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Item 7. Management’s Discussion and Analysis

2022-02-25 compared with 2021-02-26 · 174 added, 335 removed, 165 unchanged (76% of the section changed)

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Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 26, 2021, which is available without charge on the SEC's website at www.sec.gov and on our investor relations website at investor.aligntech.com .

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

To date, over 9.6 million people worldwide have been treated with our Invisalign System.

To encourage consumers to treat malocclusions with clear aligners under the direction and supervision of licensed dental professionals, we have developed a business strategy designed to bring to market solutions that we believe strengthen our digital dental platform for doctors, labs and partners, including establishing the iTero intraoral scanner and related services as the preferred 3D digital scanning solution and integrating computer-aided design and computer-aided manufacturing (“CAD/CAM”) solutions and workflows into the markets for clear aligner orthodontics and dental restorative treatments.

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

Executive Overview of Results

Trends and Uncertainties

Our business strategic priorities remain focused on four principal pillars of growth:

(i) international expansion;

(ii) GP adoption;

(iii) Patient demand & conversion;

(iii) patient demand and conversion;

and (iv) orthodontic utilization.

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

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

• New Technology, Products, and Feature Enhancements.

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

thereby supporting adoption of Invisalign treatment in their practices.

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

▪ Invisalign clear aligners:

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

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

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

▪ iTero Scanner:

We continue to expand our intraoral digital scanning solutions;

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

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

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

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

thereby improving doctor experiences and improving engagement opportunities and communications with their patients.

The iTero Element 5D aids in the detection and monitoring of interproximal caries lesions above the gingiva without using harmful radiation.

On April 1, 2020, we completed the acquisition of privately-held exocad Global Holdings GmbH (“exocad”), a German dental CAD/CAM software company that offers fully integrated workflows to dental labs and practices.

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

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

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

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

• Invisalign Adoption.

Our goal is to establish Invisalign clear aligners as the treatment of choice for treating malocclusion, ultimately driving increased product adoption and frequency of use by dental professionals, which we refer to as “utilization rates.”

• Our growth depends on the continued penetration and adoption of Invisalign products, intraoral scanners and CAD/CAM solutions in international markets.

We continue to invest in manufacturing operations, research and development, clinical treatment planning, sales and marketing and building our quality and regulatory capabilities in existing and emerging markets globally.

For instance, in 2021, we:

◦ opened new offices in Israel to support the long-term growth of iTero scanner and services business for treatment planning and other operations;

◦ announced plans to open an aligner fabrication facility in Wroclaw, Poland as a part of our strategy to bring operational facilities closer to customers and thereby serve them more quickly and respond to their needs more effectively as well as new treatment planning operations in targeted regional geographies;

◦ expanded our sales and marketing efforts into new countries and regions, including establishing offices in the African countries of Ghana and Morocco.

• We continue to see growth opportunities with international orthodontists and GP customers, particularly with adopters of digital dentistry platforms as we continue to tailor our sales and marketing strategies and resources around the unique needs of each customer channel.

As we continue growing, we intend to opportunistically expand our research, development, manufacturing, treatment planning, sales and marketing operations to meet local and regional demand thoughtfully and deliberately.

Over the longer-term, we expe ct international revenues to grow faster than Americas' revenues as a result of growing international demand, our continued investment in international market expansion, the size of the market opportunities and our relatively low market penetration of these regions.

• We believe our training and education efforts are important to building the confidence within the GP and orthodontic communities needed to increase their adoption and utilization of clear aligner treatment.

Accordingly, we continue to expand our Invisalign customer base by educating new doctors on the benefits of digital dentistry through the Invisalign system and demonstrating to GPs and orthodontists how the iTero portfolio of intraoral scanners and CAD/CAM restorative services and workflows can increase the profitability of their dental practices by enhancing patient experiences.

However, training and education alone are insufficient to drive adoption and utilization growth sufficiently.

We need to continue to innovate, develop and bring to market products and solutions that deliver the ever-increasing clinical precision and predictability doctors expect with the speed and convenience their patients require.

For this reason, we expect to continue to invest in research and development and open facilities closer to our customers and their patients to timely and conveniently support them.

• Patient demand and conversion depends on making targeted investments in advertising and public relations through social media, influencers and other forms of digital communications to encourage patients to seek treatment from Invisalign trained doctors.

We believe that well-designed, targeted sales and marketing promotions that build on our strong brand awareness and allow us to differentiate our products and solutions from traditional and emerging competitors.

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

For instance, in 2021, we introduced the “Invis-is” consumer advertising campaign with new creative content and influencers focused on teens, moms and young adults.

We expect to make further investments to create additional demand for Invisalign system treatment driving more consumers to dental professionals for those treatments.

In addition, we are pursuing new lines of Consumer Products that are complementary to our doctor-prescribed principal products currently available in certain e-commerce channels in the U.S.

Similarly, in order to grow our retainer business, which is significantly underpenetrated, we have begun investing more directly in marketing strategies focused on driving adoption and increasing market share in the U.S.

• We expect global orthodontic utilization rates to continue increasing overall as doctors’ clinical confidence in the efficacy and predictability of the Invisalign system increases with advancements in products and technology and as patients and doctors demand treatments that emphasize convenience and safety through fewer in office visits and less invasive and quicker treatments rise.

In addition, the teenage and younger market makes up 75% of the approximately 21 million total annual global orthodontic case starts each year.

As we continue to emphasize the benefits of the Invisalign system for teenage and younger patient treatments through education, training and sales and marketing programs, we expect utilization rates to rise.

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

Refer to “ COVID-19 Pandemic Update ” below for further details.

• To achieve these strategic pillars, we expect to continue hiring skilled employees in our clinical engineering, technology development, manufacturing, sales and management teams.

Expanding our workforce will require that we offer competitive compensation and result in increasing costs which we expect to offset with increasing revenues.

COVID-19 Pandemic Update

The COVID-19 pandemic continues to cause significant volatility and uncertainty in the global and regional economies, leading to changes in consumer and business behavior, fear and market fluctuations, materials and product shortages and restrictions on business and individual activities, all of which is materially impacting supply and demand in broad sectors of the world markets.

During 2021, many businesses and countries, including the U.S., continued imposing preventative and precautionary measures to mitigate the spread of the virus and its variants.

As a result of the restrictive measures imposed, the

demand for digital solutions has increased.

Society and businesses continue to adapt to practices such as social distancing and remote working that further the need for greater flexibility and convenience of digital solutions.

Our efforts to promote the digital transformation of dental practices with our clear aligners, intraoral scanners, clinical treatment planning and other offerings has allowed us to quickly respond to fluctuating demands in the dental field in various regions.

Consequently, despite the economic challenges caused by the pandemic, our revenue grew by 59.9% in 2021 compared to 2020.

The growth was a combination of non-COVID related increases as well as lower revenues in 2020 as the initial preventative measures to combat the spread of the virus resulted in significant office closures and materially reduced operating capacities for many of our customers.

Our overall business performance has been strong, and we believe the digital transition to dentistry that began before the pandemic will continue to be positive for our business, results of operations, cash flows, and financial condition, although we intend to adjust spending to coincide with the fluctuating pace of recovery and changes in demand.

As such, our recent operating results and levels of growth may not be indicative of our future performance.

The continuing evolution of the pandemic remains highly fluid and unpredictable, including the setbacks occurring as a result of new virus strains and new or additional operating restrictions imposed on businesses, supply chain shortages and delays, the positive impacts of vaccinations, the uncertainties regarding consumer spending as demand for entertainment, dining, and travel returns and remote working diminishes.

Our top priority continues to be the health and safety of our employees and their families, our customers and their staff.

In addition, new variants of the virus have caused unpredictable fluctuations in the number of patients seeking treatment and the number of doctors providing the services and treatments.

These fluctuations have adversely impacted our results of operations from time to time in the recent past and are expected to continue to impact our results, particularly in the near term.

We continue to follow recommended safety measures, including encouraging employees to work from home when possible, suspending non-essential work travel, and implementing various access controls at our facilities.

In order to overcome the supply chain shortages and delays, we are also proactively communicating with our suppliers and distributors and modifying our purchase order commitments to mitigate the risks of supply chain interruptions and maintaining inventory levels greater than historically required.

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

Key financial and operating metrics

We measure our performance against these strategic priorities by the achievement of key financial and operating metrics.

For the year ended December 31, 2021, we achieved the following, taking into consideration that percentage changes from prior year financial results include the impact of COVID-19 and do not necessarily reflect our future growth rates:

◦ Revenues of $3,952.6 million, an increase of 59.9% year-over-year;

◦ Clear Aligner revenues of $3,247.1 million, an increase of 54.5% year-over-year reflecting the expanding opportunity for Invisalign system treatment among adults globally, as well as the underlying orthodontic market as we continue to build awareness of the Invisalign brand and drive utilization among teens and younger patients through increased consumer marketing.

