Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
A discussion regarding our financial condition and results of operations for fiscal 2021 compared to fiscal 2020 is presented under Results of Operations of this Form 10-K. Discussions regarding our financial condition and results of operations for fiscal 2020 compared to 2019 have been omitted from this Annual Report on Form 10-K, but can be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 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 .
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 and conversion; and (iv) orthodontic utilization.
We strive to deliver on each of our strategic growth drivers through a variety of interrelated enterprise-wide efforts including:
• 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; and
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◦ 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
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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; and
◦ Number of employees was 22,540 as of December 31, 2021, an increase of 24.7% year-over-year.
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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. For the fourth quarter of 2021, 96.4% of Invisalign cases submitted by North American orthodontists were submitted digitally. Our annual utilization rates for the last three fiscal years are as follows:
* Invisalign utilization rates are calculated by 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.
• North America: Utilization rate among our North American orthodontist customers increased to 98.1 cases per doctor in 2021 compared to 67.3 cases per doctor in 2020 and 65.0 cases per doctor in 2019 and the utilization rate among our North American GP customers increased to 14.3 cases per doctor in 2021 compared to 9.6 cases per doctor in 2020 and 9.5 cases per doctor in 2019.
• International: 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 .
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Results of Operations
Net Revenues by Reportable Segment
We group our operations into two reportable segments: Clear Aligner segment and Systems and Services segment.
• Our Clear Aligner segment consists of Comprehensive Products, Non-Comprehensive Products and Non-Case revenues as defined below:
• Comprehensive Products include, but are not limited to, Invisalign Comprehensive and Invisalign First.
• Non-Comprehensive Products include, but are not limited to, Invisalign Moderate, Lite and Express packages and Invisalign Go and Invisalign Go Plus.
• 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):
Year Ended December 31, Year Ended December 31,
Net Revenues 2021 2020 Change 2020 2019 Change
Clear Aligner revenues:
Americas $ 1,544.8 $ 1,010.2 $ 534.5 52.9 % $ 1,010.2 $ 1,022.1 $ (11.9) (1.2) %
International 1,498.7 965.4 533.2 55.2 % 965.4 881.4 84.1 9.5 %
Non-case 203.7 125.8 77.8 61.9 % 125.8 122.3 3.5 2.9 %
Total Clear Aligner net revenues
$ 3,247.1 $ 2,101.5 $ 1,145.6 54.5 % $ 2,101.5 $ 2,025.8 $ 75.7 3.7 %
Systems and Services net revenues 705.5 370.5 335.0 90.4 % 370.5 381.0 (10.6) (2.8) %
Total net revenues $ 3,952.6 $ 2,471.9 $ 1,480.6 59.9 % $ 2,471.9 $ 2,406.8 $ 65.1 2.7 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
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,
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 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
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 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
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$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 $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 $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 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):
Year Ended December 31, Year Ended December 31,
2021 2020 Change 2020 2019 Change
Clear Aligner
Cost of net revenues $ 772.7 $ 569.3 $ 203.4 $ 569.3 $ 526.0 $ 43.3
% of net segment revenues 23.8 % 27.1 % 27.1 % 26.0 %
Gross profit $ 2,474.4 $ 1,532.1 $ 942.2 $ 1,532.1 $ 1,499.7 $ 32.4
Gross margin % 76.2 % 72.9 % 72.9 % 74.0 %
Systems and Services
Cost of net revenues $ 244.5 $ 139.4 $ 105.1 $ 139.4 $ 136.9 $ 2.5
% of net segment revenues 34.7 % 37.6 % 37.6 % 35.9 %
Gross profit $ 461.0 $ 231.1 $ 229.9 $ 231.1 $ 244.2 $ (13.1)
Gross margin % 65.3 % 62.4 % 62.4 % 64.1 %
Total cost of net revenues $ 1,017.2 $ 708.7 $ 308.5 $ 708.7 $ 662.9 $ 45.8
% of net revenues 25.7 % 28.7 % 28.7 % 27.5 %
Gross profit $ 2,935.4 $ 1,763.2 $ 1,172.1 $ 1,763.2 $ 1,743.9 $ 19.3
Gross margin % 74.3 % 71.3 % 71.3 % 72.5 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Cost of net revenues includes personnel-related costs including payroll and stock-based compensation for staff involved in the production process, the cost of materials, packaging, freight and shipping related costs, depreciation on capital equipment and facilities used in the production process, amortization of acquired intangible assets and training costs.
Clear Aligner
The gross margin percentage increased in 2021 as compared to 2020 primarily due to manufacturing efficiencies driven by higher production volumes.
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Systems and Services
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):
Year Ended December 31, Year Ended December 31,
2021 2020 Change 2020 2019 Change
Selling, general and administrative $ 1,708.6 $ 1,200.8 $ 507.9 $ 1,200.8 $ 1,072.1 $ 128.7
% of net revenues 43.2 % 48.6 % 48.6 % 44.5 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Selling, general and administrative expense generally includes personnel-related costs, including payroll, stock-based compensation and commissions for our sales force, marketing and advertising expenses including media, 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):
Year Ended December 31, Year Ended December 31,
2021 2020 Change 2020 2019 Change
Research and development $ 250.3 $ 175.3 $ 75.0 $ 175.3 $ 157.4 $ 17.9
% of net revenues 6.3 % 7.1 % 7.1 % 6.5 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Research and development expense generally includes personnel-related costs, including payroll and stock-based compensation, outside service costs associated with the research and development of new products and enhancements to existing products, software, equipment, material and maintenance costs, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and IT.
Research and development expense increased in 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):
Year Ended December 31, Year Ended December 31,
2021 2020 Change 2020 2019 Change
Clear Aligner
Income from operations $ 1,325.9 $ 768.0 $ 557.8 $ 768.0 $ 836.0 $ (67.9)
Operating margin % 40.8 % 36.5 % 36.5 % 41.3 %
Systems and Services
Income from operations $ 259.1 $ 96.1 $ 163.1 $ 96.1 $ 137.7 $ (41.7)
Operating margin % 36.7 % 25.9 % 25.9 % 36.1 %
Total income from operations 1
$ 976.4 $ 387.2 $ 589.2 $ 387.2 $ 542.5 $ (155.3)
Operating margin % 24.7 % 15.7 % 15.7 % 22.5 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
1 Refer to Note 18 “Segments and Geographical Information” of the Notes to Consolidated Financial Statements for details on unallocated corporate expenses and the reconciliation to Consolidated Income from Operations.
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Clear Aligner
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 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):
Year Ended December 31, Year Ended December 31,
2021 2020 Change 2020 2019 Change
Interest income $ 3.1 $ 3.1 $ — $ 3.1 $ 12.5 $ (9.4)
% of net revenues 0.1 % 0.1 % 0.1 % 0.5 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Interest income generally includes interest earned on cash, cash equivalents and investment balances. In 2021, there was no change to interest income compared to 2020.
Other income (expense), net (in millions):
Year Ended December 31, Year Ended December 31,
2021 2020 Change 2020 2019 Change
Other income (expense), net $ 32.9 $ (11.3) $ 44.3 $ (11.3) $ 7.7 $ (19.0)
% of net revenues 0.8 % (0.5) % (0.5) % 0.3 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Other income (expense), net, generally includes foreign exchange gains and losses, gains and losses on foreign currency forward contracts, interest expense, gains and losses on equity investments and other miscellaneous charges.
Other income (expense), net, 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):
Year Ended December 31, Year Ended December 31,
2021 2020 Change 2020 2019 Change
Provision for (benefit from) income taxes $ 240.4 $ (1,396.9) $ 1,637.3 $ (1,396.9) $ 112.3 $ (1,509.3)
Effective tax rates 23.7 % (368.6) % (368.6) % 20.0 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
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; however, it did result in a step-up of the Swiss tax deductible basis in the transferred assets, and accordingly, created a temporary difference between the book basis and the tax basis of such intellectual property rights. Consequently, this transaction resulted in the recognition of a deferred tax asset and related one-time tax benefit of approximately $1,493.5 million during the year ended December 31, 2020, which is the net impact of the deferred tax asset recognized as a result of the additional Swiss tax deductible basis in the transferred assets and certain costs related to the transfer of fixed assets and inventory. The amortization of this deferred tax asset depends on the
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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
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):
December 31,
2021 2020
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
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 $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.
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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,
2021 2020 2019
Net cash provided by (used in):
Operating activities $ 1,172,544 $ 662,174 $ 747,270
Investing activities (563,430) (231,506) (350,444)
Financing activities (458,332) (30,808) (485,540)
Effects of foreign exchange rate changes on cash, cash equivalents, and restricted cash (12,117) 10,480 2,282
Net increase (decrease) in cash, cash equivalents, and restricted cash
$ 138,665 $ 410,340 $ (86,432)
Operating Activities
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; and
• Gain related to our SDC arbitration award of $43.4 million.
Significant changes in working capital
• 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; and
• 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; and
• Depreciation and amortization of $93.5 million related to our investments in property, plant and equipment and intangible assets.
Significant changes in working capital
• 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; and
• Increase of $52.2 million in accounts payable due to timing of certain invoice payments.
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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.
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.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures at the date of the financial statements. We 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.
We believe the following critical accounting policies and estimates affect our more significant judgments used in the preparation of our consolidated financial statements. For further information on all of our significant accounting policies, see Note 1 “ Summary of Significant Accounting Policies ” of the Notes to Consolidated Financial Statements under Item 8 .
Revenue Recognition
Our revenues are derived primarily from the sale of aligners, scanners, and services from our Clear Aligner and Systems and Services segments. We enter into sales contracts that may consist of multiple distinct performance obligations where certain performance obligations of the sales contract are not delivered in one reporting period. We measure and allocate revenues according to ASC 606-10, “ Revenues from Contracts with Customers. ”
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. This is because the contract consideration is allocated to each performance obligation, delivered or undelivered, at the inception of the contract based on the SSP of each distinct performance obligation.
We allocate 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 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.
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Unfulfilled Performance Obligations for Clear Aligners and Scanners
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 are subject to income taxes in the U.S. and numerous foreign jurisdictions. The evaluation of our uncertain tax positions involves significant judgment in the interpretation and application of U.S. GAAP and complex domestic and international tax laws related to the allocation of international taxation rights between countries. We are also required to evaluate the realizability of our deferred tax assets on an ongoing basis in accordance with U.S. GAAP, which requires the assessment of both of our historical and future performance as well as other relevant factors. Realization of our deferred tax assets is dependent on our ability to generate future taxable income which is determined based on assumptions such as estimated growth rates in revenues, gross margins, future cash flows and discount rates. The accuracy of these estimates could be affected by unforeseen events or actual results, and the sustainability of our future tax benefits is dependent upon the acceptance of these valuation estimates and assumptions by the taxing authorities.
Accounting for Legal Proceedings and 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. The final outcome of legal proceedings is dependent on many variables difficult to predict and, therefore, the ultimate cost to entirely resolve such matters may be materially different than the amount of current estimates. Consequently, new information or changes in judgments and estimates could have a material adverse effect on our business, financial condition, and results of operations or cash flows.
Recent Accounting Pronouncements
See Note 1 “ Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Item 8 for a discussion of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein.