ALIGN TECHNOLOGY INC 10-Q

Item 1. Financial Statements. ALIGN TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net revenues $ 890,348 $ 1,015,906 $ 2,833,120 $ 2,921,485 Cost of net revenues 271,179 260,750 817,046 730,693 Gross profit 619,169 755,156 2,016,074 2,190,792 Operating expenses: Selling, general and administrative 398,547 428,409 1,264,402 1,257,445 Research and development 76,966 65,587 221,738 177,839 Total operating expenses 475,513 493,996 1,486,140 1,435,284 Income from operations 143,656 261,160 529,934 755,508 Interest income and other income (expense), net: Interest income 1,685 401 2,607 2,427 Other income (expense), net ( 22,700 ) 427 ( 48,805 ) 34,476 Total interest income and other income (expense), net ( 21,015 ) 828 ( 46,198 ) 36,903 Net income before provision for income taxes 122,641 261,988 483,736 792,411 Provision for income taxes 49,941 81,019 163,938 211,352 Net income $ 72,700 $ 180,969 $ 319,798 $ 581,059 Net income per share: Basic $ 0.93 $ 2.29 $ 4.08 $ 7.36 Diluted $ 0.93 $ 2.28 $ 4.07 $ 7.29 Shares used in computing net income per share: Basic 78,093 78,904 78,408 78,971 Diluted 78,237 79,516 78,652 79,677 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents ALIGN TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net income $ 72,700 $ 180,969 $ 319,798 $ 581,059 Other comprehensive loss: Change in foreign currency translation adjustment, net of tax ( 20,246 ) ( 12,037 ) ( 41,313 ) ( 25,902 ) Change in unrealized gains (losses) on investments, net of tax ( 729 ) 20 ( 3,758 ) — Other comprehensive loss ( 20,975 ) ( 12,017 ) ( 45,071 ) ( 25,902 ) Comprehensive income $ 51,725 $ 168,952 $ 274,727 $ 555,157 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents ALIGN TECHNOLOGY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) (unaudited) September 30, 2022 December 31, 2021 ASSETS Current assets: Cash and cash equivalents $ 1,044,523 $ 1,099,370 Marketable securities, short-term 46,242 71,972 Accounts receivable, net of allowance for doubtful accounts of $ 9,617 and $ 9,245 , respectively 859,629 897,198 Inventories 320,903 230,230 Prepaid expenses and other current assets 229,283 195,305 Total current assets 2,500,580 2,494,075 Marketable securities, long-term 50,256 125,320 Property, plant and equipment, net 1,199,880 1,081,926 Operating lease right-of-use assets, net 116,031 121,257 Goodwill 377,616 418,547 Intangible assets, net 91,711 109,709 Deferred tax assets 1,524,584 1,533,767 Other assets 52,144 57,509 Total assets $ 5,912,802 $ 5,942,110 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 138,918 $ 163,886 Accrued liabilities 383,618 607,315 Deferred revenues 1,286,867 1,152,870 Total current liabilities 1,809,403 1,924,071 Income tax payable 127,059 118,072 Operating lease liabilities 96,694 102,656 Other long-term liabilities 185,024 174,597 Total liabilities 2,218,180 2,319,396 Commitments and contingencies (Notes 6 and 7) Stockholders’ equity: Preferred stock, $ 0.0001 par value ( 5,000 shares authorized; none issued) — — Common stock, $ 0.0001 par value ( 200,000 shares authorized; 78,111 and 78,710 issued and outstanding, respectively) 8 8 Additional paid-in capital 1,060,698 999,006 Accumulated other comprehensive income (loss), net ( 40,745 ) 4,326 Retained earnings 2,674,661 2,619,374 Total stockholders’ equity 3,694,622 3,622,714 Total liabilities and stockholders’ equity $ 5,912,802 $ 5,942,110 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents ALIGN TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) (unaudited) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss), Net Retained Earnings Total Three Months Ended September 30, 2022 Shares Amount Balance as of June 30, 2022 78,059 $ 8 $ 1,016,882 $ ( 19,770 ) $ 2,601,961 $ 3,599,081 Net income — — — — 72,700 72,700 Net change in unrealized gains (losses) from investments — — — ( 729 ) — ( 729 ) Net change in foreign currency translation adjustment — — — ( 20,246 ) — ( 20,246 ) Issuance of common stock relating to employee equity compensation plans 52 — 11,322 — — 11,322 Tax withholdings related to net share settlements of equity awards — — ( 424 ) — — ( 424 ) Stock-based compensation — — 32,918 — — 32,918 Balance as of September 30, 2022 78,111 $ 8 $ 1,060,698 $ ( 40,745 ) $ 2,674,661 $ 3,694,622 Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss), Net Retained Earnings Total Nine Months Ended September 30, 2022 Shares Amount Balance as of December 31, 2021 78,710 $ 8 $ 999,006 $ 4,326 $ 2,619,374 $ 3,622,714 Net income — — — — 319,798 319,798 Net change in unrealized gains (losses) from investments — — — ( 3,758 ) — ( 3,758 ) Net change in foreign currency translation adjustment — — — ( 41,313 ) — ( 41,313 ) Issuance of common stock relating to employee equity compensation plans 302 — 26,149 — — 26,149 Tax withholdings