▪ Americas Clear Aligner revenues of $1,544.8 million, an increase of 52.9% year-over-year;

▪ International Clear Aligner revenues of $1,498.7 million, an increase of 55.2% year-over-year;

▪ Clear Aligner volume increase of 54.8% year-over-year and Clear Aligner volume increase for teenage patients of 47.3% year-over-year;

◦ Imaging Systems and CAD/CAM Services revenues of $705.5 million, an increase of 90.4% year-over-year reflecting strong growth across all regions with continued adoption of the iTero Element 5D and 5D Plus Series of next generation scanners and imaging systems launched in February 2021, as well as increased average selling prices (“ASP”) predominately due to favorable product mix shift towards higher priced scanners;

◦ Income from operations of $976.4 million and operating margin of 24.7%;

◦ Effective tax rate of 23.7%;

◦ Net income of $772.0 million with diluted net income per share of $9.69;

◦ Cash, cash equivalents and marketable securities of $1,296.7 million as of December 31, 2021;

◦ Operating cash flow of $1,172.5 million;

◦ Capital expenditures of $401.1 million, predominantly related to increases in our manufacturing capacity and facilities;

◦ Number of employees was 22,540 as of December 31, 2021, an increase of 24.7% year-over-year.

Other Statistical Data and Trends

• Our primary goal is to establish clear aligners as the principal solution for the treatment of malocclusions and our Invisalign system as the treatment solution of choice by orthodontists, GPs and patients globally, our intraoral scanning platform as the preferred scanning protocol for digital dental scans, and our exocad CAD/CAM software as the solution of choice for dental labs.

As of December 31, 2021, over 12 million people worldwide have been treated with our Invisalign system, over 68,000 iTero scanners have been sold and over 47,000 exocad software licenses have been installed.

Management measures these results by comparing to the estimated 500 million people who can benefit from straighter teeth, 21 million annual orthodontic case starts and 2 million dental practices that could use intraoral scanners and uses this data to target opportunities to expand the market for orthodontics by educating consumers about the benefits of straighter teeth using the Invisalign system, dental professionals and/or labs and service providers to use iTero intraoral scanners, and dental labs and practitioners to install exocad CAD/CAM software.

• For the fourth quarter of 2021, total Invisalign cases submitted with a digital scanner in the Americas increased to 89.1%, up from 84.0% in the fourth quarter of 2020 and international scans increased to 80.8%, up from 73.7% in the fourth quarter of 2020.

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

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

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

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

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

Our International region includes EMEA, APAC.

Latin America ( “ LATAM ” ) is excluded from the International region based on its immateriality to the year, however is included in the Total utilization.

• Total utilization rate in 2021 increased to 20.8 cases per doctor compared to 16.1 cases per doctor in 2020 and 15.9 cases per doctor in 2019.

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• International:

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

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

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

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

• Invisalign Doctor Training.

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

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

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

• International Invisalign Growth.

Our future growth is dependent upon the continued penetration and expansion of Invisalign product usage in international markets.

Accordingly, we continue to focus our efforts towards increasing Invisalign clear aligner adoption by dental professionals internationally.

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

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

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

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

For instance, prior to the impact of COVID-19, we experienced slower growth rates than prior periods in China which we believe were primarily due to the U.S.-China trade war and resulting economic uncertainty which caused headwind for consumer demand especially for consumption of luxury goods and considered purchases.

We also believe there has been increased competitive activity in China from clear aligner suppliers.

Notwithstanding these uncertainties, we continue to see growth opportunities with international orthodontists and GP customers, particularly with adopters of digital dentistry platforms and as we continue to segment our sales and marketing resources and programs specifically around each customer channel.

Furthermore, we continue to expand in our existing markets through targeted investments in sales coverage and professional marketing and education programs, along with consumer marketing in select country markets.

For instance, we increased our sales presence in APAC in the first half of 2020 and will continue to strategically invest in regions as we deem appropriate for long-term success.

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

Overall, we expect International revenues to grow at a faster rate than Americas' revenues for the foreseeable future due to our continued investment in international market expansion, the size of the market opportunities and our relatively low market penetration of these regions.

• Increasing Competition.

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

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

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

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

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

During 2020, our marketing and consumer engagement included

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

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

driving more consumers to dental professionals for those treatments.

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

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

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

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

COVID-19 Update

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Furthermore, if our employees or their families are sickened by COVID-19, our ability to respond or mitigate the impact of COVID-19 may be adversely impacted.

