ALIGN TECHNOLOGY INC 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Management on Internal Control over Financial Reporting 55 Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 56 Consolidated Statements of Operations for the year ended December 31, 2021, 2020 and 2019 58 Consolidated Statements of Comprehensive Income for the year ended December 31, 2021, 2020 and 2019 59 Consolidated Balance Sheets as of December 31, 2021 and 2020 60 Consolidated Statements of Stockholders’ Equity for the year ended December 31, 2021, 2020 and 2019 61 Consolidated Statements of Cash Flows for the year ended December 31, 2021, 2020 and 2019 62 Notes to Consolidated Financial Statements 63 54 REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of Align is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed by, or under supervision of, our CEO and CFO, and effected by the board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: • pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Align; • provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Align are being made only in accordance with authorizations of management and directors of Align; and • provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Align’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on our assessment, management has concluded that, as of December 31, 2021, our internal control over financial reporting was effective based on criteria in Internal Control - Integrated Framework (2013) issued by the COSO . The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein. / S / JOSEPH M. HOGAN Joseph M. Hogan President and Chief Executive Officer February 25, 2022 / S / JOHN F. MORICI John F. Morici Chief Financial Officer and Executive Vice President, Global Finance February 25, 2022 55 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Align Technology, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Align Technology, Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate 56 because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below , providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition – Determination of Standalone Selling Price of Distinct Performance Obligations in Clear Aligner Contracts As described in Notes 1 and 18 to the consolidated financial statements, the Company recognized net revenues of $3.2 billion from its Clear Aligner segment for the year ended December 31, 2021. The Company enters into contracts (“treatment plans”) that involve multiple future performance obligations. Management identifies 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, 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. 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. Management also considers usage rates, which is the number of times a customer is expected to order additional aligners. Management’s process for estimating usage rates requires significant judgment and evaluation of inputs, including historical usage data by region, country and channel. The principal considerations for our determination that performing procedures related to revenue recognition and the determination of standalone selling price of distinct performance obligations in Clear Aligner contracts is a critical audit matter are the significant judgment by management in determining the estimate of standalone selling price, which includes significant assumptions related to usage rates for each distinct performance obligation. This in turn led to significant auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s determination of the estimates of standalone selling price and usage rates for each distinct performance obligation. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to revenue recognition, including controls over the determination of standalone selling price for each distinct performance obligation in the Company’s Clear Aligner contracts. These procedures also included, among others, (i) testing management’s process for determining the estimate of standalone selling price, which included testing the completeness and accuracy of inputs used and evaluating the reasonableness of factors considered by management related to same or similar product historical sales and usage rates, and (ii) testing management’s process for estimating usage rates, which included evaluating the reasonableness of inputs evaluated by management related to historical usage data by region, country and channel. /s/ PricewaterhouseCoopers LLP San Jose, California February 25, 2022 We have served as the Company’s auditor since 1997. 57 ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year Ended December 31, 2021 2020 2019 Net revenues $ 3,952,584 $ 2,471,941 $ 2,406,796 Cost of net revenues 1,017,229 708,706 662,899 Gross profit 2,935,355 1,763,235 1,743,897 Operating expenses: Selling, general and administrative 1,708,640 1,200,757 1,072,053 Research and development 250,315 175,307 157,361 Impairments and other charges (gains), net — — 22,990 Litigation settlement gain — — ( 51,000 ) Total operating expenses 1,958,955 1,376,064 1,201,404 Income from operations 976,400 387,171 542,493 Interest income and other income (expense), net: Interest income 3,103 3,125 12,482 Other income (expense), net 32,920 ( 11,347 ) 7,676 Total interest income and other income (expense), net 36,023 ( 8,222 ) 20,158 Net income before provision for (benefit from) income taxes and equity in losses of investee 1,012,423 378,949 562,651 Provision for (benefit from) income taxes 240,403 ( 1,396,939 ) 112,347 Equity in losses of investee, net of tax — — 7,528 Net income $ 772,020 $ 1,775,888 $ 442,776 Net income per share: Basic $ 9.78 $ 22.55 $ 5.57 Diluted $ 9.69 $ 22.41 $ 5.53 Shares used in computing net income per share: Basic 78,917 78,760 79,424 Diluted 79,670 79,230 80,100 The accompanying notes are an integral part of these consolidated financial statements. 58 ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Year Ended December 31, 2021 2020 2019 Net income $ 772,020 $ 1,775,888 $ 442,776 Other comprehensive income (loss): Change in foreign currency translation adjustment, net of tax ( 38,680 ) 44,383 1,787 Change in unrealized gains (losses) on investments, net of tax ( 495 ) ( 194 ) 299 Other comprehensive income (loss) ( 39,175 ) 44,189 2,086 Comprehensive income $ 732,845 $ 1,820,077 $ 444,862 The accompanying notes are an integral part of these consolidated financial statements. 59 ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) December 31, 2021 2020 ASSETS Current assets: Cash and cash equivalents $ 1,099,370 $ 960,843 Marketable securities, short-term 71,972 — Accounts receivable, net of allowance for doubtful accounts of $ 9,245 and $ 10,239 , respectively 897,198 657,704 Inventories 230,230 139,237 Prepaid expenses and other current assets 195,305 91,754 Total current assets 2,494,075 1,849,538 Marketable securities, long-term 125,320 — Property, plant and equipment, net 1,081,926 734,721 Operating lease right-of-use assets, net 121,257 82,553 Goodwill 418,547 444,817 Intangible assets, net 109,709 130,072 Deferred tax assets 1,533,767 1,552,831 Other assets 57,509 35,151 Total assets $ 5,942,110 $ 4,829,683 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 163,886 $ 142,132 Accrued liabilities 607,315 405,582 Deferred revenues 1,152,870 777,887 Total current liabilities 1,924,071 1,325,601 Income tax payable 118,072 105,748 Operating lease liabilities 102,656 64,445 Other long-term liabilities 174,597 100,024 Total liabilities 2,319,396 1,595,818 Commitments and contingencies (Notes 10 and 11) Stockholders’ equity: Preferred stock, $ 0.0001 par value ( 5,000 shares authorized; none issued) — — Common stock, $ 0.0001 par value ( 200,000 shares authorized; 78,710 and 78,860 issued and outstanding, respectively) 8 8 Additional paid-in capital 999,006 974,556 Accumulated other comprehensive income (loss), net 4,326 43,501 Retained earnings 2,619,374 2,215,800 Total stockholders’ equity 3,622,714 3,233,865 Total liabilities and stockholders’ equity $ 5,942,110 $ 4,829,683 The accompanying notes are an integral part of these consolidated financial statements. 60 ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss), Net Retained Earnings Total Shares Amount Balance as of December 31, 2018 79,778 $ 8 $ 877,514 $ ( 2,774 ) $ 378,143 $ 1,252,891 Net income — — — — 442,776 442,776 Net change in unrealized gains (losses) from investments — — — 299 — 299 Net change in foreign currency translation adjustment — — — 1,787 — 1,787 Issuance of common stock relating to employee equity compensation plans 542 — 17,907 — — 17,907 Tax withholdings related to net share settlements of equity awards — — ( 57,676 ) — — ( 57,676 ) Common stock repurchased and retired ( 1,887 ) — ( 18,992 ) — ( 381,007 ) ( 399,999 ) Stock-based compensation — — 88,184 — — 88,184 Balance as of December 31, 2019 78,433 8 906,937 ( 688 ) 439,912 1,346,169 Net income — — — — 1,775,888 1,775,888 Net change in unrealized gains (losses) from investments — — — ( 194 ) — ( 194 ) Net change in foreign currency translation adjustment — — — 44,383 — 44,383 Issuance of common stock relating to employee equity compensation plans 427 — 20,314 — — 20,314 Tax withholdings related to net share settlements of equity awards — — ( 51,122 ) — — ( 51,122 ) Stock-based compensation — — 98,427 — — 98,427 Balance as of December 31, 2020 78,860 8 974,556 43,501 2,215,800 3,233,865 Net income — — — — 772,020 772,020 Net change in unrealized gains (losses) from investments — — — ( 495 ) — ( 495 ) Net change in foreign currency translation adjustment — — — ( 38,680 ) — ( 38,680 ) Issuance of common stock relating to employee equity compensation plans 442 — 25,623 — — 25,623 Tax withholdings related to net share settlements of equity awards — — ( 108,917 ) — — ( 108,917 ) Common stock repurchased and retired ( 592 ) — ( 6,592 ) — ( 368,446 ) ( 375,038 ) Stock-based compensation — — 114,336 — — 114,336 Balance as of December 31, 2021 78,710 $ 8 $ 999,006 $ 4,326 $ 2,619,374 $ 3,622,714 The accompanying notes are an integral part of these consolidated financial statements. 61 ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2021 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 772,020 $ 1,775,888 $ 442,776 Adjustments to reconcile net income to net cash provided by operating activities: Deferred taxes 15,455 ( 1,491,577 ) 307 Depreciation and amortization 108,729 93,538 78,990 Stock-based compensation 114,336 98,427 88,184 Non-cash operating lease cost 26,807 22,467 18,475 Allowance for doubtful accounts provisions 2,814 12,073 5,853 Arbitration award gain ( 43,403 ) — — Impairments on long-lived assets — — 28,498 Equity in losses of investee — — 7,528 Gain on lease terminations — — ( 6,792 ) Gain from sale of equity method investment — — ( 15,769 ) Other non-cash operating activities 21,549 21,670 24,007 Changes in assets and liabilities, net of effects of acquisition: Accounts receivable ( 262,066 ) ( 139,777 ) ( 121,014 ) Inventories ( 112,450 ) ( 29,110 ) ( 58,269 ) Prepaid expenses and other assets ( 124,626 ) ( 21,130 ) ( 31,529 ) Accounts payable 19,747 52,206 22,099 Accrued and other long-term liabilities 158,543 42,168 60,240 Long-term income tax payable 12,449 ( 2,802 ) 14,611 Deferred revenues 462,640 228,133 189,075 Net cash provided by operating activities 1,172,544 662,174 747,270 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition, net of cash acquired ( 8,002 ) ( 420,788 ) — Purchase of property, plant and equipment ( 401,098 ) ( 154,916 ) ( 149,707 ) Purchase of marketable securities ( 200,928 ) ( 5,341 ) ( 693,284 ) Proceeds from maturities of marketable securities 498 42,641 290,754 Proceeds from sales of marketable securities 3,114 278,817 194,677 Repayment on unsecured promissory note 4,594 26,925 21,820 Proceeds from arbitration award 43,403 — — Other investing activities ( 5,011 ) 1,156 ( 14,704 ) Net cash used in investing activities ( 563,430 ) ( 231,506 ) ( 350,444 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 25,623 20,314 17,907 Common stock repurchases ( 375,038 ) — ( 399,999 ) Payroll taxes paid upon the vesting of equity awards ( 108,917 ) ( 51,122 ) ( 57,675 ) Purchase of finance lease — — ( 45,773 ) Net cash used in financing activities ( 458,332 ) ( 30,808 ) ( 485,540 ) Effect 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 ) Cash, cash equivalents, and restricted cash at beginning of year 961,474 551,134 637,566 Cash, cash equivalents, and restricted cash at end of year $ 1,100,139 $ 961,474 $ 551,134 The accompanying notes are an integral part of these consolidated financial statements. 62 ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies Business Description Align Technology, Inc. (“We”, “Our”, or “Align”) was incorporated in April 1997 in Delaware. Align is a global medical device company primarily engaged in the design, manufacture and marketing of Invisalign® clear aligners, iTero® intraoral scanners, services for orthodontics, restorative and aesthetic dentistry and exocad® computer-aided design and computer-aided manufacturing (“CAD/CAM”) software for dental laboratories and dental practitioners. We also market and sell consumer products that are complementary to our doctor-prescribed principal products under the Invisalign brand, including retainers, aligner cases (clamshells), teeth whitening products and cleaning solutions (crystals, foam and other material) (collectively “Consumer Products”). 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, general dental practitioners 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. Our corporate headquarters is located in Tempe, Arizona, which moved from San Jose, California effective January 1, 2021, and we have offices worldwide. Our Americas regional headquarters is located in Raleigh, North Carolina; our European, Middle East and Africa (“EMEA”) regional headquarters is located in Rotkreuz, Switzerland; and our Asia Pacific (“APAC”) regional headquarters is located in Singapore. We have two operating segments: (1) Clear Aligner, known as the Invisalign system, and (2) Imaging Systems and CAD/CAM services (“Systems and Services”), known as the iTero intraoral scanner and CAD/CAM services. Basis of Presentation and Preparation The consolidated financial statements include the accounts of Align and our wholly-owned subsidiaries after elimination of intercompany transactions and balances. Out-of-Period Adjustments For the year ended December 31, 2021 and 2020, we recorded out-of-period corrections that resulted in tax benefits of $ 16.0 million and $ 12.7 million, respectively, in our Consolidated Statement of Operations. We do not believe these out-of-period adjustments are material to the interim or annual consolidated financial statements for the respective reporting period or to any of the related prior periods. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America (“U.S.”) requires our management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, useful lives of intangible assets and property and equipment, long-lived assets and goodwill, income taxes and contingent liabilities, the fair values of financial instruments, stock-based compensation and valuation of investments in privately held companies among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Fair Value of Financial Instruments Fair value is an exit price, representing the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We use the GAAP fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value: Level 1 - Quoted (unadjusted) prices in active markets for identical assets or liabilities. Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. We obtain fair values for our Level 2 investments. Our custody bank and asset managers independently use 63 professional pricing services to gather pricing data which may include quoted market prices for identical or comparable financial instruments, or inputs other than quoted prices that are observable either directly or indirectly, and we are ultimately responsible for these underlying estimates. Level 3 - Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation. Cash and Cash Equivalents We consider currency on hand, demand deposits, time deposits, and all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash and cash equivalents. Cash and cash equivalents are held in various financial institutions in the U.S. and internationally. Restricted Cash The restricted cash primarily consists of funds reserved for legal requirements. Restricted cash balances are primarily included in other assets within our Consolidated Balance Sheets. Marketable Securities Our marketable securities consist of marketable debt securities which are classified as available-for-sale and are carried at fair value. Our fixed-income securities investment portfolio allows for investments with a maximum effective maturity of up to 40 months on any individual security. Marketable securities classified as current assets have maturities within one year from the balance sheet date. Unrealized gains or losses on such securities are included in accumulated other comprehensive income (loss), net in stockholders’ equity. Realized gains and losses from sales and maturities of all such securities are reported in earnings and computed using the specific identification cost method. All of our marketable securities are subject to a periodic impairment review. We evaluate if an allowance for credit loss is necessary by considering available information relevant to the collectibility of the security and information about credit rating changes, past events, current conditions, and reasonable and supportable forecasts. Any allowance for credit loss is recorded as a charge to other income (expense), net, in our Consolidated Statement of Operations. If we have an intent to sell, or if it is more likely than not that we will be required to sell the security in an unrealized loss position before recovery of its amortized cost basis, we will write down the security to its fair value and record the corresponding charge as a component of other income (expense), net in our Consolidated Statement of Operations. Variable Interest Entities We evaluate whether an entity in which we have made an investment is considered a variable interest entity (“VIE”). If we determine we are the primary beneficiary of a VIE, we would consolidate the VIE into our financial statements. In determining if we are the primary beneficiary, we evaluate whether we have the power to direct the activities that most significantly impact the VIE ’ s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our evaluation includes identification of significant activities and an assessment of our ability to direct those activities based on governance provisions and arrangements to provide or receive product and process technology, product supply, operations services, equity funding, financing, and other applicable agreements and circumstances. Our assessments of whether we are the primary beneficiary of a VIE require significant assumptions and judgments. We have concluded that we are not the primary beneficiary of our VIE investments; therefore, we do not consolidate their results into our consolidated financial statements. Investments in Privately Held Companies Investments in privately held companies in which we can exercise significant influence but do not own a majority equity interest or otherwise control are accounted for under the equity method. We record our share of their operating results within equity in losses of investee, net of tax, in our Consolidated Statement of Operations. Investments in privately held companies in which we cannot exercise significant influence and do not own a majority equity interest or otherwise control are accounted for under the measurement alternative. Under the measurement alternative, the carrying value of our equity investment is adjusted to fair value for observable transactions for identical or similar investments of the same issuer. Investments in equity securities are reported on our Consolidated Balance Sheet as other assets, 64 and we periodically evaluate them for impairment. We record any change in carrying value of our equity securities, in other income (expense), net in our Consolidated Statement of Operations. Derivative Financial Instruments We enter into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations associated with certain assets and liabilities. These forward contracts are not designated as hedging instruments and do not subject us to material balance sheet risk due to fluctuations in foreign currency exchange rates. The gains and losses on these forward contracts are intended to offset the gains and losses in the underlying foreign currency denominated monetary assets and liabilities being economically hedged. We do not enter into foreign currency forward contracts for trading or speculative purposes. The net gain or loss from the settlement of these foreign currency forward contracts is recorded in other income (expense), net in the Consolidated Statement of Operations. Foreign Currency For our international subsidiaries, we analyze on an annual basis or more often if necessary, if a significant change in facts and circumstances indicate that the functional currency has changed. For international subsidiaries where the local currency is the functional currency, adjustments from translating financial statements from the local currency to the U.S. dollar reporting currency are recorded as a separate component of accumulated other comprehensive income (loss), net in the stockholders’ equity section of the Consolidated Balance Sheet. This foreign currency translation adjustment reflects the translation of the balance sheet at period end exchange rates, and the income statement at the transaction date or average exchange rate in effect during the period. The foreign currency revaluation that are derived from monetary assets and liabilities stated in a currency other than functional currency are included in other income (expense), net. For the year ended December 31, 2021, 2020 and 2019, we had foreign currency net gains (losses) of $( 13.3 ) million, $ 6.8 million and $( 2.0 ) million, respectively. Certain Risks and Uncertainties Our operating results depend to a significant extent on our ability to market and develop our products. The life cycles of our products are difficult to estimate due, in part, to the effect of future product enhancements and competition. Our inability to successfully develop and market our products as a result of competition or other factors would have a material adverse effect on our business, financial condition and results of operations. The U.S. Food and Drug Administration (“FDA”) and similar international agencies regulate the design, manufacture, distribution, pre-clinical and clinical study, clearance and approval of medical devices. Products developed by us may require approvals or clearances from the FDA or other international regulatory agencies prior to commercialized sales. There can be no assurance that our products will receive any of the required approvals or clearances. If we were denied approval or clearance or such approval was delayed, it may have a material adverse impact on us. Our cash and investments are held primarily by four financial institutions. Financial instruments which potentially expose us to concentrations of credit risk consist primarily of cash equivalents and marketable securities. We invest excess cash primarily in money market funds, commercial paper, certificates of deposits, corporate bonds, asset-backed securities, municipal bonds and U.S. government agency bonds and treasury bonds and periodically evaluate them for credit losses. Such credit losses have not been material to our financial statements. We provide credit to customers in the normal course of business. Collateral is not required for accounts receivable but ongoing evaluations of customers’ credit worthiness are performed. We maintain an allowance for potential credit losses for uncollectible accounts and such losses have been within management’s expectations. No individual customer accounted for 10% or more of our accounts receivable at December 31, 2021 or 2020 or net revenues for the year ended December 31, 2021, 2020 or 2019. We have manufacturing facilities located in Juarez, Mexico where we conduct