year Ending December 31, Operating Lease

Thereafter 4,891

Total minimum lease payments $ 11,014

For the year ended December 31, 2019 , operating lease income was not material.

Equity Method Investments

On July 25, 2016, we acquired a 17 % equity interest, on a fully diluted basis, in SDC for $ 46.7 million .

Concurrently with the investment, we also entered into a supply agreement to manufacture clear aligners for SDC, which expired on December 31, 2019.

The sale of aligners to SDC and the income from the supply agreement are reported in our Clear Aligner business segment.

On July 24, 2017, we purchased an additional 2 % equity interest in SDC for $ 12.8 million .

The investment was accounted for as an equity method investment and recorded in our Consolidated Balance Sheet.

We recorded our proportional share of SDC's losses within equity in losses of investee, net of tax, in our Consolidated Statement of Operations.

As a result of the arbitrator’s decision regarding SDC announced on March 5, 2019, we were ordered to tender our SDC equity interest by April 3, 2019 for a purchase price equal to the “capital account” balance as of October 31, 2017 under the terms of the investment.

In April 2019, based on the “capital account” value provided by SDC, we entered into an unsecured promissory note with SDC to receive $ 54.2 million through February 1, 2021 in exchange for the tender of our membership interests.

As a result, we derecognized the equity method investment balance of $ 38.4 million in exchange for an unsecured promissory note of $ 54.2 million and we recorded the difference of $ 15.8 million as a gain in the second quarter of 2019 in other income in our Consolidated Statement of Operations.

Although we tendered our membership interests pursuant to the arbitrator’s decision, the parties did not agree on the amount of the “capital account” balance as of October 31, 2017 or the appropriate repurchase price for the membership units.

On July 3, 2019, we filed a demand for arbitration regarding SDC’s calculation of the “capital account” balance.

The arbitration proceeding remains pending and currently is scheduled to be heard (Refer to Note 10 “Legal Proceedings” of the Notes to Consolidated Financial Statements for SDC legal proceedings discussion).

For the year ended December 31, 2020 and 2019, operating lease income was not material.

Business Combination

On April 1, 2020 (the “acquisition date”), we completed the acquisition of privately-held exocad for a total purchase consideration of $ 430.0 million and exocad became a wholly-owned subsidiary.

exocad is a German dental CAD/CAM software company that offers fully integrated workflows to dental labs and dental practices.

We believe the synergies from the acquisition will strengthen our digital platform by adding exocad’s expertise in restorative dentistry, implantology, guided surgery, and smile design to extend our digital solutions and pave the way for new, seamless cross-discipline dentistry in the lab and at chairside.

The total purchase consideration consisted of the following (in thousands):

Cash paid to exocad stockholders $ 412,287

Cash paid to settle exocad’s bank debt

Total purchase consideration paid $ 429,978

The preliminary allocation of purchase price to assets acquired and liabilities assumed which is subject to change within the measurement period is as follows (in thousands):

Goodwill $ 340,181

Identified intangible assets 118,700

Cash and cash equivalents 9,190

Deferred tax liabilities ( 35,419 )

Other assets (liabilities), net ( 2,674 )

Total $ 429,978

Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets, and represents the expected synergies of the transaction and the knowledge and experience of the workforce in place.

None of this goodwill is deductible for tax purposes.

Under the applicable accounting guidance, goodwill will not be amortized but will be tested for impairment on an annual basis or more frequently if certain indicators are present.

We allocated approximately $ 296.7 million of goodwill to our Systems and Services reporting unit (formerly the “Scanner and Services” reporting unit prior to its renaming during the second quarter of 2020) and approximately $ 43.5 million of the goodwill to our Clear Aligner reporting unit (Refer to Note 6“Goodwill and Intangible Assets” of the Notes to C onsolidated Financial Statements for additional details).

Our reporting units are the same as our operating segments.

Acquisition related costs are recognized separately from the business combination and expensed as incurred.

The following table presents details of the identified intangible assets acquired (in thousands, except years):

Weighted Average Amortization Period (in years) Fair Value

Intangible assets subject to amortization:

Existing technology

Customer relationships

Intangible assets not subject to amortization:

In-process Research and Development (“IPR&D”)

Total intangible assets $ 118,700

We believe the amount of purchased intangible assets recorded above represent the fair values and approximate the amount a market participant would pay for these intangible assets as of the acquisition date.

Existing technology represents the estimated fair value of exocad’s core technology that has reached technological feasibility.

We valued the existing technology using the multi-period excess earnings method under the income approach.

The economic useful life of existing technology was determined by considering the life cycle of the technology and related cash flows.

Customer relationships represent the fair value of future projected revenue that will be derived from sales of products to existing customers.

Customer relationships were valued using the with-and-without method under the income approach.

The economic useful life for customer relationships was based on historical customer attrition rates.

Tradenames relates to the exocad tradenames that are recognized within the industry.

The fair value was determined using the relief-from-royalty method under the income approach.

The economic useful life of tradenames was determined by benchmarking against similar transactions entered into by peer companies.

IPR&D refers to the fair value of projects that are not yet completed but have potential value to the company.

Deferred tax liabilities were recorded for significant basis differences primarily to reflect the tax effect of fair value adjustments made to the beginning balance of the intangible assets and deferred revenue as of the acquisition date (Refer to Note 15 “Accounting for Income Taxes” of the Notes to Consolidated Financial Statements for additional details).

Our consolidated financial statements include the operating results of exocad from the acquisition date.

Separate post-acquisition operating results and pro forma results of operations for this acquisition have not been presented as the effect is not material to our financial results.

Goodwill and Intangible Assets

The change in the carrying value of goodwill for the year ended December 31, 2019 and 2018 , all attributable to our Clear Aligner reporting unit, is as follows (in thousands):

The change in the carrying value of goodwill for the year ended December 31, 2020 and 2019, categorized by reportable segments, is as follows (in thousands):

Clear Aligner Systems and Services Total

Balance as of December 31, 2018 $ 64,029 $ — $ 64,029

Adjustments 2

( 105 ) — ( 105 )

Balance as of December 31, 2019 63,924 — 63,924

Additions from exocad acquisition 1

43,500 296,681 340,181

Adjustments 2

5,267 35,445 40,712

Balance as of December 31, 2020 $ 112,691 $ 332,126 $ 444,817

Adjustments were related to foreign currency translation within the measurement period.

Based on the qualitative assessments performed, there were no impairments to goodwill in 2019 or 2018 .

1 Includes goodwill adjustments within the measurement period (up to one year from acquisition date).

Refer to Note 5 "Business Combination" of the Notes to Consolidated Financial Statements for additional details.

2 Adjustments related to foreign currency translation within the measurement period

We completed our annual goodwill impairment assessments in 2020 and 2019 and determined there were no impairments.

Intangible Long-Lived Assets

3 unchanged sentences

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.

There were no triggering events in 2020 or 2019 that would cause impairments of our intangible long-lived assets.

Acquired intangible long-lived assets are being amortized as follows (in thousands):

Weighted Average Amortization Period (in years)

Gross Carrying Amount as of

December 31, 2019

Accumulated Impairment Loss

Acquired intangible long-lived assets were as follows, excluding intangibles that were fully amortized (in thousands):

Weighted Average Amortization Period (in years) Gross Carrying Amount as of

December 31, 2020 Accumulated

Amortization Accumulated Impairment Loss Net Carrying

December 31, 2020

1 unchanged sentence

Customer relationships 11 55,000 ( 21,879 ) ( 10,751 ) 22,370

Reacquired rights

Trademarks and tradenames 10 16,600 ( 2,934 ) ( 4,179 ) 9,487

Patents and other 8 6,610 ( 3,785 ) — 2,825

$ 177,610 $ ( 41,317 ) $ ( 19,258 ) 117,035

Foreign currency translation 13,037

Total intangible assets 1

Weighted Average Amortization Period (in years)

Gross Carrying

December 31, 2018

Accumulated Impairment Loss

1 Refer to Note 5 "Business Combination" of the Notes to Consolidated Financial Statements for additional details on intangible assets from our exocad acquisition

Weighted Average Amortization Period (in years) Gross Carrying

December 31, 2019 Accumulated

Amortization 2

Accumulated Impairment Loss Net Carrying

December 31, 2019

Trademarks 15 $ 6,800 $ ( 1,745 ) $ ( 4,179 ) $ 876

Existing technology 13 12,400 ( 5,631 ) ( 4,328 ) 2,441

1 unchanged sentence

Reacquired rights 3 7,500 ( 7,059 ) — 441

Patents and other 8 6,770 ( 3,104 ) — 3,666

Total intangible assets $ 66,970 $ ( 35,944 ) $ ( 19,258 ) $ 11,768

2 Includes foreign currency translation which is immaterial

The total estimated annual future amortization expense for these acquired intangible assets as of December 31, 2020 is as follows (in thousands):

Fiscal Year Amortization

2021 $ 15,622

Thereafter 48,069

Total $ 117,035

Amortization expense was $ 13.4 million, $ 5.9 million and $ 6.0 million for the year ended December 31, 2020, 2019 and 2018, respectively.

Equity Method Investments

On July 25, 2016, we acquired a 17 % equity interest, on a fully diluted basis, in SDC for $ 46.7 million.

Concurrently with the investment, we also entered into a supply agreement to manufacture clear aligners for SDC, which expired on December 31, 2019.

The sale of aligners to SDC and the income from the supply agreement are reported in our Clear Aligner business segment.

On July 24, 2017, we purchased an additional 2 % equity interest in SDC for $ 12.8 million.

The investment was accounted for as an equity method investment and recorded in our Consolidated Balance Sheet.

We recorded our proportional share of SDC’s losses within equity in losses of investee, net of tax, in our Consolidated Statement of Operations within our Clear Aligner reportable segment.

On July 3, 2019, we filed a demand for arbitration regarding SDC’s calculation of the “capital account” balance.

Refer to Note 10 “Legal Proceedings” of the Notes to Consolidated Financial Statements for SDC legal proceedings discussion.

As of December 31, 2020, the unsecured promissory note had a remaining current balance of $ 5.4 million.

Credit Facility

On February 27, 2018, we entered into a 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 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.

The 2020 Credit Facility requires us to comply with specific financial conditions and performance requirements.

The loans bear interest, at our option, at either a rate based on the reserve adjusted LIBOR for the applicable interest period or a base rate, in each case plus a margin.

Loans under the 2020 Credit Facility bear interest, at our option, at either a rate based on the reserve adjusted LIBOR for the applicable interest period or a

base rate, in each case plus a margin.

The base rate is the highest of the credit facility’s publicly announced prime rate, the federal funds rate plus 0.50 % and one-month LIBOR plus 1.0 %.

1 unchanged sentence

Interest on the loans is payable quarterly in arrears with respect to base rate loans and at the end of an interest period (and at three month intervals if the interest period exceeds three months) in the case of LIBOR loans.

Principal, together with accrued and unpaid interest, is due on the maturity date.

As of December 31, 2019 , we had no outstanding borrowings under this credit facility and were in compliance with the conditions and performance requirements.

Impairments and Other (Gains) Charges

The outstanding principal, together with accrued and unpaid interest, is due on the maturity date.

As of December 31, 2020, we had no outstanding borrowings under the 2020 Credit Facility and were in compliance with the conditions and performance requirements.

Impairments and Other Charges (Gains), net

On March 5, 2019, we announced the outcome of the arbitration regarding SDC (Refer to Note 10 “Legal Proceedings” of the Notes to Consolidated Financial Statements for SDC legal proceedings discussion) which required Align to close its Invisalign stores and tender Align’s equity interest in SDC by April 3, 2019.

8 unchanged sentences

On November 5, 2018, a class action lawsuit against Align and three of our executive officers was filed in the U.S.

District Court for the Northern District of California on behalf of a purported class of purchasers of our common stock between July 25, 2018 and October 24, 2018.

The complaint generally alleges claims under the federal securities laws and seeks monetary damages in an unspecified amount and costs and expenses incurred in the litigation.

On December 12, 2018, a similar lawsuit was filed in the same court on behalf of a purported class of purchasers of our common stock between April 25, 2018 and October 24, 2018 (together with the first lawsuit, the “Securities Actions”).

On May 10, 2019, the lead plaintiff filed a consolidated complaint against Align and four of our executive officers alleging similar claims as the initial complaints on behalf of a purported class of purchasers of our common stock between April 25, 2018 and October 24, 2018.

On June 24, 2019, defendants filed a motion to dismiss the consolidated complaint.

On October 29, 2019, that motion to dismiss was granted with leave to amend.

District Court for the Northern District of California on behalf of a purported class of purchasers of our common stock.

The complaint generally alleged claims under the federal securities laws and sought monetary damages in an unspecified amount and costs and expenses incurred in the litigation.

On December 12, 2018, a similar lawsuit was filed in the same court on behalf of a purported class of purchasers of our common stock.

On November 29, 2019, the lead plaintiff filed an amended consolidated complaint against Align and two of our executive officers alleging similar claims as the initial complaints on behalf of a purported class of purchasers of our common stock from May 23, 2018 and October 24, 2018.

Defendants’ motion to dismiss the amended consolidated complaint was filed on January 17, 2020.

Align believes these claims are without merit and intends to vigorously defend itself.

Align is currently unable to predict the outcome of these lawsuits and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.