related to net share settlements of equity awards — — ( 52,611 ) — — ( 52,611 ) Common stock repurchased and retired ( 901 ) — ( 10,525 ) — ( 264,511 ) ( 275,036 ) Stock-based compensation — — 98,679 — — 98,679 Balance as of September 30, 2022 78,111 $ 8 $ 1,060,698 $ ( 40,745 ) $ 2,674,661 $ 3,694,622 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents ALIGN TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED) (in thousands) (unaudited) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss), Net Retained Earnings Total Three Months Ended September 30, 2021 Shares Amount Balance as of June 30, 2021 78,948 $ 8 $ 895,831 $ 29,616 $ 2,458,955 $ 3,384,410 Net income — — — — 180,969 180,969 Net change in unrealized gains (losses) from investments — — — 20 — 20 Net change in foreign currency translation adjustment — — — ( 12,037 ) — ( 12,037 ) Issuance of common stock relating to employee equity compensation plans 69 — 12,490 — — 12,490 Tax withholdings related to net share settlements of equity awards — — ( 2,454 ) — — ( 2,454 ) Common stock repurchased and retired ( 165 ) — ( 1,819 ) — ( 113,219 ) ( 115,038 ) Equity forward contract related to accelerated stock repurchase — — 40,000 — — 40,000 Stock-based compensation — — 28,402 — — 28,402 Balance as of September 30, 2021 78,852 $ 8 $ 972,450 $ 17,599 $ 2,526,705 $ 3,516,762 Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss), Net Retained Earnings Total Nine Months Ended September 30, 2021 Shares Amount Balance as of December 31, 2020 78,860 $ 8 $ 974,556 $ 43,501 $ 2,215,800 $ 3,233,865 Net income — — — — 581,059 581,059 Net change in foreign currency translation adjustment — — — ( 25,902 ) — ( 25,902 ) Issuance of common stock relating to employee equity compensation plans 434 — 25,623 — — 25,623 Tax withholdings related to net share settlements of equity awards — — ( 107,343 ) — — ( 107,343 ) Common stock repurchased and retired ( 442 ) — ( 4,884 ) — ( 270,154 ) ( 275,038 ) Stock-based compensation — — 84,498 — — 84,498 Balance as of September 30, 2021 78,852 $ 8 $ 972,450 $ 17,599 $ 2,526,705 $ 3,516,762 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents ALIGN TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited ) Nine Months Ended September 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 319,798 $ 581,059 Adjustments to reconcile net income to net cash provided by operating activities: Deferred taxes 6,765 48,104 Depreciation and amortization 92,096 79,141 Stock-based compensation 98,679 84,498 Non-cash operating lease cost 22,756 19,364 Arbitration award gain — ( 43,403 ) Other non-cash operating activities 26,216 15,651 Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable 32,284 ( 216,081 ) Inventories ( 108,524 ) ( 83,249 ) Prepaid expenses and other assets ( 32,440 ) ( 74,736 ) Accounts payable ( 27,100 ) 13,495 Accrued and other long-term liabilities ( 213,378 ) 107,159 Long-term income tax payable 9,019 20,263 Deferred revenues 197,854 348,430 Net cash provided by operating activities 424,025 899,695 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired ( 12,304 ) ( 8,002 ) Purchase of property, plant and equipment ( 238,696 ) ( 292,002 ) Purchase of marketable securities ( 20,466 ) — Proceeds from maturities of marketable securities 22,456 — Proceeds from sales of marketable securities 93,647 — Repayment on unsecured promissory note — 4,594 Proceeds from arbitration award — 43,403 Other investing activities ( 2,143 ) ( 3,712 ) Net cash used in investing activities ( 157,506 ) ( 255,719 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 26,149 25,623 Common stock repurchases ( 275,036 ) ( 275,038 ) Payroll taxes paid upon the vesting of equity awards ( 52,611 ) ( 107,344 ) Net cash used in financing activities ( 301,498 ) ( 356,759 ) Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash ( 20,422 ) ( 10,241 ) Net (decrease) increase in cash, cash equivalents, and restricted cash ( 55,401 ) 276,976 Cash, cash equivalents, and restricted cash at beginning of the period 1,100,139 961,474 Cash, cash equivalents, and restricted cash at end of the period $ 1,044,738 $ 1,238,450 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 8 Table of Contents ALIGN TECHNOLOGY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by Align Technology, Inc. (“we”, “our”, "Company", or “Align”) on a consistent basis with the audited Consolidated Financial Statements for the year ended December 31, 2021, and contains all adjustments, including normal recurring adjustments, necessary to fairly state the information set forth herein. The unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”), and, therefore, omit certain information and footnote disclosures necessary to present the unaudited Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“U.S.”). The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2021. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 or any other future period, and we make no representations related thereto. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the 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, contingent liabilities, the fair values of financial instruments, stock-based compensation and the 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. Certain Risks and Uncertainties Our business has been materially impacted by fluctuations in macroeconomic conditions, exacerbated by the ongoing geopolitical issues between Russia and Ukraine. While the situation is highly uncertain and evolving, we have been and continue to be impacted by factors such as inflation, supply chain challenges, rising interest rates, volatilities in the financial market, foreign currency exchange rate fluctuations, impacts on consumer confidence and purchasing power, and global recession concerns which could further subject our business to materially adverse consequences should any portion of its impacts become prolonged or escalate beyond its current scope. Additionally, we could also be materially adversely affected by 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. While the overall impact of the COVID-19 pandemic is gradually declining, we continue to be exposed to risks and uncertainties posed by it which varies by geographic regions at different levels. The extent to which our business could be impacted in the future by the pandemic is highly uncertain and difficult to predict. 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”) in order to allocate consideration from the contract to the individual performance obligations is the result of various factors, such as changing trends and market conditions, historical prices, costs, 9 Table of Contents and gross margins. 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. 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. In addition to historical data, we take into consideration changing trends and market conditions. For treatment plans with multiple future performance obligations, we also consider usage rates, which is the number of times a customer is expected to order 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 account factors such as same or similar historical prices and 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 data such as 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. Recent Accounting Pronouncements (i) New Accounting Updates Recently Adopted In October 2021, the Financial Accounting Standards Board ( “ FASB ” ) issued Accounting Standards Update 2021-08, “ Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, ” which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured in accordance with ASC 606, Revenue from Contracts with Customers as if the acquirer had originated the contracts. The updated guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2022 on a prospective basis and early adoption is permitted. We early adopted this standard in the third quarter of 2022 which did not have a material impact on our consolidated financial statements and related disclosures. (ii) Recent Accounting Pronouncements 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 a material impact on our consolidated financial statements or related disclosures. 10 Table of Contents Note 2. Financial Instruments Cash, Cash Equivalents and Marketable Securities The following tables summarize our cash and cash equivalents, and marketable securities on our Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (in thousands): Reported as: September 30, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Cash and Cash Equivalents Marketable securities, short-term Marketable securities, long-term Cash $ 709,497 $ — $ — $ 709,497 $ 709,497 $ — $ — Money market funds 335,026 — — 335,026 335,026 — — Corporate bonds 70,560 — ( 3,405 ) 67,155 — 29,454 37,701 U.S. government treasury bonds 18,587 — ( 641 ) 17,946 — 9,078 8,868 Asset-backed securities 5,624 — ( 53 ) 5,571 — 3,695 1,876 Municipal bonds 4,780 — ( 93 ) 4,687 — 4,015 672 U.S. government agency bonds 1,204 — ( 65 ) 1,139 — — 1,139 Total $ 1,145,278 $ — $ ( 4,257 ) $ 1,141,021 $ 1,044,523 $ 46,242 $ 50,256 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 The following table summarizes the fair value of our available-for-sale marketable securities classified by contractual maturity as of September 30, 2022 and December 31, 2021 (in thousands): September 30, 2022 December 31, 2021 Due in 1 year or less $ 35,157 $ 59,737 Due in 1 year through 5 years 61,341 139,113 Total $ 96,498 $ 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 September 30, 2022 and December 31, 2021 are primarily due to changes in interest rates and credit spreads. Accounts Receivable Factoring During the third quarter of 2022, we entered into factoring transactions on a non-recourse basis with financial institutions to sell certain of our non-U.S. accounts receivable. We account for these transactions as sales of accounts receivables and include the cash proceeds as a part of our cash flows from operations in the Condensed Consolidated Statements of Cash Flows. Total accounts receivable sold under the factoring arrangements was $ 22.9 million during the three months ended September 30, 2022. Factoring fees on the sales of receivables were recorded in other income (expense), net in our Condensed Consolidated Statement of Operations and were not material. 11 Table of Contents Fair Value Measurements 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 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. The following tables summarize our financial assets measured at fair value as of September 30, 2022 and December 31, 2021 (in thousands): Description Balance as of September 30, 2022 Level 1 Level 2 Level 3 Cash equivalents: Money market funds $ 335,026 $ 335,026 $ — $ — Short-term investments: U.S. government treasury bonds 9,078 9,078 — — Corporate bonds 29,454 — 29,454 — Municipal bonds 4,015 — 4,015 — Asset-backed securities 3,695 — 3,695 — Long-term investments: U.S. government treasury bonds 8,868 8,868 — — Corporate bonds 37,701 — 37,701 — Municipal bonds 672 — 672 — U.S. government agency bonds 1,139 — 1,139 — Asset-backed securities 1,876 — 1,876 — Other assets: Investments in privately held companies 12,180 — — 12,180 $ 443,704 $ 352,972 $ 78,552 $ 12,180 12 Table of Contents 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 8,621 — — 8,621 $ 554,322 $ 385,938 $ 159,763 $ 8,621 Derivatives Not Designated as Hedging Instruments 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 three months ended September 30, 2022 and 2021, we recognized net gains of $ 34.6 million and $ 14.7 million, respectively, and during the nine months ended September 30, 2022 and 2021, we recognized net gains of $ 43.8 million and $ 14.1 million, respectively. As of September 30, 2022 and December 31, 2021, the fair value of foreign exchange forward contracts outstanding was no t material. 13 Table of Contents The following tables present the gross notional value of all our foreign exchange forward contracts outstanding as of September 30, 2022 and December 31, 2021 (in thousands): September 30, 2022 Local Currency Amount Notional Contract Amount (USD) Euro € 181,300 $ 177,102 Chinese Yuan ¥ 569,000 79,875 Canadian Dollar C$ 92,800 67,607 Polish Zloty PLN 315,800 63,306 British Pound £ 44,200 48,974 Japanese Yen ¥ 6,224,000 43,194 Brazilian Real R$ 200,000 36,666 Swiss Franc CHF 24,800 25,391 Israeli Shekel ILS 78,390 22,021 Mexican Peso M$ 283,900 14,088 Korean Won ₩ 8,200,000 5,710 Australian Dollar A$ 4,090 2,653 New Taiwan Dollar NT$ 70,000 2,200 Czech Koruna Kč 40,000 1,585 New Zealand Dollar NZ$ 2,500 1,419 $ 591,791 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 Note 3. Balance Sheet Components Inventories consist of the following (in thousands): September 30, 2022 December 31, 2021 Raw materials $ 147,629 $ 123,234 Work in process 101,179 51,706 Finished goods 72,095 55,290 Total inventories $ 320,903 $ 230,230 14 Table of Contents Prepaid expenses and other current assets consist of the following (in thousands): September 30, 2022 December 31, 2021 Value added tax receivables $ 132,070 $ 93,610 Prepaid expenses 50,567 70,218 Other current assets 46,646 31,477 Total prepaid expenses and other current assets $ 229,283 $ 195,305 Accrued liabilities consist of the following (in thousands): September 30, 2022 December 31, 2021 Accrued payroll and benefits $ 137,754 $ 288,355 Accrued expenses 66,859 67,169 Accrued sales and marketing expenses 35,661 41,387 Current operating lease liabilities 24,173 22,719 Accrued property, plant and equipment 22,648 46,561 Accrued professional fees 21,260 31,457 Other accrued liabilities 75,263 109,667 Total accrued liabilities $ 383,618 $ 607,315 Accrued warranty, which is included in the "Other accrued liabilities" category of the accrued liabilities table above, consists of the following activity (in thousands): Nine Months Ended September 30, 2022 2021 Balance at beginning of period $ 16,169 $ 12,615 Charged to cost of net revenues 11,359 13,400 Actual warranty expenditures ( 11,109 ) ( 11,040 ) Balance at end of period $ 16,419 $ 14,975 Deferred revenues consist of the following (in thousands): September 30, 2022 December 31, 2021 Deferred revenues - current $ 1,286,867 $ 1,152,870 Deferred revenues - long-term 1 $ 152,070 $ 136,684 1 Included in Other long-term liabilities within our Condensed Consolidated Balance Sheet During the three months ended September 30, 2022 and 2021, we recognized $ 890.3 million and $ 1,015.9 million of net revenues, respectively, of which $ 156.5 million and $ 122.2 million was included in the deferred revenues balance at December 31, 2021 and 2020, respectively. During the nine months ended September 30, 2022 and 2021, we recognized $ 2,833.1 million and $ 2,921.5 million of net revenues, respectively, of which $ 519.8 million and $ 382.4 million was included in the deferred revenues balance at December 31, 2021 and 2020, respectively. Our unfulfilled performance obligations, including deferred revenues and backlog, as of September 30, 2022 were $ 1,442.5 million. These performance obligations are expected to be fulfilled over six months to five years . Note 4. Goodwill and Intangible Assets During the three months ended September 30, 2022, we completed an immaterial business combination which increased goodwill and existing technology intangible assets. 15 Table of Contents Goodwill The change in the carrying value of goodwill for the nine months ended September 30, 2022, categorized by reportable segments, is as follows (in thousands): Clear Aligner Systems and Services Total Balance as of December 31, 2021 $ 112,208 $ 306,339 $ 418,547 Additions from acquisition — 8,729 8,729 Foreign currency translation adjustments ( 6,694 ) ( 42,966 ) ( 49,660 ) Balance as of September 30, 2022 $ 105,514 $ 272,102 $ 377,616 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 September 30, 2022 Accumulated Amortization Accumulated Impairment Loss Net Carrying Value as of September 30, 2022 Existing technology 10 $ 112,051 $ ( 30,589 ) $ ( 4,328 ) $ 77,134 Customer relationships 10 21,500 ( 5,375 ) — 16,125 Trademarks and tradenames 10 17,200 ( 5,925 ) ( 4,179 ) 7,096 Patents 8 6,511 ( 5,090 ) — 1,421 $ 157,262 $ ( 46,979 ) $ ( 8,507 ) 101,776 Foreign currency translation adjustments ( 10,065 ) Total intangible assets, net 1 $ 91,711 1 Also includes $ 33.5 million of fully amortized intangible assets related to customer relationships. 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 8 6,511 ( 4,495 ) — 2,016 $ 183,242 $ ( 57,428 ) $ ( 19,258 ) 106,556 Foreign currency translation adjustments 3,153 Total intangible assets, net $ 109,709 The total estimated annual future amortization expense for these acquired intangible assets as of September 30, 2022 is as follows (in thousands): Fiscal Year Ending December 31, Amortization Remainder of 2022 $ 4,144 2023 16,501 2024 15,335 2025 14,959 2026 14,353 Thereafter 36,484 Total $ 101,776 16 Table of Contents Amortization expense for the three months ended September 30, 2022 and 2021 was $ 3.9 million and $ 4.4 million, respectively, and amortization expense for the nine months ended September 30, 2022 and 2021 was $ 12.1 million and $ 12.2 million, respectively. Note 5. 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 September 30, 2022, we had no outstanding borrowings under the 2020 Credit Facility and were in compliance with the conditions and performance requirements in all material respects. Note 6. Legal Proceedings 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 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 is currently stayed. Defendants have not yet responded to the complaints. 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 is currently stayed. Defendants have not yet responded to the complaint. 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 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. Oral argument was held on March 10, 2022. On July 8, 2022, a panel of the Ninth Circuit affirmed the district court order dismissing the compla int. On July 21, 2022, plaintiff-appellant filed a petition for rehearing or hearing en banc, which the court denied on August 15, 2022. Align believes th ese 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. 17 Table of Contents 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 were similar to those presented in the 2020 Securities Class Action Lawsuit, but this complaint asserted state law claims for breach of fiduciary duty and insider trading. The complaint sought unspecified monetary damages on behalf of Align, which was 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. Following the denial of the petition for rehearing or hearing en banc in the 2020 Securities Class Action appeal, Plaintiff in the derivative lawsuit agreed to voluntarily dismiss the case. The parties filed a stipulation of dismissal on August 26, 2022, which the court granted. 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 June 29, 2024. Align 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. Plaintiffs filed a second amended complaint on October 21, 2021. On March 2, 2022, Plaintiffs filed a third amended complaint. On October 3, 2022, Plaintiffs filed a fourth amended complaint. A jury trial is scheduled to begin in this matter on June 29, 2024. 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 On August 27, 2020, Align initiated a confidential arbitration proceeding against SmileDirectClub LLC (“SDC”) 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 SDC 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. On May 3, 2022, SDC filed an additional counterclaim alleging that Align breached the Supply Agreement. Align denies SDC's allegations in the counterclaims and intends to vigorously defend itself against them. The arbitration hearing on Align’s claims and SDC’s first counterclaim was held on July 18-27, 2022 in Chicago, Illinois. The arbitration hearing on SDC’s second counterclaim is set for February 20-24, 2023. On October 27, 2022, the arbitrator issued an interim award on Align’s claims and SDC’s first counterclaim finding that SDC breached the Supply Agreement, Align did not breach the Supply Agreement, and SDC caused harm to Align. Based on these findings, the arbitrator awarded Align an interim award that, when confirmed, may be material to our results in the quarter reported. Unless otherwise accelerated by the arbitrator, the final amount payable to Align will be determined after the disposition of SDC’s second counterclaim. Align anticipates recognizing the amount ultimately realizable following confirmation of the final award. Align is currently unable to predict the outcome of SDC’s second counterclaim 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. 18 Table of Contents Note 7. Commitments and Contingencies Off-Balance Sheet Arrangements As of September 30, 2022, 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 Note 11 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021. Indemnification Provisions In the normal course of business to facilitate transactions in our services and products, we indemnify certain parties: customers, vendors, lessors, and other parties with respect to certain matters, including, but not limited to, services to be provided by us and intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and our executive officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. Several of these agreements limit the time within which an indemnification claim can be made and the amount of the claim. It is not possible to make a reasonable estimate of the maximum potential amount under these indemnification agreements due to the unique facts and circumstances involved in each particular agreement. Additionally, we have a limited history of prior indemnification claims and the payments we have made under such agreements have not had a material adverse effect on our results of operations, cash flows or financial position. However, to the extent that valid indemnification claims arise in the future, future payments by us could be significant and could have a material adverse effect on our results of operations or cash flows in a particular period. As of September 30, 2022, we did not have any material indemnification claims that were probable or reasonably possible. Note 8. Stockholders’ Equity As of September 30, 2022, the 2005 Incentive Plan, as amended, has a total reserve of 27,783,379 shares of which 3,757,122 shares are available for issuance. Summary of Stock-Based Compensation Expense The stock-based compensation related to our stock-based awards and employee stock purchase plan for the three and nine months ended September 30, 2022 and 2021 is as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Cost of net revenues $ 1,651 $ 1,451 $ 4,779 $ 4,175 Selling, general and administrative 25,293 22,229 76,509 67,131 Research and development 5,974 4,722 17,391 13,192 Total stock-based compensation $ 32,918 $ 28,402 $ 98,679 $ 84,498 Restricted Stock Units (“RSUs”) 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 nine months ended September 30, 2022 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, 2021 492 $ 369.17 Granted 239 478.94 Vested and released ( 196 ) 334.10 Forfeited ( 35 ) 433.42 Unvested as of September 30, 2022 500 $ 430.73 1.4 $ 103,619 19 Table of Contents As of September 30, 2022, we expect to recognize $ 154.1 million of total unamortized compensation costs, net of estimated forfeitures, related to RSUs over a weighted average period of 2.4 years. Market-Performance Based Restricted Stock Units (“MSUs”) We grant MSUs to members of senior management. 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 eligible to vest in the future is 250 % of the MSUs initially granted. The following table summarizes the MSU performance for the nine months ended September 30, 2022: 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, 2021 174 $ 551.57 Granted 1 101 607.96 Vested and released ( 128 ) 396.10 Forfeited ( 3 ) 744.39 Unvested as of September 30, 2022 144 $ 725.73 1.2 $ 29,838 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. As of September 30, 2022, we expect to recognize $ 47.7 million of total unamortized compensation costs, net of estimated forfeitures, related to MSUs over a weighted average period of 1.2 years. Employee Stock Purchase Plan As of September 30, 2022, we have 2,108,898 shares available for future issuance under our Amended and Restated 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”). 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: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Expected term (in years) 1.5 1.2 1.5 1.1 Expected volatility 52.3 % 51.1 % 50.2 % 52.7 % Risk-free interest rate 2.9 % 0.1 % 1.8 % 0.1 % Expected dividends — — — — Weighted average fair value at grant date $ 112.84 $ 257.89 $ 159.44 $ 246.84 As of September 30, 2022, we expect to recognize $ 22.0 million of total unamortized compensation costs related to future employee stock purchases over a weighted average period of 1.1 years. Note 9. Common Stock Repurchase Program 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 September 30, 2022, we have $ 449.9 million available for repurchases under the May 2021 Repurchase Program. 20 Table of Contents Accelerated Share Repurchase Agreements (“ASRs”) During the nine months ended September 30, 2022 and 2021, we entered into 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 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 Q2 2022 May 2021 $ 200.0 Q2 2022 756,502 $ 264.37 Subsequent to the third quarter, on October 28, 2022, we entered into an ASR to repurchase $ 200.0 million of our common stock. We paid $ 200.0 million and received an initial delivery of approximately 0.8 million shares based on current market prices. The final number of shares to be repurchased will be based on our volume-weighted average stock price under the terms of the ASR, less an agreed upon discount. Open Market Common Stock Repurchases During the nine months ended September 30, 2022, we repurchased on the open market approximately 0.1 million shares of our common stock at an average price of $ 522.61 per share, including commissions and fees, for an aggregate purchase price of $ 75.0 million. Note 10. Accounting for Income Taxes Our provision for income taxes was $ 49.9 million and $ 81.0 million for the three months ended September 30, 2022 and 2021, respectively, representing effective tax rates of 40.7 % and 30.9 %, respectively. Our provision for income taxes was $ 163.9 million and $ 211.4 million for the nine months ended September 30, 2022 and 2021, respectively, representing effective tax rates of 33.9 % and 26.7 %, respectively. Our effective tax rate differs from the statutory federal income tax rate of 21% for the three and nine months ended September 30, 2022 and 2021 primarily due to the recognition of additional tax expense resulting from foreign income taxed at different rates, state income taxes, and non-deductible expenses in the U.S., partially offset by the recognition of excess tax benefits related to stock-based compensation. Additionally, a change in U.S. tax laws effective January 1, 2022 which requires capitalization and amortization of research and development expenses incurred after December 31, 2021 has increased our effective tax rate for the three and nine months ended September 30, 2022. We exercise significant judgment in regards to estimates of future market growth, forecasted earnings and projected taxable income in determining the provision for income taxes and for purposes of assessing our ability to utilize any future benefit from deferred tax assets. We continue to assess the realizability of the deferred tax assets as we take into account new information. 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 2017. 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 filed an administrative appeal challenging the assessment during the first quarter of 2022 and, by doing so, proceeded to the next administrative stage of the audit. We will continue to 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 nine months ended September 30, 2022. With few exceptions, we are no longer subject to examination by foreign tax authorities for years before 2015. Our total gross unrecognized tax benefits, excluding interest and penalties, were $ 134.2 million and $ 63.3 million as of September 30, 2022 and December 31, 2021, respectively, a material amount of which would impact our effective tax rate if recognized. The increase in our unrecognized tax benefits relates primarily to positions taken on income tax return calculations finalized during the three months ended September 30, 2022 . We have elected to recognize interest and penalties related to unrecognized tax benefits as a component of income taxes. Total interest and penalties accrued as of September 30, 2022 was $ 5.5 million. 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 21 Table of Contents 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. The U.S. Inflation Reduction Act of 2022 ( “ IRA ”) was enacted in the United States on August 16, 2022. The IRA imposes a 15% alternative minimum tax on the financial statement income of certain corporations which is effective for tax years beginning after December 31, 2022, as well as a 1% excise tax on the net fair market value of stock repurchases made after December 31, 2022. Based upon our analysis of the IRA, we have determined there is no impact to our tax provision for the three and nine months ended September 30, 2022. We will continue to evaluate the impact of these tax law changes on future periods. Note 11. Net Income per Share 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): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Numerator: Net income $ 72,700 $ 180,969 $ 319,798 $ 581,059 Denominator: Weighted average common shares outstanding, basic 78,093 78,904 78,408 78,971 Dilutive effect of potential common stock 144 612 244 706 Total shares, diluted 78,237 79,516 78,652 79,677 Net income per share, basic $ 0.93 $ 2.29 $ 4.08 $ 7.36 Net income per share, diluted $ 0.93 $ 2.28 $ 4.07 $ 7.29 Anti-dilutive potential common shares 1 345 83 317 67 1 Represents RSUs and MSUs not included in the calculation of diluted net income per share as the effect would have been anti-dilutive. Note 12. Supplemental Cash Flow Information The supplemental cash flow information consists of the following (in thousands): Nine Months Ended September 30, 2022 2021 Non-cash investing and financing activities: Acquisition of property, plant and equipment in accounts payable and accrued liabilities $ 41,255 $ 72,531 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 23,310 $ 21,626 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 26,532 $ 31,635 Note 13. 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 22 Table of Contents 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 Imaging Systems and CAD/CAM services (“Systems and Services”) segment. Summarized financial information by segment is as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net revenues Clear Aligner $ 732,837 $ 837,593 $ 2,340,931 $ 2,431,821 Systems and Services 157,511 178,313 492,189 489,664 Total net revenues $ 890,348 $ 1,015,906 $ 2,833,120 $ 2,921,485 Gross profit Clear Aligner $ 519,387 $ 638,169 $ 1,710,328 $ 1,869,368 Systems and Services 99,782 116,987 305,746 321,424 Total gross profit $ 619,169 $ 755,156 $ 2,016,074 $ 2,190,792 Income from operations Clear Aligner $ 259,434 $ 346,957 $ 879,362 $ 1,022,048 Systems and Services 44,436 65,791 140,834 177,694 Unallocated corporate expenses ( 160,214 ) ( 151,588 ) ( 490,262 ) ( 444,234 ) Total income from operations $ 143,656 $ 261,160 $ 529,934 $ 755,508 Stock-based compensation Clear Aligner $ 4,377 $ 2,824 $ 10,232 $ 7,750 Systems and Services 240 169 690 514 Unallocated corporate expenses 28,301 25,409 87,757 76,234 Total stock-based compensation $ 32,918 $ 28,402 $ 98,679 $ 84,498 Depreciation and amortization Clear Aligner $ 14,678 $ 13,191 $ 42,474 $ 36,481 Systems and Services 7,181 5,827 20,879 14,994 Unallocated corporate expenses 10,330 8,596 28,743 27,666 Total depreciation and amortization $ 32,189 $ 27,614 $ 92,096 $ 79,141 The following table reconciles total segment income from operations in the table above to net income before provision for income taxes (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Total segment income from operations $ 303,870 $ 412,748 $ 1,020,196 $ 1,199,742 Unallocated corporate expenses ( 160,214 ) ( 151,588 ) ( 490,262 ) ( 444,234 ) Total income from operations 143,656 261,160 529,934 755,508 Interest income 1,685 401 2,607 2,427 Other income (expense), net ( 22,700 ) 427 ( 48,805 ) 34,476 Net income before provision for income taxes $ 122,641 $ 261,988 $ 483,736 $ 792,411 23 Table of Contents Geographical Information Net revenues are presented below by geographic area (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net revenues 1 : U.S. $ 400,045 $ 448,858 $ 1,251,018 $ 1,266,258 Switzerland 257,845 323,036 919,935 1,004,820 Other International 232,458 244,012 662,167 650,407 Total net revenues $ 890,348 $ 1,015,906 $ 2,833,120 $ 2,921,485 1 Net revenues are attributed to countries based on the location of where revenues are recognized by our legal entities. 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): September 30, 2022 December 31, 2021 Long-lived assets 1 : Switzerland $ 519,202 $ 444,205 U.S. 214,975 210,582 China 112,715 125,346 Other International 469,019 423,050 Total long-lived assets $ 1,315,911 $ 1,203,183 1 Long-lived assets are attributed to countries based on the location of our entity that owns or leases the assets. 24 Table of Contents