our aligner fabrication, distribution and perform certain services and in Ziyang, China where we fabricate aligners primarily for China and other APAC markets. In addition, we produce our handheld intraoral scanner wand, perform final scanner assembly and repair our scanners at our facilities in Ziyang, China and Or Yehuda, Israel and service and repair certain scanners in Juarez, Mexico. In the second quarter of 2021, we announced the start of a multi-million dollar project to bring operational facilities closer to our customers through the expansion of our manufacturing operations in Wroclaw, Poland. Expected to begin serving doctors during the first half of 2022, the new aligner fabrication facility will be our third and allow us to more quickly and effectively serve tens of thousands of customers throughout EMEA. Additionally, in the third quarter of 2021, we opened our multi-story iTero scanner and services facilities in Petach Tikva, Israel to further the design and development of our portfolio of iTero intraoral scanners, imaging systems and services. Our digital treatment plans using a sophisticated, internally developed computer-modeling 65 program are located in multiple international locations to support our customers within the regions. Our reliance on international operations exposes us to related risks and uncertainties, including difficulties in staffing and managing international operations such as hiring and retaining qualified personnel; controlling production volume and quality of manufacture; political, social and economic instability; interruptions and limitations in telecommunication services; product and material transportation delays or disruption; trade restrictions and changes in tariffs; import and export license requirements and restrictions; fluctuations in foreign currency exchange rates; and potential adverse tax consequences. If any of these risks materialize, our international manufacturing operations, as well as our operating results, may be harmed. We purchase certain inventory from sole suppliers. Additionally, we rely on a limited number of hardware manufacturers. The inability of any supplier or manufacturer to fulfill our supply requirements could materially and adversely impact our future operating results. Due to the COVID-19 pandemic, we are subject to a greater degree of uncertainty than normal in making the judgments and estimates needed to apply our significant accounting policies. The full extent to which the pandemic, including as a result of any new variants, business restrictions or lockdowns, and the impact of vaccinations, will directly or indirectly impact our business, results of operations, cash flows, and financial condition will depend on future developments that are highly uncertain and cannot be accurately determined. Further, we could also be materially adversely affected by supply chain disruptions, including shortages and inflationary pressures, uncertain or reduced demand, labor shortages, delays in collection of outstanding receivables and the impact of any initiatives or programs that we may undertake to address financial and operational challenges faced by our customers. Accounts Receivable, net Trade accounts receivable are recorded at the invoiced amount. Accounts receivable, net includes allowances for doubtful accounts for any potentially uncollectible amounts. We periodically assess the adequacy of the allowance for doubtful accounts by reviewing the accounts receivable on a collective basis by considering factors such as aging of the receivables and customers’ expected ability to pay, and on an individual basis for specific customers with known disputes or collectability issues. In determining the amount of the allowance for doubtful accounts, we also evaluate the creditworthiness of customers, current market conditions and forecasts of future economic conditions to make any adjustments. Actual write-offs have not materially differed from the estimated allowances. Inventories Inventories are valued at the lower of cost or net realizable value, with cost computed using standard cost which approximates actual cost on a first-in-first-out basis. Excess and obsolete inventories are determined primarily based on future demand forecasts, and write-downs of excess and obsolete inventories are recorded as a component of cost of net revenues. Property, Plant and Equipment, net Property, plant and equipment, net are stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Construction in progress is related to the construction or development of property (including land) and equipment that have not yet been placed in service for their intended use. Upon sale or retirement, the asset’s cost and related accumulated depreciation are removed from the balance sheet and any related gains or losses are reflected in income from operations. Maintenance and repairs are expensed as incurred. Refer to Note 3 "Balance Sheet Components" of the Notes of Consolidated Financial Statements for details on estimated useful lives . Leases We determine if an arrangement is a lease at inception. Leases with a term of 12 months or less are not recorded on the balance sheet. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments as the rate implicit in our leases is not readily determinable. We determine lease terms as the noncancellable period of the lease and may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We have lease agreements with lease and non-lease components which are accounted for as a single lease component. Payments under our lease arrangements are primarily fixed; however, certain lease agreements contain variable payments which are expensed as incurred and not included in the operating lease ROU assets and liabilities. 66 Business Combinations We allocate the fair value of the purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. When determining the fair value of assets acquired and liabilities assumed, management is required to make certain estimates and assumptions, especially with respect to intangible assets. The estimates and assumptions used in valuing intangible assets include, but are not limited to, the amount and timing of projected future cash flows including forecasted revenues, the discount rate used to determine the present value of these cash flows, and the determination of the assets’ life cycle. Amounts recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available. Goodwill and Finite-Lived Acquired Intangible Assets 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. 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. Impairment of Goodwill and Long-Lived Assets Goodwill 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. Long-Lived Assets We evaluate long-lived assets (including finite-lived intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. An asset or asset group is considered impaired if its carrying amount exceeds the future undiscounted net cash flows that the asset or asset group is expected to 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 long-lived assets . 67 Development Costs for Internal Use Software Internally developed software includes enterprise-level business software that we customize to meet our specific operational needs. Such capitalized costs include external direct costs utilized in developing or obtaining the applications and payroll and payroll-related costs for employees, who are directly associated with the development of the applications. There were no significant internally developed software costs capitalized in 2021 or 2020. The costs to develop software that is marketed externally have not been capitalized as we believe our current software development process is essentially completed concurrent with the establishment of technological feasibility. As such, all related software development costs are expensed as incurred and included in research and development expense in our Consolidated Statement of Operations. Product Warranty We offer assurance warranties on our products which provide the customer assurance that the product will function as the parties intended because it complies with agreed-upon specifications; therefore, warranties are not treated as a separate revenue performance obligation and are accounted for as guarantees under GAAP. Clear Aligner We warrant our Invisalign products against material defects until the treatment plan is complete except in the case of retainers, which are warranted up to three months from expected first use. We accrue for warranty costs, which are primarily based on historical experience as to product failures as well as current information on replacement costs. Systems and Services We warrant our intraoral scanners for a period of one year , which includes materials and labor. We accrue for these warranty costs based on average historical repair costs. An extended warranty may be purchased for additional fees. We warrant our CAD/CAM software for a one year period to perform in accordance with agreed product specifications. As we have not historically incurred any material warranty costs, we do not accrue for these software warranties. Warranty costs are recorded in cost of net revenues upon shipment of products. We regularly review our warranty liability and update these balances based on historical warranty cost trends. Actual warranty costs incurred have not materially differed from those accrued; however future actual warranty costs could differ from the estimated amounts. 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. ” 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. 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. 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 and Invisalign Go Plus includes optional additional aligners at no charge for a period of up to two years after initial shipment. 68 Our treatment plans comprise the following performance obligations that also represent distinct deliverables: initial aligners, the option of 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 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. We also consider usage rates, which is the number of times a customer is expected to order additional aligners. 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 same or similar 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. Accrued Sales Return Reserve We provide a reserve for sales returns based on historical sales returns as a percentage of revenues. Costs to Obtain a Contract We offer a variety of commission plans to our salesforce; each plan has multiple components. To match the costs to obtain a contract to the associated revenues, we evaluate the individual components and capitalize the eligible components, recognizing the costs over the treatment period. The costs to obtain contracts were $ 31.1 million and $ 22.8 million as of December 31, 2021 and 2020, respectively, and are included in other assets in our Consolidated Balance Sheets. We recognized amortization on our costs to obtain a contract of $ 17.0 million, $ 10.1 million, and $ 7.2 million during the year ended December 31, 2021, 2020, and 2019, respectively, which is included in selling, general and administrative expenses in our Consolidated Statements of Operations. Unfulfilled Performance Obligations for Clear Aligners and Scanners Our unfulfilled performance obligations, including deferred revenues and backlog, as of December 31, 2021 and the estimated revenues expected to be recognized in the future related to these performance obligations are $ 1,307.3 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 . This also includes 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 69 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. Shipping and Handling Costs Shipping and handling charges to customers are included in net revenues, and the associated costs incurred are recorded in cost of net revenues. 