On September 9, 2020, Defendants’ motion to dismiss the amended consolidated complaint was granted in part and denied in part.

Trial is scheduled for October 3, 2022.

Align believes the claims that remain in the case are without merit and intends to vigorously defend itself.

Align is currently unable to predict the outcome of the lawsuit and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.

2019 Shareholder Derivative Lawsuit

In January 2019, three derivative lawsuits were filed in the U.S.

District Court for the Northern District of California, purportedly on behalf of Align, naming as defendants the members of our Board of Directors along with certain of our executive officers.

The allegations in the complaints are similar to those presented in the Securities Actions, but the complaints assert various state law causes of action including for breaches of fiduciary duty, insider trading, and unjust enrichment, among others.

District Court for the Northern District of California which were later consolidated, purportedly on behalf of Align, naming as defendants the members of our Board of Directors along with certain of our executive officers.

The allegations in the complaints are similar to those asserted in the 2018 Securities Class Action Lawsuit, but the complaints assert various state law causes of action, including for breaches of fiduciary duty, insider trading, and unjust enrichment.

The complaints seek unspecified monetary damages on behalf of Align, which is named solely as a nominal defendant against whom no recovery is sought, as well as disgorgement and the costs and expenses associated with the litigation, including attorneys’ fees.

On February 26, 2019, the three lawsuits were consolidated.

On April 10, 2019, the court stayed the consolidated action pending final disposition of the Securities Actions.

The consolidated action has been stayed pending final disposition of the 2018 Securities Class Action Lawsuit.

On April 12, 2019, a derivative lawsuit was also filed in California Superior Court for Santa Clara County, purportedly on behalf of Align, naming as defendants the members of our Board of Directors along with certain of our executive officers.

The allegations in this complaint are similar to those in the derivative suits described above.

On May 16, 2019, the court stayed this action pending final disposition of the Securities Actions.

On February 22, 2019, a purported stockholder sent a letter to Align pursuant to 8 Del.

§ 220 demanding certain books and records for the stated purpose of investigating potential breaches of duty, corporate mismanagement, and alleged wrongdoing by fiduciaries of the Company.

On April 16, 2019, Align responded and refused the demand on several legal grounds.

On June 10, 2019, the purported stockholder petitioned the Superior Court of the State of California, County of Santa Clara, to issue a writ of mandate commanding Align to provide the books and records requested.

On August 23, 2019, Align filed a demurrer seeking to dismiss the petition, and on October 28, 2019, the Court issued an order sustaining Align’s demurrer and dismissing the petition without an opportunity to amend.

On December 19, 2019, the same purported stockholder filed a complaint in the Superior Court of California, County of Santa Clara, seeking an order from the Court compelling Align to permit the inspection of the same books and records that were previously requested, as well as requesting attorneys’ fees.

Align expects to respond to this new complaint by March 12, 2020.

Align is currently unable to predict the outcome of this demand or of these lawsuits and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.

The allegations in the complaint are similar to those in the derivative suits described above.

The matter has been similarly stayed pending final disposition of the 2018 Securities Class Action Lawsuit.

Align is currently unable to predict the outcome of these lawsuits and therefore cannot determine the likelihood of loss nor estimate a range of possible loss .

2020 Securities Class Action Lawsuit

On March 2, 2020, a class action lawsuit against Align and two of our executive officers was filed in the U.S.

District Court for the Southern District of New York (later transferred to the U.S.

District Court for the Northern District of California) on behalf of a purported class of purchasers of our common stock.

The complaint alleged claims under the federal securities laws and sought monetary damages in an unspecified amount and costs and expenses incurred in the litigation.

The lead plaintiff filed an amended complaint on August 4, 2020 against Align and three of our executive officers alleging similar claims as in the initial complaint on behalf of a purported class of purchasers of our common stock from April 25, 2019 to July 24, 2019.

A motion to dismiss the amended complaint was filed on September 18, 2020.

Align believes these claims are without merit and intends to vigorously defend itself.

Align is currently unable to predict the outcome of this lawsuit and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.

2020 Shareholder Derivative Lawsuit

On May 4, 2020, a derivative lawsuit was filed in the U.S.

District Court for the Northern District of California, purportedly on behalf of Align, naming as defendants the members of our Board of Directors along with certain of our executive officers.

The allegations in the complaint are similar to those presented in the 2020 Securities Class Action Lawsuit, but this complaint asserts state law claims for breach of fiduciary duty and insider trading.

The complaint seeks unspecified monetary damages on behalf of Align, which is named solely as a no minal defendant against whom no recovery is sought, as well as disgorgement and the costs and expenses associated with the litigation, including attorneys’ fees.

This action has been stayed pending a decision on the motion to dismiss in the 2020 Securities Class Action Lawsuit.

Align is currently unable to predict the outcome of this lawsuit and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.

3Shape Litigation

On November 14, 2017, Align filed six patent infringement lawsuits asserting 26 patents against 3Shape, a Danish corporation, and a related U.S.

On November 14, 2017, Align filed several patent infringement lawsuits asserting patents against 3Shape, a Danish corporation, and a related U.S.

corporate entity, asserting that 3Shape’s Trios intraoral scanning system and Dental System software infringe Align patents.

Align filed two Section 337 complaints with the U.S.

International Trade Commission (“ITC”) alleging that 3Shape violates U.S.

trade laws by selling for importation and importing its infringing Trios intraoral scanning system and Dental System software.

Align’s ITC complaints sought cease and desist orders and exclusion orders prohibiting the importation of 3Shape’s Trios scanning system and Dental System software products into the U.S.

Align also filed four separate complaints in the U.S.

These lawsuits were filed in the U.S.

District Court for the District of Delaware alleging patent infringement by 3Shape’s Trios intraoral scanning system and Dental System software.

Two of those cases were stayed pending the ITC determinations, and the other two cases have been active in discovery and pretrial proceedings.

Trials in the latter two cases have been rescheduled to begin on August 5, 2020 in one case

and November 30, 2020 in the other.

Certain of Align’s asserted patents in the Delaware actions were found invalid by the District Court Judge.

The ITC conducted hearings in the Section 337 investigations in September and November 2018.

On March 1, 2019, the Administrative Law Judge issued an Initial Determination in one of the Section 337 investigations, finding no violation of Section 337 by 3Shape.

On April 26, 2019, the Administrative Law Judge issued an Initial Determination in the second Section 337 investigation, finding no violation of Section 337 by 3Shape.

On August 20, 2019, the Commission vacated one Initial Determination and terminated the investigation.

In the corresponding Delaware case, the District Court lifted the stay and scheduled trial to begin on November 8, 2021.

On November 22, 2019, the Commission affirmed a finding of no violation on modified grounds in the other investigation.