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

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

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

2021 Expenses

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

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

▪ Manufacturing capacity and facilities to enhance our regional capabilities;

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

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

We believe these investments position us to take advantage of a recovering market and thereafter once markets return to greater normalcy, increasing our revenues and growing our market share over the long term, but they could negatively impact our results of operations, particularly in the near term.

Relocating Headquarters

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

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

There were no layoffs associated with this move.

International doctor utilization rate increased to 17.5 cases per doctor in 2021 compared to 14.5 cases per doctor in 2020 and 13.8 cases per doctor in 2019 .

Results of Operations

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We group our operations into two reportable segments:

Clear Aligner segment and Imaging Systems and CAD/CAM Services (“ Systems and Services ”) segment.

Clear Aligner segment and Systems and Services segment.

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

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

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

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

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

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

• Non-Case products include, but are not limited to, retention products, Invisalign training, adjusting tools used by dental professionals during the course of treatment and, more recently, Consumer Products that are complementary to our doctor-prescribed principal products such as aligner cases (clamshells), teeth whitening products, cleaning solutions (crystals, foam and other material) and other oral health products available in certain e-commerce channels in the U.S.

• Our Systems and Services segment consists of our iTero intraoral scanning systems, which includes a single hardware platform and restorative or orthodontic software options.

Our services include subscription software, disposables, rentals, pay per scan services, as well as exocad’s CAD/CAM software solutions that integrate workflows to dental labs and dental practices.

Net revenues for our Clear Aligner and Systems and Services segments by region for the year ended December 31, 2021, 2020 and 2019 are as follows (in millions):

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Certain tables may not sum or recalculate due to rounding.

Clear Aligner Case Volume by Region

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

Clear Aligner Case Volume

Case volume data which represents Clear Aligner case shipments for the year ended December 31, 2021, 2020 and 2019 is as follows (in thousands):

Year Ended December 31, Year Ended December 31,

Region 2020 2019 Change 2019 2018 Change

Americas 886.5 867.3 19.2 2.2 % 867.3 780.7 86.6 11.1 %

International 758.9 669.8 89.0 13.3 % 669.8 499.9 169.9 34.0 %

2021 2020 Change 2020 2019 Change

Total case volume 2,547.7 1,645.3 902.4 54.8 % 1,645.3 1,537.1 108.3 7.0 %

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Certain tables may not sum or recalculate due to rounding.

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

Total net revenues increased by $1,480.6 million in 2021 as compared to 2020 primarily as a result of increases in Clear Aligner volume of 54.8% and an increase in the number of scanners recognized across most regions.

Clear Aligner - Americas

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

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

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

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

Americas net revenues increased by $534.5 million in 2021 as compared to 2020 primarily due to a 57.6% increase in volume which resulted in higher net revenues of $582.1 million, partially offset by lower ASP that decreased net revenues by

$47.7 million.

Lower ASP was mostly due to higher promotional discounts which decreased revenue by $52.1 million and net deferrals which decreased revenues by $40.3 million.

The decreases in ASP were partially offset by favorable product mix shift which increased net revenues by $34.2 million and favorable exchanges rates which increased net revenues by $12.2 million.

Clear Aligner - International

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

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

These reductions were partially offset by July 2019 price increases across most products along with a benefit from going direct in several additional countries and therefore we now recognize direct sales at full ASP rather than the discounted distributor ASP which combined, increased net revenues by $20.9 million and favorable foreign exchange rates increased net revenues by $14.5 million.

International net revenues increased by $533.2 million in 2021 as compared to 2020 primarily due to a 51.6% increase in volume which resulted in higher net revenues by $497.8 million.

Higher ASP increased net revenues by $35.4 million mostly due to favorable exchange rates which increased net revenues by $61.8 million and favorable product mix shift which increased net revenues by $27.6 million.

The increases in ASP were partially offset by higher net deferrals which decreased net revenues by $49.6 million.

Clear Aligner - Non-Case

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

Non-case net revenues increased by $77.8 million in 2021 compared to 2020 due to increased volume for retention products across all regions primarily driven by Vivera retainers.

Systems and Services

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

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

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

Systems and Services net revenues increased by $335.0 million in 2021 as compared to 2020 due to a higher number of scanners recognized which increased net revenues by $186.3 million.

Net revenues also increased by $97.7 million as a result of higher iTero service revenues mostly due to a larger scanner install base and additional exocad CAD/CAM revenues.

Additionally, higher scanner ASP increased net revenues by $51.0 million mostly due to favorable product mix shift towards higher priced scanners such as the iTero Element Plus Series.

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

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Certain tables may not sum or recalculate due to rounding.

Cost of net revenues includes personnel-related costs including payroll and stock-based compensation for staff involved in the production process, the cost of materials, packaging, shipping costs, depreciation on capital equipment and facilities used in the production process, amortization of acquired intangible assets and training costs.

Cost of net revenues includes personnel-related costs including payroll and stock-based compensation for staff involved in the production process, the cost of materials, packaging, freight and shipping related costs, depreciation on capital equipment and facilities used in the production process, amortization of acquired intangible assets and training costs.

Clear Aligner

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

The gross margin percentage increased in 2021 as compared to 2020 primarily due to manufacturing efficiencies driven by higher production volumes.

Systems and Services

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

The gross margin percentage increased in 2021 as compared to 2020 as a result of higher ASP from a product mix shift and an increase in service revenues which was partially offset by higher freight costs.

Selling, general and administrative (in millions):

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

industry events, legal and outside service costs, equipment and maintenance costs, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and Information Technology (“IT”).

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

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

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

Selling, general and administrative expense generally includes personnel-related costs, including payroll, stock-based compensation and commissions for our sales force, marketing and advertising expenses including media, public relations, marketing materials, clinical education, trade shows and industry events, legal and outside service costs, equipment, software and maintenance costs, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and Information Technology (“IT”).

Selling, general and administrative expense increased in 2021 compared to 2020 primarily due to higher compensation related costs of $235.0 million from higher salaries, fringe benefits, incentive bonuses and commissions due to increased headcount as we continue to invest in sales and marketing to penetrate into new markets as well as higher advertising and marketing costs of $183.4 million.

Research and development (in millions):

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Certain tables may not sum or recalculate due to rounding.

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

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

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

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

Year Ended December 31, Year Ended December 31,

2020 2019 Change 2019 2018 Change

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

% of net revenues — % 1.0 % 1.0 % — %

Changes and percentages are based on actual values.

Certain tables may not sum or recalculate due to rounding.

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

Litigation settlement gain (in millions):

Year Ended December 31, Year Ended December 31,

2020 2019 Change 2019 2018 Change

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

% of net revenues — % (2.1) % (2.1) % — %

Changes and percentages are based on actual values.

Certain tables may not sum or recalculate due to rounding.

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

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

Research and development expense increased in 2021 compared to 2020 primarily due to higher compensation costs including higher salaries, fringe benefits and incentive bonuses mainly from increased headcount as we continue to focus our investments in innovation and research.

Income from operations (in millions):

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Clear Aligner

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

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

Operating margin percentage increased in 2021 compared to 2020 due to higher gross margins and operating leverage on higher net revenues.

Systems and Services

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

Operating margin percentage increased in 2021 compared to 2020 due to operating leverage on higher net revenues and higher gross margins due to a favorable mix shift towards higher priced scanners.

Interest income (in millions):

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Certain tables may not sum or recalculate due to rounding.

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

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

Interest income generally includes interest earned on cash, cash equivalents and investment balances.

In 2021, there was no change to interest income compared to 2020.

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

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Certain tables may not sum or recalculate due to rounding.

Other income (expense), net, includes foreign exchange gains and losses, gains and losses on foreign currency forward contracts, interest expense, gains and losses on equity investments and other miscellaneous charges.

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

acquisition recorded in 2020.

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

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

Year Ended December 31, Year Ended December 31,

2020 2019 Change 2019 2018 Change

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

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

Changes and percentages are based on actual values.

Certain tables may not sum or recalculate due to rounding.

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

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

Other income (expense), net, generally includes foreign exchange gains and losses, gains and losses on foreign currency forward contracts, interest expense, gains and losses on equity investments and other miscellaneous charges.

Other income (expense), net, increased in 2021 compared to 2020 primarily due to a $43.4 million gain related to the SDC arbitration award recognized in the first quarter of 2021, a $10.2 million loss on a foreign currency forward contract related to the exocad acquisition recognized in 2020 and an increase due to fair value changes relating to our investments in privately held companies recognized during 2021 compared to 2020.

These increases were partially offset by net foreign exchange losses in 2021 as compared to net foreign exchange gains in 2020.

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

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During 2020, we completed an intra-entity transfer of certain intellectual property rights and fixed assets to our Swiss subsidiary, where our EMEA regional headquarters is located beginning January 1, 2020.

The increase in our effective tax rate for the year ended December 31, 2021 compared to 2020 is primarily attributable to the recognition of tax benefits associated with the intra-entity transfer of certain intellectual property rights and fixed assets during the year ended December 31, 2020.

During 2020, we completed an intra-entity transfer of certain intellectual property rights and fixed assets to our Swiss entity.

The transfer of intellectual property rights did not result in a taxable gain;

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Consequently, this transaction resulted in the recognition of a deferred tax asset and related one-time tax benefit of approximately $1,493.5 million during the year ended December 31, 2020, which is the net impact of the deferred tax asset recognized as a result of the additional Swiss tax deductible basis in the transferred assets and certain costs related to the transfer of fixed assets and inventory.

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

The decrease in our effective tax rate for the year ended December 31, 2020 compared to the same period in 2019 is primarily attributable to the recognition of a deferred tax asset related to the intra-entity transfer of certain intellectual property rights during the year ended December 31, 2020.

The amortization of this deferred tax asset depends on the

profitability of our Swiss headquarters and the recognition of this tax benefit is allowed for a maximum recovery period of 15 years.

Liquidity and Capital Resources

We fund our operations from product sales.

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

Liquidity and Trends

As of December 31, 2021 and 2020, we had the following cash and cash equivalents and short-term and long-term marketable securities (in thousands):

Cash and cash equivalents $ 1,099,370 $ 960,843

Marketable securities, short-term 71,972 —

Marketable securities, long-term 125,320 —

Total $ 1,296,662 $ 960,843

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

government treasury bonds, U.S.

government agency bonds, commercial paper and certificates of deposit.

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

As of December 31, 2021 and 2020, approximately $713.8 million and $412.5 million, respectively, of cash, cash equivalents and marketable securities was held by our foreign subsidiaries.

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

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

We believe that

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

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

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

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

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

Cash flows (in thousands):

operations as we generate sufficient domestic operating cash flow and have access to external funding under our $300.0 million revolving line of credit.

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

Our material cash requirements as of December 31, 2021 are as below:

• Our purchase commitments for goods and services, excluding capital expenditures, totaled $1,278.0 million, of which $731.0 million will be payable within the next 12 months.

These commitments primarily relate to agreements with contract manufacturers and suppliers, sales and marketing services, research and development services and technological services.

• We expect our investments in capital expenditures to exceed $350.0 million for the next 12 months.

Capital expenditures primarily relate to building construction and improvements as well as additional manufacturing capacity to support our international expansion.

This includes our planned investment in an aligner fabrication facility in Wroclaw, Poland, which is expected to begin serving doctors in 2022, as a part of our strategy to bring operational facilities closer to customers .

As we continue growing, we intend to expand our investments in research and development, manufacturing, treatment planning, sales and marketing operations to meet local and regional demand.

• We have future operating lease payments of $160.8 million, which includes $17.8 million for leases that have not yet commenced as of December 31, 2021.

Refer to Note 4 “ Leases ” of the Notes to Consolidated Financial Statements for details on the lease payments.

• We have $725.0 million available for repurchase under the stock repurchase program authorized by our Board of Directors in May 2021.

Our stock repurchase program is subject to periodic evaluations to determine when and if repurchases are in the best interests of our stockholders, taking into account prevailing market conditions.

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

Subsequent to year end, during February 2022, we repurchased on the open market approximately 0.1 million shares of our common stock at an average price of $522.35 per share, including commissions, for an aggregate purchase price of $75.0 million.

Sources and Use of Cash

The following table summarizes our Consolidated Statements of Cash Flows for the year ended December 31, 2021, 2020 and 2019 (in thousands):

Year Ended December 31,

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Operating Activities

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

Significant non-cash activities

• Deferred taxes of $1.5 billion related to the one-time tax benefit associated with the intra-entity sale of certain intellectual property rights;

For the year ended December 31, 2021, cash flows from operations of $1,172.5 million resulted primarily from our net income of approximately $772.0 million as well as the following:

Significant adjustments to net income

• Stock-based compensation of $114.3 million related to equity awards granted to employees and directors;

• Depreciation and amortization of $108.7 million related to our investments in property, plant and equipment and intangible assets;

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

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

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

• Gain related to our SDC arbitration award of $43.4 million.

Significant changes in working capital

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

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

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

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

Significant non-cash activities

• Increase of $462.6 million in deferred revenues primarily related to increased case volumes in our Clear Aligner segment, increased scanner volumes in our Systems and Services segment and timing of revenue recognition;

• Increase of $262.1 million in accounts receivable which is primarily a result of the increase in sales;

• Increase of $158.5 million in accrued and other long-term liabilities and an increase of $124.6 million in prepaid expenses and other assets due to the timing of payment and activities;

• Increase of $112.5 million in inventories to support our demand, including safety stock, due to shipping delays during the COVID-19 pandemic as well as long lead times with our suppliers.

For the year ended December 31, 2020, cash flows from operations of $662.2 million resulted primarily from our net income of approximately $1,775.9 million as well as the following:

Significant adjustments to net income

• Deferred taxes of $1,491.6 million related to the one-time tax benefit associated with the intra-entity sale of certain intellectual property rights;

• Stock-based compensation of $98.4 million related to equity awards granted to employees and directors;

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

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

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

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

Significant changes in working capital

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

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

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

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

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

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

Investing Activities

Net cash used in investing activities was $563.4 million for the year ended December 31, 2021 and primarily consisted of purchases of property, plant and equipment of $401.1 million and purchases of marketable securities of $200.9 million, which were partially offset by $43.4 million of proceeds from our SDC arbitration award.

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

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

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

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

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

Financing Activities

Net cash used in financing activities was $458.3 million for the year ended December 31, 2021 which consisted of payments related to our accelerated stock repurchase agreements of $375.0 million and payroll taxes paid for equity awards through share withholdings of $108.9 million which were partially offset by $25.6 million of proceeds from the issuance of common stock.

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

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

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

Common Stock Repurchases

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

Credit Facility

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

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

Contractual Obligations / Off Balance Sheet Arrangements

The impact that our contractual obligations as of December 31, 2020 are expected to have on our liquidity and cash flows in future periods is as follows (in thousands):

Payments Due by Period

Total Less than

Years More than

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

Unconditional purchase obligations 704,961 474,204 203,977 26,780 —

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

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

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

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

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

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

Indemnification Provisions

In the normal course of business to facilitate transactions in our services and products, we indemnify certain parties:

customers, vendors, lessors, and other parties with respect to certain matters, including, but not limited to, services to be provided by us and intellectual property infringement claims made by third parties.

In addition, we have entered into indemnification agreements with our directors and our executive officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers.

Several of these agreements limit the time within which an indemnification claim can be made and the amount of the claim.

It is not possible to make a reasonable estimate of the maximum potential amount under these indemnification agreements due to the unique facts and circumstances involved in each particular agreement.

Additionally, we have a limited history of prior indemnification claims and the payments we have made under such agreements have not had a material adverse effect on our results of operations, cash flows or financial position.

However, to the extent that valid indemnification claims arise in the future, future payments by us could be significant and could have a material adverse effect on our results of operations or cash flows in a particular period.

As of December 31, 2020, we did not have any material indemnification claims that were probable or reasonably possible.

Critical Accounting Policies and Estimates

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

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

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

We evaluate our estimates on an on-going basis and use authoritative pronouncements, historical experience and other assumptions as the basis for making the estimates.

Actual results could differ from those estimates.

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

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

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

We enter into sales contracts that may consist of multiple distinct performance obligations where certain performance obligations of the sales contract are not delivered in one reporting period.

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

We identify a performance obligation as distinct if both of the following criteria are met:

the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.

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.

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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.

Clear Aligner

We enter into contracts (“treatment plan(s)”) that involve multiple future performance obligations.

Invisalign Comprehensive, Invisalign First, Invisalign Moderate, and Lite and Express Packages include optional additional aligners at no charge for a certain period of time ranging from six months to five years after initial shipment, and Invisalign Go includes optional additional aligners at no charge for a period of up to two years after initial shipment.

Our treatment plans comprise the following performance obligations that also represent distinct deliverables:

initial aligners, additional aligners, case refinement, and replacement aligners.

We take the practical expedient to consider shipping and handling costs as activities to fulfill the performance obligation.

We allocate revenues for each treatment plan based on each unit’s SSP.

Management considers a variety of factors such as historical sales, costs, and gross margin, which may vary over time depending upon the unique facts and circumstances related to each performance obligation in making these estimates.

We also consider usage rates, which is the number of times a customer is expected to order additional aligners.

We allocate revenues for each clear aligner treatment plan based on each unit’s SSP.

Management considers a variety of factors such as same or similar product historical sales, costs, and gross margin, which may vary over time depending upon the unique facts and circumstances related to each performance obligation in making these estimates.

For treatment plans with multiple future performance obligations, we also consider usage rates, which is the number of times a customer is expected to order more aligners after the initial shipment.

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

We recognize the revenues upon shipment, as the customers obtain physical possession and we have enforceable rights to payment.

As we collect most consideration upfront, we consider whether a significant financing component exists;

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.

The intraoral scanner sales price includes one year of warranty and unlimited scanning services.

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 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.

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

In certain situations, we offer promotions in which the discount will increase depending upon the volume purchased over time.

We concluded that in these situations, the promotions can represent either variable consideration or options, depending upon the specifics of the promotion.

In the event the promotion contains an option, the option is considered a material right and, therefore, included in the accounting for the initial arrangement.

We estimate the average anticipated discount over the lifetime of the promotion or contract, and apply that discount to each unit as it is sold.

On a quarterly basis, we review our estimates and, if needed, updates are made and changes are applied prospectively.

We estimate the SSP of each element in a scanner system and services sale taking into consideration same or similar product historical prices as well as our discounting strategies.

Unfulfilled Performance Obligations for Clear Aligners and Scanners

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 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.

Contract Balances

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.

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

If the revenue recognition exceeds the billing, the exceeded amount is considered unbilled receivable and a contract asset.

Conversely, if the billing occurs prior to the revenue recognition, the amount is considered deferred revenue and a contract liability.

Goodwill and Finite-Lived Acquired Intangible Assets and Long-Lived Assets

Goodwill represents the excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets acquired in business combinations and is allocated to the respective reporting units based on relative synergies generated.

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 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.

In performing the qualitative assessment, we identify and consider the significance of relevant key factors, events, and circumstances that affect the fair value of our reporting units.

These factors include external factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such as our actual and planned financial performance.

We also give consideration to the difference between the reporting unit fair value and carrying value as of the most recent date a fair value measurement was performed.

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

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

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

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

Finite-Lived Acquired Intangible Assets and Long-Lived Assets

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

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

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

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

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

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

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

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

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

Business Combination

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

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

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

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

The estimated revenues expected to be recognized in the future related to our unfulfilled performance obligations, including deferred revenues and backlog, as of December 31, 2021 is $1,307.3 million.

This 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 all of which involve significant judgement.

Generally, our deferred revenue will be recognized over a period of one to five years .

Goodwill and Finite-Lived Acquired Intangible Assets

Goodwill and acquired intangible assets with finite lives are subject to impairment testing and are reviewed for impairment when events or circumstances indicate that the carrying value of an asset is not recoverable and the carrying amount exceeds its fair value.

We evaluate the recoverability of the carrying value of these identifiable intangible assets based on estimated undiscounted cash flows to be generated from such assets.

If the cash flow estimates or the significant operating assumptions upon which they are based change in the future, we may be required to record impairment charges.

Assumptions and estimates about future values and remaining useful lives of our acquired intangible assets are complex and subjective.

They can be affected by external factors such as industry and economic trends and internal factors such as changes in our business strategy and internal forecasts.

Our ongoing consideration of all these factors could result in impairment charges in the future.

If we were to have impairments to goodwill or finite-lived acquired intangible assets, it could adversely affect our operating results.

During the fiscal year 2021 and 2020, we did not have any impairment charges related to our goodwill or acquired intangible assets.

Accounting for Income Taxes

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

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

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

This process involves us estimating our current tax exposure under the applicable tax laws and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.

These differences result in deferred tax assets and liabilities which are included in our Consolidated Balance Sheet.

We account for uncertainty in income taxes pursuant to authoritative guidance based on a two-step approach to recognize and measure uncertain tax positions taken or expected to be taken in a tax return.

The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit based on its technical merits, including resolution of any related appeals or litigation processes.

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.

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.

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.

We are subject to income taxes in the U.S.

and numerous foreign jurisdictions.

The evaluation of our uncertain tax positions involves significant judgment in the interpretation and application of U.S.

GAAP and complex domestic and international tax laws related to the allocation of international taxation rights between countries.

We are also required to evaluate the realizability of our deferred tax assets on an ongoing basis in accordance with U.S.

GAAP, which requires the assessment of both of our historical and future performance as well as other relevant factors.

Realization of our deferred tax assets is dependent on our ability to generate future taxable income which is determined based on assumptions such as estimated growth rates in revenues, gross margins, future cash flows and discount rates.

The accuracy of these estimates could be affected by unforeseen events or actual results, and the sustainability of our future tax benefits is dependent upon the acceptance of these valuation estimates and assumptions by the taxing authorities.

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

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

Accounting for Legal Proceedings and Litigations

We are involved in legal proceedings on an ongoing basis.

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

If only a range of

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

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

Accounting for Legal Proceedings and Litigation

Estimates of probable losses resulting from litigation are inherently difficult to make, particularly when the matters are in early procedural stages with incomplete facts and information.

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What changed 10-K

Item 7. Management’s Discussion and Analysis