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. Research and Development Research and development costs are expensed as incurred and includes the costs associated with the research and development of new products and enhancements to existing products. These costs primarily include personnel-related costs, including payroll and stock-based compensation, equipment, material and maintenance costs, outside consulting expenses, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and information technology (“IT”). Advertising Costs The cost of advertising and media is expensed as incurred. For the year ended December 31, 2021, 2020 and 2019, we incurred advertising costs of $ 325.6 million, $ 161.0 million and $ 119.1 million, respectively. Stock-Based Compensation We recognize stock-based compensation cost for shares expected to vest on a straight-line basis over the requisite service period of the award, net of estimated forfeitures. We use the Black-Scholes option pricing model to determine the fair value of stock awards and employee stock purchase plan shares. We use a Monte Carlo simulation model to estimate the fair value of market-performance based restricted stock units (“MSUs”) which requires the input of assumptions, including expected term, stock price volatility and the risk-free rate of return. In addition, judgment is also required in estimating the number of stock-based awards that are expected to be forfeited. Forfeitures are estimated based on historical experience at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. 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 70 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 Sheets. 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. 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. The U.S. 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. Common Stock Repurchase We repurchase our own common stock from time to time under stock repurchase programs approved by our Board of Directors. We account for these repurchases under the accounting guidance for equity where we allocate the total repurchase value that is in excess over par value between additional paid-in capital and retained earnings. All shares repurchased are retired. Recent Accounting Pronouncements (i) New Accounting Updates Recently Adopted In December 2019, the Financial Accounting Standards Board ( “ FASB ” ) issued Accounting Standard Update ( “ ASU ” ) 2019-12, “ Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes, ” to enhance and simplify various aspects of the income tax accounting guidance. The amendment removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The amendments are effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020. Adoption of this standard in the first quarter of fiscal year 2021 did not have a material impact on our consolidated financial statements or related disclosures. (ii) Recent Accounting Updates Not Yet Effective We continue to monitor new accounting pronouncements issued by the FASB and do not believe any of the recently issued accounting pronouncements will have an impact on our consolidated financial statements or related disclosures. 71 Note 2. Financial Instruments Cash, Cash Equivalents and Marketable Securities The following table summarizes our cash and cash equivalents, and marketable securities on our Consolidated Balance Sheet as of December 31, 2021 (in thousands): Reported as: December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Cash and Cash Equivalents Marketable securities, short-term Marketable securities, long-term Cash $ 754,802 $ — $ — $ 754,802 $ 754,802 $ — $ — Money market funds 343,012 — ( 2 ) 343,010 343,010 — — Corporate bonds 115,507 9 ( 398 ) 115,118 1,042 35,065 79,011 U.S. government treasury bonds 42,976 — ( 48 ) 42,928 — 22,251 20,677 Asset-backed securities 32,031 — ( 40 ) 31,991 — 10,999 20,992 Municipal bonds 7,628 — ( 15 ) 7,613 516 3,657 3,440 U.S. government agency bonds 1,201 — ( 1 ) 1,200 — — 1,200 Total $ 1,297,157 $ 9 $ ( 504 ) $ 1,296,662 $ 1,099,370 $ 71,972 $ 125,320 As of December 31, 2020, we held $ 441.6 million of cash and $ 519.2 million of money market funds which were reported as cash and cash equivalents on our Consolidated Balance Sheet. We had no short-term or long-term marketable securities as of December 31, 2020. Net realized and unrealized gains and losses were not material for the year ended December 31, 2021, 2020 and 2019. The following table summarizes the fair value of our available-for-sale marketable securities classified by contractual maturity as of December 31, 2021 (in thousands): December 31, 2021 Due in 1 year or less $ 59,737 Due in 1 year through 5 years 139,113 Total $ 198,850 The securities that we invest in are generally deemed to be low risk based on their credit ratings from the major rating agencies. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. As interest rates increase, those securities purchased at a lower yield show a mark-to-market unrealized loss. Our unrealized losses as of December 31, 2021 are primarily due to changes in interest rates and credit spreads. We had no marketable securities that have been in a continuous material unrealized loss position for greater than twelve months as of December 31, 2021. 72 Fair Value Measurements The following tables summarize our financial assets measured at fair value as of December 31, 2021 and 2020 (in thousands): Description Balance as of December 31, 2021 Level 1 Level 2 Level 3 Cash equivalents: Money market funds $ 343,010 $ 343,010 $ — $ — Corporate bonds 1,042 — 1,042 — Municipal bonds 516 — 516 — Short-term investments: U.S. government treasury bonds 22,251 22,251 — — Corporate bonds 35,065 — 35,065 — Municipal bonds 3,657 — 3,657 — Asset-backed securities 10,999 — 10,999 — Long-term investments: U.S. government treasury bonds 20,677 20,677 — — Corporate bonds 79,011 — 79,011 — Municipal bonds 3,440 — 3,440 — U.S. government agency bonds 1,200 — 1,200 — Asset-backed securities 20,992 — 20,992 — Prepaid expenses and other current assets: Israeli funds 3,841 — 3,841 — Other assets: Investments in privately held companies 1 8,621 — — 8,621 $ 554,322 $ 385,938 $ 159,763 $ 8,621 1 The adjustment to the carrying value of our equity investments in privately held companies without readily determinable fair value are not material during the year ended December 31, 2021, 2020 and 2019. Description Balance as of December 31, 2020 Level 1 Level 2 Level 3 Cash equivalents: Money market funds $ 519,228 $ 519,228 $ — — Prepaid expenses and other current assets: Israeli funds 3,500 — 3,500 — Current unsecured promissory note 5,408 — — 5,408 $ 528,136 $ 519,228 $ 3,500 $ 5,408 Derivatives Not Designated as Hedging Instruments Recurring foreign currency forward contracts We enter into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations on certain trade and intercompany receivables and payables. These forward contracts are classified within Level 2 of the fair value hierarchy. As a result of the settlement of foreign currency forward contracts, during the year ended December 31, 2021, 2020 and 2019, we recognized a net gain of $ 18.8 million, a net loss of $ 22.1 million and a net gain of $ 3.2 million, respectively. As of December 31, 2021 and 2020, the fair value of foreign exchange forward contracts outstanding were not material. 73 The following table presents the gross notional value of all our foreign exchange forward contracts outstanding as of December 31, 2021 and 2020 (in thousands): December 31, 2021 Local Currency Amount Notional Contract Amount (USD) Euro € 165,110 $ 186,358 Canadian Dollar C$ 99,800 78,018 Chinese Yuan ¥ 494,500 77,358 Polish Zloty PLN 219,800 54,014 Brazilian Real R$ 286,500 50,894 Japanese Yen ¥ 5,548,700 48,206 British Pound £ 34,740 46,881 Israeli Shekel ILS 54,110 17,416 Mexican Peso M$ 311,500 15,133 Swiss Franc CHF 9,950 10,883 Australian Dollar A$ 6,900 5,009 $ 590,170 December 31, 2020 Local Currency Amount Notional Contract Amount (USD) Euro € 126,300 $ 155,125 Chinese Yuan ¥ 936,000 143,393 Canadian Dollar C$ 65,000 50,791 British Pound £ 32,300 43,879 Japanese Yen ¥ 4,249,000 41,222 Brazilian Real R$ 142,000 27,264 Israeli Shekel ILS 74,000 23,094 Mexican Peso M$ 140,000 7,002 Australian Dollar A$ 5,800 4,447 Swiss Franc CHF 3,700 4,191 $ 500,408 Other foreign currency forward contract Prior to the closing of the exocad acquisition on April 1, 2020, we entered into a Euro foreign currency forward contract with a notional contract amount of € 376.0 million. Relating to this forward contract, in 2020, we recognized a loss of $ 10.2 million within other income (expense), net in our Consolidated Statement of Operations. Note 3. Balance Sheet Components Inventories consist of the following (in thousands): December 31, 2021 2020 Raw materials $ 123,234 $ 76,404 Work in progress 51,706 31,393 Finished goods 55,290 31,440 Total inventories $ 230,230 $ 139,237 74 Prepaid expenses and other current assets consist of the following (in thousands): December 31, 2021 2020 Prepaid expenses $ 70,218 $ 30,069 Other current assets 125,087 61,685 Total prepaid expenses and other current assets $ 195,305 $ 91,754 Property, plant and equipment consist of the following (in thousands): December 31, Generally Used Estimated Useful Life 2021 2020 Clinical and manufacturing equipment Up to 10 years $ 452,876 $ 372,077 Building 20 years 310,344 244,166 Leasehold improvements Lease term 1 61,289 63,541 Computer software and hardware 3 years 117,986 108,068 Land — 58,869 34,598 Furniture, fixtures and other 2 - 5 years 71,977 50,031 Construction in progress — 367,686 163,492 Total 1,441,027 1,035,973 Less: Accumulated depreciation and impairment charges ( 359,101 ) ( 301,252 ) Total property, plant and equipment, net $ 1,081,926 $ 734,721 1 Shorter of the remaining lease term or the estimated useful lives of the assets Depreciation was $ 92.1 million, $ 80.1 million and $ 73.1 million for the year ended December 31, 2021, 2020 and 2019, respectively. Accrued liabilities consist of the following (in thousands): December 31, 2021 2020 Accrued payroll and benefits $ 288,355 $ 170,106 Accrued expenses 67,169 42,536 Accrued property, plant and equipment 46,561 27,692 Accrued sales and marketing expenses 41,387 34,488 Accrued professional fees 31,457 20,617 Accrued income taxes 33,838 30,130 Current operating lease liabilities 22,719 21,735 Other accrued liabilities 75,829 58,278 Total accrued liabilities $ 607,315 $ 405,582 Accrued warranty as of December 31, 2021 and 2020, which is included in the “Other accrued liabilities” category of the accrued liabilities table above, consists of the following activity (in thousands): Accrued warranty as of December 31, 2019 $ 11,205 Charged to cost of net revenues 12,581 Actual warranty expenditures ( 11,171 ) Accrued warranty as of December 31, 2020 12,615 Charged to cost of net revenues 18,213 Actual warranty expenditures ( 14,659 ) Accrued warranty as of December 31, 2021 $ 16,169 75 Deferred revenues consist of the following (in thousands): December 31, 2021 2020 Deferred revenues - current $ 1,152,870 $ 777,887 Deferred revenues - long-term 1 136,684 62,551 1 Included in Other long-term liabilities within our Consolidated Balance Sheet During the year ended December 31, 2021 and 2020, we recognized $ 3,952.6 million and $ 2,471.9 million of net revenues, respectively, of which $ 481.1 million and $ 341.9 million was included in the deferred revenues balance at December 31, 2020 and December 31, 2019, respectively. Note 4. Leases We have operating leases for manufacturing facilities, office and retail spaces, vehicles and office equipment. The components of lease expenses consist of following (in thousands): Year Ended December 31, Lease Cost 2021 2020 2019 Operating lease cost 1 $ 33,241 $ 27,825 $ 22,778 Variable lease cost 2 11,134 1,429 1,899 Total lease cost $ 44,375 $ 29,254 $ 24,677 1 Includes expense associated with short term leases of less than 12 months which is not material 2 Includes payments related to agreements with embedded leases that are not otherwise reflected on the balance sheet. These costs are associated with our manufacturing supply arrangements and fluctuate based on factory output and material price changes. The following table provides a summary of our operating lease terms and discount rates: December 31, Remaining Lease Term and Discount Rate 2021 2020 Weighted average remaining lease term (in years) 7.8 7.4 Weighted average discount rate 3.2 % 4.2 % As of December 31, 2021, the future payments related to our operating lease liabilities are as follows (in thousands): Fiscal Year Ending December 31, Operating Leases 2022 $ 26,035 2023 24,620 2024 18,284 2025 15,517 2026 13,113 Thereafter 45,461 Total lease payments 143,030 Less: Imputed interest ( 17,655 ) Total lease liabilities $ 125,375 As of December 31, 2021, we had additional leases that have not yet commenced with future lease payments of $ 17.8 million. These leases will commence during 2022 with non-cancelable lease terms of two to seven years . Note 5. Business Combination On April 1, 2020, we completed the acquisition of privately-held exocad for a total purchase consideration of $ 430.0 million and exocad became a wholly-owned subsidiary. exocad is a German dental CAD/CAM software company that offers fully integrated workflows to dental labs and dental practices. 76 The allocation of purchase price to assets acquired and liabilities assumed based on estimated fair values is as follows (in thousands): Goodwill 1 $ 340,181 Identified intangible assets 118,700 Cash and cash equivalents 9,190 Deferred tax liabilities ( 35,419 ) Other assets (liabilities), net ( 2,674 ) Total $ 429,978 1 None of this goodwill is deductible for tax purposes. The following table presents details of the identified intangible assets acquired (in thousands, except years): Weighted Average Amortization Period (in years) Fair Value Intangible assets subject to amortization: Existing technology 10 $ 87,000 Customer relationships 10 21,500 Tradenames 7 9,800 Intangible assets not subject to amortization: In-process Research and Development (“IPR&D”) N/A 400 Total intangible assets $ 118,700 We believe the amount of purchased intangible assets recorded above represent the fair values and approximate the amount a market participant would pay for these intangible assets as of the acquisition date. Existing technology represents the estimated fair value of exocad’s core technology that has reached technological feasibility. We valued the existing technology using the multi-period excess earnings method under the income approach. The economic useful life of existing technology was determined by considering the life cycle of the technology and related cash flows. Customer relationships represent the fair value of future projected revenue that will be derived from sales of products to existing customers. Customer relationships were valued using the with-and-without method under the income approach. The economic useful life for customer relationships was based on historical customer attrition rates. Tradenames relates to the exocad tradenames that are recognized within the industry. The fair value was determined using the relief-from-royalty method under the income approach. The economic useful life of tradenames was determined by benchmarking against similar transactions entered into by peer companies. IPR&D refers to the fair value of projects that are not yet completed but have potential value to the company. 77 Note 6. Goodwill and Intangible Assets During the year ended December 31, 2021, we completed an immaterial business combination which increased goodwill and existing technology intangible assets. Goodwill The change in the carrying value of goodwill for the year ended December 31, 2021 and 2020, categorized by reportable segments, is as follows (in thousands): Clear Aligner Systems and Services Total Balance as of December 31, 2019 $ 63,924 $ — $ 63,924 Additions from acquisition 43,500 296,681 340,181 Foreign currency translation adjustments 5,267 35,445 40,712 Balance as of December 31, 2020 112,691 332,126 444,817 Additions from acquisition 3,646 — 3,646 Foreign currency translation adjustments ( 4,129 ) ( 25,787 ) ( 29,916 ) Balance as of December 31, 2021 $ 112,208 $ 306,339 $ 418,547 We completed our annual goodwill impairment assessments in 2021 and 2020 and determined there were no impairments. Intangible Long-Lived Assets Acquired intangible long-lived assets were as follows, excluding intangibles that were fully amortized (in thousands): Weighted Average Amortization Period (in years) Gross Carrying Amount as of December 31, 2021 Accumulated Amortization Accumulated Impairment Loss Net Carrying Value as of December 31, 2021 Existing technology 10 $ 104,531 $ ( 22,495 ) $ ( 4,328 ) $ 77,708 Customer relationships 11 55,000 ( 25,891 ) ( 10,751 ) 18,358 Trademarks and tradenames 10 17,200 ( 4,547 ) ( 4,179 ) 8,474 Patents and other 8 6,511 ( 4,495 ) — 2,016 $ 183,242 $ ( 57,428 ) $ ( 19,258 ) 106,556 Foreign currency translation 3,153 Total intangible assets $ 109,709 Weighted Average Amortization Period (in years) Gross Carrying Amount as of December 31, 2020 Accumulated Amortization Accumulated Impairment Loss Net Carrying Value as of December 31, 2020 Existing technology 10 $ 99,400 $ ( 12,719 ) $ ( 4,328 ) $ 82,353 Customer relationships 11 55,000 ( 21,879 ) ( 10,751 ) 22,370 Trademarks and tradenames 10 16,600 ( 2,934 ) ( 4,179 ) 9,487 Patents and other 8 6,610 ( 3,785 ) — 2,825 $ 177,610 $ ( 41,317 ) $ ( 19,258 ) 117,035 Foreign currency translation 13,037 Total intangible assets $ 130,072 There were no triggering events in 2021 or 2020 that would cause impairments of our intangible long-lived assets. 78 The total estimated annual future amortization expense for these acquired intangible assets as of December 31, 2021 is as follows (in thousands): Fiscal Year Amortization 2022 $ 15,692 2023 14,997 2024 13,831 2025 13,455 2026 12,849 Thereafter 35,732 Total $ 106,556 Amortization expense was $ 16.6 million, $ 13.4 million and $ 5.9 million for the year ended December 31, 2021, 2020 and 2019, respectively. Note 7. Equity Method Investments On July 25, 2016, we acquired a 17 % equity interest, on a fully diluted basis, in SmileDirectClub, LLC (“SDC”) for $ 46.7 million. Concurrently with the investment, we also entered into a supply agreement to manufacture clear aligners for SDC, which expired on December 31, 2019. The sale of aligners to SDC and the income from the supply agreement were reported in our Clear Aligner business segment. On July 24, 2017, we purchased an additional 2 % equity interest in SDC for $ 12.8 million. The investment was accounted for as an equity method investment and recorded in our Consolidated Balance Sheet. We recorded our proportional share of SDC’s losses within equity in losses of investee, net of tax, in our Consolidated Statement of Operations within our Clear Aligner reportable segment. As a result of the arbitrator’s decision regarding SDC announced on March 5, 2019, we were ordered to tender our SDC equity interest by April 3, 2019 for a purchase price equal to the “capital account” balance as of October 31, 2017 under the terms of the investment. In April 2019, based on the “capital account” value provided by SDC, we entered into an unsecured promissory note with SDC to receive $ 54.2 million through February 1, 2021 in exchange for the tender of our membership interests. As a result, we derecognized the equity method investment balance of $ 38.4 million in exchange for an unsecured promissory note of $ 54.2 million and we recorded the difference of $ 15.8 million as a gain in 2019 in other income in our Consolidated Statement of Operations. The unsecured promissory note was paid in full by SDC during the year ended December 31, 2021. Although we tendered our membership interests pursuant to the arbitrator’s decision, the parties did not agree on the amount of the “capital account” balance as of October 31, 2017 or the appropriate repurchase price for the membership units. On July 3, 2019, we filed a demand for arbitration regarding SDC’s calculation of the “capital account” balance. On March 12, 2021, the Arbitrator ruled in favor of Align and against SDC and issued an award of $ 43.4 million along with interest. The gain of $ 43.4 million was recognized as a part of our other income (expense), net in our Consolidated Statement of Operation during the year ended December 31, 2021. Refer to Note 10 “ Legal Proceedings ” of the Notes to Consolidated Financial Statements included for more information on the arbitration. Note 8. Credit Facility On July 21, 2020 we entered into a credit facility for a $ 300.0 million unsecured revolving line of credit, with a $ 50.0 million letter of credit sublimit, and a maturity date of July 21, 2023 (“2020 Credit Facility”). The 2020 Credit Facility requires us to comply with specific financial conditions and performance requirements. Loans under the 2020 Credit Facility bear interest, at our option, at either a rate based on the reserve adjusted LIBOR for the applicable interest period or a base rate, in each case plus a margin. The base rate is the highest of the credit facility’s publicly announced prime rate, the federal funds rate plus 0.50 % and one-month LIBOR plus 1.0 %. The margin ranges from 1.50 % to 2.25 % for LIBOR loans and 0.50 % to 1.25 % for base rate loans. The 2020 Credit Facility allows for an alternative rate to be identified if LIBOR is no longer available. Interest on the loans is payable quarterly in arrears with respect to base rate loans and at the end of an interest period (and at three month intervals if the interest period exceeds three months) in the case of LIBOR loans. The outstanding principal, together with accrued and unpaid interest, is due on the maturity date. As of December 31, 2021, we had no outstanding borrowings under the 2020 Credit Facility and were in compliance with the conditions and performance requirements. 79 Note 9. Impairments and Other Charges (Gains), net On March 5, 2019, we announced the outcome of the arbitration regarding SDC (Refer to Note 10 “Legal Proceedings” of the Notes to Consolidated Financial Statements for SDC legal proceedings discussion) which required Align to close its Invisalign stores and tender Align’s equity interest in SDC by April 3, 2019. Accordingly, Align evaluated the ongoing value of the Invisalign stores’ operating lease right-of-use assets and related leasehold improvements and other fixed assets and determined that the carrying value of these assets were not recoverable. Align evaluated the fair value of these assets and we considered the market participant’s ability to generate economic benefits by using these assets in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. As a result, in 2019, we recorded impairment losses of $ 14.2 million for operating lease right-of-use assets and $ 14.3 million of leasehold improvements and other fixed assets. In addition, we also recorded $ 1.3 million of employee severance costs and other charges. During 2019, we also negotiated early termination of our Invisalign store leases and recorded lease termination gains of $ 6.8 million. Note 10. Legal Proceedings 2018 Securities Class Action Lawsuit On November 5, 2018, a class action lawsuit against Align and three of our executive officers was filed in the U.S. District Court for the Northern District of California on behalf of a purported class of purchasers of our common stock. The complaint generally alleged claims under the federal securities laws and sought monetary damages in an unspecified amount and costs and expenses incurred in the litigation. On December 12, 2018, a similar lawsuit was filed in the same court on behalf of a purported class of purchasers of our common stock. On November 29, 2019, the lead plaintiff filed an amended consolidated complaint against Align and two of our executive officers alleging similar claims as the initial complaints on behalf of a purported class of purchasers of our common stock from May 23, 2018 and October 24, 2018. On September 9, 2020, Defendants’ motion to dismiss the amended consolidated complaint was granted in part and denied in part. On June 30, 2021, counsel for the parties signed a Stipulation and Agreement of Settlement to resolve all claims for $ 16 million. The settlement amount will be funded by insurance proceeds and consequently, we recorded a short term liability and a receivable for this amount in our consolidated financial statements. The Court granted preliminary approval of the settlement on November 2, 2021. A final settlement approval hearing is currently set for April 28, 2022. The settlement is subject to notice to class members and final approval by the Court. 2019 Shareholder Derivative Lawsuit In January 2019, three derivative lawsuits were filed in the U.S. District Court for the Northern District of California which were later consolidated, purportedly on behalf of Align, naming as defendants the then current members of our Board of Directors along with certain of our executive officers. The allegations in the complaints are similar to those asserted in the 2018 Securities Class Action Lawsuit, but the complaints assert various state law causes of action, including for breaches of fiduciary duty, insider trading, and unjust enrichment. The complaints seek unspecified monetary damages on behalf of Align, which is named solely as a nominal defendant against whom no recovery is sought, as well as disgorgement and the costs and expenses associated with the litigation, including attorneys’ fees. The consolidated action has been stayed pending final disposition of the 2018 Securities Class Action Lawsuit. On April 12, 2019, a derivative lawsuit was also filed in California Superior Court for Santa Clara County, purportedly on behalf of Align, naming as defendants the members of our Board of Directors along with certain of our executive officers. The allegations in the complaint are similar to those in the derivative suits described above. The matter has been similarly stayed pending final disposition of the 2018 Securities Class Action Lawsuit. Align believes these claims are without merit. Align is currently unable to predict the outcome of these lawsuits and therefore cannot determine the likelihood of loss nor estimate a range of possible loss . 2020 Securities Class Action Lawsuit On March 2, 2020, a class action lawsuit against Align and two of our executive officers was filed in the U.S. District Court for the Southern District of New York (later transferred to the U.S. District Court for the Northern District of California) on behalf of a purported class of purchasers of our common stock. The complaint alleged claims under the federal securities laws and sought monetary damages in an unspecified amount and costs and expenses incurred in the litigation. The lead plaintiff filed an amended complaint on August 4, 2020 against Align and three of our executive officers alleging similar claims as in the initial complaint on behalf of a purported class of purchasers of our common stock from April 25, 2019 to July 24, 2019. On March 29, 2021, defendants’ motion to dismiss the amended complaint was granted with leave for the lead plaintiff to file a further amended complaint. On April 22, 2021, lead plaintiff filed a notice stating it would not file a further amended 80 complaint. On April 23, 2021, the Court dismissed the action with prejudice and judgment was entered. Lead plaintiff filed a notice of appeal on April 28, 2021 and filed its opening appeal brief with the United States Court of Appeals for the Ninth Circuit on September 1, 2021. The defendants-appellees filed their answering brief on November 22, 2021. The lead plaintiff-appellant’s reply brief was filed on January 12, 2022, and oral argument is set for March 10, 2022 . Align believes these claims are without merit and intends to vigorously defend itself. Align is currently unable to predict the outcome of this lawsuit and therefore cannot determine the likelihood of loss nor estimate a range of possible loss. 2020 Shareholder Derivative Lawsuit On May 4, 2020, a derivative lawsuit was filed in the U.S. District Court for the Northern District of California, purportedly on behalf of Align, naming as defendants the members of our Board of Directors along with certain of our executive officers. The allegations in the complaint are similar to those presented in the 2020 Securities Class Action Lawsuit, but this complaint asserts state law claims for breach of fiduciary duty and insider trading. The complaint seeks unspecified monetary damages on behalf of Align, which is named solely as a no minal defendant against whom no recovery is sought, as well as disgorgement and the costs and expenses associated with the litigation, including attorneys’ fees. This action is stayed pending resolution of the appeal in the 2020 Securities Class Action Lawsuit. Align believes these claims are without merit. Align is currently unable to predict the outcome of this lawsuit and therefore cannot determine the likelihood of loss nor estimate a range of possible loss. 3Shape Litigation On February 7, 2022, Align and 3Shape, a Danish corporation, settled their outstanding patent infringement and antitrust litigation, which began in November 2017. The terms of the settlement are confidential, and the settlement is not expected to have a material effect on Align’s ongoing operations and financial results. The parties have filed stipulations to stay all proceedings pending completion of the settlement. Antitrust Class Actions On June 5, 2020, a dental practice named Simon and Simon, PC doing business as City Smiles brought an antitrust action in the U.S. District Court for the Northern District of California on behalf of itself and a putative class of similarly situated practices seeking monetary damages and injunctive relief relating to Align’s alleged market activities in alleged clear aligner and intraoral scanner markets. Plaintiff filed an amended complaint and added VIP Dental Spas as a plaintiff on August 14, 2020. A jury trial is scheduled to begin in this matter on November 20, 2023. A lign believes the plaintiffs’ claims are without merit and intends to vigorously defend itself. On May 3, 2021, an individual named Misty Snow brought an antitrust action in the U.S. District Court for the Northern District of California on behalf of herself and a putative class of similarly situated individuals seeking monetary damages and injunctive relief relating to Align’s alleged market activities in alleged clear aligner and intraoral scanner markets. Plaintiff filed an amended complaint on July 30, 2021 adding new plaintiffs and various state law claims. Align moved to dismiss the first amended complaint. On September 30, 2021, the Court dismissed the complaint and granted Plaintiffs leave to amend. Plaintiffs filed a second amended complaint on October 21, 2021 . Align filed a motion to dismiss the second amended complaint, which the Court granted in part and denied in part. Align believes the plaintiffs’ claims are without merit and intends to vigorously defend itself. Align is currently unable to predi ct the outcome of these lawsuits and therefore cannot determine the likelihood of loss, if any, nor estimate a range of possible loss. SDC Dispute In April 2018, SDC Financial LLC, SmileDirectClub LLC, and the Members of SDC Financial LLC other than the Company (collectively, the “SDC Entities”) initiated confidential arbitration proceedings against Align. In an award dated March 4, 2019, (“Award”) an arbitrator found that Align breached a restrictive covenant and that Align misused the SDC Entities’ confidential information and violated fiduciary duties to SDC Financial LLC. As part of the Award, Align was enjoined from opening new Invisalign stores or providing certain services in physical retail establishments in connection with the marketing and sale of clear aligners in the U.S., and enjoined from using the SDC Entities’ confidential information. The arbitrator extended the expiration date of specified aspects of the restrictive covenant to August 18, 2022. The arbitrator also ordered Align to tender its SDC Financial LLC membership interests to the SDC Entities for a purchase price equal to the “capital account” balance as of October 31, 2017, to be determined in accordance with the applicable provisions of the SDC Operating Agreements. No financial damages were awarded to the SDC Entities. The Circuit Court for Cook County, Illinois confirmed the Award on April 29, 2019. 81 As required by the Award, Align tendered its membership interests for a purchase price that SDC claimed to be Align’s “capital account” balance. Align disputed that the SDC Entities properly determined the value of Align’s “capital account” balance as of October 31, 2017. Consequently, on July 3, 2019, Align filed a confidential demand for arbitration challenging the propriety of the SDC Entities’ determination. On March 12, 2021 the Arbitrator issued a final award in favor of Align and against SDC finding that the SDC entities owed Align an additional $ 43.4 million plus interest. SDC paid the amount due to Align on March 17, 2021. On August 27, 2020, Align initiated a confidential arbitration proceeding against the SDC entities before the American Arbitration Association in San Jose, California. This arbitration relates to the Strategic Supply Agreement (“Supply Agreement”) entered into between the parties in 2016. The complaint alleges that the SDC Entities breached the Supply Agreement ’ s terms, causing damages to Align in an amount to be determined. On January 19, 2021, SDC filed a counterclaim alleging that Align breached the Supply Agreement. Align denies the SDC Entities’ allegations in the counterclaim and will vigorously defend itself against them. This arbitration hearing is set for July 18-29, 2022. Align is currently unable to predict the outcome of these disputes and therefore cannot determine the likelihood of loss or success nor estimate a range of possible loss or success, if any. In addition to the above, in the ordinary course of Align’s operations, Align is involved in a variety of claims, suits, investigations, and proceedings, including actions with respect to intellectual property claims, patent infringement claims, government investigations, labor and employment claims, breach of contract claims, tax, and other matters. Regardless of the outcome, these proceedings can have an adverse impact on us because of defense costs, diversion of management resources, and other factors. Although the results of complex legal proceedings are difficult to predict and Align’s view of these matters may change in the future as litigation and events related thereto unfold; Align currently does not believe that these matters, individually or in the aggregate, will materially affect Align’s financial position, results of operations or cash flows. Note 11. Commitments and Contingencies Unconditional Purchase Obligations On May 29, 2018, we entered into a purchase agreement, as amended, with an existing single source supplier which requires us to purchase aligner material for a minimum amount of approximately $ 425.9 million over five years through 2022. On June 24, 2021, we amended the agreement which requires an additional minimum align material purchase of approximately $ 348.0 million from 2023 through 2026. As of December 31, 2021, our remaining commitment under this agreement totaled $ 419.6 million. On October 30, 2020, we entered into a subscription agreement with a software company to renew our license for a total consideration of $ 95.2 million. As of December 31, 2021, we had a remaining commitment of $ 47.6 million which is expected to be paid through 2024. On December 6, 2020, we entered into a supply agreement for certain components used for our manufacturing operations. As of December 31, 2021, we had purchase commitments of $ 140.5 million which is expected to be paid through 2025. On December 14, 2021, we entered into a letter of intent to amend a promotional rights agreement with a third-party which includes advertising and media coverage. As of December 31, 2021, we had a remaining commitment of $ 79.2 million which is expected to be paid through 2026. Off-Balance Sheet Arrangements As of December 31, 2021, we had no material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources other than certain items disclosed in the Unconditional Purchase Obligations section above. 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 82 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, 2021, we did not have any material indemnification claims that were probable or reasonably possible. Note 12. Stockholders’ Equity Common Stock The holders of common stock are entitled to receive dividends whenever funds are legally available and when and if declared by the Board of Directors. We have never declared or paid dividends on our common stock. Stock-Based Compensation Plans Our 2005 Incentive Plan, as amended, provides for the granting of incentive stock options, non-statutory stock options, restricted stock units (“RSUs”), market-performance based restricted stock units (“MSUs”), stock appreciation rights, performance units and performance shares to employees, non-employee directors and consultants. Shares granted on or after May 16, 2013 as an award of restricted stock, restricted stock unit, market-performance based restricted stock units, performance share or performance unit (“full value awards”) are counted against the authorized share reserve as one and nine-tenths (1 9/10 ) shares for every one (1) share subject to the award, and any shares canceled that were counted as one and nine-tenths against the plan reserve will be returned at the same ratio. As of December 31, 2021, the 2005 Incentive Plan, as amended, has a total reserve of 27,783,379 shares for issuance of which 4,244,723 shares are available for issuance. We issue new shares from our pool of authorized but unissued shares to satisfy the exercise and vesting obligations of our stock-based compensation plans. Summary of Stock-Based Compensation Expense The stock-based compensation related to our stock-based awards and employee stock purchase plan for the year ended December 31, 2021, 2020 and 2019 is as follows (in thousands): Year Ended December 31, 2021 2020 2019 Cost of net revenues $ 5,633 $ 4,719 $ 5,154 Selling, general and administrative 90,659 78,500 69,817 Research and development 18,044 15,208 13,213 Total stock-based compensation $ 114,336 $ 98,427 $ 88,184 The income tax benefit related to stock-based compensation was $ 13.8 million, $ 11.9 million and $ 10.3 million for the year ended December 31, 2021, 2020 and 2019, respectively. 83 Restricted Stock Units The fair value of RSUs is based on our closing stock price on the date of grant. RSUs granted generally vest over a period of four years . A summary for the year ended December 31, 2021 is as follows: Number of Shares Underlying RSUs (in thousands) Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Unvested as of December 31, 2020 632 $ 243.55 Granted 166 600.10 Vested and released ( 265 ) 216.73 Forfeited ( 41 ) 350.75 Unvested as of December 31, 2021 492 $ 369.17 1.1 $ 323,239 The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (calculated by multiplying our closing stock price on the last trading day of 2021 by the number of unvested RSUs) that would have been received by the unit holders had all RSUs been vested and released as of the last trading day of 2021. This amount will fluctuate based on the fair market value of our stock. During 2021, of the 264,655 shares vested and released, 78,930 shares were withheld for employee statutory tax obligations, resulting in a net issuance of 185,725 shares. The total fair value of RSUs vested as of their respective vesting dates during 2021, 2020 and 2019 was $ 158.8 million, $ 89.6 million and $ 112.4 million, respectively. The weighted average grant date fair value of RSUs granted during 2021, 2020 and 2019 was $ 600.10 , $ 267.24 and $ 255.42 , respectively. As of December 31, 2021, we expect to recognize $ 116.8 million of total unamortized compensation costs, net of estimated forfeitures, related to RSUs over a weighted average period of 2.1 years. Market-Performance Based Restricted Stock Units We grant MSUs to our executive officers. Each MSU represents the right to one share of Align’s common stock. The actual number of MSUs which will be eligible to vest will be based on the performance of Align’s stock price relative to the performance of a stock market index over the vesting period. MSUs vest over a period of three years and the maximum number of eligible to vest in the future is 250 % of the MSUs initially granted. The following table summarizes the MSU performance for the year ended December 31, 2021: Number of Shares Underlying MSUs (in thousands) Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Unvested as of December 31, 2020 227 $ 430.50 Granted 1 177 658.02 Vested and released ( 230 ) 513.73 Unvested as of December 31, 2021 174 $ 551.57 1.0 $ 114,414 1 Includes MSUs vested during the period above 100% of the grant as actual shares released is based on Align’s stock performance over the vesting period The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (calculated by multiplying our closing stock price on the last trading day of 2021 by the number of unvested MSUs) that would have been received by the unit holders had all MSUs been vested and released as of the last trading day of 2021. This amount will fluctuate based on the fair market value of our stock. During 2021, of the 229,877 shares vested and released, 104,317 shares were withheld for employee statutory tax obligations, resulting in a net issuance of 125,560 shares. The total fair value of MSUs vested as of their respective vesting dates during 2021, 2020 and 2019 was $ 135.6 million, $ 47.1 million and $ 47.7 million, respectively. As of December 31, 2021, we expect to recognize $ 38.5 million of total unamortized compensation costs, net of estimated forfeitures, related to MSUs over a weighted average period of 1.0 year. 84 The fair value of MSUs is estimated at the grant date using a Monte Carlo simulation that includes factors for market conditions. The weighted average assumptions used in the Monte Carlo simulation were as follows: Year Ended December 31, 2021 2020 2019 Expected term (in years) 3.0 3.0 3.0 Expected volatility 56.3 % 44.4 % 37.3 % Risk-free interest rate 0.2 % 1.4 % 2.5 % Expected dividends — — — Weighted average fair value per share at grant date $ 1,102.09 $ 392.67 $ 392.03 Employee Stock Purchase Plan ( “ ESPP ” ) In May 2010, our stockholders approved the 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”) which consists of consecutive overlapping twenty-four month offering periods with four six-month purchase periods in each offering period. Employees purchase shares at 85 % of the lower of the fair market value of the common stock at either the beginning of the offering period or the end of the purchase period. The 2010 Purchase Plan will continue until terminated by either the Board of Directors or its administrator. In June 2019, the 2010 Purchase Plan was amended to include a non-Code Section 423 component to grant purchase rights to employees outside the U.S. and Canada with six-month offering periods and purchase periods. In May 2021, the 2010 Purchase Plan was amended and restated to increase the maximum number of shares available for purchase to 4,400,000 shares. The following table summarizes the ESPP shares issued: Year Ended December 31, 2021 2020 2019 Number of shares issued (in thousands) 131 116 130 Weighted average price $ 195.44 $ 175.69 $ 136.73 As of December 31, 2021, 2,194,566 shares remain available for future issuance. The fair value of the option component of the 2010 Purchase Plan shares was estimated at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions: Year Ended December 31, 2021 2020 2019 Expected term (in years) 1.1 1.0 1.4 Expected volatility 52.7 % 55.0 % 50.0 % Risk-free interest rate 0.1 % 0.9 % 2.2 % Expected dividends — — — Weighted average fair value at grant date $ 246.84 $ 96.94 $ 86.02 We recognized stock-based compensation related to our employee stock purchase plan of $ 12.2 million, $ 10.5 million and $ 12.1 million for the year ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, we expect to recognize $ 10.4 million of total unamortized compensation costs related to future employee stock purchases over a weighted average period of 0.5 year. Note 13. Common Stock Repurchase Programs In May 2018, our Board of Directors authorized a plan to repurchase up to $ 600.0 million of our common stock (“May 2018 Repurchase Program”). As of December 31, 2021, the authorization under the May 2018 Repurchase Program was completed. In May 2021, our Board of Directors authorized a plan to repurchase up to $ 1.0 billion of our common stock (“May 2021 Repurchase Program”). As of December 31, 2021, we have $ 725.0 million available for repurchase under the May 2021 Repurchase Program. 85 Accelerated Stock Repurchase Agreements ( “ ASRs ” ) We entered into the following ASRs providing for the repurchase of our common stock based on the volume-weighted average price during the term of the agreement, less an agreed upon discount. The following table summarizes the information regarding repurchases of our common stock under ASRs: Agreement Date Repurchase Program Amount Paid (in millions) Completion Date Total Shares Received Average Price per Share Q3 2019 May 2018 $ 200.0 Q3 2019 1,132,464 $ 176.61 Q2 2021 May 2018 $ 100.0 Q3 2021 171,322 $ 583.70 Q2 2021 May 2021 $ 100.0 Q3 2021 161,707 $ 618.40 Q3 2021 May 2021 $ 75.0 Q3 2021 109,239 $ 686.91 Q4 2021 May 2021 $ 100.0 Q4 2021 150,031 $ 666.53 Open Market Common Stock Repurchases During the year ended December 31, 2019, we repurchased on the open market approximately 0.8 million shares of our common stock at an average price of $ 264.93 per share, including commissions, for an aggregate purchase price of $ 200.0 million. 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. Note 14. Employee Benefit Plans We have defined contribution retirement plan under Section 401(k) of the Internal Revenue Code for our U.S. employees which covers substantially all U.S. employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. We match 50 % of our employee’s salary deferral contributions up to 6 % of the employee’s eligible compensation. We contributed approximately $ 8.5 million, $ 6.9 million and $ 6.2 million to the 401(k) plan during the year ended December 31, 2021, 2020 and 2019, respectively. We also have defined contribution retirement plans outside of the U.S. to which we contributed $ 42.3 million, $ 28.9 million and $ 25.4 million during the year ended December 31, 2021, 2020 and 2019, respectively. Note 15. Income Taxes Net income before provision for (benefit from) income taxes and equity in losses of investee consists of the following (in thousands): Year Ended December 31, 2021 2020 2019 Domestic $ 378,478 $ 173,099 $ 184,956 Foreign 633,945 205,850 377,695 Net income before provision for (benefit from) income taxes and equity in losses of investee $ 1,012,423 $ 378,949 $ 562,651 86 The provision for (benefit from) income taxes consists of the following (in thousands): Year Ended December 31, 2021 2020 2019 Federal Current $ 157,383 $ 55,291 $ 76,528 Deferred ( 25,598 ) ( 11,749 ) 1,235 131,785 43,542 77,763 State Current 28,365 8,862 9,169 Deferred ( 5,860 ) ( 2,121 ) 209 22,505 6,741 9,378 Foreign Current 42,681 29,399 28,364 Deferred 43,432 ( 1,476,621 ) ( 3,158 ) 86,113 ( 1,447,222 ) 25,206 Provision for (benefit from) income taxes $ 240,403 $ ( 1,396,939 ) $ 112,347 The differences between income taxes using the federal statutory income tax rate for 2021, 2020 and 2019 and our effective tax rates are as follows: Year Ended December 31, 2021 2020 2019 U.S. federal statutory income tax rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal tax benefit 2.2 1.8 1.7 U.S. tax on foreign earnings 2.7 — 1.9 Impact of differences in foreign tax rates ( 2.0 ) 5.6 ( 5.1 ) Stock-based compensation ( 0.3 ) 1.1 ( 0.3 ) Impact of expiration of statute of limitations ( 0.7 ) ( 0.3 ) — Impact of intra-entity intellectual property rights transfer — ( 395.6 ) — Settlement on audits — ( 1.4 ) — Impact of U.S. Tax Cuts and Jobs Act — ( 0.5 ) — Change in valuation allowance 1.1 0.1 0.1 Other items not individually material ( 0.3 ) ( 0.4 ) 0.7 Effective tax rate 23.7 % ( 368.6 ) % 20.0 % As of December 31, 2021, substantially all of the earnings previously determined to be not indefinitely reinvested have been repatriated. U.S. income taxes have already been provided on the $ 1,257.5 million undistributed earnings that is indefinitely reinvested in our international operations, therefore, the tax impact upon distribution is limited to mainly state income and withholding taxes and is not significant. During the year ended December 31, 2020, we completed an intra-entity transfer of certain intellectual property rights and fixed assets to our new Swiss subsidiary, where our EMEA regional headquarters is located beginning January 1, 2020. The transfer of intellectual property rights did not result in a taxable gain; however, it did result in a step-up of the Swiss tax deductible basis in the transferred assets, and accordingly, created a temporary difference between the book basis and the tax basis of such intellectual property rights. Consequently, this transaction resulted in the recognition of a deferred tax asset and related one-time tax benefit of approximately $ 1,493.5 million during the year ended December 31, 2020, which is the net impact of the deferred tax asset recognized as a result of the additional Swiss tax deductible basis in the transferred assets and certain costs related to the transfer of fixed assets and inventory. 87 As of December 31, 2021 and 2020, the significant components of our deferred tax assets and liabilities are (in thousands): December 31, 2021 2020 Deferred tax assets: Net operating loss and capital loss carryforwards $ 11,069 $ 20,728 Reserves and accruals 47,641 34,469 Stock-based compensation 13,576 10,842 Deferred revenue 83,514 32,562 Amortizable tax basis in intangibles 1,392,471 1,468,159 Net translation losses 10,008 2,939 Credit carryforwards 5,637 905 Total deferred tax assets 1,563,916 1,570,604 Deferred tax liabilities: Depreciation and amortization 11,915 14,730 Acquisition-related intangibles 28,989 35,689 Prepaid expenses 6,931 1,720 Total deferred tax liabilities 47,835 52,139 Net deferred tax assets before valuation allowance 1,516,081 1,518,465 Valuation allowance ( 12,938 ) ( 1,325 ) Net deferred tax assets $ 1,503,143 $ 1,517,140 The available positive evidence at December 31, 2021 included historical operating profits and a projection of future income sufficient to realize most of our remaining deferred tax assets. As of December 31, 2021, it was considered more likely than not that our deferred tax assets would be realized with the exception of certain net operating loss, capital loss carryovers and unrealized translation losses as we are unable to forecast sufficient future profits to realize the deferred tax assets. The total valuation allowance as of December 31, 2021 was $ 12.9 million. During the year ended December 31, 2021, the valuation allowance increased by $ 11.6 million primarily due to deferred tax assets related to unrealized translation losses and net operating loss from one of our German subsidiaries that are not more likely than not to be realized. As of December 31, 2021, we have foreign net operating loss carryforwards of approximately $ 44.8 million, attributed mainly to losses in Israel, China and Germany. The losses in Israel and Germany can be carried forward indefinitely. The operating loss carryforwards in China, if not utilized, will expire beginning 2026. The changes in the balance of gross unrecognized tax benefits, which exclude interest and penalties, for the year ended December 31, 2021, 2020 and 2019, are as follows (in thousands): Year Ended December 31, 2021 2020 2019 Gross unrecognized tax benefits at January 1, $ 46,320 $ 46,650 $ 33,262 Increases related to tax positions taken during the current year 27,710 20,592 19,012 Increases related to tax positions taken during a prior year 5,471 10,201 143 Decreases related to tax positions taken during a prior year ( 5,804 ) ( 29,977 ) ( 3,783 ) Decreases related to expiration of statute of limitations ( 8,986 ) — ( 1,984 ) Decreases related to settlement with tax authorities ( 1,416 ) ( 1,146 ) — Gross unrecognized tax benefits at December 31, $ 63,295 $ 46,320 $ 46,650 The total amount of gross unrecognized tax benefits as of December 31, 2021 was $ 63.3 million, of which $ 61.9 million would impact our effective tax rate if recognized. We file U.S. federal, U.S. state, and non-U.S. income tax returns. Our major tax jurisdictions include U.S. federal, the State of California and Switzerland. For U.S. federal and state tax returns, we are no longer subject to tax examinations for years before 2018 and 2014, respectively. Our Israeli subsidiary is under tax audit for years 2016 through 2019. During the fourth quarter of 2021, the Israel Tax Authority issued a tax assessment in connection with a 2016 transaction to which our Israeli subsidiary was a party. We intend to file an administrative appeal during the first quarter of 2022 and will continue to 88 vigorously defend our Israeli subsidiary’s tax return position. Based on our assessment of the information currently available, we have not derecognized or remeasured our tax positions with respect to this matter during the year. With few exceptions, we are no longer subject to examination by foreign tax authorities for years before 2014. We have elected to recognize interest and penalties related to unrecognized tax benefits as a component of income taxes. Interest and penalties included in tax expense for the year ended December 31, 2021, 2020 and 2019 as well as accrued as of December 31, 2021 and 2020 were not material. While we defend income tax audits in various jurisdictions and the results of such audits may differ materially from the amounts accrued for each year, we cannot currently ascertain the bases on which any given audit will be ultimately resolved. Accordingly, we are unable to estimate the range of possible adjustments to our balance of gross unrecognized tax benefits in the next 12 months. Note 16. Net Income per Share Basic net income per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed using the weighted average number of shares of common stock, adjusted for any dilutive effect of potential common stock. Potential common stock, computed using the treasury stock method, includes RSUs, MSUs and our ESPP. The following table sets forth the computation of basic and diluted net income per share attributable to common stock (in thousands, except per share amounts): Year Ended December 31, 2021 2020 2019 Numerator: Net income $ 772,020 $ 1,775,888 $ 442,776 Denominator: Weighted average common shares outstanding, basic 78,917 78,760 79,424 Dilutive effect of potential common stock 753 470 676 Total shares, diluted 79,670 79,230 80,100 Net income per share, basic $ 9.78 $ 22.55 $ 5.57 Net income per share, diluted $ 9.69 $ 22.41 $ 5.53 Anti-dilutive potential common shares 1 1 280 79 1 Represents RSUs and MSUs not included in the calculation of diluted net income per share as the effect would have been anti-dilutive. 89 Note 17. Supplemental Cash Flow Information The supplemental cash flow information consists of the following (in thousands): Year Ended December 31, 2021 2020 2019 Taxes paid $ 203,309 $ 76,332 $ 71,746 Non-cash investing and financing activities: Acquisition of property, plant and equipment in accounts payable and accrued liabilities $ 64,135 $ 37,267 $ 16,488 Issuance of promissory note in exchange for sale of equity method investment $ — $ — $ 54,154 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 29,769 $ 26,022 $ 26,337 Investing cash flows from finance leases (1) $ — $ — $ 10,896 Financing cash flows from finance leases $ — $ — $ 45,773 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 68,463 $ 47,981 $ 32,723 Finance leases $ — $ — $ 51,064 1 A portion of finance lease purchase payment relates to leasing a part of the building to a third party as a lessor. This amount is included in Other Investing Activities in our Consolidated Statement of Cash Flows. Note 18. Segments and Geographical Information Segment Information We report segment information based on the management approach. The management approach designates the internal reporting used by our Chief Operating Decision Maker for decision making and performance assessment as the basis for determining our reportable segments. The performance measures of our reportable segments include net revenues, gross profit and income from operations. Income from operations for each segment includes all geographic revenues, related cost of net revenues and operating expenses directly attributable to the segment. Certain operating expenses are attributable to operating segments and each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Costs not specifically allocated to segment income from operations include various corporate expenses such as stock-based compensation and costs related to IT, facilities, human resources, accounting and finance, legal and regulatory, and other separately managed general and administrative costs outside the operating segments. 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 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. 90 Summarized financial information by segment is as follows (in thousands): Year Ended December 31, 2021 2020 2019 Net revenues Clear Aligner $ 3,247,080 $ 2,101,459 $ 2,025,750 Systems and Services 705,504 370,482 381,046 Total net revenues $ 3,952,584 $ 2,471,941 $ 2,406,796 Gross profit Clear Aligner $ 2,474,373 $ 1,532,130 $ 1,499,713 Systems and Services 460,982 231,105 244,184 Total gross profit $ 2,935,355 $ 1,763,235 $ 1,743,897 Income from operations Clear Aligner $ 1,325,866 $ 768,045 $ 835,957 Systems and Services 259,127 96,052 137,720 Unallocated corporate expenses ( 608,593 ) ( 476,926 ) ( 431,184 ) Total income from operations $ 976,400 $ 387,171 $ 542,493 Stock-based compensation Clear Aligner $ 10,648 $ 8,975 $ 9,220 Systems and Services 705 734 255 Unallocated corporate expenses 102,983 88,718 78,709 Total stock-based compensation $ 114,336 $ 98,427 $ 88,184 Depreciation and amortization Clear Aligner $ 50,723 $ 41,371 $ 38,979 Systems and Services 21,581 16,798 7,441 Unallocated corporate expenses 36,425 35,369 32,570 Total depreciation and amortization $ 108,729 $ 93,538 $ 78,990 Impairments and other charges (gains), net Clear Aligner $ — $ — $ 22,990 Total impairments and other charges (gains), net $ — $ — $ 22,990 Litigation settlement gain Clear Aligner $ — $ — $ ( 51,000 ) Total litigation settlement gain $ — $ — $ ( 51,000 ) The following table reconciles total segment income from operations in the table above to net income before provision for (benefit from) income taxes and equity in losses of investee (in thousands): Year Ended December 31, 2021 2020 2019 Total segment income from operations $ 1,584,993 $ 864,097 $ 973,677 Unallocated corporate expenses ( 608,593 ) ( 476,926 ) ( 431,184 ) Total income from operations 976,400 387,171 542,493 Interest income 3,103 3,125 12,482 Other income (expense), net 32,920 ( 11,347 ) 7,676 Net income before provision for (benefit from) income taxes and equity in losses of investee $ 1,012,423 $ 378,949 $ 562,651 91 Geographical Information Net revenues are presented below by geographic area (in thousands): Year Ended December 31, 2021 2020 2019 Net revenues 1 : U.S. $ 1,724,296 $ 1,099,564 $ 1,161,959 Switzerland 2 1,353,229 809,080 — China 275,503 199,851 196,733 The Netherlands 2 — — 760,444 Other International 599,556 363,446 287,660 Total net revenues $ 3,952,584 $ 2,471,941 $ 2,406,796 1 Net revenues are attributed to countries based on the location of where revenues are recognized by our legal entities. 2 In 2020, we implemented a new international corporate structure. This changed the structure of international procurement and sales operations from the Netherlands to Switzerland. Tangible long-lived assets, which includes Property, plant and equipment, net, and Operating lease right-of-use assets, net, are presented below by geographic area (in thousands): As of December 31, 2021 2020 Long-lived assets 1 : Switzerland $ 444,205 $ 257,337 U.S. 210,582 180,539 China 125,346 113,918 Costa Rica 92,204 97,804 Other International 330,846 167,676 Total long-lived assets $ 1,203,183 $ 817,274 1 Long-lived assets are attributed to countries based on the location of our entity that owns or leases the assets. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None