On May 9, 2018, 3Shape filed a complaint in the U.S.

District Court for the District of Delaware alleging patent infringement by Align’s iTero Element scanner of a single 3Shape patent.

On June 14, 2018, 3Shape filed another complaint in the U.S.

District Court for the District of Delaware alleging patent infringement by Align’s iTero Element scanner of another 3Shape patent.

On August 19, 2019, the Court consolidated the two actions, and 3Shape filed an amended complaint alleging infringement of an additional patent on August 30, 2019.

Align has asserted counterclaims for patent infringement of three additional Align patents.

The case is active and in the early discovery phase, with trial scheduled to begin on April 12, 2021.

On December 10, 2018, Align filed three additional patent infringement lawsuits asserting 10 additional patents against 3Shape.

Align filed one Section 337 complaint with the ITC alleging that 3Shape violates U.S.

trade laws through unfair competition by selling for importation and importing the infringing TRIOS intraoral scanning system, Trios Lab Scanners and TRIOS software, TRIOS Module software, Dental System software, and Ortho System Software.

On December 11, 2018, Align filed two separate complaints in the U.S.

Three of the cases are active and 3Shape has filed counterclaims for breach of contract and business torts in two.

Those counterclaims are the subject of pending motions to dismiss.

In 2018, 3Shape filed two separate complaints in the U.S.

District Court for the District of Delaware alleging patent infringement by Align’s iTero Element scanner of 3Shape patents.

On August 19, 2019, the Court consolidated the two actions, and on August 30, 2019, 3Shape filed an amended complaint.

On December 10, 2018, Align filed a Section 337 complaint with the ITC alleging that 3Shape violated U.S.

trade laws by selling for importation and importing the infringing TRIOS intraoral scanning system, Trios Lab Scanners and TRIOS software, TRIOS Module software, Dental System software, and Ortho System Software.

On April 30, 2020, an Administrative Law Judge (“ALJ”) issued an initial determination that found a violation of Section 337 stemming from 3Shape’s infringement of 4 claims in 2 of Align’s asserted patents.

The Commissioners at the ITC affirmed in part and reversed in part, resulting in no finding of infringement of valid patent claims and a finding of no violation of Section 337.

On December 11, 2018, Align filed two additional complaints in the U.S.

District Court for the District of Delaware alleging patent infringement by 3Shape’s Trios intraoral scanning system, Lab Scanners and Dental and Ortho System Software.

The ITC instituted the investigation, and one of the District Court cases was stayed pending the ITC determination.

The remaining District Court case is in the very early stages of discovery and pretrial proceedings, and trial has been scheduled for February 7, 2022.

The ITC evidentiary hearing was held at the end of October 2019.

The deadline for the Administrative Law Judge’s initial determination is March 6, 2020.

On November 5, 2019, Align filed a complaint for patent infringement asserting an additional patent against 3Shape.

On January 7, 2020, Align voluntarily dismissed the suit without prejudice, and Align has instead asserted the patent as a counterclaim in the patent infringement suit brought by 3Shape.

3Shape has sought to invalidate certain of Align’s patents through petitions for inter partes review proceedings.

Align disputes 3Shape’s positions and intends to vigorously defend the validity of its patent rights.

Each of the District Court patent infringement complaints seek monetary damages and injunctive relief against further infringement.

One of those cases was voluntarily dismissed.

3Shape has filed business tort counterclaims, which are the subject of a motion to dismiss.

On October 19, 2020, Align filed a complaint in the U.S.

District Court for the Western District of Texas alleging patent infringement by 3Shape ’s intraoral scanners and associated software products.

In response, 3Shape filed a motion to dismiss as well as b usiness tort and patent infringement counterclaims.

Align has moved to dismiss the business tort counterclaims .

Each of 3Shape and Align’s District Court patent infringement complaints and all of 3Shape’s counterclaims seek monetary damages and/or injunctive relief.

One of Align’s Delaware District Court cases against 3Shape was scheduled to proceed to jury trial on April 12, 2021;

that jury trial has been rescheduled for July 26, 2021.

The case pending in the Western District of Texas has been given an estimated trial date of October 3, 2022.

No trial dates have been set in the remaining cases.

On August 28, 2018, 3Shape filed a complaint against Align in the U.S.

District Court for the District of Delaware alleging antitrust violations and seeking monetary damages and injunctive relief relating to Align’s alleged market activities, including Align’s assertion of its patent portfolio, in alleged clear aligner and intraoral scanning markets, and the Court scheduled trial to begin on May 10, 2021.

Align filed a motion to dismiss 3Shape’s complaint on October 17, 2018.

Align also moved to stay the litigation pending the outcome of its motion to dismiss.

The court granted Align’s motion to stay.

On August 15, 2019, the Magistrate Judge recommended that Align’s motion to dismiss be granted, and, on September 26, 2019, the District Court Judge adopted the Magistrate Judge’s Report and Recommendation, granted Align’s motion to dismiss, and dismissed 3Shape’s complaint with leave to amend within thirty days of the order.

On October 28, 2019, 3Shape filed an amended complaint, and Align again moved to dismiss the complaint.

A hearing on Align’s motion to dismiss was held on February 13, 2020 before the magistrate judge.

A written report and recommendation from the magistrate judge will be forthcoming.

District Court for the District of Delaware alleging antitrust violations and seeking monetary damages and injunctive relief relating to Align’s alleged market activities,

including Align’s assertion of its patent portfolio, in alleged clear aligner and intraoral scanning markets.

After the Court dismissed 3Shape’s complaint, 3Shape filed an amended complaint on October 28, 2019.

The Court denied Align’s motion to dismiss the amended complaint on November 25, 2020.

No trial date has been set.

Align is currently unable to predict the outcome of these lawsuits and therefore cannot determine the likelihood of loss, if any, nor estimate a range of possible loss.

Simon & Simon

On March 14, 2019, a dental practice named Simon and Simon, PC d/b/a City Smiles brought an antitrust action in the United States District Court for the District of Delaware on behalf of itself and a putative class of similarly situated practices seeking monetary damages and injunctive relief relating to Align’s alleged market activities in alleged clear aligner and intraoral scanning markets.

Align filed a motion to dismiss the complaint on April 5, 2019, and the court held a hearing on Align’s motion.

On October 15, 2019, the Magistrate Judge issued a Report and Recommendation on Align’s motion to dismiss which recommends that Align’s motion be granted and that the plaintiffs’ complaint be dismissed without prejudice.

On October 29, 2019, Simon and Simon filed objections to the Magistrate Judge’s Report and Recommendation, and Align responded on November 12, 2019.

Align believes

the plaintiffs’ claims are without merit and intends to vigorously defend itself.

Align is currently unable to predict the outcome of this lawsuits and therefore cannot determine the likelihood of loss, if any, nor estimate a range of possible loss.

In February 2018, Align received a communication on behalf of SDC Financial LLC, SmileDirectClub LLC, and the Members of SDC Financial LLC other than the Company (collectively, the “SDC Entities”) alleging that the launch and operation of the Invisalign store pilot program constituted a breach of non-compete provisions applicable to the members of SDC Financial LLC, including Align.

As a result of this alleged breach, SDC Financial LLC notified us that its members (other than Align) sought to exercise a right to repurchase all of Align's SDC Financial LLC membership interests for a purchase price equal to the current “capital account” balance of Align.

The SDC Entities’ communication also alleged that Align breached confidentiality provisions applicable to the SDC Financial LLC members and demanded that Align cease all activities related to the Invisalign store pilot project, close existing Invisalign stores and cease using SDC’s confidential information.

In April 2018, the SDC Entities instigated confidential arbitration proceedings and filed a complaint in the Chancery Court of Davidson County, State of Tennessee that sought, among other forms of relief, to preliminarily and permanently enjoin all activities related to the Invisalign store pilot project, require Align to close existing Invisalign stores, prohibit Align from opening any additional stores, and allow the SDC Entities to exercise a right to repurchase all of Align's SDC Financial LLC membership interests for a purchase price equal to Align's current “capital account” balance.

On June 29, 2018, the Chancery Court of Davidson County, State of Tennessee denied the SDC Entities’ request for a temporary injunction to prevent Align from opening additional Invisalign stores.

During December 2018, the parties participated in binding arbitration proceedings and presented closing arguments on January 23, 2019.

The arbitrator issued his decision on March 4, 2019.

The arbitrator found that Align breached the non-compete provision applicable to the members of SDC Financial LLC and that Align misused the SDC Entities’ confidential information and violated fiduciary duties to SDC Financial LLC.

The arbitrator ordered Align to close its Invisalign stores by April 3, 2019, and enjoined Align from opening new Invisalign stores or providing certain services in physical retail establishments in connection with the marketing and sale of clear aligners, and enjoined Align from using the SDC Entities’ confidential information.

The arbitrator extended the expiration date of specified aspects of the non-compete provision to August 18, 2022.

On June 5, 2020, a dental practice named Simon and Simon, PC d/b/a City Smiles brought an antitrust action in the United States District Court for the Northern District of California on behalf of itself and a putative class of similarly situated practices seeking monetary damages and injunctive relief relating to Align’s alleged market activities in alleged clear aligner and intraoral scanning markets.

Prior to filing in the Northern District of California, Plaintiff had voluntarily dismissed a similar action in the U.S.

District Court for the District of Delaware.

Plaintiff filed an amended complaint and added VIP Dental Spas as a plaintiff on August 14, 2020.

On September 9, 2020, Align moved to dismiss Plaintiffs’ amended complaint.

The District Court Judge heard argument regarding Align’s motion to dismiss on December 10, 2020.

Align’s motion to dismiss remains pending before the court.

The court has not entered a schedule or set a trial date.

A lign believes the plaintiffs’ claims are without merit and intends to vigorously defend itself.

Align is currently unable to predi ct the outcome of this lawsuit and therefore cannot determine the likelihood of loss, if any, nor estimate a range of possible loss.

In April 2018, SDC Financial LLC, SmileDirectClub LLC, and the Members of SDC Financial LLC other than the Company (collectively, the “SDC Entities”) initiated confidential arbitration proceedings against Align.

In an award dated March 4, 2019, (“Award”) an arbitrator found that Align breached a restrictive covenant and that Align misused the SDC Entities’ confidential information and violated fiduciary duties to SDC Financial LLC.

As part of the Award, Align was enjoined from opening new Invisalign stores or providing certain services in physical retail establishments in connection with the marketing and sale of clear aligners in the United States, and enjoined from using the SDC Entities’ confidential information.

The arbitrator extended the expiration date of specified aspects of the restrictive covenant to August 18, 2022.

The arbitrator also ordered Align to tender its SDC Financial LLC membership interests to the SDC Entities for a purchase price equal to the “capital account” balance as of October 31, 2017, to be determined in accordance with the applicable provisions of the SDC Operating Agreements.

No financial damages were awarded to the SDC Entities.

The SDC Entities filed a motion to confirm the Award, which Align did not oppose, in the Circuit Court for Cook County, Illinois.

The motion to confirm the Award was granted on April 29, 2019.

As required by the Award, on April 3, 2019, Align had closed its Invisalign stores, returned SDC’s alleged confidential information, and tendered its membership interests for a purchase price that SDC claims to be Align’s “capital account” balance as of October 31, 2017.

Align disputes that the SDC Entities properly determined the value of Align’s “capital account” balance as of October 31, 2017 as required by the SDC Operating Agreements and the Award.

Consequently, on July 3, 2019, Align filed a confidential demand for arbitration challenging the propriety of the SDC Entities’ determination of Align’s “capital account” balance as of October 31, 2017.

That arbitration proceeding remains pending and currently is scheduled to be heard June 23-26, 2020.

Although Align expects the proper amount of its Capital Account balance as of October 31, 2017 to be determined in the course of the pending arbitration, that amount is not capped at $ 97.0 million as SDC has claimed in its public filings.

The Circuit Court for Cook County, Illinois confirmed the Award on April 29, 2019.

As required by the Award, Align tendered its membership interests for a purchase price that SDC claims to be Align’s “capital account” balance.

Align disputes that the SDC Entities properly determined the value of Align’s “capital account” balance as of October 31, 2017.

Consequently, on July 3, 2019, Align filed a confidential demand for arbitration challenging the propriety of the SDC Entities’ determination.

The arbitration hearing occurred in December 2020 and issuance of the arbitrator’s award remains pending.

Relatedly, the SDC Entities filed a contempt petition with the Illinois court which confirmed the Award, asserting that Align had no right to contest the “capital account” determination as made by the SDC Entities.

On September 4, 2019, the Illinois court denied in its entirety the contempt petition filed by the SDC Entities.

The SDC Entities have appealed the denial of the contempt petition, and that appeal remains pending.

On August 19, 2019, the SDC Entities filed a separate confidential arbitration proceeding alleging that Align has violated the non-compete provisions applicable to the members of the SDC Entities by virtue of Align’s alleged dealings with a third-party claimed to be a competitor of the SDC Entities.

Align has denied the claim and intends to vigorously defend itself against the newly asserted allegations.

The SDC Entities have yet to identify the range of damages they may seek to recover in the course of this arbitration and no hearing date has yet been set.

Align is currently unable to predict the outcome of these disputes and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.

Straumann Group Litigation Settlement

In March 2019, Align entered into an agreement with Straumann Group to settle all outstanding patent disputes in the U.S., the U.K., and Brazil, including those involving ClearCorrect, a subsidiary of Straumann Group.

Under the terms of the settlement, Straumann Group paid Align $ 35.0 million on March 29, 2019.

In addition, Align also signed a non-binding letter of

intent with Straumann Group for a 5 -year global development and distribution agreement whereby Straumann would distribute 5,000 iTero Element scanners that would be fully integrated into the Straumann/Dental Wings CARES®/DWOS® workflow.

The agreement provided that if for any reason the companies chose not to enter into the development and distribution agreement by July 2, 2019 or by a mutually agreed extended date, Straumann Group would pay Align an additional $ 16.0 million in lieu of the development and distribution agreement.

In June 2019, the parties terminated the discussions regarding a possible development and distribution agreement and as a result, Straumann paid us the additional $ 16.0 million in July 2019.

In 2019, we recognized a litigation settlement gain of $ 51.0 million .

The SDC Entities appealed and, on February 9, 2021, the Illinois Appellate Court affirmed the denial of the contempt petition.

On August 19, 2019, the SDC Entities filed a separate confidential arbitration proceeding alleging that Align had violated a restrictive covenant applicable to the members of the SDC Entities by virtue of Align’s alleged dealings with a third-party claimed to be a competitor of the SDC Entities.

On April 27, 2020, the SDC Entities filed an amended arbitration demand, which additionally asserted that Align’s alleged dealings with a third-party constituted contempt of the Award.

On February 5, 2021, pursuant to SDC’s unopposed notice of voluntary dismissal, the arbitrator dismissed the arbitration with prejudice.

On August 27, 2020, Align initiated a confidential arbitration proceeding against the SDC entities before the American Arbitration Association in San Jose, California.

This arbitration relates to the Strategic Supply Agreement (“Supply Agreement”) entered into between the parties in 2016.

The complaint states that the SDC Entities breached the Supply Agreement ’ s terms, causing damages to Align in an amount to be determined.

On January 19, 2021, SDC filed a counterclaim to Align’s suit alleging that Align breached the Supply Agreement.

Align denies the SDC Entities’ allegations in this arbitration and will vigorously defend itself against them.

This arbitration hearing is scheduled for September 27, 2021.

Align is currently unable to predict the outcome of these disputes and therefore cannot determine the likelihood of loss or success nor estimate a range of possible loss or success, if any.

In addition to the above, in the course of Align’s operations, Align is involved in a variety of claims, suits, investigations, and proceedings, including actions with respect to intellectual property claims, patent infringement claims, government investigations, labor and employment claims, breach of contract claims, tax, and other matters.

6 unchanged sentences

On May 29, 2018, we entered into an amendment to the Purchase Agreement with the existing single source supplier to increase the original term of the agreement to five years and total minimum purchase amount to approximately $ 425.9 million.

On January 15, 2019, we entered into a Purchase Agreement to purchase five floors of a building under construction in Petach Tivka, Israel for a purchase price of approximately $ 27.0 million with an option to purchase additional three floors with progress payments due through 2020.

During the fourth quarter of 2019, we exercised the option to purchase three additional floors and purchased one additional floor in the building for a purchase price of approximately $ 24.4 million .

As of December 31, 2019, we have a remaining commitment of $ 31.2 million which is expected to be paid in 2020.

On September 26, 2019, we entered into a Purchase and Sale Agreement to purchase a building located in San Jose, California for $ 21.3 million .

The remaining and substantial portion of the purchase price will be paid on or before the closing date, which is expected to occur in the first quarter of 2020.

On October 3, 2019, we entered into a Promotional Rights Agreement (the “Agreement”) for $ 36.0 million with a third-party which includes certain advertising and media coverage.

The expense related to the Agreement will be incurred over the period of April 1, 2020 through March 31, 2023.

On October 3, 2019, we entered into a Promotional Rights Agreement with NFL Properties LLC for $ 36.0 million which includes certain advertising and media coverage.

As of December 31, 2020, we had a remaining commitment of $ 27.9 million which is expected to be paid through 2023.

On October 30, 2020, we entered into a non-cancelable Addendum to the Master Subscription Agreement with a software company to renew our software license subscription for the total price of $ 95.2 million over the next four years starting on January 1, 2021.

Off-Balance Sheet Arrangements

14 unchanged sentences

Our 2005 Incentive Plan, as amended, provides for the granting of incentive stock options, non-statutory stock options, restricted stock units (“RSUs”), market-performance based restricted stock units (“MSUs”), stock appreciation rights, performance units and performance shares to employees, non-employee directors and consultants.

Shares granted on or after May 16, 2013 as an award of restricted stock, restricted stock unit, market-performance based restricted stock units, performance share or performance unit ("full value awards") are counted against the authorized share reserve as one and nine-tenths (1 9/10 ) shares for every one (1) share subject to the award, and any shares canceled that were counted as one and nine-tenths against the plan reserve will be returned at the same ratio.

Shares granted on or after May 16, 2013 as an award of restricted stock, restricted stock unit, market-performance based restricted stock units,

performance share or performance unit (“full value awards”) are counted against the authorized share reserve as one and nine-tenths (1 9/10 ) shares for every one (1) share subject to the award, and any shares canceled that were counted as one and nine-tenths against the plan reserve will be returned at the same ratio.

As of December 31, 2020, the 2005 Incentive Plan, as amended, has a total reserve of 27,783,379 shares for issuance of which 4,624,704 shares are available for issuance.

4 unchanged sentences

The stock-based compensation related to all of our stock-based awards and employee stock purchase plan for the year ended December 31, 2020, 2019 and 2018 is as follows (in thousands):

For the Year Ended December 31,

Year Ended December 31,

2020 2019 2018

Cost of net revenues $ 4,719 $ 5,154 $ 3,695

4 unchanged sentences

We have not granted options since 2011 and all outstanding options were fully vested and associated stock-based compensation expense was recognized as of December 31, 2015.

During the year ended December 31, 2019 , 8,187 stock options were exercised at a weighted average exercise price of $ 8.07 per share.

As of December 31, 2019 , there were no options outstanding and exercisable.

The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between our closing stock price on the last trading day in 2019 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last trading day of 2019 .

During the year ended December 31, 2020, no stock options were exercised and as of December 31, 2020, there were no options outstanding and exercisable.

The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between our closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last trading day of the fiscal year.

This amount will fluctuate based on the fair market value of our stock.

The total intrinsic value of stock options exercised for the year ended December 31, 2019 , 2018 and 2017 was $ 2.0 million , $ 17.6 million and $ 18.1 million respectively.

The total intrinsic value of stock options exercised for the year ended December 31, 2019 and 2018 was $ 2.0 million and $ 17.6 million, respectively.

Restricted Stock Units

The fair value of RSUs is based on our closing stock price on the date of grant.

RSUs granted generally vest over a period of four years .

A summary for the year ended December 31, 2020, is as follows:

1 unchanged sentence

Underlying RSUs

(in thousands)

Weighted Average Grant Date Fair Value

Weighted Average

(in thousands) Weighted Average Grant Date Fair Value Weighted Average

Contractual Term

(in years) Aggregate

Intrinsic Value

1 unchanged sentence

Unvested as of December 31, 2019 696 $ 190.60

Granted 300 267.24

Vested and released ( 324 ) 152.51

Forfeited ( 40 ) 236.90

Unvested as of December 31, 2020 632 $ 243.55 1.2 $ 337,677

1 unchanged sentence

This amount will fluctuate based on the fair market value of our stock.

During 2019 , of the 442,524 shares vested and released, 141,543 shares vested were withheld for employee statutory tax obligations, resulting in a net issuance of 300,981 shares.

The total intrinsic value of RSUs vested and released during 2019 , 2018 and 2017 was $ 112.4 million , $ 146.7 million and $ 99.5 million , respectively.

The total fair value of RSUs vested during the year ended December 31, 2019 , 2018 and 2017 was $ 46.8 million , $ 42.2 million and $ 46.2 million , respectively.

During 2020, of the 323,633 shares vested and released, 103,065 shares were withheld for employee statutory tax obligations, resulting in a net issuance of 220,568 shares.

The total fair value of RSUs vested as of their respective vesting dates during 2020, 2019 and 2018 was $ 89.6 million, $ 112.4 million and $ 146.7 million, respectively.

The weighted average grant date fair value of RSUs granted during 2020, 2019 and 2018 was $ 267.24 , $ 255.42 and $ 262.58 , respectively.

As of December 31, 2020, there was $ 100.2 million of total unamortized compensation costs, net of estimated forfeitures, related to RSUs and these costs are expected to be recognized over a weighted average period of 2.2 years.

Market-Performance Based Restricted Stock Units ("MSUs")

Market-Performance Based Restricted Stock Units

We grant MSUs to our executive officers.

1 unchanged sentence

The actual number of MSUs which will be eligible to vest will be based on the performance of Align’s stock price relative to the performance of a stock market index over the vesting period, and certain MSU grants are also based on Align’s stock price at the end of the performance period.

Generally, the vesting period of MSUs is three years .

For MSUs granted during the year ended December 31, 2019 , the maximum number of MSUs which will be eligible to vest are 250 % of the MSUs initially granted.

The maximum number of MSUs which will be eligible to vest range from 250 % to 300 % of the MSUs initially granted and the vesting period is three years .

The following table summarizes the MSU performance for the year ended December 31, 2020:

1 unchanged sentence

Underlying MSUs

(in thousands)

Weighted Average Grant Date Fair Value

Weighted Average

(in thousands) Weighted Average Grant Date Fair Value Weighted Average

Contractual Term

(in years) Aggregate

Intrinsic Value

1 unchanged sentence

Unvested as of December 31, 2019 244 $ 331.35

Granted 156 242.04

Vested and released 173 120.39

2 unchanged sentences

This amount will fluctuate based on the fair market value of our stock.

During 2019 , of the 191,176 shares vested and released, 88,292 shares were withheld for tax payments, resulting in a net issuance of 102,884 shares.

The total intrinsic value of MSUs vested and released during 2019 , 2018 and 2017 was $ 47.7 million , $ 92.7 million and $ 28.8 million , respectively.

The total fair value of MSUs vested during the year ended December 31, 2019 , 2018 and 2017 was $ 14.8 million , $ 19.5 million and $ 15.0 million , respectively.

As of December 31, 2019 , we expect to recognize $ 36.2 million of total unamortized compensation cost, net of estimated forfeitures, related to MSUs over a weighted average period of 1.1 years.

During 2020, of the 173,000 shares vested and released, 82,591 shares were withheld for employee statutory tax obligations, resulting in a net issuance of 90,409 shares.

The total fair value of MSUs vested as of their respective vesting dates during 2020, 2019 and 2018 was $ 47.1 million, $ 47.7 million and $ 92.7 million, respectively.

As of December 31, 2020, there was $ 31.7 million of total unamortized compensation costs, net of estimated forfeitures, related to MSUs and these costs are expected to be recognized over a weighted average period of 1.1 years.

The fair value of MSUs is estimated at the grant date using a Monte Carlo simulation that includes factors for market conditions.

The following weighted-average assumptions used in the Monte Carlo simulation were as follows:

The weighted average assumptions used in the Monte Carlo simulation were as follows:

Year Ended December 31,

2020 2019 2018

Expected term (in years) 3.0 3.0 3.0

3 unchanged sentences

Weighted average fair value per share at grant date $ 392.67 $ 392.03 $ 470.75

Total payments to tax authorities for payroll taxes related to RSUs, including MSUs, that vested during the period were $ 57.7 million , $ 86.1 million and $ 46.2 million during the year ended December 31, 2019 , 2018 and 2017 , respectively, and are reflected as a financing activity in the Consolidated Statement of Cash Flows.

Employee Stock Purchase Plan ( “ ESPP ” )

7 unchanged sentences

Year Ended December 31,

2020 2019 2018

Number of shares issued (in thousands) 116 130 164

3 unchanged sentences

Year Ended December 31,

2020 2019 2018

Expected term (in years) 1.0 1.4 1.3

4 unchanged sentences

We recognized stock-based compensation related to our employee stock purchase plan of $ 10.5 million, $ 12.1 million and $ 5.6 million for the year ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2019 , there was $ 9.9 million of total unamortized compensation costs related to future employee stock purchases which we expect to be recognized over a weighted average period of 0.9 year.

As of December 31, 2020, there was $ 2.6 million of total unamortized compensation costs related to future employee stock purchases which are expected to be recognized over a weighted average period of 0.3 year.

Common Stock Repurchase Programs

1 unchanged sentence

In April 2016, we announced that our Board of Directors had authorized a plan to repurchase up to $ 300.0 million of our common stock (“April 2016 Repurchase Program”).

Prior to 2017, we entered into accelerated share purchase agreements to repurchase $ 190.0 million of our common stock and received a total of approximately 3.2 million shares.

In addition, we repurchased on the open market approximately 1.6 million shares of our common stock for an aggregate purchase price of approximately $ 106.2 million .

In 2017, we repurchased on the open market approximately 0.04 million shares of our common stock at an average price of $ 96.37 per share, including commissions, for an aggregate purchase price of approximately $ 3.8 million , completing the April 2014 Repurchase Program.

April 2016 Repurchase Program

In April 2016, we announced that our Board of Directors had authorized a plan to repurchase up to $ 300.0 million of our common stock ("April 2016 Repurchase Program").

In 2017, we entered into an accelerated share repurchase agreement (“ASR”) to repurchase $ 50.0 million of our common stock which was completed in August 2017.

5 unchanged sentences

In 2018, we repurchased on the open market approximately 0.1 million shares of our common stock at an average price of $ 356.54 per share, including commissions, for an aggregate purchase price of approximately $ 50.0 million.

In 2018, we entered into an accelerated stock repurchase agreement ("ASR") to repurchase $ 50.0 million of our common stock which was completed in December 2018.

In 2018, we entered into an ASR to repurchase $ 50.0 million of our common stock which was completed in December 2018.

We received a total of approximately 0.2 million shares for an average share price of $ 213.18 .

7 unchanged sentences

employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis.

We match 50 % of our employee’s salary deferral contributions up to a 6 % of the employee’s eligible compensation.

We match 50 % of our employee’s salary deferral contributions up to 6 % of the employee’s eligible compensation.

We contributed approximately $ 6.9 million, $ 6.2 million and $ 5.2 million to the 401(k) plan during the year ended December 31, 2020, 2019 and 2018, respectively.

Net income before provision for income taxes and equity in losses of investee consists of the following (in thousands):

We also have defined contribution retirement plans outside of the U.S.

to which we contributed $ 28.9 million $ 25.4 million, and $ 18.0 million during the year ended December 31, 2020, 2019 and 2018, respectively.

Net income before provision for (benefit from) income taxes and equity in losses of investee consists of the following (in thousands):

Year Ended December 31,

Net income before provision for income taxes and equity in losses of investee

2020 2019 2018

Domestic $ 173,099 $ 184,956 $ 171,658

Foreign 205,850 377,695 294,993

Net income before provision for (benefit from) income taxes and equity in losses of investee $ 378,949 $ 562,651 $ 466,651

The provision for (benefit from) income taxes consists of the following (in thousands):

Year Ended December 31,

Provision for income taxes

2020 2019 2018

Current $ 55,291 $ 76,528 $ 35,788

Deferred ( 11,749 ) 1,235 ( 5,989 )

43,542 77,763 29,799

Current 8,862 9,169 9,568

Deferred ( 2,121 ) 209 ( 3,274 )

6,741 9,378 6,294

Current 29,399 28,364 22,753

Deferred ( 1,476,621 ) ( 3,158 ) ( 1,123 )

( 1,447,222 ) 25,206 21,630

Provision for (benefit from) income taxes $ ( 1,396,939 ) $ 112,347 $ 57,723

The differences between income taxes using the federal statutory income tax rate for 2020, 2019 and 2018 and our effective tax rates are as follows:

Year Ended December 31,

2020 2019 2018

federal statutory income tax rate 21.0 % 21.0 % 21.0 %

State income taxes, net of federal tax benefit 1.8 1.7 1.3

Impact of intra-entity intellectual property rights transfer ( 395.6 ) — —

Impact of differences in foreign tax rates 5.6 ( 5.1 ) ( 6.7 )

Stock-based compensation 1.1 ( 0.3 ) ( 2.8 )

tax on foreign earnings — 1.9 4.1

Settlement on audits ( 1.4 ) — —

Impact of U.S.

Tax Cuts and Jobs Act (“TCJA”) ( 0.5 ) — 2.1

Impact of differences in foreign tax rates

Impact of expiration of statute of limitations ( 0.3 ) — ( 6.2 )

Stock-based compensation

Other items not individually material ( 0.3 ) 0.8 ( 0.4 )

2 unchanged sentences

international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.

On December 22, 2017, Staff Accounting Bulletin No.

118 ("SAB 118") was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA.

As of December 31, 2017, we recorded a provisional tax charge for the estimated impact of the TCJA of $ 84.3 million , of which $ 73.9 million was related to a provisional transition tax liability on the mandatory deemed repatriation of foreign earnings and $ 10.4 million was related to the remeasurement of certain deferred tax assets and liabilities.

We finalized our assessment of the impact of the TCJA on our 2017 financial statements and recorded additional charges of $ 3.0 million in 2018, all of which relate to the transition tax on the mandatory deemed repatriation of foreign earnings.

As of December 31, 2020, undistributed earnings of our foreign subsidiaries totaled $ 638.8 million and substantially all of the earnings previously determined to be not indefinitely reinvested have been repatriated.

Under the GILTI provisions of the TCJA, U.S.

income taxes have already been provided on the $ 638.8 million undistributed earnings that is indefinitely reinvested in our international operations, therefore, the tax impact upon distribution is limited to mainly state income and withholding taxes and is not significant.

During the year ended December 31, 2020, we completed an intra-entity transfer of certain intellectual property rights and fixed assets to our new 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.

As of December 31, 2020 and 2019, the significant components of our deferred tax assets and liabilities are (in thousands):

Year Ended December 31,

Deferred tax assets:

3 unchanged sentences

Deferred revenue 32,562 20,909

Amortizable tax basis in intangibles 1,468,159 —

Net translation losses 2,939 1,589

Credit carryforwards 905 1,801

1,570,604 90,161

Deferred tax liabilities:

Depreciation and amortization 14,730 23,817

Acquisition-related intangibles 35,689 —

Prepaid expenses 1,720 1,341

Unremitted foreign earnings

52,139 25,158

Net deferred tax assets before valuation allowance 1,518,465 65,003

3 unchanged sentences

As of December 31, 2020, it was considered more likely than not that our deferred tax assets would be realized with the exception of certain capital loss carryovers as we are unable to forecast sufficient future profits to realize the deferred tax assets.

The total valuation allowance as of December 31, 2019 as well as the increase for the year 2019 was not material to our financial statements.

As of December 31, 2019 , we have foreign net operating loss carryforwards of approximately $ 82.1 million , the majority of which can be carried forward indefinitely, and a minor portion of which, if not utilized, will expire beginning after 2024.

In the event of a change in ownership, as defined under federal and state tax laws, our tax credit carryforwards may be subject to annual limitations.

The annual limitations may result in the expiration of the tax credit carryforwards before utilization.

The total valuation allowance as of December 31, 2020 as well as the increase during the year ended December 31, 2020 was not material to our financial statements.

As of December 31, 2020, we have foreign net operating loss carryforwards of approximately $ 90.7 million, attributed mainly to losses in Israel which can be carried forward indefinitely.

The majority of the remaining foreign net operating loss carryforwards is related to losses in China which, if not utilized, will expire beginning after 2025.

The changes in the balance of gross unrecognized tax benefits, which exclude interest and penalties, for the year ended December 31, 2020, 2019 and 2018, are as follows (in thousands):

Unrecognized tax benefits as of December 31, 2016

Tax positions related to current year: