Align Technology Annual Report 2015

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549________________________________________________________________________FORM 10-K ________________________________________________________________________(Mark One)ýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2015Or¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the transition period from to Commission file number: 0-32259_______________________________________________________ALIGN TECHNOLOGY, INC.(Exact name of registrant as specified in its charter)_____________________________________________________________________ Delaware 94-3267295(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification Number)2560 Orchard ParkwaySan Jose, California 95131(Address of principal executive offices)(408) 470-1000(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:______________________________________________________ Title of each class Name of each exchange on which registeredCommon Stock, $0.0001 par value(Including associated Preferred Stock Purchase Rights) The NASDAQ Stock Market LLC(NASDAQ Global Market)Securities registered pursuant to Section 12(g) of the Act:NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No ýIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post suchfiles). Yes ý No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ýIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer x Accelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ýThe aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $ 3,646,077,546 as of June 30, 2015 based on the closing sale price of theregistrant’s common stock on the NASDAQ Global Market on such date. Shares held by persons who may be deemed affiliates have been excluded. This determination of affiliate status is notnecessarily a conclusive determination for other purposes.On February 19, 2016 , 79,625,640 shares of the registrant’s common stock were outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive Proxy Statement relating to its 2016 Annual Stockholders’ Meeting to be filed pursuant to Regulation 14A within 120 days after the registrant’s fiscalyear end of December 31, 2015 are incorporated by reference into Part III of this Annual Report on Form 10-K.1ALIGN TECHNOLOGY, INC.FORM 10-KFor the Year Ended December 31, 2015TABLE OF CONTENTS PagePART I 3Item 1.Business3 Executive Officers of the Registrant13Item 1A.Risk Factors14Item 1B.Unresolved Staff Comments27Item 2.Properties27Item 3.Legal Proceedings28Item 4.Mine Safety Disclosures29PART II30Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities30Item 6.Selected Consolidated Financial Data32Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations34Item 7A.Quantitative and Qualitative Disclosures About Market Risk50Item 8.Consolidated Financial Statements and Supplementary Data51Item 9.Changes In and Disagreements With Accountants on Accounting and Financial Disclosure89Item 9A.Controls and Procedures89Item 9B.Other Information89PART III90Item 10.Directors, Executive Officers and Corporate Governance90Item 11.Executive Compensation90Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters90Item 13.Certain Relationships and Related Transactions and Director Independence91Item 14.Principal Accounting Fees and Services91PART IV92Item 15.Exhibits, Financial Statement Schedules92Signatures96Invisalign, Align, the Invisalign logo, ClinCheck, Invisalign Assist, Invisalign Teen, Vivera, SmartForce, SmartTrack, SmartStage, Power Ridge, iTero, iTeroElement, Orthocad, iCast and iRecord, among others, are trademarks and/or service marks of Align Technology, Inc. or one of its subsidiaries or affiliatedcompanies and may be registered in the United States and/or other countries.2In addition to historical information, this annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, among other things, our expectations regarding theanticipated impact of our new products and product enhancements including Invisalign G5 and ClinCheck Pro will have on doctor utilization and our marketshare, our expectations regarding product mix and product adoption, our expectations regarding the existence and impact of seasonality, our expectationsregarding the financial and strategic benefits of our iTero scanner, our expectations regarding the continued expansion of our international markets the level ofour operating expenses and gross margins, and other factors beyond our control, as well as other statements regarding our future operations, financial conditionand prospects and business strategies. These statements may contain words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” orother words indicating future results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differmaterially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, thosediscussed in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and in particular, the risks discussed below inPart I, Item 1A “Risk Factors”. We undertake no obligation to revise or update these forward-looking statements. Given these risks and uncertainties, readersare cautioned not to place undue reliance on such forward-looking statements.PART I ITEM 1. BUSINESSOur CompanyAlign Technology, Inc (“We”, “Our”, “Align”) designs, manufactures and markets a system of clear aligner therapy, intra-oral scanners and CAD/CAM(computer-aided design and computer-aided manufacturing) digital services used in dentistry, orthodontics, and dental records storage. Align Technology wasfounded in March 1997 and incorporated in Delaware in April 1997. Our headquarters are located at 2560 Orchard Parkway, San Jose, California 95131, and ourtelephone number is 408-470-1000. Our internet address is www.aligntech.com. Our international headquarters are located in Amsterdam, the Netherlands.We have two operating segments: (1) Clear Aligner, known as the Invisalign System; and (2) Scanners and Services ("Scanner"), known as the iTero intra-oral scanner and OrthoCAD services and formerly referred to as our Scanners and CAD/CAM Services segment. For the year ended December 31, 2015 , ClearAligner revenues represent approximately 95 percent of worldwide revenue, while Scanner represent the remaining 5 percent of worldwide revenues. We distributethe vast majority of our products directly to our customers: orthodontists and general practitioner dentists ("GPs"), as well as to restorative dentists, includingprosthodontists, periodontists, and oral surgeons.We received 510(k) clearance from the United States Food and Drug Administration (“FDA”) to market the Invisalign System in 1998. The InvisalignSystem is regulated by the FDA as a Class II medical device. In order to provide Invisalign treatment to their patients, orthodontists and GPs must initiallycomplete an Invisalign training course. The Invisalign System is primarily sold through a direct sales force in the United States ("U.S."), Canada, Europe, andcertain Asia Pacific countries including Australia, New Zealand, China and Japan. We use a distributor model for the sale of our products in non-core countrymarkets in the Asia Pacific, Europe, Middle East and Africa ("EMEA"), and Latin America regions.We acquired the iTero digital intra-oral scanner and CAD/CAM services business, our Scanner segment, in April 2011. Our iTero scanner is used by dentalprofessionals and/or labs and services for restorative and orthodontic digital procedures as well as Invisalign digital impression submission. We received 501(k)clearance from the FDA to market iTero software for expanded indications in 2013. Scanners and CAD/CAM Services are primarily sold through our direct salesforce in North America and in select international markets primarily through distribution partners. 3Our Products and ServicesOur net revenues are generated from the sale of the following product offerings: Fiscal YearPercentage of Net Revenues by Product2015 2014 2013Invisalign Full Products78% 77% 75%Invisalign Express Products11 11 11Invisalign Non-case*6 6 7Scanners and Services5 6 7Total net revenues100% 100% 100% *Non-case net revenues include retainers, training revenues, and ancillary offerings under our Clear Aligner product lines.Clear Aligner SegmentMalocclusion and Traditional Orthodontic TreatmentMalocclusion, or the misalignment of teeth, is one of the most prevalent clinical dental conditions, affecting nearly a billion people, or approximately 50% to75% of the population of major developed countries. Approximately 6.8 million people annually elect treatment by orthodontists worldwide, of whichapproximately 2.6 million have mild to moderate malocclusion and are applicable to Invisalign treatment - our served market.In the U.S., orthodontists and GPs treat malocclusion primarily with metal arch wires and brackets, referred to as braces, and augment braces with elastics,metal bands, headgear and other ancillary devices as needed. Available options for improving treatment aesthetics include the use of ceramic, tooth-coloredbrackets or bonding brackets on the inside, or lingual surface, of the patient’s teeth. The average treatment takes approximately 12 to 24 months to complete andrequires several hours of direct dental professional involvement, known in the industry as “chair time,” including the initial diagnosis, creation of an appropriatetreatment plan and bonding of the brackets to the patient’s teeth, and attachment of arch wires to the brackets. Subsequent visits involve tightening or otherwiseadjusting the braces approximately every six weeks until the final visit when the dental professional removes each bracket and residual bonding agent from thepatient’s teeth. Upon completion of the treatment, the dental professional may, at his or her discretion, have the patient use a retainer.The Invisalign SystemThe Invisalign System is a proprietary method for treating malocclusion based on a series of doctor-prescribed, custom manufactured, clear plasticremovable orthodontic aligners. The Invisalign System offers a range of treatment options, specialized services, and proprietary software for treatmentvisualization and is comprised of the following phases:Orthodontic diagnosis and transmission of treatment data to us . The Invisalign-trained dental professional prepares and sends us a patient’s treatment datapackage which consists of a prescription form, a polyvinyl-siloxane, (or "PVS") impression of the relevant dental arches, photographs of the patient and, at thedental professional’s election, x-rays of the patient’s dentition. The Invisalign-trained dental professional can also submit an intra-oral scan or “digital impression”instead of a physical PVS impression through either Align's iTero scanner, 3M's True Definition or Sirona's CEREC Omnicam scanner, currently the only otherInvisalign qualified intra-oral scanners.Preparation of 3D computer models of the patient’s initial malocclusion . Upon receipt, we use the treatment data package to construct digital models of thepatient’s dentition. In cases where a PVS impression has been submitted, we use computed tomography, known as CT scanning to develop a digital, three-dimensional computer model of the patient’s current dentition. In cases where the dental professional submits a digital impression, this step in the process iseliminated.Preparation of computer-simulated treatment and viewing of treatment using ClinCheck software . We transform this initial digital model into a proposedcustom, three-dimensional treatment plan, called a ClinCheck treatment plan. The ClinCheck plan simulates appropriate tooth movement broken down into a seriesof two-week increments, and details timing and placement of4any attachments that will be used during treatment. Attachments are tooth-colored “buttons” that are sometimes used to increase the biomechanical force on aspecific tooth or teeth in order to effect the desired movement. The patient’s ClinCheck treatment plan is then made available to the prescribing dental professionalvia the Invisalign Doctor Site which enables the dental professional to project tooth movement with a level of accuracy not previously possible with metal archwires and brackets. By reviewing and amending the treatment simulation, the dental professional retains control over the treatment plan. ClinCheck Pro is the nextgeneration Invisalign treatment software tool, designed to provide more precise control over final tooth position and to help Invisalign providers achieve theirtreatment goals. This latest software innovation features interactive 3D controls that, for the first time, allow Invisalign providers to make adjustments to theposition of individual teeth directly on the 3D model and to visualize the effects on the whole dentition in real time.Construction of molds corresponding to each step of treatment . Upon the dental professional’s approval of the ClinCheck treatment plan, we use the dataunderlying the simulation, in conjunction with stereolithography technology, to construct a series of molds depicting the future position of the patient’s teeth. Eachmold is a replica of the patient’s teeth at each two-week stage of the simulated course of treatment.Manufacture of aligners and shipment to the dental professional . From these molds, aligners are fabricated by pressure-forming polymeric sheets over eachmold. Aligners are thin, clear plastic, removable dental appliances that are custom manufactured in a series to correspond to each two-week stage of the ClinCheckanimation. Aligners are generally worn for consecutive two-week periods which correspond to the approved ClinCheck treatment plan. After two weeks of use,the patient replaces them with the next pair in the series, advancing tooth movement with each aligner stage. Throughout treatment, the doctor may placeattachments or use other auxiliaries to achieve desired tooth movements, per the doctor’s original prescription and resulting ClinCheck treatment plan.Retention . Upon completion of the treatment, the patient may be prescribed our single clear retainer product or our Vivera Retainer product. Clear Aligner ProductsInvisalign Full . Used for a wide range of malocclusion, the Invisalign Full treatment consists of the number of aligners necessary to achieve the doctor’streatment goals. Invisalign Full treatment aligners are manufactured and then delivered to the dental professionals in a single shipment. Invisalign Full is sold inthe U.S., Canada, and our international regions. The Invisalign Full product is included in "Invisalign Full Products."Invisalign Teen. The Invisalign Teen treatment includes all the features of Invisalign Full treatment, plus additional features that address the orthodonticneeds of teenage patients such as compliance indicators, compensation for tooth eruption and six free single arch replacement aligners. This product ispredominantly marketed to orthodontists who treat the vast majority of malocclusion in teenage patients. Invisalign Teen treatment aligners (other than thereplacement aligners) are manufactured and then delivered to the dental professionals in a single shipment. Invisalign Teen is sold in the U.S., Canada, and ourinternational regions. The Invisalign Teen product is included in "Invisalign Full Products".Invisalign Assist. Used for anterior alignment and aesthetically-oriented cases, the Invisalign Assist treatment offers added support to our dental practitionersthroughout the treatment process, including progress tracking that allows the dental professional to submit new impressions every nine stages. When the progresstracking feature is selected, aligners are shipped to the dental professional after every nine stages thereby helping to achieve successful treatment outcomes.Predominantly marketed to GPs, Invisalign Assist is intended to make it easier to select appropriate cases for their experience level or treatment approach, submitcases more efficiently and manage appointments with suggested tasks. Invisalign Assist is sold in the U.S. and Canada. The Invisalign Assist product is included in"Invisalign Full Products".Invisalign Express (10 and 5) and Invisalign Lite/i7. Invisalign Express treatment, Invisalign Lite treatment and Invisalign i7 treatment are lower-costsolutions for less complex orthodontic cases, non-comprehensive treatment relapse cases, or straightening prior to restorative or cosmetic treatments such asveneers. Invisalign Express 10 and Invisalign Express 5, which are sold in the U.S. and Canada, uses up to 10 and 5 sets of aligners, respectively, and are alsoavailable as a single arch option. Invisalign Lite and Invisalign i7, sold in our international regions, uses up to 14 and 7 sets of aligners, respectively. For InvisalignExpress/Lite/i7, aligners are manufactured and then delivered to the dental professionals in a single shipment. The Invisalign Express (10 and 5) products andInvisalign Lite /i7 products are included in "Invisalign Express Products".Retention . We offer two products for post treatment retention. The first is a single set of custom clear aligner retainers. The second is offered as a set of fourcustom clear aligners called Vivera Retainers made with proprietary material strong enough to maintain tooth position and correct minor relapse if necessary. Eachset of Vivera Retainers is intended to be used for three5consecutive months and deliver one year of retention. Doctors can prescribe Vivera Retainers for their Invisalign and their non-Invisalign patients.Invisalign non-case revenues . Invisalign non-case revenues represent retainer products discussed above, Invisalign training fees and sales of ancillaryproducts, such as cleaning material and adjusting tools used by dental professionals during the course of treatment.Feature Enhancements. We have consistently introduced enhanced features across the Invisalign System over the past several years, such as Invisalign G3(launched in October 2010), Invisalign G4 (launched in November 2011), and Invisalign G5 (launched in February 2014). In 2015, we did a phased launch ofInvisalign G6 clinical innovations for first premolar extraction. These feature enhancements are a collection of clinical innovations designed to address some of themost significant treatment challenges doctors encounter.Invisalign G5 is our first set of innovations designed specifically as an integrated solution to enhance treatment predictability for deep bite, a specific type ofmalocclusion. Invisalign G5 feature enhancements include:•Precision Cuts, which are custom mesial and distal hooks used to provide anchorage for elastics and button cutouts to accommodate buttons bonded to thetooth aimed to help treat patients with Class II and Class III malocclusion.•SmartForce features engineered to achieve more predictable tooth movements using custom optimized attachments and Power Ridges designed to provideadditional force in cases where certain types of root movement are prescribed.•Precision aligner bite ramps designed to disocclude the posterior teeth for improved efficiency in deep bite treatments.Invisalign G6 is engineered to improve clinical outcomes for orthodontic treatment of severe crowding and bimaxillary protrusion. Invisalign G6 clinicalinnovations was launched in Asia Pacific, Europe, Middle East and Africa, and Latin America geographies throughout 2015 and will be launched in NorthAmerica in early 2016. Invisalign G6 feature enhancements include:•New SmartStage programmed tooth movements that optimize the progression of tooth movements and provide aligner activation, engineered to eliminateunwanted tipping and unwanted anterior extrusion during retraction.•New SmartForce features that are designed to deliver the force systems necessary to achieve predictable tooth movements. These new features includeOptimized Retraction Attachments, designed to work with SmartStage technology for effective bodily movement during canine retraction, with or withoutelastics, and new Optimized Anchorage Attachments, designed to work with SmartStage technology to maximize posterior anchorage.SmartTrack ™ Aligner Material. SmartTrack is a proprietary, custom-engineered Invisalign Clear Aligner material that delivers gentle, more constant forceconsidered ideal for orthodontic tooth movements. Conventional aligner materials relax and lose a substantial percent of energy in the initial days of aligner wear,but SmartTrack maintains more constant force over the two weeks that a patient wears the aligners. The flexible SmartTrack material also more precisely conformsto tooth morphology, attachments, and interproximal spaces to improve control of tooth movement throughout treatment.Scanner SegmentIntra-oral scanning is an emerging technology that we believe will have substantial impact on the future of dentistry. BY enabling the dental practitioner tocreate a 3D image of the patient's teeth using a handheld intra-oral scanner inside the mouth, intra-oral scanning is more efficient and precise and more comfortablefor patients, compared to the mess, discomfort and subjective nature of taking physical impressions. The digital model created with an intra-oral scanner is moreaccurate than a physical impression and substantially reduces the rate of restoration "remakes" so patients are recalled less often and the appointment time for therestoration is shorter because of fewer adjustments, which results in greater overall patient satisfaction. The 3D digital model file can be used for variousprocedures and services including fabrication of physical dental models for use by labs to create restorative units such as veneers, inlays, onlays, crowns, bridgesand implant abutments; Invisalign digital impression submission; digital records storage; orthodontic diagnosis; and orthodontic retainers and appliances.iTero Scanner . The iTero scanner is available as a single hardware platform with software options for restorative or orthodontic procedures. The iTeroscanner includes our innovative powderless technology and features a modern design, scanning wand and easy-to-use keyboard design with full color modelrendering, enabling clinicians to show patients a life-like final model of their scanned dentition. We market and sell the iTero in North America and in selectinternational markets.6The iTero scanner is interoperable with our Invisalign treatment such that a full arch digital scan can be submitted for the Invisalign case submission processtreatment. In January 2014, we announced that we qualified the 3M™ True Definition scanner for use with Invisalign case submissions. This qualification enablesInvisalign providers with a True Definition scanner to submit a digital impression in place of a traditional PVS impression as part of the Invisalign case submissionprocess. In March 2015, we announced that the Sirona CEREC Omnicam with the new CEREC Ortho software 1.1 was qualified for use with Invisalign casesubmissions. The new CEREC Omnicam scanner was available in select markets in the summer of 2015. The 3M True Definition scanner and Sirona CERECOmnicam scanner are the only third-party scanners that have been qualified for use with Invisalign treatment. We support an open systems approach to digitalimpressions and continue to work with intraoral scanning companies interested in developing interoperability for use with Invisalign treatment.In March 2015, we announced our next generation iTero Element Intraoral Scanner which features a more compact footprint, enhanced wand and multi-touchdisplay and is engineered to enable faster scan speeds for more efficient, real-time clinical evaluation. We began shipping the iTero Element Intraoral Scanner inSeptember 2015 and expect to ramp up our production over the next few quarters accordingly.Restorative software for iTero. Software designed for GPs, prosthodontists, periodontists, and oral surgeons which includes features for restorativeprocedures commonly performed in their practices such as veneers, inlays, onlays, crowns, bridges and implants. The iTero restorative software provides the abilityto scan quadrants and full arches, and allows simple powder-free capture of digital impressions for single-unit cases as well as more complex restorative andimplant treatment plans. The iTero software also contains Invisalign interoperability to support clear aligner orthodontic treatment.In the past year, we have expanded the digital workflow options to include several partnerships which provide our customers with a broader spectrum ofCAD/CAM options. Connectivity partnership announcements include:•IOS Technologies Inc., a wholly owned subsidiary of Glidewell Laboratories, provides the option to mill same-day restorations in the office.•DENTSPLY Implants featuring connectivity with ATLANTIS™ custom abutments.•Zimmer Dental, Inc. with connectivity with Zimmer Zfx custom abutments for implants.Orthodontic software for iTero. Software designed for orthodontists for digital records storage, orthodontic diagnosis, Invisalign digital impressionsubmission, and for the fabrication of printed models and retainers. The iTero orthodontic software digitally captures the contours of the dentition and the gingivalstructures, providing an accurate, powder-free digital orthodontic scan in just minutes. This digital impression procedure ensures a more comfortable patientexperience and produces a precise scan that can be seamlessly integrated with Invisalign treatment, OrthoCAD iCast, and OrthoCAD iRecord which allows adoctor to utilize sophisticated measurement and treatment planning tools.CAD/CAM ServicesiTero Models and Dies. An accurate physical model and dies are manufactured based on the digital scan and sent to the laboratory of the dentist’s choice forcompletion of the needed restoration. The laboratory also has the option to export the digital file for immediate production of coping and full-contour restorationson their laboratory CAD/CAM systems. The laboratory conducts then completes the ceramic buildup or staining and glazing and delivers the end result - aprecisely fitting restoration. iTero prosthetics have a near-zero remake rate.OrthoCAD iCast. iCast provides a digital alternative to traditional stone cast models which allows for simplified storage and digital record retrieval. TheiCast digital model contains a full American Board of Orthodontics ("ABO") base and is available from an iTero scan or from a traditional alginate impression.OrthoCAD iRecord. iRecord provides a digital alternative to traditional stone cast models which allows for simplified storage and digital recordretrieval. This simplified model without an ABO base is an economical option for record retention. iRecord is available exclusively from an iTero scan.Chair Side ApplicationsInvisalign Outcome Simulator . The Invisalign Outcome Simulator is an interactive application that provides GPs and orthodontists an enhanced platform forpatient education and is designed to increase treatment acceptance by helping patients visualize the benefits possible with Invisalign treatment. As the onlyInvisalign chair-side intra-oral scanning application on the market, the Invisalign Outcome Simulator's unique dual view layout shows a prospective patient animage of his/her own current7dentition next to his/her simulated final position of how their teeth may look after Invisalign treatment. Using a full arch Invisalign scan, the Invisalign OutcomeSimulator takes a few minutes to run and may be viewed chair-side, on the scanner, or from a computer using MyAlignTech.com. Intuitive tools allow doctors tomake real-time adjustments to individual teeth during consultations that increase patient education and the likelihood of patient acceptance.Our iTero scanner includes orthodontic software, restorative software, or both, and the Invisalign Outcome Simulator. The orthodontic or restorative softwaremay also be purchased subsequently for an upgrade fee. The Invisalign Outcome Simulator is not available for sale separately.Other proprietary software mentioned in this Annual Report on Form 10-K such as ClinCheck and ClinCheck Pro software, the Invisalign Doctor Site, andenhanced feature solutions such as Invisalign G6 are included as part of the Invisalign System and are not sold separately nor do they contribute as individual itemsof revenue.Business StrategyOur goal is to establish Invisalign clear aligners as the standard method for treating malocclusion and to establish the iTero intra-oral scanner as the preferredscanning protocol for 3D digital scans, ultimately driving increased product adoption by dental professionals. We intend to achieve this by continued focus andexecution of our strategic growth drivers: Market Expansion, Doctor Preference, and Brand Strength.1.Market Expansion . We expect to continue to grow and expand our business by investing in resources, infrastructure, and initiatives that will drive growthfrom both a geographic and market segment standpoint. From a geographic standpoint, we focus our efforts on expanding our sales territory coverage inall of our direct sales geographies, with particular emphasis in our highest growth areas such as Europe and the Asia Pacific region. We strive to makesure that our new geographies and our expanded territories internationally have everything they need from the products, to the support, to the people, inorder to successfully establish Invisalign as the treatment of choice for orthodontics in each geographic market. From a market segment standpoint, we arefocused on two important markets: adults and teenagers. We believe expansion in these two markets can be achieved through product innovations that canexpand the types of indications our Invisalign products can treat, as well as by expanding the overall market for orthodontics, primarily with adults whowould not otherwise seek treatment with traditional wires and brackets. We believe continued market expansion can be achieved by having the rightproducts, services, and communications worldwide to give our doctors the confidence they need to treat with Invisalign more often and attract potentialpatients to their practice so they ask for Invisalign by name.In parallel with these investments, we also engage in professional marketing, clinical support and education initiatives that support doctor practicedevelopment and facilitate the continued growth of their practices.In our iTero scanner business, we leverage our combined sales and marketing resources to facilitate the adoption and penetration of each product into ourdoctors’ practices. Many of our customers recognize that having an iTero scanner at chair-side improves practice effectiveness for Invisalign as evidencedby higher Invisalign utilization rates among customers with an iTero scanner.2.Doctor Preference. We want all of our doctors to have the confidence and motivation to lead with Invisalign for every patient that walks into theirpractice. We strive to achieve this by investing in two areas. First, continuing to improve product predictability and applicability for more complex casesthereby expanding the types of malocclusion that our Invisalign products can treat. As an example, we launched Invisalign G5 in February 2014, whichrepresented our first set of features engineered specifically to treat deep bite malocclusion. We estimate that deep bite manifests itself in approximately30% to 40% of the orthodontic cases treated worldwide depending on geography. In 2015, we did a phased launch of Invisalign G6 clinical innovationsfor first premolar extractions. The nature of malocclusion that requires first premolar tooth extraction is an orthodontic problem that affects more than50% of people in Asia, 20% in Europe and 12% in North America. Secondly, enhancing the customer’s experience by making it easier to treat with andintegrate Invisalign into their practices. As an example, we launched ClinCheck Pro in February 2014, the next generation Invisalign treatment softwaretool, designed to simplify the treatment process and help our doctors achieve their treatment goals.3.Brand Strength. Our goal is to make Invisalign a highly recognized name brand worldwide by creating awareness for Invisalign treatment amongconsumers and motiving potential patients to seek treatment from an Invisalign provider. In support of this objective, we invest in initiatives designed tostrengthen our global brand name recognition and drive8consumer purchase intent. We accomplish this objective through an integrated consumer marketing strategy that includes television, media, socialnetworking and event marketing.Manufacturing and SuppliersOur manufacturing facilities are located in Juarez, Mexico, where we conduct our aligner fabrication, distribute and repair our scanners, perform ourCAD/CAM services, and in Or Yehuda, Israel where we produce our handheld intra-oral scanner wand. The final assembly of our iTero scanner is performed by athird party manufacturer located in Israel. Our Invisalign digital treatment planning and interpretation for iTero restorative cases are conducted primarily at ourfacility located in San Jose, Costa Rica. Information regarding risks associated with our manufacturing process and foreign operations may be found in Item 1A ofthis Annual Report on Form 10-K under the heading “Risk Factors.”Our quality system is required to be in compliance with the Quality System regulations enforced by the FDA, and similar regulations enforced by otherworldwide regulatory authorities. We are certified to EN ISO 13485:2003, an internationally recognized standard for medical device manufacturing. We have aformal, documented quality system by which quality objectives are defined, understood and achieved. Systems, processes and procedures are implemented toensure high levels of product and service quality. We monitor the effectiveness of the quality system based on internal data and direct customer feedback and striveto continually improve our systems and processes, taking corrective action, as needed.Since the manufacturing process of our products requires substantial and varied technical expertise, we believe that our manufacturing capabilities areimportant to our success. In order to produce our highly customized, highly precise, medical quality products in volume, we have developed a number ofproprietary processes and technologies. These technologies include complex software algorithms and solutions, CT scanning, stereolithography and automatedaligner fabrication. To increase the efficiency of our manufacturing processes, we continue to focus our efforts on software development and the improvement ofrate-limiting processes, or bottlenecks. We continuously upgrade our proprietary, three-dimensional treatment planning software to enhance computer analysis oftreatment data and to reduce time spent on manual and judgmental tasks for each case, thereby increasing the efficiency of our technicians in Costa Rica. Inaddition, to improve efficiency and increase the scale of our operations, we continue to invest in the development of automated systems for the fabrication andpackaging of aligners.We are highly dependent on manufacturers of specialized scanning equipment, rapid prototyping machines, resin and other advanced materials for ouraligners, as well as the optics, electronic and other mechanical components of our intra-oral scanners. We maintain single supply relationships for many of thesemachines and materials technologies. In particular, our CT scanning and stereolithography equipment used in our aligner manufacturing and many of the criticalcomponents for the optics of our intra-oral scanners are provided by single suppliers. We are also committed to purchasing all of our resin and polymer, theprimary raw materials used in our manufacturing process for clear aligners, from a single source. The need to replace one of our single source suppliers could causea disruption in our ability to timely deliver certain of our products or increase costs. See Item 1A Risk Factors — “We maintain single supply relationships forcertain of our key machines and materials technologies, and our business and operating results could be harmed if supply is restricted or ends or the price of rawmaterials used in our manufacturing process increases.”Sales and MarketingOur sales efforts are focused primarily on the Invisalign System and continuing to increase adoption and utilization by orthodontists and GPs worldwide. InNorth America, Europe and certain Asia Pacific country markets, we have direct sales and support organizations, which includes quota carrying salesrepresentatives, sales management, and sales administration. Currently, we have several distribution partners that sell the Invisalign System in smaller non-core country markets in the EMEA, Asia Pacific and LatinAmerica regions. We evaluate adding distribution partners in other non-core country markets on a case-by-case basis or assess modifying our current distributionagreements, as our international business grows. We continued to expand in our existing markets through targeted investments in sales coverage, professionalmarketing and education programs, along with consumer marketing in selected country markets. For the iTero scanner, we have a small team of direct sales representatives in North America. Our intra-oral scanner sales team leverages leads generated byour Invisalign sales and marketing resources, including customer events and industry trade-shows. We sell the iTero scanner in select country marketsinternationally and will look to grow the scanner business over time.We provide training, marketing and clinical support to orthodontists and GPs. In 2015 , we had approximately 48,170 active Invisalign providers.9Research and DevelopmentWe are committed to investing in world-class technology development, which we believe is critical to achieving our goal of establishing the InvisalignSystem as the standard method for treating malocclusion and our intra-oral scanning platform as the preferred scanning protocol for 3D digital scans. Our researchand development expenses were $61.2 million , $52.8 million , and $44.1 million for the year ended December 31, 2015 , 2014 and 2013 , respectively.Our research and development activities are directed toward developing the technology innovations that we believe will deliver our next generation ofproducts and platforms. Our research and development activities range from accelerating product and clinical innovation, to developing manufacturing processimprovements, to researching future technologies and products.In an effort to demonstrate Invisalign’s broad treatment capabilities, various clinical case studies and articles have been published that highlight the clinicalapplicability of Invisalign to malocclusion cases, including those of severe complexity. We undertake pre-commercialization trials and testing of our technologicalimprovements to the product and manufacturing process.Intellectual PropertyWe believe our intellectual property position represents a substantial business advantage. As of December 31, 2015 , we had issued 384 U.S. patents, 276foreign issued patents, and 236 pending global patent applications.We continue to pursue further intellectual property protection through U.S. and foreign patent applications and non-disclosure agreements. We also seek toprotect our software, documentation and other written materials under trade secret and copyright laws. We cannot be certain that patents will be issued as a resultof any patent application or that patents that have been issued to us or that may be issued in the future will be found to be valid and enforceable and sufficient toprotect our technology or products. Our intellectual property rights may not be successfully asserted in the future or may be invalidated, circumvented orchallenged. In addition, the laws of various foreign countries do not protect our intellectual property rights to the same extent as U.S. laws. Our inability to protectour proprietary information could harm our business. Information regarding risks associated with failing to protect our proprietary technology and our intellectualproperty rights may be found in Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.”Seasonal FluctuationsGeneral economic conditions impact our business and financial results, and we experience seasonal trends related to our two operating segments, customerchannels and the geographic locations that we serve. For example, European sales of Invisalign treatment are often weaker in the summer months due to ourcustomers and their patients being on holiday. In North America, summer is typically the busiest season for orthodontists with practices that have a high percentageof adolescent and teenage patients as many parents want to get their teenagers started in treatment before the start of the school year; however, many GPs are onvacation during this time and therefore tend to start fewer cases. For our Scanner segment, capital equipment sales are often stronger in the fourth calendarquarter. Consequently, these seasonal trends have caused and may continue to cause, fluctuations in our quarterly results, including fluctuations in sequentialrevenue growth rates.BacklogDue to the individualized nature of an Invisalign treatment which is prescribed by a doctor, no two cases are alike, thus we maintain relatively low levels ofbacklog. The period from which a treatment data package (or “a case”) is received until the acceptance of the digital ClinCheck treatment plan is dependent on thedental professional’s discretion to modify, accept or cancel the treatment plan. Therefore, we consider the case a firm order to manufacture aligners once the dentalprofessional has approved the ClinCheck treatment plan. Our Invisalign backlog consists of ClinCheck treatment plans that have been accepted but not yetshipped. Because aligners are shipped shortly after the ClinCheck treatment plan has been accepted, we believe that backlog is not a good indicator of futureInvisalign sales. Our quarterly Invisalign revenues can be impacted by the timing of the ClinCheck treatment plan acceptances and our ability to ship those cases inthe same quarter. We define our intra-oral scanner backlog as orders where payment is reasonably assured and credit and financing is approved but the scanner hasnot yet shipped. Our intra-oral scanner backlog as of December 31, 2015 was not material.CompetitionWe operate in a highly competitive market and we encounter a wide variety of competitors, including larger companies or divisions of larger companies withsubstantial sales, marketing, research and financial capabilities. We also face competition from early stage companies. Although the number of competitors variesby segment, currently our products compete directly10against products manufactured and distributed by various companies, both within and outside the U.S., including Danaher Corporation, 3M, Sirona DentalSystems, Inc., Dentsply International, Inc. and other private competitors. In addition, the expiration of certain key patents commencing in 2017 owned by us mayresult in additional competition. Information regarding risks associated with increased competition may be found in Item 1A of this Annual Report on Form 10-Kunder the heading “ Risk Factors .”Key competitive factors include:•effectiveness of treatment;•price;•software features;•aesthetic appeal of the treatment method;•customer support;•customer online interface;•brand awareness;•innovation;•distribution network;•comfort associated with the treatment method;•oral hygiene;•ease of use; and•dental professionals’ chair time.We believe that our products compare favorably with our competitors’ products with respect to each of these factors.Government RegulationIn order for us to market our products, we must obtain regulatory authorization and comply with extensive product and quality system regulations both withinand outside the United States. These regulations, including the requirements for approvals or clearance and the time required for regulatory review, vary fromcountry to country. Failure to obtain regulatory approval and to meet all local requirements including language and specific safety standards in any country inwhich we currently market or plan to market our products could prevent us from marketing products in such countries or subject us to sanctions and fines. Theapproval by government authorities is unpredictable and uncertain and may not be granted on a timely basis, if at all. Delays in receipt of, or a failure to receive,such approvals or clearances, or the loss of any previously received approvals or clearances, could have a material adverse effect on our business, financialcondition, and results of operations.Certain of the Company’s products are classified as medical devices under the United States Food, Drug, and Cosmetic Act (the “FDCA”). The FDCArequires these products, when sold in the United States, to be safe and effective for their intended use and to comply with the regulations administered by theUnited States Food and Drug Administration (“FDA”). Our products may also be regulated by comparable agencies in non-U.S. countries in which they areproduced or sold. In the European Union, our products are subject to the medical devices laws of the various member states, which are based on a Directive of theEuropean Commission. Such laws generally regulate the safety of the products in a similar way to the FDA regulations.We believe we are in compliance with all FDA, federal and state laws and International regulatory requirements that are applicable to our products andmanufacturing operations.We are also subject to various laws inside and outside the U.S. concerning our relationships with healthcare professionals and government officials, pricereporting and regulation, the promotion, sales and marketing of our products and services, the importation and exportation of our products, the operation of ourfacilities and distribution of our products. As a global company, we are subject to varying degrees of government regulation in the various countries in which wedo business, and the general trend is toward increasingly stringent oversight and enforcement. Initiatives sponsored by government agencies, legislative bodies, andthe private sector to limit the growth of healthcare expenses generally are ongoing in markets where we do business. It is not possible to predict at this time thelong-term impact of such cost containment measures on our future business.11Our customers are healthcare providers that may be reimbursed by federally funded programs such as Medicaid or a foreign national healthcare program,each of which may offer some degree of oversight. Many government agencies, both domestic and foreign, have increased their enforcement activities with respectto healthcare providers and companies in recent years. Enforcement actions and associated defense can be expensive, and any resulting findings carry the risk ofsignificant civil and criminal penalties. For example, the U.S. Federal Physician Payment Sunshine Act went into effect in 2014 which requires public transparencyof transfers of value to physicians.In addition, we must comply with numerous data protection requirements that span from individual state and national laws in the US to multinationalrequirements in the EU. In the U.S., final regulations implementing amendments to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”)became effective in the latter part of 2013 with the HIPAA Omnibus Rule. The EU is currently considering a proposal to enact legislation governing dataprotection which would transform the current mix of European countries’ laws to one overarching multinational law. Meanwhile, the Asia Pacific region has alsoseen rapid development of privacy laws, including in Singapore, Hong Kong, and Australia. We believe we have designed our product and service offerings to becompliant with the requirements of applicable data protection laws and regulations. Maintaining systems that are compliant with these laws and regulations iscostly and could require complex changes in the way we do business or provide services to our customers and their patients. Additionally, our success may bedependent on the success of healthcare providers in managing data protection requirements.EmployeesAs of December 31, 2015 , we had approximately 4,375 employees, including 2,805 in manufacturing and operations, 950 in sales and marketing whichincludes customer care, 310 in research and development and 310 in general and administrative functions.Available InformationOur website is located at www.aligntech.com , and our investor relations website is located at http://investor.aligntech.com . The information on oraccessible through our websites is not part of this Annual Report on Form 10-K. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, CurrentReports on Form 8-K, our proxy statement on Schedule 14A for our annual stockholders’ meeting and amendments to such reports are available, free of charge, onour investor relations website as soon as reasonably practicable after we electronically file or furnish such material with the SEC. Further, a copy of this AnnualReport on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the PublicReference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and informationstatements and other information regarding our filings at www.sec.gov .12Executive Officers of the RegistrantThe following table sets forth certain information regarding our executive officers as of February 25, 2016: NameAgePositionJoseph M. Hogan58President and Chief Executive OfficerDavid L. White60Chief Financial OfficerSimon Beard49Vice President and Managing Director, EMEAJennifer M. Erfurth46Vice President, Global Human ResourcesRoger E. George50Vice President, Corporate and Legal Affairs and General CounselTimothy A. Mack57Vice President, Business DevelopmentRaphael Pascaud44Chief Marketing Portfolio and Business Development OfficerChristopher C. Puco55Vice President, North AmericaZelko Relic51Vice President, Research & DevelopmentJulie Tay49Vice President and Managing Director, Asia PacificEmory M. Wright46Vice President, OperationsJoseph M. Hogan has served as our President and Chief Executive Officer and as a member of our Board of Directors since June 2015. Prior to joining us,Mr. Hogan was Chief Executive Officer of ABB Ltd., a global power and automation technologies company based in Zurich, Switzerland from 2008 to 2013. Priorto working in ABB, Mr. Hogan worked at General Electric Company (GE) in a variety of executive and management roles from 1985 to 2008, including eightyears as Chief Executive Officer of GE Healthcare from 2000 to 2008.David L. White has served as our Chief Financial Officer ("CFO") since August 2013. Prior to joining us, Mr. White was CFO of Enecsys, Ltd., a privately-held supplier of solar micro inverters and monitoring systems from June 2012. Prior to Enecsys, he was Executive Vice President and CFO at NVIDIACorporation, a fabless semiconductor company known for its development of advanced graphics and high performance computing processors from February 2009to June 2011. Prior to NVIDIA, he was Executive Vice President of Finance and CFO at SANMINA-SCI Corporation, which provides contract design, supplychain, and manufacturing services from 2004 to 2009. He also served as CFO at Asyst Technologies Corporation, CEO at Candescent Technologies Corporation,and Senior Vice President of Finance at Connor Peripherals.Simon Beard has served as our Vice President and Managing Director, EMEA since November 2014. Prior to joining us, from December 2012 to October2014, Mr. Beard was Regional Director for the South East Asia business of Smith & Nephew, a multinational medical equipment manufacturing company. FromOctober 2006 to November 2012, Mr. Beard was Director & General Manager for UK and Ireland for Smith & Nephew's Advanced Woundcare business. Prior toSmith & Nephew, Mr. Beard held multiple commercial, strategic, and general management positions in companies such as DePuy International (Johnson &Johnson), Sankyo Pharmaceutical and Sanofi Aventis.Jennifer M. Erfurth has served as our Vice President, Global Human Resources since October 2012. Prior to joining us, Ms. Erfurth was Senior VicePresident of Shared Services at Dyno Nobel, Inc., a manufacturer and supplier of industrial explosives, from July 2011 to July 2012, and was Vice President,Human Resources for Federal Signal Corporation prior to that. From 2001 to 2010, Ms. Erfurth held positions of increasing responsibility at Schawk, Inc., mostrecently as Global Senior Vice President of Human Resources, a position she held from 2007 until her departure in 2010. Earlier in her career, she served asDirector of Human Resources at CINTAS Corporation and World Color.Roger E. George has served as our Vice President, Corporate and Legal Affairs and General Counsel since July 2002. Prior to joining us, Mr. George wasthe Chief Financial Officer, Vice President of Finance and Legal Affairs and General Counsel of SkyStream Networks, a privately held broadband and broadcastnetwork equipment company. Prior to SkyStream, Mr. George was a partner at Wilson Sonsini Goodrich & Rosati, P.C. in Palo Alto, California.Timothy A. Mack has served as our Vice President, Marketing and Business Development since May 2012. He served as Vice President, BusinessDevelopment since our acquisition of Cadent Holdings, Inc. in April 2011. At Cadent, he was President and Chief Executive Officer since 2009. He joinedCadent in 2005, as Executive Vice President & General Manager where he led the introduction and adoption of Cadent’s new 3D digital imaging technology intothe market. Prior to Cadent, Mr. Mack was Vice President and General Manager of DENTSPLY Ceramco, a wholly-owned subsidiary of DENTSPLYInternational. Prior to13DENTSPLY, Mr. Mack held a series of management positions in the U.S. and Europe within Consumer Electronics and Medical Imaging Divisions at EastmanKodak Company. Mr. Mack will be retiring in March 2016.Raphael Pascaud was promoted to Chief Marketing Portfolio and Business Development Officer in July 2015. He joined Align in 2010 as Vice Presidentand Managing Director for the Europe, Middle East and Africa Region, ("EMEA") and was promoted in January 2014 to Vice President, International. Prior toAlign, Mr. Pascaud spent 14 years in various management positions within DePuy, a Johnson & Johnson family of companies, including Vice PresidentOrthopedics of EMEA and Vice President Marketing of International. Christopher C. Puco has served as our Vice President, North America since December 2012. He joined Align in 2006 as a sales director and in 2008 becamesenior director for the Eastern sales area. Most recently, as Vice President of Sales Strategy, he led Align's go-to-market strategy and managed the integration ofthe North American scanner and CAD/CAM services sales organization. Mr. Puco has more than 20 years of experience in the medical device industry, holdingsales management positions in both starts-ups and established corporate environments. Prior to Align, he was with United States Surgical Corporation, GeneralSurgical Innovations, Baxter BioSurgery and Fusion Medical Technologies.Zelko Relic was appointed Vice President, Research & Development in December 2013. Prior to joining Align, Mr. Relic was Vice President, Engineeringfor Datalogic Automation, a global leader in automatic data capture and industrial automation markets from 2012. Mr. Relic was previously Vice President,Engineering at Danaher Corporation, Accu-Sort Systems business from 2010 to 2012 before it was acquired by Datalogic Automation. From 2005 to 2010, he wasat Siemens Medical Solutions USA, most recently as Vice President, and from 2002 to 2004 he held senior management positions in engineering at Kulicke &Soffa Industries, designers and manufactures of semiconductor products. He also held management positions at KLA-Tencor, manufacturer of metrology toolsfrom 1994 to 2000.Julie Tay was appointed Vice President and Managing Director, Asia Pacific in March 2013. Prior to joining us, Ms. Tay was regional head of BayerHealthcare (Diabetes Care) overseeing operations across Asia, from 2010 to 2013. From 2006 to 2010, Ms. Tay served as director of marketing and corporateaccounts at Sealed Air Corporation (formerly Johnson Diversey), a global provider of food safety and security, facility hygiene and product protection. Prior tothat, Ms. Tay spent 15 years with Johnson & Johnson Medical.Emory M. Wright has served as our Vice President, Operations since December 2007. He has been with us since March 2000, predominantly inmanufacturing and operations roles. Previously, Mr. Wright served as Vice President, Manufacturing and, was General Manager of New ProductDevelopment. Prior to joining us, Mr. Wright was Senior Manufacturing Manager at Metrika, Inc. a medical device manufacturer, from May 1999 to March2000. From July 1994 to May 1999, Mr. Wright served as Manager of Manufacturing and Process Development for Metra Biosystems Inc.ITEM 1A. RISK FACTORSWe depend on the sale of the Invisalign system for the vast majority of our net revenues, and any decline in sales of Invisalign treatment for any reason, ora decline in average selling prices would adversely affect net revenues, gross margin and net income.We expect that net revenues from the sale of the Invisalign System, primarily Invisalign Full and Invisalign Teen, will continue to account for the vastmajority of our total net revenues for the foreseeable future. Continued and widespread market acceptance of Invisalign by orthodontists, GPs and consumers iscritical to our future success. If orthodontists and GPs experience a reduction in consumer demand for orthodontic services, if consumers prove unwilling to adoptInvisalign as rapidly as we anticipate or in the volume that we anticipate, if orthodontists or GPs choose to use a competitive product rather than Invisalign or if theaverage selling price of our product declines, our operating results would be harmed.Demand for our products may not increase as rapidly as we anticipate due to a variety of factors including a weakness in general economic conditions.Consumer spending habits are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wage rates, gas prices,consumer confidence and consumer perception of economic conditions. A general slowdown in the U.S. economy and certain international economies or anuncertain economic outlook would adversely affect consumer spending habits which may, among other things, result in a decrease in the number of overallorthodontic case starts, reduced patient traffic in dentists’ offices, reduction in consumer spending on higher value procedures or a reduction in the demand fordental services generally, each of which would have a material adverse effect on our sales and operating results. Weakness in the global economy results in achallenging environment for selling dental technologies and dentists may postpone investments in capital equipment,14such as intra-oral scanners. In addition, Invisalign treatment, which currently accounts for the vast majority of our net revenues, represents a significant changefrom traditional orthodontic treatment, and customers and consumers may be reluctant to accept it or may not find it preferable to traditional treatment. We havegenerally received positive feedback from orthodontists, GPs and consumers regarding Invisalign treatment as both an alternative to braces and as a clinicalmethod for the treatment of malocclusion, but a number of dental professionals believe that the Invisalign treatment is appropriate for only a limited percentage oftheir patients. Increased market acceptance of all of our products will depend in part upon the recommendations of dental professionals, as well as other factorsincluding effectiveness, safety, ease of use, reliability, aesthetics, and price compared to competing products.The frequency of use of the Invisalign system by orthodontists or GPs may not increase at the rate that we anticipate or at all.One of our key objectives is to continue to increase utilization, or the adoption and frequency of use, of the Invisalign System by new and existing customers.If utilization of the Invisalign System by our existing and newly trained orthodontists or GPs does not occur or does not occur as quickly as we anticipate, ouroperating results could be harmed.We may experience declines in average selling prices of our products which may decrease our net revenues.We provide volume based discount programs to our doctors. In addition, we sell a number of products at different list prices. If we introduce any pricereductions or consumer rebate programs; if we expand our discount programs in the future or participation in these programs increases; if our product mix shifts tolower priced products or products that have a higher percentage of deferred revenue, our average selling prices would be adversely affected and our net revenues,gross profit, gross margin and net income may be reduced. In July 2015, we launched a new product policy called "Additional Aligners at No Charge" thataddresses one of our customer's top complaints. With this product policy change, we no longer distinguish between mid-course correction and case refinements andallow doctors to order additional aligners to address either treatment need at no charge, subject to certain requirements. Based on this new product policy,beginning in the third quarter of 2015, we deferred more revenue as a result of providing free additional aligners for eligible treatments. Additionally, as wegrandfathered over 1 million open cases, we will recognize lower revenues as additional aligners are shipped for at least the next two years until these casescomplete.We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and results of operations.Although the U.S. dollar is our reporting currency, a portion of our net revenues and net income are generated in foreign currencies. Net revenues and netincome generated by subsidiaries operating outside of the U.S. are translated into U.S. dollars using exchange rates effective during the respective period and areaffected by changes in exchange rates. As a result, negative movements in currency exchange rates against the U.S. dollar will adversely affect our net revenuesand net income in our consolidated financial statements. The exchange rate between the U.S. dollar and foreign currencies has fluctuated substantially in recentyears and may continue to fluctuate substantially in the future. As a result, beginning in September 2015, we began entering into currency hedging transactions inan effort to cover some of our exposure to foreign currency exchange fluctuations. These transactions may not operate to fully or effectively hedge our exposure tocurrency fluctuations, and, under certain circumstances, these transactions could have an adverse effect on our financial condition.As we continue to grow, we are subject to growth related risks, including risks related to excess or constrained capacity at our existing facilities.We are subject to growth related risks, including excess or constrained capacity and pressure on our internal systems and personnel. In order to manage currentoperations and future growth effectively, we will need to continue to implement and improve our operational, financial and management information systems andto hire, train, motivate, manage and retain employees. We may be unable to manage such growth effectively. Any such failure could have a material adverseimpact on our business, operations and prospects. In addition, in order to meet the demands from expected volumes, we purchased a second manufacturing facilityin Juarez, Mexico. We began manufacturing aligners in this second facility in September 2015 while continuing to manufacture Aligners at our existing facility inJuarez. Our ability to plan, construct and equip additional manufacturing facilities is subject to significant risk and uncertainty, including risks inherent in theestablishment of a new manufacturing facility, such as hiring and retaining employees and delays and cost overruns as a result of a number of factors, any of whichmay be out of our control. If the transition into this additional facility is significantly delayed or demand for our product exceeds our current expectations, we maynot be able to fulfill orders timely, which may negatively impact our financial results and overall business. In addition, because we cannot immediately adapt ourproduction capacity and related cost structures to changing market conditions, our manufacturing capacity may at times exceed or fall short of our productionrequirements. In addition, if product demand decreases or we fail to forecast demand accurately, we could be required to write off inventory or record excesscapacity charges, which would lower our gross margin. Any or all of these problems could result in the loss of customers, provide an opportunity for competingproducts to15gain market acceptance and otherwise harm our business and financial results.If we fail to sustain or increase profitability or revenue growth in future periods, the market price for our common stock may decline.If we are to sustain or increase profitability in future periods, we will need to continue to increase our net revenues, while controlling our expenses. Becauseour business is evolving, it is difficult to predict our future operating results or levels of growth, and we have in the past not been and may in the future not be ableto sustain our historical growth rates. If we do not increase profitability or revenue growth or otherwise meet the expectations of securities analysts or investors, themarket price of our common stock will likely decline.Our financial results have fluctuated in the past and may fluctuate in the future which may cause volatility in our stock price.Our operating results have fluctuated in the past and we expect our future quarterly and annual operating results to fluctuate as we focus on increasing doctorand consumer demand for our products. These fluctuations could cause our stock price to decline or significantly fluctuate. Some of the factors that could cause ouroperating results to fluctuate include:•limited visibility into and difficulty predicting the level of activity in our customers’ practices from quarter to quarter;•weakness in consumer spending as a result of the slowdown in the U.S. economy and global economies;•changes in relationships with our distributors;•changes in the timing of receipt of Invisalign case product orders during a given quarter which, given our cycle time and the delay between case receiptsand case shipments, could have an impact on which quarter revenue can be recognized;•fluctuations in currency exchange rates against the U.S. dollar;•changes in product mix;•our inability to scale production of our iTero Element scanner to meet customer demand;•if participation in our customer rebate or discount programs increases our average selling price will be adversely affected;•seasonal fluctuations in the number of doctors in their offices and their availability to take appointments;•success of or changes to our marketing programs from quarter to quarter;•our reliance on our contract manufacturers for the production of sub-assemblies for our intra-oral scanners;•timing of industry tradeshows;•changes in the timing of when revenue is recognized, including as a result of the introduction of new products or promotions, modifications to our termsand conditions or as a result of changes to critical accounting estimates or new accounting pronouncements;•changes to our effective tax rate;•unanticipated delays in production caused by insufficient capacity or availability of raw materials;•any disruptions in the manufacturing process, including unexpected turnover in the labor force or the introduction of new production processes, poweroutages or natural or other disasters beyond our control;•the development and marketing of directly competitive products by existing and new competitors;•major changes in available technology or the preferences of customers may cause our current product offerings to become less competitive or obsolete;•aggressive price competition from competitors;•costs and expenditures in connection with litigation;•the timing of new product introductions by us and our competitors, as well as customer order deferrals in anticipation of enhancements or new products;16•unanticipated delays in our receipt of patient records made through an intraoral scanner for any reason;•disruptions to our business due to political, economic or other social instability, including the impact of an epidemic any of which results in changes inconsumer spending habits, consumers unable or unwilling to visit the orthodontist or general practitioners office, as well as any impact on workforceabsenteeism;•inaccurate forecasting of net revenues, production and other operating costs,•investments in research and development to develop new products and enhancements; and•our ability to successfully hedge against a portion of our foreign currency-denominated assets and liabilities.To respond to these and other factors, we may need to make business decisions that could adversely affect our operating results such as modifications to ourpricing policy, business structure or operations. Most of our expenses, such as employee compensation and lease payment obligations, are relatively fixed in theshort term. Moreover, our expense levels are based, in part, on our expectations regarding future revenue levels. As a result, if our net revenues for a particularperiod fall below our expectations, whether caused by changes in consumer spending, consumer preferences, weakness in the U.S. or global economies, changes incustomer behavior related to advertising and prescribing our product, or other factors, we may be unable to adjust spending quickly enough to offset any shortfallin net revenues. Due to these and other factors, we believe that quarter-to-quarter comparisons of our operating results may not be meaningful. You should not relyon our results for any one quarter as an indication of our future performance.Our future success may depend on our ability to develop, successfully introduce and achieve market acceptance of new products.Our future success may depend on our ability to develop, manufacture, market, and obtain regulatory approval or clearance of new products. There can be noassurance that we will be able to successfully develop, sell and achieve market acceptance of these and other new products and applications and enhanced versionsof our existing product or software. The extent of, and rate at which, market acceptance and penetration are achieved by future products is a function of manyvariables, which include, among other things, our ability to:•correctly identify customer needs and preferences and predict future needs and preferences;•include functionality and features that address customer requirements;•ensure compatibility of our computer operating systems and hardware configurations with those of our customers;•allocate our research and development funding to products with higher growth prospects;•anticipate and respond to our competitors’ development of new products and technological innovations;•differentiate our offerings from our competitors’ offerings;•innovate and develop new technologies and applications;•the availability of third-party reimbursement of procedures using our products;•obtain adequate intellectual property rights; and•encourage customers to adopt new technologies.If we fail to accurately predict customer needs and preferences or fail to produce viable technologies, we may invest heavily in research and development ofproducts that do not lead to significant revenue. Even if we successfully innovate and develop new products and produce enhancements, we may incur substantialcosts in doing so, and our profitability may suffer. In addition, even if our new products are successfully introduced, it is unlikely that they will rapidly gainmarket share and acceptance primarily due to the relatively long period of time it takes to successfully treat a patient with Invisalign. Since it takes approximately12 to 24 months to treat a patient, our customers may be unwilling to rapidly adopt our new products until they successfully complete at least one case or untilmore historical clinical results are available.Our ability to market and sell new products may also be subject to government regulation, including approval or clearance by the FDA, and foreigngovernment agencies. Any failure in our ability to successfully develop and introduce or achieve market17acceptance of our new products or enhanced versions of existing products could have a material adverse effect on our operating results and could cause our netrevenues to decline.A disruption in the operations of our primary freight carrier or higher shipping costs could cause a decline in our net revenues or a reduction in ourearnings.We are dependent on commercial freight carriers, primarily UPS, to deliver our products to our customers. If the operations of these carriers are disrupted forany reason, we may be unable to deliver our products to our customers on a timely basis. If we cannot deliver our products in an efficient and timely manner, ourcustomers may reduce their orders from us and our net revenues and operating profits could materially decline. In a rising fuel cost environment, our freight costswill increase. If freight costs materially increase and we are unable to pass that increase along to our customers for any reason or otherwise offset such increases inour cost of net revenues, our gross margin and financial results could be adversely affected.We are dependent on our international operations, which exposes us to foreign operational, political and other risks that may harm our business.Our key production steps are performed in operations located outside of the U.S. At our facility in San Jose, Costa Rica, technicians use a sophisticated,internally developed computer-modeling program to prepare digital treatment plans, which are then transmitted electronically to Juarez, Mexico. These digital filesform the basis of the ClinCheck treatment plan and are used to manufacture aligner molds. Our order acquisition, aligner fabrication and shipping operations areconducted in Juarez, Mexico. In addition to the research and development efforts conducted in our North America facilities, we also carry out research anddevelopment at locations in Moscow, Russia. In addition, our customer-care, accounts receivable, credit and collections and customer event registrationorganizations are located at our facility in San Jose, Costa Rica. We also have operations in Israel where the design and wand assembly and our intra-oral scannerare manufactured. Our reliance on international operations exposes us to risks and uncertainties that may affect our business or results of operation, including:•difficulties in hiring and retaining employees generally, as well as difficulties in hiring and retaining employees with the necessary skills to perform themore technical aspects of our operations;•difficulties in managing international operations, including any travel restrictions to or from our facilities located in Russia and Israel;•fluctuations in currency exchange rates;•increased income taxes, and other restrictions and limitations, if we were to decide to repatriate any of our foreign cash balances back to the U.S.;•import and export license requirements and restrictions;•controlling production volume and quality of the manufacturing process;•political, social and economic instability, including as a result of increased levels of violence in Juarez, Mexico or the Middle East. We cannot predict theeffect on us of any future armed conflict, political instability or violence in these regions. In addition, some of our employees in Israel are obligated toperform annual reserve duty in the Israeli military and are subject to being called for additional active duty under emergency circumstances. We cannotpredict the full impact of these conditions on us in the future, particularly if emergency circumstances or an escalation in the political situation occurs. Ifmany of our employees are called for active duty, our operations in Israel and our business may not be able to function at full capacity;•acts of terrorism and acts of war;•geopolitical risks around the Ukraine and the possibility of additional sanctions against Russia which continue to bring uncertainty to this region;•interruptions and limitations in telecommunication services;•product or material transportation delays or disruption, including as a result of increased levels of violence, acts of terrorism, acts of war or healthepidemics restricting travel to and from our international locations or as a result of natural disasters, such as earthquakes or volcanic eruptions;•burdens of complying with a wide variety of local country and regional laws;18•trade restrictions and changes in tariffs; and•potential adverse tax consequences.If any of these risks materialize in the future, we could experience production delays and lost or delayed revenue.We earn an increasingly larger portion of our total revenues from international sales and face risks attendant to those operations.We earn an increasingly larger portion of our total revenues from international sales generated through our foreign direct and indirect operations. As a result ofthese sales operations, we face a variety of risks, including:•local political and economic instability;•the engagement of activities by our employees, contractors, partners and agents, especially in countries with developing economies, that are prohibited byinternational and local trade and labor laws and other laws prohibiting corrupt payments to government officials, including the Foreign Corrupt PracticesAct, the UK Bribery Act of 2010 and export control laws, in spite of our policies and procedures designed to ensure compliance with these laws;•although it is our intention to indefinitely reinvest earnings outside the U.S., restrictions on the transfer of funds held by our foreign subsidiaries,including with respect to restrictions on our ability to repatriate foreign cash to the U.S at favorable tax rates;•fluctuations in currency exchange rates; and•increased expense of developing, testing and making localized versions of our products.Any of these factors, either individually or in combination, could materially impact our international operations and adversely affect our business as a whole. If we are unable to accurately predict our volume growth, and fail to hire a sufficient number of technicians in advance of such demand, the delivery timeof our products could be delayed which could adversely affect our results of operations.Treatment planning is a key step leading to our manufacturing process which relies on sophisticated computer technology requiring new technicians toundergo a relatively long training process. Training production technicians takes approximately 90 to 120 days. As a result, if we are unable to accurately predictour volume growth, we may not have a sufficient number of trained technicians to deliver our products within the timeframe our customers expect. Such a delaycould cause us to lose existing customers or fail to attract new customers. This could cause a decline in our net revenues and net income and could adversely affectour results of operations.Our headquarters, digital dental modeling processes, and other manufacturing processes are principally located in regions that are subject to earthquakesand other natural disasters.Our digital dental modeling is processed in our facility located in San Jose, Costa Rica. The operations team in Costa Rica creates ClinCheck treatment plansusing sophisticated computer software. In addition, our customer facing operations are located in Costa Rica. Our aligner molds and finished aligners are fabricatedin Juarez, Mexico. Both locations in Costa Rica and Mexico are in earthquake zones and may be subject to other natural disasters. If there is a major earthquake orany other natural disaster in a region where one of these facilities is located, our ability to create ClinCheck treatment plans, respond to customer inquiries ormanufacture and ship our aligners could be compromised which could result in our customers experiencing a significant delay in receiving their completed alignersand a decrease in service levels for a period of time. In addition, our headquarters facility in California is located in the San Francisco Bay Area. An earthquake orother natural disaster in this region could result in a disruption in our operations. Any such business interruption could materially and adversely affect our business,financial condition and results of operations.19Our information technology systems are critical to our business. System integration and implementation issues and system security risks could disrupt ouroperations, which could have a material adverse impact on our business and operating results.We rely on the efficient and uninterrupted operation of complex information technology systems. All information technology systems are vulnerable todamage or interruption from a variety of sources. As our business has grown in size and complexity, the growth has placed, and will continue to place, significantdemands on our information technology systems. To effectively manage this growth, our information systems and applications require an ongoing commitment ofsignificant resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information processingtechnology, evolving industry and regulatory standards and changing customer preferences. We are in the process of implementing a multi-year, company-wideprogram to transform certain business processes or extend established processes, including the transition to a single enterprise resource planning ("ERP") softwaresystem to perform various functions. The implementation of additional functionality in the ERP system entails certain risks, including difficulties with changes inbusiness processes that could disrupt our operations, such as our ability to track orders and timely ship products, manage our supply chain and aggregate financialand operational data. During transitions we must continue to rely on legacy information systems, which may be costly or inefficient, while the implementation ofnew initiatives may not achieve the anticipated benefits and may divert management's attention from other operational activities, negatively affect employeemorale, or have other unintended consequences. Additionally, if we are not able to accurately forecast expenses and capitalized costs related to the project, thismay have an adverse impact on our financial condition and operating results. If the information we rely upon to run our businesses were to be found to be inaccurate or unreliable, if we fail to properly maintain our information systemsand data integrity, or if we fail to develop new capabilities to meet our business needs in a timely manner, we could have operational disruptions, have customerdisputes, lose our ability to produce timely and accurate reports, have regulatory or other legal problems, have increases in operating and administrative expenses,lose existing customers, have difficulty in attracting new customers or in implementing our growth strategies, or suffer other adverse consequences. In addition,experienced computer programmers and hackers may be able to penetrate our network security and misappropriate our confidential information or that of thirdparties, create system disruptions or cause shutdowns. Furthermore, sophisticated hardware and operating system software and applications that we either internallydevelop or procure from third parties which we depend upon may contain defects in design and manufacture, including “bugs” and other problems that canunexpectedly interfere with the operation of the system. The costs to eliminate or alleviate security problems, viruses and bugs could be significant, and the effortsto address these problems could result in interruptions that may have a material adverse impact on our operations, net revenues and operating results.System upgrades and enhancements require significant expenditures and allocation of valuable employee resources. Delays in integration or disruptions to ourbusiness from implementation of these new or upgraded systems could have a material adverse impact on our financial condition and operating results.Additionally, we continuously upgrade our customer facing software applications, specifically the ClinCheck and MyAligntech software. Softwareapplications frequently contain errors or defects, especially when they are first introduced or when new versions are released. The discovery of a defect or error orthe incompatibility with the computer operating system and hardware configurations of customers in a new upgraded version or the failure of our primaryinformation systems may result in the following consequences, among others: loss of revenue or delay in market acceptance, damage to our reputation or increasedservice costs, any of which could have a material adverse effect on our business, financial condition or results of operations.Furthermore, our business requires the secure transmission of confidential information over public networks. Because of the confidential health informationwe store and transmit, security breaches could expose us to a risk of regulatory action, litigation, possible liability and loss. Our security measures may beinadequate to prevent security breaches, and our business operations and profitability would be adversely affected by, among other things, loss of customers andpotential criminal and civil sanctions if they are not prevented.There can be no assurance that our process of improving existing systems, developing new systems to support our expanding operations, integrating newsystems, protecting confidential patient information, and improving service levels will not be delayed or that additional systems issues will not arise in the future.Failure to adequately protect and maintain the integrity of our information systems and data may result in a material adverse effect on our financial position, resultsof operations and cash flows.Competition in the markets for our products is intense and we expect aggressive competition from existing competitors and other companies that mayintroduce new technologies in the future.Currently, our products compete directly against products manufactured and distributed by various companies, both within and outside the U.S. Many of thesemanufacturers, including Danaher Corporation, 3M, Sirona Dental Systems, Inc. and Dentsply International, have substantially greater financial resources andmanufacturing and marketing experience than we do and may, in20the future, attempt to develop an orthodontic system similar to ours or combine technologies that make our product economically unattractive. The expiration ofcertain key patents commencing in 2017 owned by us may result in additional competition. Large consumer product companies may also enter the orthodonticsupply market. Furthermore, we may face competition in the future from new companies that may introduce new technologies. We may be unable to compete withthese competitors and one or more of these competitors may render our technology obsolete or economically unattractive. If we are unable to compete effectivelywith existing products or respond effectively to any products developed by new or existing competitors, our business could be harmed. Increased competition hasresulted in the past and may in the future result in volume discounting and price reductions, reduced gross margins, reduced profitability and loss of market share,and reduce dental professionals’ efforts and commitment to expand their use of our products, any of which could have a material adverse effect on our netrevenues, volume growth, net income and stock price. We cannot assure you that we will be able to compete successfully against our current or future competitorsor that competitive pressures will not have a material adverse effect on our business, results of operations and financial condition.If the security of our customer and patient information is compromised, patient care could suffer, and we could be liable for related damages, and ourreputation could be impaired.We retain confidential customer and patient information in our processing centers. Therefore, it is critical that our facilities and infrastructure remain secureand that our facilities and infrastructure are perceived by the marketplace and our customers to be secure. Despite the implementation of security measures, ourinfrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. If we fail tomeet our clients’ expectations regarding the security of healthcare information, we could be liable for damages and our reputation could be impaired. In addition,patient care could suffer, and we could be liable if our systems fail to deliver correct information in a timely manner. Our insurance may not protect us from thisrisk.Our success depends in part on our proprietary technology, and if we are unable to successfully enforce our intellectual property rights, our competitiveposition may be harmed. Litigating claims of this type is costly and could distract our management and cause a decline in our results of operations and stockprice.Our success will depend in part on our ability to maintain existing intellectual property and to obtain and maintain further intellectual property protection forour products, both in the U.S. and in other countries. Our inability to do so could harm our competitive position. As of December 31, 2015, we had issued 384 U.S.patents, 276 foreign issued patents, and 236 pending global patent applications.We intend to rely on our portfolio of issued and pending patent applications in the U.S. and in other countries to protect a large part of our intellectual propertyand our competitive position; however, our currently pending or future patent filings may not result in the issuance of patents. Additionally, any patents issued tous may be challenged, invalidated, held unenforceable, circumvented, or may not be sufficiently broad to prevent third parties from producing competing productssimilar in design to our products. In addition, any protection afforded by foreign patents may be more limited than that provided under U.S. patents and intellectualproperty laws. We also rely on protection of our copyrights, trade secrets, know-how and proprietary information. We generally enter into confidentialityagreements with our employees, consultants and our collaborative partners upon commencement of a relationship with us; however, these agreements may notprovide meaningful protection against the unauthorized use or disclosure of our trade secrets or other confidential information, and adequate remedies may notexist if unauthorized use or disclosure were to occur. Our inability to maintain the proprietary nature of our technology through patents, copyrights or trade secretswould impair our competitive advantages and could have a material adverse effect on our operating results, financial condition and future growth prospects. Inparticular, a failure to protect our proprietary rights might allow competitors to copy our technology, which could adversely affect our pricing and market share. Inaddition, in an effort to protect our intellectual property we have in the past been and may in the future be involved in litigation. The potential effects on ourbusiness operations resulting from litigation that we may participate in the future, whether or not ultimately determined in our favor or settled by us, are costly anddivert the efforts and attention of our management and technical personnel from normal business operations.Litigation is subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or, in cases whereinjunctive relief is sought, an injunction prohibiting us from selling our products. Any of these results from our litigation could adversely affect our results ofoperations and stock price.While we believe we currently have adequate internal control over financial reporting, we are required to assess our internal control over financialreporting on an annual basis and any future adverse results from such assessment could result in a loss of investor confidence in our financial reports andhave an adverse effect on our stock price.Pursuant to the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated by the SEC, we are required to furnish in our Form 10-K a report byour management regarding the effectiveness of our internal control over financial reporting. The report21includes, among other things, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including astatement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in ourinternal control over financial reporting identified by management. While we believe our internal control over financial reporting is currently effective, theeffectiveness of our internal controls in future periods is subject to the risk that our controls may become inadequate because of changes in conditions, and, as aresult, the degree of compliance of our internal control over financial reporting with the existing policies or procedures may become ineffective. Establishing,testing and maintaining an effective system of internal control over financial reporting requires significant resources and time commitments on the part of ourmanagement and our finance staff, may require additional staffing and infrastructure investments, and would increase our costs of doing business. If we are unableto assert that our internal control over financial reporting is effective in any future period (or if our auditors are unable to express an opinion on the effectiveness ofour internal controls or conclude that our internal controls are ineffective), we could lose investor confidence in the accuracy and completeness of our financialreports, which could have an adverse effect on our stock price.If we lose our key personnel or are unable to attract and retain key personnel, we may be unable to pursue business opportunities or develop our products.We are highly dependent on the key employees in our clinical engineering, technology development, sales, training and marketing personnel and managementteams. The loss of the services provided by those individuals may significantly delay or prevent the achievement of our product development and other businessobjectives and could harm our business. Our future success will also depend on our ability to identify, recruit, train and retain additional qualified personnel,including orthodontists. Few orthodontists are accustomed to working in a manufacturing environment since they are generally trained to work in private practices,universities and other research institutions. Thus, we may be unable to attract and retain personnel with the advanced qualifications necessary for the furtherdevelopment of our business. Furthermore, we may not be successful in retaining our key personnel or their services. If we are unable to attract and retain keypersonnel, our business could be materially harmed. In addition, our ability to recognize revenue on the direct sales of our intra-oral scanners depends in part uponour ability to schedule and staff trainings. The loss of the services provided by these individuals or our ability to timely hire such personnel in sufficient numbersbased on our volume growth, may harm our business. If we are unable to retain our trainers or replace such individuals with persons having equivalent technicalexpertise and qualifications, or if we are unable to successfully instill such technical expertise in newly hired personnel or accurately predict the number of suchpersonnel needed, our net revenues could be materially harmed. If we infringe the patents or proprietary rights of other parties or are subject to a patent infringement claim, our ability to grow our business may beseverely limited.Extensive litigation over patents and other intellectual property rights is common in the medical device industry. We have been sued for infringement of thirdparty’s patents in the past and we may be the subject of patent or other litigation in the future. From time to time, we have received and may in the future receiveletters from third parties drawing our attention to their patent rights. While we do not believe that we infringe upon any valid and enforceable rights that have beenbrought to our attention, there may be other more pertinent rights of which we are presently unaware. The defense and prosecution of intellectual property suits,interference proceedings and related legal and administrative proceedings could result in substantial expense to us and significant diversion of effort by ourtechnical and management personnel. An adverse determination of any litigation or interference proceeding to which we may become a party could subject us tosignificant liabilities. An adverse determination of this nature could also put our patents at risk of being invalidated or interpreted narrowly or require us to seeklicenses from third parties. Licenses may not be available on commercially reasonable terms or at all, in which event, our business would be materially adverselyaffected.22We maintain single supply relationships for certain of our key machines and materials technologies, and our business and operating results could beharmed if supply is restricted or ends or the price of raw materials used in our manufacturing process increases.We are highly dependent on manufacturers of specialized scanning equipment, rapid prototyping machines, resin and other advanced materials, as well as theoptics, electronic and other mechanical components of our intra-oral scanners. We maintain single supply relationships for many of these machines and materialstechnologies. In particular, our CT scanning and stereolithography equipment used in our aligner manufacturing and many of the critical components for the opticsof our scanners are provided by single suppliers. We are also committed to purchasing the vast majority of our resin and polymer, the primary raw materials usedin our manufacturing process for clear aligners, from a single source. If these or other suppliers encounter financial, operating or other difficulties or if ourrelationship with them changes, we might not be able to quickly establish or qualify replacement sources of supply and could face production interruptions, delaysand inefficiencies. In addition, technology changes by our vendors could disrupt access to required manufacturing capacity or require expensive, time consumingdevelopment efforts to adapt and integrate new equipment or processes. Our growth may exceed the capacity of one or more of these manufacturers to produce theneeded equipment and materials in sufficient quantities to support our growth. Conversely, in order to secure supplies for production of products, we sometimesenter into non-cancelable purchase commitments with vendors, which could impact our ability to adjust our inventory to reflect declining market demands. Ifdemand for our products is less than we expect, we may experience additional excess and obsolete inventories and be forced to incur additional charges and ourprofitability may suffer. In the event of technology changes, delivery delays, or shortages of or increases in price for these items, our business and growth prospectsmay be harmed.We depend on a single contract manufacturer and supplier of parts used in our iTero scanner and any disruption in this relationship may cause us to fail tomeet the demands of our customers and damage our customer relationships.We rely on a third party manufacturer in the Czech Republic to supply key sub-assemblies for our iTero Element scanner. As a result, if this third partymanufacturer fails to deliver its components, if we lose its services or if we fail to negotiate acceptable terms, we may be unable to deliver our products in a timelymanner and our business may be harmed. Any difficulties encountered by the third party manufacturer with respect to hiring personnel and maintaining acceptablemanufacturing standards, controls, procedures and policies could disrupt our ability to deliver our products in a timely manner. Finding a substitute manufacturermay be expensive, time-consuming or impossible and could result in a significant interruption in the supply of our intra-oral scanning products. Any failure by ourcontract manufacturer that results in delays in our fulfillment of customer orders may cause us to lose revenues and suffer damage to our customer relationships.We primarily rely on our direct sales force to sell our products, and any failure to maintain our direct sales force could harm our business.Our ability to sell our products and generate revenues primarily depends upon our direct sales force within our North American and international markets. Wedo not have any long-term employment contracts with the members of our direct sales force. The loss of the services provided by these key personnel may harmour business. If we are unable to retain our direct sales force personnel or replace them with individuals of equivalent technical expertise and qualifications, or ifwe are unable to successfully instill such technical expertise or if we fail to establish and maintain strong relationships with our customers within a relatively shortperiod of time, our net revenues and our ability to maintain market share could be materially harmed. In addition, due to our large and fragmented customer base,we may not be able to provide all of our customers with product support immediately upon the launch of a new product. As a result, adoption of new products byour customers may be slower than anticipated and our ability to grow market share and increase our net revenues may be harmed.If our distributor relationships are not successful, our ability to market and sell our products would be harmed and our financial performance will beadversely affected.We depend on relationships with distributors for the marketing and sales of our products in various geographic regions, and we have a limited ability toinfluence their efforts. Relying on distributors for our sales and marketing could harm our business for various reasons, including:23•agreements with distributors may terminate prematurely due to disagreements or may result in litigation between the partners;•we may not be able to renew existing distributor agreements on acceptable terms;•our distributors may not devote sufficient resources to the sale of products;•our distributors may be unsuccessful in marketing our products;•our existing relationships with distributors may preclude us from entering into additional future arrangements with other distributors; and•we may not be able to negotiate future distributor agreements on acceptable terms.Complying with regulations enforced by the FDA and other regulatory authorities is an expensive and time-consuming process, and any failure to complycould result in substantial penalties.Our products are considered medical devices and are subject to extensive regulation in the U.S. and internationally. FDA regulations are wide ranging andgovern, among other things:•product design, development, manufacturing and testing;•product labeling;•product storage;•pre-market clearance or approval;•complaint handling and corrective actions;•advertising and promotion; and•product sales and distribution.Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA or state agencies, which may include any of thefollowing sanctions:•warning letters, fines, injunctions, consent decrees and civil penalties;•repair, replacement, refunds, recall or seizure of our products;•operating restrictions or partial suspension or total shutdown of production;•refusing our requests for 510(k) clearance or pre-market approval of new products, new intended uses, or modifications to existing products;•withdrawing clearance or pre-market approvals that have already been granted; and•criminal prosecution.If any of these events were to occur, they could harm our business. We must comply with facility registration and product listing requirements of the FDA andadhere to applicable Quality System regulations. The FDA enforces its Quality System regulations through periodic unannounced inspections. Our failure to takesatisfactory corrective action in response to an adverse inspection or the failure to comply with applicable manufacturing regulations could result in enforcementaction, and we may be required to find alternative manufacturers, which could be a long and costly process. Any FDA enforcement action could have a materialadverse effect on us.Before we can sell a new medical device in the U.S., or market a new use of or claim for an existing product we must obtain FDA clearance or approval,unless an exemption applies. Obtaining regulatory clearances or approvals can be a lengthy and time-consuming process. Even though the devices we market haveobtained the necessary clearances from the FDA, we may be unable to maintain such clearances in the future. Furthermore, we may be unable to obtain thenecessary clearances for new devices that24we intend to market in the future. Our inability to maintain or obtain regulatory clearances or approvals could materially harm our business.In addition, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC adopted disclosure requirements regarding the use of certainminerals, known as conflict minerals, which are mined from the Democratic Republic of Congo and adjoining countries, as well as procedures regarding amanufacturer's efforts to identify and discourage the sourcing of such minerals and metals produced from those minerals. Additional reporting obligations arebeing proposed by the European Union. The U.S. requirements and any additional requirements in Europe could affect the sourcing and availability of metals usedin the manufacture of a limited number of parts (if any) contained in our products. For example, the implementation of these disclosure requirements may decreasethe number of suppliers capable of supplying our needs for certain metals, thereby negatively affecting our ability to obtain products in sufficient quantities or atcompetitive prices. Our material sourcing is broad based and multi-tiered, and we may be unable to conclusively verify the origins for all metals used in ourproducts. We may suffer financial and reputational harm if customers require, and we are unable to deliver, certification that our products are conflict free.Regardless, we will incur additional costs associated with compliance with these disclosure requirements, including time-consuming and costly efforts to determinethe source of any conflict minerals used in our products.If compliance with healthcare regulations becomes costly and difficult for our customers or for us, we may not be able to grow our business.Participants in the healthcare industry are subject to extensive and frequently changing regulations under numerous laws administered by governmentalentities at the federal, state and local levels, some of which are, and others of which may be, applicable to our business. In response to perceived increases in healthcare costs in recent years, Congress passed health care reform legislation that President Obama signed into law in March 2010. This legislation contains manyprovisions designed to generate the revenues necessary to fund the coverage expansions. The most relevant of these provisions are those that impose fees or taxeson certain health-related industries, including medical device manufacturers. Furthermore, our healthcare provider customers are also subject to a wide variety of laws and regulations that could affect the nature and scope of theirrelationships with us. The healthcare market itself is highly regulated and subject to changing political, economic and regulatory influences. Regulationsimplemented pursuant to the Health Insurance Portability and Accountability Act ("HIPAA"), including regulations affecting the security and privacy of patienthealthcare information held by healthcare providers and their business associates may require us to make significant and unplanned enhancements of softwareapplications or services, result in delays or cancellations of orders, or result in the revocation of endorsement of our products and services by healthcareparticipants. The effect of HIPAA and newly enforced regulations on our business is difficult to predict, and there can be no assurance that we will adequatelyaddress the business risks created by HIPAA and its implementation or that we will be able to take advantage of any resulting business opportunities.Extensive and changing government regulation of the healthcare industry may be expensive to comply with and exposes us to the risk of substantialgovernment penalties.In addition to medical device laws and regulations, numerous state and federal healthcare-related laws regulate our business, covering areas such as:•storage, transmission and disclosure of medical information and healthcare records;•prohibitions against the offer, payment or receipt of remuneration to induce referrals to entities providing healthcare services or goods or to inducethe order, purchase or recommendation of our products; and•the marketing and advertising of our products.Complying with these laws and regulations could be expensive and time-consuming, and could increase our operating costs or reduce or eliminate certain ofour sales and marketing activities or our revenues.25We face risks related to our international sales, including the need to obtain necessary foreign regulatory clearance or approvals.Outside of North America, we currently sell our products in Europe, Asia Pacific, Latin America and the Middle East and may expand into other countriesfrom time to time. For sales of our products outside the U.S., we are subject to foreign regulatory requirements that vary widely from country to country. The timerequired to obtain clearances or approvals required by other countries may be longer than that required for FDA clearance or approval, and requirements for suchapprovals may differ from FDA requirements. We may be unable to obtain regulatory approvals in one or more of the other countries in which we do business or inwhich we may do business in the future. We may also incur significant costs in attempting to obtain and maintain foreign regulatory approvals. If we experiencedelays in receipt of approvals to market our products outside of the U.S., or if we fail to receive these approvals, we may be unable to market our products orenhancements in international markets in a timely manner, if at all.Our business exposes us to potential product liability claims, and we may incur substantial expenses if we are subject to product liability claims or litigation.Medical devices involve an inherent risk of product liability claims and associated adverse publicity. We may be held liable if any product we develop or anyproduct that uses or incorporates any of our technologies causes injury or is otherwise found unsuitable. Although we intend to continue to maintain productliability insurance, adequate insurance may not be available on acceptable terms, if at all, and may not provide adequate coverage against potential liabilities. Aproduct liability claim, regardless of its merit or eventual outcome, could result in significant legal defense costs. These costs would have the effect of increasingour expenses and diverting management’s attention away from the operation of our business, and could harm our business.Historically, the market price for our common stock has been volatile.The market price of our common stock could be subject to wide price fluctuations in response to various factors, many of which are beyond our control. Thefactors include:•quarterly variations in our results of operations and liquidity;•changes in recommendations by the investment community or in their estimates of our net revenues or operating results;•speculation in the press or investment community concerning our business and results of operations;•strategic actions by our competitors, such as product announcements or acquisitions;•announcements of technological innovations or new products by us, our customers or competitors; and•general economic market conditions.In addition, the stock market in general, and the market for technology and medical device companies in particular, have experienced extreme price andvolume fluctuations that have often been unrelated to or disproportionate to the operating performance of those companies. These broad market and industryfactors may seriously harm the market price of our common stock, regardless of our operating performance. Historically, class action litigation is often broughtagainst an issuing company following periods of volatility in the market price of a company’s securities.Future sales of significant amounts of our common stock may depress our stock price.A large percentage of our outstanding common stock is currently owned by a small number of significant stockholders. These stockholders have sold in thepast, and may sell in the future, large amounts of common stock over relatively short periods of time. Sales of substantial amounts of our common stock in thepublic market by our existing stockholders may adversely affect the market price of our common stock. Such sales could create public perception of difficulties orproblems with our business and may depress our stock price.26If our goodwill or long-lived assets become impaired, we may be required to record a significant charge to earnings.Under Generally Accepted Accounting Principles in the United States (“U.S. GAAP”), we review our goodwill and asset group for impairment when events orchanges in circumstances indicate the carrying value may not be recoverable. Additionally, goodwill is required to be tested for impairment at least annually. Thequalitative and quantitative analysis used to test goodwill are dependent upon various assumptions and reflect management’s best estimates. Changes in certainassumptions including revenue growth rates, discount rates, earnings multiples and future cash flows may cause a change in circumstances indicating that thecarrying value of goodwill or the asset group may be impaired. We may be required to record a significant charge to earnings in the financial statements during theperiod in which any impairment of goodwill or asset group are determined.Changes in, or interpretations of, accounting rules and regulations, could result in unfavorable accounting charges.We prepare our consolidated financial statements in conformity with U.S. GAAP. These principles are subject to interpretation by the SEC and various bodiesformed to interpret and create appropriate accounting policies. A change in these policies can have a significant effect on our reported results and may evenretroactively affect previously reported transactions. Our accounting policies that recently have been, or may be affected by changes in the accounting rules relateto revenue recognition.If we fail to manage our exposure to global financial and securities market risk successfully, our operating results and financial statements could bematerially impacted.The primary objective of our investment activities is to preserve principal. To achieve this objective, a majority of our marketable investments are investmentgrade, liquid, fixed-income securities and money market instruments denominated in U.S. dollars. If the carrying value of our investments exceeds the fair value,and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments, which could materially harmour results of operations and financial condition. Moreover, the performance of certain securities in our investment portfolio correlates with the credit condition ofthe U.S. financial sector. In a current unstable credit environment, we might incur significant realized, unrealized or impairment losses associated with theseinvestments.Our effective tax rate may vary significantly from period to period.Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate. These factors include, but are not limited to,changes in tax laws, regulations and/or rates, non-deductible goodwill impairments, changing interpretations of existing tax laws or regulations, changes in therelative proportions of revenues and income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates, the future levels oftax benefits of stock option deductions relating to incentive stock options and employee stock purchase plans, settlement of income tax audits, and changes inoverall levels of pretax earnings.In June 2009, the Costa Rica Ministry of Foreign Trade, an agency of the Government of Costa Rica, granted a twelve year extension of various income taxincentives, which were previously granted in 2002. The incentive tax rates will expire in various years beginning in 2017. Under these incentives, all of the incomein Costa Rica during these twelve year incentive periods is subject to reduced rates of Costa Rica income tax. In order to receive the benefit of these incentives, wemust hire specified numbers of employees and maintain certain minimum levels of fixed asset investment in Costa Rica. If we do not fulfill these conditions forany reason, our incentive could lapse, and our income in Costa Rica would be subject to taxation at higher rates, which could have a negative impact on ouroperating results. The Costa Rica corporate income tax rate that would apply, absent the incentives, is 30% for 2015, 2014 and 2013. As a result of theseincentives, our income taxes were reduced by $32.7 million, $32.5 million, and $27.7 million for the year ended December 31, 2015, 2014, and 2013, respectively,representing a benefit to diluted net income per share of $0.40, $0.40 and $0.34 in 2015, 2014 and 2013, respectively. Our subsidiary in Israel is under audit by thelocal tax authorities for calendar years 2006 through 2012. We are currently under audit by the California Franchise Tax Board for fiscal year 2011, 2012 and2013.ITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESWe occupy several leased and owned facilities with total office and manufacturing area of over 898,000 square feet. At December 31, 2015 , the significantfacilities were occupied as follows: 27LocationLease/OwnPrimary UseSegmentExpiration ofleaseSan Jose, CaliforniaLeaseOffice for corporate headquarters, research & development andadministrative personnelClear Aligner andScannerSeptember 2017San Jose, Costa RicaLeaseOffice for administrative personnel, manufacturing personnel, and customercareClear Aligner andScannerNovember 2017Juarez, MexicoOwnManufacturing and office facilities for manufacturing and administrativepersonnelClear Aligner andScannerN/AOr Yehuda, IsraelLeaseManufacturing and office for manufacturing, administrative personnel, andresearch and developmentScannerOctober 2017Amsterdam, TheNetherlandsLeaseOffice for international headquarters, sales and marketing andadministrative personnelClear AlignerApril 2017Moscow, RussiaLeaseOffice for research and developmentClear Aligner andScannerApril 2017Raleigh, North CarolinaLeaseOffice for research & development and administrative personnelClear AlignerAugust 2020ITEM 3. LEGAL PROCEEDINGS Securities Class Action Lawsuit On November 28, 2012, plaintiff City of Dearborn Heights Act 345 Police & Fire Retirement System filed a lawsuit against Align, Thomas M. Prescott (“Mr.Prescott”), Align’s former President and Chief Executive Officer, and Kenneth B. Arola (“Mr. Arola”), Align’s former Vice President, Finance and Chief FinancialOfficer, in the United States District Court for the Northern District of California on behalf of a purported class of purchasers of our common stock (the “SecuritiesAction”). On July 11, 2013, an amended complaint was filed, which named the same defendants, on behalf of a purported class of purchasers of our common stockbetween January 31, 2012 and October 17, 2012. The amended complaint alleged that Align, Mr. Prescott and Mr. Arola violated Section 10(b) of the SecuritiesExchange Act of 1934 and Rule 10b-5 promulgated thereunder, and that Mr. Prescott and Mr. Arola violated Section 20(a) of the Securities Exchange Act of 1934.Specifically, the amended complaint alleged that during the purported class period defendants failed to take an appropriate goodwill impairment charge related tothe April 29, 2011 acquisition of Cadent Holdings, Inc. in the fourth quarter of 2011, the first quarter of 2012 or the second quarter of 2012, which rendered ourfinancial statements and projections of future earnings materially false and misleading and in violation of U.S. GAAP. The amended complaint sought monetarydamages in an unspecified amount, costs and attorneys’ fees. On December 9, 2013, the court granted defendants’ motion to dismiss with leave for plaintiff to filea second amended complaint. Plaintiff filed a second amended complaint on January 8, 2014 on behalf of the same purported class. The second amended complaintstates the same claims as the amended complaint. On August 22, 2014, the court granted our motion to dismiss without leave to amend. On September 22, 2014,Plaintiff filed a notice of appeal to the Ninth Circuit Court of Appeals. Align intends to vigorously defend itself against these allegations. Align is currently unableto predict the outcome of this amended complaint and therefore cannot determine the likelihood of loss nor estimate a range of possible loss, if any. Shareholder Derivative Lawsuit On February 1, 2013, plaintiff Gary Udis filed a shareholder derivative lawsuit against several of Align’s current and former officers and directors in theSuperior Court of California, County of Santa Clara. The complaint alleges that our reported income and earnings were materially overstated because of a failure totimely write down goodwill related to the April 29, 2011 acquisition of Cadent Holdings, Inc., and that defendants made allegedly false statements concerning ourforecasts. The complaint asserts various state law causes of action, including claims of breach of fiduciary duty, unjust enrichment, and insider trading, amongothers. The complaint seeks unspecified damages on behalf of Align, which is named solely as nominal defendant against whom no recovery is sought. Thecomplaint also seeks an order directing Align to reform and improve its corporate governance and internal procedures, and seeks restitution in an unspecifiedamount, costs, and attorneys’ fees. On July 8, 2013, an Order was entered staying this derivative lawsuit until an initial ruling on our first motion to dismiss theSecurities Action. On January 15, 2014, an Order was entered staying this derivative lawsuit until an initial ruling on our second motion to dismiss the SecuritiesAction. On October 14, 2014, an Order was entered staying this derivative lawsuit until a ruling by the Ninth Circuit in the Securities Action discussed above.Align is currently unable to predict the outcome of this complaint and therefore cannot determine the likelihood of loss nor estimate a range of possible losses.28In addition, in the course of Align's operations, Align is involved in a variety of claims, suits, investigations, and proceedings, including actions with respect tointellectual property claims, patent infringement claims, government investigations, labor and employment claims, breach of contract claims, tax, and othermatters. Regardless of the outcome, these proceedings can have an adverse impact on us because of defense costs, diversion of management resources, and otherfactors. 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 andevents 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.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.29PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIESPrice Range of Common StockOur common stock is quoted on the NASDAQ Global Select Market under the symbol “ALGN.” The following table sets forth the range of high and low pershare sales prices as reported for each period indicated: High LowYear Ended December 31, 2015: Fourth quarter$68.48 $54.69Third quarter$66.53 $52.01Second quarter$64.99 $51.65First quarter$64.75 $51.77Year Ended December 31, 2014: Fourth quarter$57.72 $43.27Third quarter$57.79 $51.29Second quarter$57.50 $47.22First quarter$65.10 $50.37On February 19, 2016, the closing price of our common stock on the NASDAQ Global Market was $63.29 per share. As of February 19, 2016 there wereapproximately 101 holders of record of our common stock. Because the majority of our shares of outstanding common stock are held by brokers and otherinstitutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings to fund the development andgrowth of our business and do not anticipate paying any cash dividends in the foreseeable future. Performance GraphNotwithstanding any statement to the contrary in any of our previous or future filings with the SEC, the following information relating to the priceperformance of our common stock shall not be deemed “filed” with the SEC or “Soliciting Material” under the Securities Exchange Act of 1934, as amended, orsubject to Regulation 14A or 14C, or to liabilities of Section 18 of the Exchange Act except to the extent we specifically request that such information be treated assoliciting material or to the extent we specifically incorporate this information by reference.The graph below matches our cumulative 5-year total shareholder return on common stock with the cumulative total returns of the NASDAQ Compositeindex, and the S&P 1500 Composite Health Care Equipment & Supplies index. The graph tracks the performance of a $100 investment in our common stock, inthe peer group, and the index (with the reinvestment of all dividends) from December 31, 2010 to December 31, 2015 .30UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSFollowing is a summary of stock repurchases for the three months ended December 31, 2015:Period Total Number ofSharesRepurchased Average PricePaid per Share Total Number ofShares Repurchasedas Part of PubliclyAnnounced Program(1) Approximate Dollar Valueof Shares that May Yet BeRepurchased Under theProgram (1)October 1, 2015 through October 31, 2015 103,000 $59.97 103,000 $104,989,100November 1, 2015 through November 30, 2015 75,875 $66.04 75,875 $99,978,175December 1, 2015 through December 31, 2015 — $— — $99,978,175(1) On April 23, 2014, we announced that our Board of Directors had authorized a stock repurchase program pursuant to which we may purchase up to $300.0million of our common stock over three years, with $100.0 million of that amount authorized to be purchased during each twelve month period. Any purchasesunder this stock repurchase program may be made, from time-to-time, pursuant to open market purchases (including pursuant to Rule 10b5-1 plans), privately-negotiated transactions, accelerated stock repurchases, block trades or derivative contracts or otherwise in accordance with applicable federal securities laws,including Rule 10b-18 of the Securities Exchange Act of 1934.As of December 31, 2015, we have approximately $100 million remaining under the April 2014 stock repurchase program. We expect to finance future stockrepurchases with current cash on hand.31ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATAThe following tables set forth the selected consolidated financial data for each of the years in the five-year period ended December 31, 2015 . The selectedconsolidated financial data should be read in conjunction with the consolidated financial statements and accompanying notes and Management’s Discussion andAnalysis of Financial Condition and Results of Operations . We have derived the statement of operations data for the year ended December 31, 2015 , 2014 and2013 and the balance sheet data as of December 31, 2015 and 2014 from the consolidated audited financial statements included elsewhere in this Annual Report onForm 10-K. The statement of operations data for the year ended December 31, 2012 and 2011 and the balance sheet data as of December 31, 2013 , 2012 and 2011were derived from the consolidated audited financial statements that are not included in this Annual Report on Form 10-K.SELECTED CONSOLIDATED FINANCIAL DATA(in thousands, except per share data) Year Ended December 31, 2015 2014 2013 2012 2011Consolidated Statement of Operations Data: Net revenues 1$845,486 $761,653 $660,206 $560,041 $479,741Gross profit 2$640,110 $578,443 $498,106 $416,388 $361,283Income from operations 3188,634 193,576 94,212 85,592 90,360Interest and other income (expense), net(2,533) (3,207) (1,073) (1,296) (419)Net income before provision for income taxes 3186,101 190,369 93,139 84,296 89,941Provision for income taxes42,081 44,537 28,844 25,605 23,225Net income 3$144,020 $145,832 $64,295 $58,691 $66,716Net income per share Basic$1.80 $1.81 $0.80 $0.73 $0.86Diluted$1.77 $1.77 $0.78 $0.71 $0.83Shares used in computing net income per share: Basic79,998 80,754 80,551 80,529 77,988Diluted81,521 82,283 82,589 83,040 80,294 December 31, 2015 2014 2013 2012 2011Consolidated Balance Sheet Data: Working capital 4$460,338 $455,349 $369,338 $330,022 $236,699Total assets1,158,633 987,997 832,147 756,312 649,264Total long-term liabilities39,035 33,415 22,839 19,224 10,366Stockholders’ equity$847,926 $752,771 $633,970 $581,317 $490,7811 Net revenues for the year ended December 31, 2011 include eight months of revenues from our Scanners segment of approximately $28.0 million as a result ofour acquisition of Cadent Holdings, Inc. on April 29, 2011. 2Gross profit includes:•$1.7 million out of period adjustment in 2013 (See Note 1 in the financial statements )•$0.2 million acquisition and integration related costs, $0.9 million amortization of intangible assets, and $0.5 million of exit costs in 2012•$0.4 million acquisition and integration related costs, $0.7 million amortization of intangible assets, and $0.8 million for exit costs in 2011323Income from operations, net income before provision for income taxes, and net income includes the following, net of taxes:•$1.8 million out of period income tax adjustment in 2014 (see Note 1 in the financial statements )•$40.7 million and $26.3 million of goodwill and long-lived asset impairment, respectively, in 2013•$1.9 million, net of tax, out of period adjustment in 2013 (see Note 1 in the financial statements )•$36.6 million of goodwill impairment, $1.3 million acquisition and integration related costs, $4.5 million of amortization of intangible assets, and$0.8 million of exit costs in 2012•$10.0 million acquisition and integration related costs, $3.2 million of amortization of intangible assets, and exit costs of $1.1 million in 20114 Working capital is calculated as the difference between total current assets and total current liabilities.33ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion and analysis of our financial condition and results of operations should be read together with “Selected Consolidated FinancialData” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.OverviewOur goal is to establish Invisalign clear aligners as the standard method for treating malocclusion and to establish the iTero intraoral scanner as the preferredscanning device for 3D digital scans, ultimately driving increased product adoption by dental professionals. We intend to achieve this by continued focus andexecution of our strategic growth drivers set forth in the Business Strategy section in our Annual Report on Form 10-K.The successful execution of our business strategy and our results in 2015 and beyond may be affected by a number of other factors including:•Additional Aligners at No Charge. In July 2015, we launched a new product policy called "Additional Aligners at No Charge" that addresses one ofour customers' top complaints. Previously, we charged customers for additional aligners ordered beyond those covered by the initial treatment plan.With this product policy change, we no longer distinguish between mid-course corrections and case refinements and allow doctors to order additionalaligners to address either treatment need at no charge, subject to certain requirements. These changes were effective for all new Invisalign Full, Teen,and Assist treatments shipped worldwide after July 18, 2015 as well as any open Invisalign Full, Teen and Assist cases as of that date.Based on this new product policy, beginning in the third quarter of 2015, we deferred more revenue as a result of providing free additional alignersfor eligible treatments. Additionally, since we grandfathered over 1 million open cases, we will recognize lower revenues as additional aligners areshipped. We expect lower amounts of revenue to be recognized for at least the next two years until these cases complete. In the fourth quarter of2015, the new product policy decreased Clear Aligner net revenues by approximately $7.0 million and reduced operating margin by 2.2% and dilutedearnings per share by $0.07 per share. We expect a decrease in Clear Aligner net revenues by approximately $7.0 million to $8.0 million in the firstquarter of 2016, and by approximately $25.0 million to $30.0 million in fiscal year 2016. While this product policy change will impact the timing ofour revenue recognition, we believe this policy change will result in a significant improvement in customer satisfaction and loyalty, and ultimatelyincrease Invisalign utilization and volume over time.•New Products, Feature Enhancements and Technology Innovation . Product innovation drives greater treatment predictability and clinicalapplicability, and ease of use for our customers, which supports adoption of Invisalign in their practices. Increasing applicability and treatingmore complex cases requires that we move away from individual features to more comprehensive solutions so that Invisalign providers canmore predictably treat the whole case, such as with Invisalign G5 for deep bite treatment, Invisalign G6 for premolar extraction and ClinCheckPro, the next generation Invisalign treatment software tool, designed to provide more precise control over final tooth position and to helpInvisalign providers achieve their treatment goals. In addition, we began shipping the next generation iTero Element Intraoral Scanner inSeptember 2015 and expect to ramp up our production over the next few quarters accordingly; however, if we are unable to scale productionof our iTero Element scanner to meet customer demand, our financial results may be negatively impacted. We believe that over the long-term,clinical solutions and treatment tools will increase adoption of Invisalign and increase sales of our intraoral scanners; however, it is difficult topredict the rate of adoption which may vary by region and channel.•Invisalign Adoption. Our goal is to establish Invisalign as the treatment of choice for treating malocclusion ultimately driving increased productadoption and frequency of use by dental professionals, also known as "utilization rates." Our quarterly utilization rates for the previous 9 quarters areas follows:34* Invisalign Utilization rates = # of cases shipped divided by # of doctors cases were shipped toTotal utilization in the fourth quarter of 2015 increased to 4.9 cases per doctor compared to 4.4 in the fourth quarter of 2014. Utilization among ourNorth American orthodontist customers reached an all time high of 9.9 cases per doctor in the fourth quarter of 2015 compared to 8.6 in the fourthquarter of 2014. International doctor utilization increased to 5.0 cases in the fourth quarter of 2015 from 4.5 in the fourth quarter of 2014. NorthAmerican GP doctor utilization increased to 3.1 cases in the fourth quarter of 2015 from 2.9 in the fourth quarter of 2014. The increase in NorthAmerica orthodontist utilization reflects improvements in product and technology, which continues to strengthen our doctors’ clinical confidence inthe use of Invisalign such that they now utilize Invisalign more often and on more complex cases, including their teenage patients. IncreasedInternational utilization reflects growth in both the EMEA and Asia Pacific regions driven by go-to-market and sales coverage investments,improving clinical education and support as well as ongoing technology innovation. We expect that over the long-term our utilization rates willgradually improve as a result of advancements in product and technology, which continue to strengthen our doctors’ clinical confidence in the use ofInvisalign, however, we expect that our utilization rates may fluctuate from period to period due to a variety of factors, including seasonal trends inour business along with adoption rates of new products and features.•Number of new Invisalign doctors trained. We continue to expand our Invisalign customer base through the training of new doctors. In 2015,Invisalign growth was driven primarily by increased utilization across all regions as well as by the continued expansion of our customer base as wetrained a total of 9,795 new Invisalign doctors, of which 56% were trained internationally.•International Clear Aligner Growth. We will continue to focus our efforts towards increasing adoption of our products by dental professionals in ourdirect international markets. International volume for 2015 increased 32.5% driven primarily by strong performance in the Asia Pacific region as wellas growth in Europe. In 2016, we are continuing to expand in our existing markets through targeted investments in sales coverage and professionalmarketing and education programs, along with consumer marketing in selected country markets. We expect international revenues to continue togrow at a faster rate than North America for the foreseeable future due to our continued investment in international market expansion, the size of themarket opportunity, and our relatively low market penetration in this region. As our international revenues have increased from $219.7 million in2014 to $250.1 million in 2015, we are increasingly subject to fluctuations in foreign currency exchange rates relative to the U.S. dollar. Although wehave historically accepted the exposure to exchange rate movements without using derivative financial instruments to manage risk, in the thirdquarter of 2015 we initiated a foreign currency economic hedging program to mitigate35the foreign currency risk in countries where we have significant monetary assets and liabilities denominated in currencies other than the functionalcurrency. The impact from these forward contracts was not material to our financial statements for the year ended December 31, 2015.In addition, as we plan for further international expansion over the next several years, we must provide better support to our customers in theseregions and be geographically closer to their practices. Accordingly, we intend to make further investments in our manufacturing over the next fewyears to enhance our regional capabilities.•Establish Regional Order Acquisition and Treatment Planning facilities: We intend to establish additional Order Acquisition and Treatment Planningfacilities closer to our International customers in order to improve our operational efficiency and provide doctors with a great experience tofurther improve their confidence in using Invisalign to treat more patients, more often. If demand for our product in 2016 exceeds our currentexpectations, or if the timing of receipt of case product orders during a given quarter is different from our expectations, we may not be able tofulfill orders in a timely manner, which may negatively impact our financial results and overall business. Conversely, if demand decreases orif we fail to forecast demand accurately, we could be required to record excess capacity charges, which would lower our gross margin.•Operating Expenses. We expect operating expenses to increase in 2016 compared to 2015 due in part to:◦investments in international expansion in new country markets such as India and Korea;◦the increase in sales and customer support resources; and◦product and technology innovation to address such things as treatment times, indications unique to teens, and predictability.We believe that these investments will position us to increase our revenue and continue to grow our market share.Results of OperationsNet revenues by Reportable Segment Comparison for Year Ended December 31, 2015 , 2014 and 2013 :We group our operations into two reportable segments: Clear Aligner segment and Scanner segment.•Our Clear Aligner segment consists of our Invisalign system which includes Invisalign Full, Teen and Assist ("Full Products"), Express/Lite("Express Products"),Vivera retainers, along with our training and ancillary products for treating malocclusion.•Our Scanner segment consists of intra-oral scanning systems and additional services available with the intra-oral scanners that provide digitalalternatives to the traditional cast models. This segment includes our iTero scanner and OrthoCAD services.Net revenues for our Clear Aligner segment by region and our Scanner segment for the year ended December 31, 2015 , 2014 and 2013 is as follows (in millions): Year Ended Year Ended December 31,2015 December 31,2014 Change December 31,2014 December 31,2013 ChangeClear Aligner Revenues: North America$498.7 $446.6 $52.1 11.7 % $446.6 $408.2 $38.4 9.4% International250.1 219.7 30.4 13.8 % 219.7 161.7 58.0 35.9% Invisalign non-case net revenues51.4 46.2 5.2 11.3 % 46.2 44.7 1.5 3.4%Total Clear Aligner net revenues $800.2 $712.5 $87.7 12.3 % $712.5 $614.6 $97.9 15.9%Total Scanner net revenues$45.3 $49.1 $(3.8) (7.7)% $49.1 $45.6 $3.5 7.7% Total net revenues$845.5 $761.6 $83.9 11.0 % $761.6 $660.2 $101.4 15.4%Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.36Clear Aligner Case Volume by RegionCase volume data which represents Invisalign case shipments by region, for the year ended December 31, 2015 , 2014 and 2013 is as follows (in millions): Year Ended Year Ended RegionDecember 31,2015 December 31,2014 Change December 31,2014 December 31,2013 Change North American Invisalign398.4 338.5 59.9 17.7% 338.5 313.9 24.6 7.8% International Invisalign184.8 139.5 45.3 32.5% 139.5 108.5 31.0 28.6%Total Invisalign case volume583.2 478.0 105.2 22.0% 478.0 422.4 55.6 13.2% Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Fiscal Year 2015 compared to Fiscal Year 2014Total net revenues increased by $83.9 million in 2015 as compared to 2014 primarily as a result of Invisalign case volume growth across all regions andproducts as well as increased Invisalign non-case revenue.Clear Aligner - North AmericaClear Aligner North America net revenues increased by $52.1 million in 2015 compared to 2014 primarily due to Invisalign case volume growth ofapproximately $79.0 million across all channels and products. These increases were offset in part by lower average selling prices ("ASP"), which decreased netrevenues by $26.9 million. The decrease in ASP was primarily as a result of higher net revenue deferrals of $16.0 million, which includes the impact of our newadditional aligner product policy launched in July 2015 of $8.9 million and the impact of higher promotional discounts in 2015 as compared to 2014 of $11.7million. These decreases in ASP were offset in part by the price increase on our Full Products, effective April 1, 2015.Clear Aligner - InternationalClear Aligner international net revenues increased by $30.4 million in 2015 compared to 2014 primarily driven by Invisalign case volume growth of $71.5million across all products. This was partially offset by lower ASP which decreased net revenues by approximately $41.1 million. The decrease in ASP wasprimarily as a result of the unfavorable impact from foreign exchange rates primarily due to the weakening of the Euro compared to the U.S. dollar in 2015compared to 2014 of $34.5 million, and to a lesser extent higher net revenue deferrals of $7.8 million which includes the impact of our new additional alignerproduct policy launched in July 2015 of $4.7 million, as well as higher promotional discounts of $6.3 million in 2015 compared to 2014. These decreases werepartially offset by an increase in ASP as we transitioned to direct sales in certain Asia Pacific countries and Europe, Middle East and Africa regions, as well as theprice increase on our Full Products effective July 1, 2015.Clear Aligner - Invisalign Non-CaseInvisalign non-case net revenues, consisting of training fees and ancillary product revenues, increased by $5.2 million in 2015 as compared to 2014 primarilydue to increased Vivera volume both in North America and International.ScannerScanner net revenues decreased by $3.8 million in 2015 compared to 2014 primarily due to a decrease in scanner revenue, offset in part by a slight increasein services revenue. In March 2015, we announced our next generation scanner which began shipping in September 2015. Net revenues declined in 2015 primarilydue to fewer scanners recognized and permanent price reductions on our previous generation scanner. The increase in services revenue was primarily due to anincrease in the volume of CAD/CAM services resulting from a larger installed base of scanners.Fiscal Year 2014 compared to Fiscal Year 2013Total net revenues increased by $101.4 million in 2014 as compared to 2013 primarily as a result of Invisalign case volume growth across all regions andproducts as well as increased Invisalign non-case revenue.37Clear Aligner - North AmericaClear Aligner North America net revenues increased by $38.4 million in 2014 compared to 2013 primarily due to Invisalign case volume growth ofapproximately $32.1 million across all channels and products, and, to a lesser extent, higher ASP which contributed approximately $6.3 million to the increase innet revenues. The increase in ASP was primarily a result of increased mid-course correction revenue from higher usage as well as a product mix shift towardshigher priced Invisalign products in 2014 compared to 2013. This increase was offset in part by higher promotional discounts in 2014 as compared to 2013.Clear Aligner - InternationalClear Aligner international net revenues increased by $58.0 million in 2014 compared to 2013 primarily driven by Invisalign case volume growth of $46.2million along with higher ASP which contributed approximately $11.8 million to the increase in net revenues. The increase in ASP was primarily due to the impactfrom acquiring our distributor in the Asia Pacific region on April 30, 2013 when we began recognizing direct sales of Invisalign products sold in that region at ourfull ASP rather than the discounted ASP under the distributor agreement, as well as the price increases which were effective July 2013 along with a favorableimpact from foreign exchange rates. Foreign exchange rates had a favorable impact on revenues in 2014 as compared to 2013, despite the weakening of the Euro tothe U.S. dollar in the last six months of 2014.Clear Aligner - Invisalign Non-CaseInvisalign non-case net revenues, consisting of training fees and ancillary product revenues, increased by $1.5 million in 2014 as compared to 2013 primarilydue to the consolidation of our Vivera product shipments in North America from four shipments per year to one shipment along with increased Vivera volume bothin North America and international.ScannerScanner net revenues increased by 7.7%, in 2014 compared to 2013 due to an increase in both services revenue as well as scanner revenue.The increase in services revenue was primarily due to an increase in the volume of CAD/CAM services resulting from a larger installed base of scanners.The increase in scanner revenue was primarily due to an increase in the number of scanners recognized offset in part by lower scanner ASP as a result ofpromotional discounts as well as permanent price reductions. The increase was partially offset as 2013 had higher net revenues due to the release of $1.4 million ofrevenue previously reserved for the iTero upgrade program which was completed in the first quarter of 2013.Cost of net revenues and gross profit (in millions): Year Ended Year Ended December 31,2015 December 31,2014 Change December 31,2014 December 31,2013 ChangeClear Aligner Cost of net revenues$172.0 $149.7 $22.3 $149.7 $129.8 $19.9% of net segment revenues21.5% 21.0% 21.0% 21.1% Gross profit$628.2 $562.9 $65.3 $562.9 $484.8 $78.1Gross margin %78.5% 79.0% 79.0% 78.9% Scanner Cost of net revenues$33.4 $33.6 $(0.2) $33.6 $32.3 $1.3% of net segment revenues73.7% 68.3% 68.3% 70.9% Gross profit$11.9 $15.6 $(3.7) $15.6 $13.3 $2.3Gross margin %26.3% 31.7% 31.7% 29.1% Total cost of net revenues$205.4 $183.2 $22.2 $183.2 $162.1 $21.1% of net revenues24.3% 24.1% 24.1% 24.6% Gross profit$640.1 $578.4 $61.7 $578.4 $498.1 $80.3Gross margin %75.7% 75.9% 75.9% 75.4% 38Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Cost of net revenues for our Clear Aligner and Scanner segments includes salaries for staff involved in the production process, the cost of materials,packaging, shipping costs, depreciation on capital equipment used in the production process, amortization of acquired intangible assets from Cadent, training costsand stock-based compensation.Fiscal Year 2015 compared to Fiscal Year 2014Clear AlignerThe gross margin percentage declined in 2015 compared to 2014 due to lower ASP which was partially offset by lower costs per unit.ScannerThe gross margin percentage decreased in 2015 compared to 2014 due to lower ASP from permanent price reductions on our previous generation scanner andhigher manufacturing costs from lower production volumes and higher inventory reserves. This was partially offset by a product mix shift to the lower costElement scanner which commenced shipping in September.Fiscal Year 2014 compared to Fiscal Year 2013Clear AlignerThe gross margin percentage improved slightly in 2014 compared to 2013 due to higher ASP. The ASP improvement was mostly offset by increasedmanufacturing costs in 2014 when compared to 2013 which benefited from an out of period adjustment (see Note 1 in the financial statements ).ScannerThe gross margin percentage increased in 2014 compared to 2013 due to increased absorption of manufacturing spend from higher production volumes, lowerproduct costs due to product mix and lower inventory reserves. These were partially offset by a lower ASP as a result of price reductions.Selling, general and administrative (in millions): Year Ended Year Ended December 31,2015 December 31,2014 Change December 31,2014 December 31,2013 ChangeSelling, general and administrative$390.2 $332.1 $58.1 $332.1 $292.8 $39.3% of net revenues46.2% 43.6% 43.6% 44.3% Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Selling, general and administrative expense includes personnel-related costs including payroll, commissions and stock-based compensation for our salesforce, marketing and administration in addition to media and advertising expenses, clinical education, trade shows and industry events, product marketing, outsideconsulting services, legal expenses, depreciation and amortization expense, the medical device excise tax ("MDET") and allocations of corporate overheadexpenses including facilities and IT.Selling, general and administrative expense increased in 2015 compared to 2014 primarily due to higher compensation related costs of $50.1 million as aresult of increased headcount, which led to higher salaries, stock based compensation and commissions. In addition, consulting costs increased by $9.7 millionprimarily due to our enterprise resource planning ("ERP") project. Partially offsetting these increases was the MDET refund of $6.8 million received in the firstquarter of 2015.Selling, general and administrative expense increased in 2014 compared to 2013 primarily due to higher compensation costs of $24.1 million due toincreased headcount, including the additional headcount from the acquisition of our APAC distributor and stock based compensation. In addition, we incurredhigher advertising and marketing expenses as a result of increased advertising production and marketing campaigns combined with higher costs for trade showsand our Europe and APAC Summits as well as39increases in consulting expenses and credit card processing fees. These increases were offset by lower MDET of $6.8 million as our aligners were no longersubject to the excise tax in 2014 as well as lower outside litigation costs. In March 2014, the IRS informed us that our aligners are not subject to the MDET, whichwe had been paying and expensing in selling, general and administrative expense in the Consolidated Statements of Operations since January 1, 2013.Research and development (in millions): Year Ended Year Ended December 31,2015 December 31,2014 Change December 31,2014 December 31,2013 ChangeResearch and development$61.2 $52.8 $8.4 $52.8 $44.1 $8.7% of net revenues7.2% 6.9% 6.9% 6.7% Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Research and development expense includes the personnel-related costs and outside consulting expenses associated with the research and development ofnew products and enhancements to existing products, corporate allocations, facility and facility related costs and stock-based compensation expense.Research and development expense increased during 2015 compared to 2014 primarily as a result of our investment in obstructive sleep apnea which wasterminated in the third quarter of 2015. While we continue to believe that the opportunities in the obstructive sleep apnea market are potentially interesting, wehave decided to remain focused on our core business and organic growth opportunities.Research and development expense increased during 2014 compared to 2013 almost entirely due to higher compensation costs as a result of higher bonuses,stock-based compensation and salaries primarily due to additional headcount.Impairment of goodwill (in millions): Year Ended Year Ended December 31,2015 December 31,2014 Change December 31,2014 December 31,2013 ChangeImpairment of goodwill$— $— $— $— $40.7 $(40.7)% of net revenues—% —% —% 6.2% Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.There was no charge for impairment of goodwill recorded in the years ended December 31, 2015 or 2014.During the first quarter of 2013, we determined that the goodwill for our Scanner reporting unit should be tested for impairment as a result of changes in thecompetitive environment for intra-oral scanners which caused us to lower our expectations for growth and profitability for our Scanner reporting unit. As a resultof our analysis, we recorded a goodwill impairment charge of $40.7 million, none of which was deductible for tax purposes. Refer to Note 5 "Goodwill andIntangible Assets" of our consolidated financial statements for details of the impairment analysis.Impairment of long-lived assets (in millions): Year Ended Year Ended December 31,2015 December 31,2014 Change December 31,2014 December 31,2013 ChangeImpairment of long-lived assets$— $— $— $— $26.3 $(26.3)% of net revenues—% —% —% 4.0% Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.There was no charge for impairment of long-lived assets recorded in the year ended December 31, 2015 or 2014.40The impairment of our long-lived assets in 2013 was the result of changes in the competitive environment for intra-oral scanners which caused us to lowerour expectations for growth and profitability for our Scanner reporting unit. As a result, we determined that the carrying value of the long-lived assets was notrecoverable and therefore recorded an impairment charge of $26.3 million. Refer to Note 5 "Goodwill and Intangible Assets" of our consolidated financialstatements for details of the impairment analysis.Interest and Other income (expense), net (in millions): Year Ended Year Ended December 31,2015 December 31,2014 Change December 31,2014 December 31,2013 ChangeInterest and other income (expense), net$(2.5) $(3.2) $0.7 $(3.2) $(1.3) $(1.9)Interest and other income (expense), net, includes foreign currency translation gains and losses, interest income earned on cash, cash equivalents andinvestment balances and other miscellaneous charges.Interest and Other income (expense), net, in 2015 increased mainly due to higher interest income on higher balances of cash, cash equivalents andinvestments offset in part by higher foreign exchange losses primarily due to the strengthening of the U.S. dollar to the Euro and Australian dollar.Interest and Other income (expense), net, in 2014 decreased due to higher foreign exchange losses primarily as a result of the weakening of the Euro to theU.S. dollar offset slightly by increased interest income earned on higher balances of cash, cash equivalents and investments.Provision for income taxes (in millions): Year Ended Year Ended December 31,2015 December 31,2014 Change December 31,2014 December 31,2013 ChangeProvision for income taxes$42.1 $44.5 $(2.4) $44.5 $28.8 $15.7Effective tax rates22.6% 23.4% 23.4% 31.0% Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.Our provision for income taxes was $42.1 million , $44.5 million and $28.8 million for the year ended December 31, 2015 , 2014 and 2013 , respectively.This represents effective tax rates of 22.6% , 23.4% and 31.0% , respectively. Our effective tax rates in these fiscal years differ from the statutory federal incometax rate of 35% due to certain foreign earnings, primarily from Costa Rica, which are subject to a lower tax rate. The decrease in the effective rate for the yearended December 31, 2015 compared to 2014 is mainly due to an additional $1.8 million tax adjustment recorded in 2014 which related to prior periods. Theeffective tax rate for the year ended December 31, 2013 also reflects a non-deductible goodwill impairment charge of $40.7 million.As of December 31, 2015, approximately $359.8 million of undistributed earnings from non-U.S. operations held by our foreign subsidiaries are designatedas indefinitely reinvested outside the U.S. Accordingly, no additional U.S. income taxes or additional foreign withholding taxes have been provided thereon. Wehave sufficient cash reserves in the U.S. and do not intend to repatriate our foreign earnings. We intend to use the undistributed earnings for local operatingexpansions and to meet local operating working capital needs. If these earnings were distributed in the form of dividends or otherwise, or if the shares of therelevant foreign subsidiaries were sold or otherwise transferred, we would be subject to additional U.S. income taxes subject to an adjustment for foreign taxcredits and foreign withholding taxes. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.We assess the likelihood that we will be able to realize our deferred tax assets quarterly. Should there be a change in our ability to realize our deferred taxassets, 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. Weconsider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxableincome 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 do not expectto 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 willnot ultimately be realizable. The available positive evidence at December 31, 2015 included historical operating profits, a projection of future income and otherobjectively verifiable evidence. As of December 31, 2015, we41believed, except for the items noted in the subsequent paragraph, that is was more likely than not that the amount of deferred tax assets recorded on the balancesheet will be realized.As of December 31, 2015, we maintained a valuation allowance of $31.7 million against our deferred tax assets which primarily relate to Israel operating losscarryforwards and Australia capital loss carryforwards. These net operating and capital loss carryforwards would result in an income tax benefit if we were toconclude it is more likely than not that the related deferred tax assets will be realized. The valuation allowance decreased from December 31, 2014 by $0.8 milliondue to the decrease of foreign tax rate which resulted in lower tax impact on net operating and capital loss carryforwards. We are currently evaluating an internalrestructuring which may result in a future reassessment of our need for a valuation allowance against these deferred tax assets. As a result it is possible that wemay realize a tax benefit which may have a material impact on the financial statements within the next twelve months. As of December 31, 2015, we have California net operating loss carryforwards of approximately $20.5 million, which, if not used, will begin to expire in2016. In the event of a change in ownership, as defined under federal and state tax laws, our net operating loss and tax credit carryforwards may be subject toannual limitations. The annual limitations may result in the expiration of the net operating loss and tax credit carryforwards before utilization. As of December 31,2015, we had California research credit carryforwards of approximately $3.9 million that can be carried forward indefinitely.We account for uncertain tax positions pursuant to authoritative guidance based on a two-step approach to recognize and measure uncertain tax positionstaken or expected to be taken in a tax return. We first determine whether it is more likely than not that a tax position will be sustained upon audit based on itstechnical merits. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize in thefinancial statements. The tax position is measured as the largest amount of benefit that is more than 50 percent likely to be realized upon ultimate settlement. Weadjust 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. Tothe extent the final outcome of these matters is different than the amounts recorded, such differences will impact our tax provision in our Consolidated Statementsof Operations in the period in which such determination is made.Our total gross unrecognized tax benefits, excluding interest, was $39.4 million and $33.1 million as of December 31, 2015 and 2014, respectively, all ofwhich would impact our effective tax rate if recognized. We have elected to recognize interest and penalties related to unrecognized tax benefits as a component ofincome taxes. The accrued interest as of December 31, 2015 was $0.7 million. We do not expect any significant changes to the amount of unrecognized tax benefitwithin the next twelve months.In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-17 , Income Taxes (Topic740), to simplify the presentation of deferred income taxes. Under the new standard, both deferred tax liabilities and assets are required to be classified asnoncurrent in a classified balance sheet. ASU 2015-17 will become effective for fiscal years, and the interim periods within those years, beginning after December15, 2016, with early adoption permitted. The new guidance has been adopted on a prospective basis by the Company for the year ended December 31, 2015 , thusresulting in the reclassification of $30.1 million of current deferred tax assets to noncurrent on the accompanying Consolidated Balance Sheet. The prior reportingperiod was not retrospectively adjusted. The adoption of this guidance had no impact on our Consolidated Statements of Operations or Consolidated Statements ofComprehensive Income.We file U.S. federal, U.S. state, and non-U.S. income tax returns. Our major tax jurisdictions are U.S. federal and the State of California. For U.S. federal andstate tax returns, we are no longer subject to tax examinations for years before 2000. With few exceptions, we are no longer subject to examination by foreign taxauthorities for years before 2007. Our subsidiary in Israel is under audit by the local tax authorities for calendar years 2006 through 2012. We are currently underaudit by the California Franchise Tax Board for fiscal year 2011, 2012 and 2013.In June 2009, the Costa Rica Ministry of Foreign Trade, an agency of the Government of Costa Rica, granted a twelve year extension of certain income taxincentives, which were previously granted in 2002. The incentive tax rates will expire in various years beginning in 2017. Under these incentives, all of the incomein Costa Rica during these twelve year incentive periods is subject to reduced rate of Costa Rica income tax. In order to receive the benefit of these incentives, wemust hire specified numbers of employees and maintain certain minimum levels of fixed asset investment in Costa Rica. If we do not fulfill these conditions forany reason, our incentive could lapse, and our income in Costa Rica would be subject to taxation at higher rates, which could have a negative impact on ouroperating results. The Costa Rica corporate income tax rate that would apply, absent the incentives, is 30% for 2015, 2014 and 2013. As a result of theseincentives, our income taxes were reduced by $32.7 million, $32.5 million and $27.7 million for the year ended December 31, 2015, 2014 and 2013, respectively,representing a benefit to diluted net income per share of $0.40, $0.40 and $0.34 in 2015, 2014 and 2013, respectively.42Liquidity and Capital ResourcesWe fund our operations from product sales. As of December 31, 2015 and 2014 , we had the following cash and cash equivalents, and short-term and long-term investments (in thousands): Year Ended December 31, 2015 2014Cash and cash equivalents$167,714 $199,871Short-term investments359,581 254,787Long-term investments151,370 147,892Total$678,665 $602,550Cash flows (in thousands): Year Ended December 31, 2015 2014 2013Net cash flow provided by (used in): Operating activities$237,997 $226,899 $185,976Investing activities(166,361) (201,627) (210,734)Financing activities(100,786) (66,420) (38,171)Effects of exchange rate changes on cash and cash equivalents(3,007) (1,934) (504)Net decrease in cash and cash equivalents$(32,157) $(43,082) $(63,433)As of December 31, 2015 , we had $678.7 million in cash, cash equivalents, and short-term and long-term marketable securities. Cash equivalents andmarketable securities are comprised of money market funds and highly liquid debt instruments which primarily include commercial paper, corporate bonds, U.S.dollar denominated foreign corporate bonds, U.S. government agency bonds, municipal bonds and asset-backed securities. Other uses of cash include our stockrepurchase program, which is described below.As of December 31, 2015 , approximately $442.5 million of cash, cash equivalents and short-term and long-term marketable securities was held by ourforeign subsidiaries. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S. The costs to repatriate ourforeign earnings to the U.S. would likely be material; however, our intent is to permanently reinvest our earnings from foreign operations, and our current plans donot require us to repatriate them to fund our U.S. operations as we generate sufficient domestic operating cash flow and have access to external funding under ourcurrent revolving line of credit.Operating ActivitiesFor the year ended December 31, 2015 , cash flows from operations of $238.0 million resulted primarily from our net income of approximately $144.0million as well as the following:Significant non-cash activities•Stock-based compensation was $52.9 million related to our equity incentive compensation granted to employees and directors.•Depreciation and amortization of $18.0 million related to our fixed assets and acquired intangible assets.•Excess tax benefits from our share-based compensation arrangements of $10.4 million .Significant changes in working capital•An increase of $41.9 million in deferred revenues corresponding to higher product sales along with the increased deferrals as a result of the change to ournew additional aligner product policy in July 2015,•an increase of $19.5 million in accrued and other long-term liabilities primarily due to an increase in income tax payable along with other accruals due totiming of payment, and43•an increase of $40.8 million in accounts receivable which is a result of the increase in net revenues.For the year ended December 31, 2014, cash flows from operations of $226.9 million resulted primarily from our net income of approximately $145.8million as well as the following:Significant non-cash activities•Stock-based compensation was $39.8 million related to our equity incentive compensation granted to employees and directors.•Deferred taxes of $25.5 million primarily due to the utilization of deferred tax assets.•Excess tax benefits from our share-based compensation arrangements of $21.4 million.•Depreciation and amortization of $17.9 million related to our fixed assets and acquired intangible assets.Significant changes in working capital•An increase of $27.2 million in accounts receivable which is a result of the increase in net revenues,•an increase of $22.7 million in accrued and other long-term liabilities primarily due to an increase in income tax payable along with other accruals due totiming of payment, and•an increase of $15.8 million in deferred revenues corresponding to the increases in revenues.For the year ended December 31, 2013, cash flows from operations of $186.0 million resulted primarily from our net income of approximately $64.3 millionas well as the following:Significant non-cash activities•Impairment of goodwill related to our Scanner reporting unit was $40.7 million.•Impairment of long-lived assets related to our Scanner reporting unit was $26.3 million.•Excess tax benefits from our share-based compensation arrangements of $27.1 million.•Stock-based compensation was $26.4 million related to our equity incentive compensation granted to employees and directors.•Depreciation and amortization of $16.8 million related to our fixed assets and acquired intangible assets.•Deferred taxes of $21.2 million primarily due to the utilization of deferred tax assets.Significant changes in working capital•An increase of $12.0 million in accounts receivable due to the increase in net revenues,•an increase of $9.7 million in accrued and other long-term liabilities due to compensation and bonuses accruals along with higher sales rebates, and•an increase of $14.9 million in deferred revenue primarily due to higher product sales along with additional deferrals as a result of our mid-coursecorrection policy change in June 2013.Investing ActivitiesNet cash used in investing activities was $166.4 million for the year ended December 31, 2015 , which primarily consisted of purchases of marketablesecurities of $447.1 million and property, plant and equipment purchases of $53.5 million for additional manufacturing capacity and infrastructure including aproject to implement a new enterprise resource planning system which we started in late 2014. These uses were partially offset by $334.1 million of maturities andsales of our marketable securities.For 2016, we expect to invest $55.0 million to $65.0 million on capital expenditures primarily for additional manufacturing capacity and to establish orderacquisition and treatment planning facility and our ERP implementation. Although we believe our current investment portfolio has little risk of impairment, wecannot predict future market conditions or market liquidity and can provide no assurance that our investment portfolio will remain unimpaired.44Net cash used in investing activities was $201.6 million for the year ended December 31, 2014, which primarily consisted of purchases of marketablesecurities of $437.2 million and property, plant and equipment purchases of $24.1 million. These uses were partially offset by $259.8 million of maturities andsales of our marketable securities.Net cash used in investing activities was $210.7 million for the year ended December 31, 2013, which primarily consisted of our purchase of marketablesecurities of $303.9 million and property and equipment purchases of $19.4 million along with $7.7 million for the acquisition of our Asia Pacific distributor inApril 2013. These uses were partially offset by $122.7 million of maturities and sales of our marketable securities.Financing ActivitiesNet cash used by financing activities was $100.8 million for the year ended December 31, 2015 resulting from repurchases of our common stock of $101.8million ( Refer to Note 10 "Common Stock Repurchase Program", of the Notes to consolidated financial statements for details of the stock repurchase program )and $20.7 million of payroll taxes paid for our employees' vesting of restricted stock units ("RSUs") through share withholdings, partially off-set by proceeds fromissuance of common stock of $11.3 million and $10.4 million from excess tax benefit from our share-based compensation arrangements.Net cash used by financing activities was $66.4 million for the year ended December 31, 2014 resulting from repurchases of our common stock of $98.2million and $7.6 million of payroll taxes paid for our employees' vesting of RSUs through share withholdings, partially off-set by proceeds from issuance ofcommon stock of $18.0 million and $21.4 million from excess tax benefit from our share-based compensation arrangements.Net cash used by financing activities was $38.2 million for the year ended December 31, 2013 resulting from repurchases of our common stock of $95.1million and $4.4 million of payroll taxes paid for our employees' vesting of restricted stock units through share withholdings, partially off-set by proceeds fromissuance of common stock of $34.2 million and $27.1 million from excess tax benefit from our share-based compensation arrangements.Net proceeds from the issuance of our common stock related to the exercise of employee stock options have historically been a significant component of ourliquidity; however, in 2006, we began granting RSUs which, unlike stock options, do not generate cash from exercises. As a result, we will continue to generateless cash from the proceeds of the sale of our common stock in future periods. In addition, because restricted stock units are taxable to the individuals when theyvest, the number of shares we issue to each of our employees will be net of applicable withholding taxes which will be paid by us on their behalf. During 2015 ,2014 and 2013 , we paid $20.7 million, $7.6 million and $4.4 million, respectively, for taxes related to RSUs that vested during the periods. The cash paid for taxesrelated to RSUs in 2015 increased in comparison to 2014 due to the Company changing its policy in mid 2014 to pay for employees' payroll taxes related to theirvesting RSUs instead of requiring employees to sell to cover for their payroll taxes.Stock RepurchaseOn April 23, 2014, we announced that our Board of Directors had authorized a stock repurchase program pursuant to which we may purchase up to $300.0million of our common stock over three years, with $100.0 million of that amount authorized to be purchased during each twelve month period. Any purchasesunder this stock repurchase program may be made, from time-to-time, pursuant to open market purchases (including pursuant to Rule 10b5-1 plans), privately-negotiated transactions, accelerated stock repurchases, block trades or derivative contracts or otherwise in accordance with applicable federal securities laws,including Rule 10b-18 of the Securities Exchange Act of 1934.As part of our $300.0 million stock repurchase program, we entered into an accelerated share repurchase agreement ("ASR") with Goldman, Sachs & Co. onApril 28, 2014 to repurchase $70.0 million of our common stock. We paid $70.0 million on April 29, 2014 and received an initial delivery of approximately 1.0million shares. The ASR was completed on July 29, 2014 with a final delivery of approximately 0.4 million shares. We received a total of approximately 1.4million shares under the ASR for an average purchase price per share of $51.46, which all shares were retired. The final number of shares repurchased was basedon our volume-weighted average stock price during the term of the transaction, less an agreed upon discount. During 2014, we repurchased on the open marketapproximately 0.6 million shares of our common stock at an average price of $50.93 per share, including commissions, for an aggregate purchase price ofapproximately $28.2 million. All repurchased shares were retired.In January 2015, our Board of Directors authorized the repurchase of the next $100.0 million under the repurchase program which we anticipate completingwithin twelve months. On April 28, 2015, we entered into an accelerated stock repurchase agreement ("2015 ASR") to repurchase $70.0 million of our commonstock. The 2015 ASR was completed on July 23, 2015. We received a total of approximately 1.2 million shares for an average share price of $60.52 under the 2015ASR, which were all retired. The45final number of shares repurchased was based on our volume-weighted average stock price during the term of the transaction, less an agreed upon discount. Inaddition, during the year ended December 31, 2015, we repurchased on the open market approximately 0.5 million shares of our common stock at an average priceof $58.89 per share, including commissions, for an aggregate purchase price of $31.8 million. All repurchased shares were retired. As of December 31, 2015, wehave approximately $100.0 million remaining under the April 2014 stock repurchase program. We expect to finance future stock repurchases with current cash onhand.Credit FacilityOn March 22, 2013, we entered into a credit facility for a $50.0 million revolving line of credit, with a $10.0 million letter of credit sublimit, and has amaturity date on March 22, 2016. ( Refer to Note 7 "Credit Facility" , of the Notes to consolidated financial statements for details of the credit facility ).Contractual Obligations/Off Balance Sheet ArrangementsThe impact that our contractual obligations as of December 31, 2015 are expected to have on our liquidity and cash flows in future periods is as follows (inthousands): Payments Due by Period Total Less than1 Year 1-3Years 3-5Years More than5 YearsOperating lease obligations$19,750 $10,236 $8,553 $853 $108Unconditional purchase obligations74,569 74,569 — — —Total contractual cash obligations$94,319 $84,805 $8,553 $853 $108Our contractual obligations table above excludes approximately $40.1 million of non-current uncertain tax benefits which are included in other long-termobligations and deferred tax assets on our balance sheet as of December 31, 2015 . We have not included this amount because we cannot make a reasonablyreliable estimate regarding the timing of settlements with taxing authorities, if any.We had no off-balance sheet arrangements as defined in Regulation S-K Item 303(a) (4) as of December 31, 2015 .We believe that our current cash and cash equivalents and marketable debt securities combined with our positive cash flows from operations will besufficient to fund our operations for at least the next 12 months. If we are unable to generate adequate operating cash flows, we may need to seek additionalsources of capital through equity or debt financing, collaborative or other arrangements with other companies, bank financing and other sources in order to realizeour objectives and to continue our operations. There can be no assurance that we will be able to obtain additional debt or equity financing on terms acceptable tous, or at all. If adequate funds are not available, we may need to make business decisions that could adversely affect our operating results such as modifications toour pricing policy, business structure or operations. Accordingly, the failure to obtain sufficient funds on acceptable terms when needed could have a materialadverse effect on our business, results of operations and financial condition.Indemnification ProvisionsIn the normal course of business to facilitate transactions in our services and products, we indemnify customers, vendors, lessors, and other parties withrespect to certain matters, including, but not limited to, services to be provided by us and intellectual property infringement claims made by third parties. Inaddition, we have entered into indemnification agreements with our directors and certain of our officers that will require us, among other things, to indemnify themagainst 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 anindemnification 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 andcircumstances involved in each particular agreement. Additionally, we have a limited history of prior indemnification claims and the payments we have madeunder such agreements have not had a material adverse effect on our results of operations, cash flows, or financial position. However, to the extent that validindemnification 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 cashflows in a particular period. As of December 31, 2015 , we did not have any material indemnification claims that were probable or reasonably possible.46Critical Accounting Policies and EstimatesManagement’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requiresmanagement to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures at the date of thefinancial statements. We evaluate our estimates on an on-going basis, including those related to revenue recognition, stock-based compensation, goodwill andfinite-lived assets and related impairment, and income taxes. We use authoritative pronouncements, historical experience and other assumptions as the basis formaking estimates. Actual results could differ from those estimates.We believe the following critical accounting policies and estimates affect our more significant judgments used in the preparation of our consolidatedfinancial statements. For further information on all of our significant accounting policies, see Note 1 "Summary of Significant Accounting Policies" , of the Notes toconsolidated financial statements under Item 8.Revenue RecognitionWe enter into sales arrangements that may consist of multiple deliverables of our products and services where certain elements of the sales arrangement arenot delivered in one reporting period. We measure and allocate revenue according to the accounting guidance for multiple-deliverable revenue arrangements inAccounting Standards Update (“ASU”) 2009-13, Multiple-Deliverable Revenue Arrangements-a consensus of the Financial Accounting Standard Board (“FASB”)Emerging Issues Task Force .Each element within a multiple-element arrangement is accounted for as a separate unit of accounting provided the following criteria are met: the deliveredproducts or services have value to the customer on a standalone basis; and for an arrangement that includes a general right of return relative to the deliveredproducts or services, delivery or performance of the undelivered product or service is considered probable and is substantially controlled by us. We consider adeliverable to have standalone value if the product or service is sold separately by us or another vendor or could be resold by the customer. Further, our revenuearrangements generally do not include a general right of return relative to the delivered products. The arrangement consideration is then allocated to each element,delivered or undelivered, based on the relative selling price of each unit of accounting based first on vendor-specific objective evidence (“VSOE”) if it exists,second on third-party evidence (“TPE”) if it exists, or on best estimated selling price (“BESP”) if neither VSOE nor TPE exist (a description as to how wedetermine VSOE, TPE, and BESP is provided below).•VSOE - In most instances, this applies to products and services that are sold separately in stand-alone arrangements. We determine VSOE based onpricing and discounting practices for the specific product or service when sold separately, considering geographical, customer, and other economic ormarketing variables, as well as renewal rates or stand-alone prices for the service element(s).•TPE - If we cannot establish VSOE of selling price for a specific product or service included in a multiple-element arrangement, we use third-partyevidence of selling price. We determine TPE based on sales of comparable amount of similar products or service offered by multiple third partiesconsidering the degree of customization and similarity of product or service sold.•BESP - The best estimated selling price represents the price at which we would sell a product or service if it were sold on a stand-alone basis. WhenVSOE or TPE do not exist for all elements, we determine BESP for the arrangement element based on sales, cost and margin analysis, as well as otherinputs based on our pricing practices. Adjustments for other market and Company-specific factors are made as deemed necessary in determining BESP.We regularly review our estimates of selling price and maintain internal controls over the establishment and update of these estimates.Judgment is required to properly identify the accounting units of the multiple deliverable transactions, to determine the best estimated selling price for eachaccounting unit, and to determine the manner in which revenue should be allocated among the accounting units. Further, while changes in the allocation of the bestestimated selling price between the accounting units will not affect the amount of total revenue recognized for a particular arrangement, any material changes inthese allocations could impact the timing of revenue recognition, which could have a material effect on our financial position and results of operations.Clear AlignerWe enter into arrangements (“treatment plans”) that involve multiple future product deliverables. Invisalign Full, Invisalign Teen, and Invisalign Assistproducts include optional Additional Aligners at no charge for a period of up to five years after initial shipment. Invisalign Teen also includes up to six optionalreplacement aligners in the price of the product and may be ordered by the dental professional any time throughout treatment. Invisalign Lite includes one optionalcase refinement in the price of the47product. Case refinement is a finishing tool used to adjust a patient's teeth to the desired final position and may be elected by the dental professional at any timeduring treatment, however, it is generally ordered in the last stages of orthodontic treatment. We determined that our treatment plans, except Invisalign Assist with progress tracking, comprise the following deliverables which also represent separateunits of accounting: single-batched aligners, additional aligners, case refinement, and replacement aligners. We allocate revenue for each treatment plan based oneach unit's relative selling price based on BESP and recognize the revenue upon the delivery of each unit in the treatment plan.For Invisalign Assist with the progress tracking feature, aligners and services are provided to the dental professional every nine stages (“a batch”). We areable to reliably estimate the number of batches which are expected to be shipped for each case based upon our historical experience. The amounts allocated to thisdeliverable are recognized on a prorated basis as each batch is shipped.Scanners and ServicesWe sell intra-oral scanners and CAD/CAM services through both our direct sales force and distribution partners. The intra-oral scanner sales priceincludes one year of warranty, and unlimited scanning services. The customer may, for additional fees, also select extended warranty and unlimited scanningservices for periods beyond the initial year. When intra-oral scanners are sold with an unlimited scanning service agreement and/or extended warranty, we allocaterevenue based on each element's relative selling price.We estimate the selling price of each element, as if it is sold on a stand-alone basis, taking into considerationhistorical prices as well as our discounting strategies. Stock-based Compensation ExpenseWe recognize stock-based compensation cost for only those shares ultimately expected to vest on a straight-line basis over the requisite service period of theaward. We use the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan shares. We estimate the fairvalue of market-performance based restricted stock units using a Monte Carlo simulation model which requires the input of assumptions, including expected term,stock price volatility and the risk-free rate of return. In addition, judgment is required in estimating the number of stock-based awards that are expected to beforfeited. Forfeitures are estimated based on historical experience at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differfrom those estimates. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimatesinvolve inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different assumptions, our stock-basedcompensation expense could be materially different in the future.Goodwill and finite-lived acquired intangible assetsGoodwill represents the excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets acquired in businesscombinations and is allocated to the reporting units based on relative synergies generated.Our intangible assets primarily consist of intangible assets acquired as part of acquisitions and are amortized using the straight-line method over theirestimated useful lives, reflecting the period in which the economic benefits of the assets are expected to be realized.Impairment of goodwill, finite-lived acquired intangible assets and long-lived assetsGoodwillWe evaluate goodwill for impairment at least annually on November 30th or more frequently if indicators are present, an event occurs or circumstanceschanges that 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. Theallocation 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 ismore 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 thesignificance of relevant key factors, events, and circumstances that affect the fair value of our reporting units. These factors include external factors such asmacroeconomic, industry, and market conditions, as well as entity-specific factors, such as our actual and planned financial performance. We also giveconsideration to the difference48between 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 ofrelevant 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 noindication of impairment, no further testing is performed; however, if we conclude otherwise, the first step of the two-step impairment test is performed byestimating the fair value of the reporting unit and comparing it with its carrying value, including goodwill. Refer to Note 5 "Goodwill and Intangible Assets" ofNotes to consolidated financial statements for details of the impairment analysis.Finite-lived intangible assets and long-lived assetsWe evaluate long-lived assets (including finite-lived intangible assets) for impairment whenever events or changes in circumstances indicate that the carryingamount 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 cashflows the asset or asset group is expected to generate. If an asset or asset group is considered to be impaired, the impairment to be recognized is calculated as theamount 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-livedassets require significant judgment based on our historical and anticipated results and are subject to many factors. Factors we consider important which couldtrigger an impairment review include significant negative industry or economic trends, significant loss of customers and changes in the competitive environment.The estimation of fair value utilizing a discounted cash flow approach includes numerous uncertainties which require our significant judgment when makingassumptions of expected growth rates and the selection of discount rates, as well as assumptions regarding general economic and business conditions, and thestructure that would yield the highest economic value, among other factors. Refer to Note 5 "Goodwill and Intangible Assets" of Notes to consolidated financialstatements for details of the impairment analysis.Accounting for Income TaxesWe make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in thecalculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statementpurposes.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 whichwe operate. This process involves us estimating our current tax exposure under the applicable tax laws and assessing temporary differences resulting from differingtreatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated BalanceSheets.We account for uncertainty in income taxes pursuant to authoritative guidance based on a two-step approach to recognize and measure uncertain tax positionstaken 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 taxposition will be sustained on audit based on its technical merits, including resolution of any related appeals or litigation processes. The second step is to measurethe 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 tochanging 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 ofthese matters is different than the amounts recorded, such differences will impact our tax provision in our Consolidated Statements of Operations in the period inwhich 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, ourtax 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 allavailable evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income andongoing 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 ourdeferred tax assets, we will increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimatelybe realized.Recent Accounting PronouncementsSee Note 1 “ Summary of Significant Accounting Policies” in the Notes to consolidated financial statements in Item 8 for a full description of recentaccounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporatedherein.49ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKIn the normal course of business, we are exposed to foreign currency exchange rate and interest rate risks that could impact our financial position and resultsof operations.Interest Rate RiskChanges in interest rates could impact our anticipated interest income on our cash equivalents and investments in marketable securities. Our cash equivalentsand investments are fixed-rate short-term and long-term securities. Fixed-rate securities may have their fair market value adversely impacted due to a rise ininterest rates, and as a result, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal ifforced to sell securities which have declined in market value due to changes in interest rates. As of December 31, 2015 , we had approximately $511.0 millioninvested in available-for-sale marketable securities. An immediate 10% change in interest rates would not have a material adverse impact on our future operatingresults and cash flows.We do not have interest bearing liabilities as of December 31, 2015 , and, therefore, we are not subject to risks from immediate interest rate increases.Currency Rate RiskWe operate in North America, Europe, Asia Pacific, Costa Rica and Israel. As a result of our international business activities, our financial results could beaffected by factors such as changes in foreign currency exchange rates or economic conditions in foreign markets, and there is no assurance that exchange ratefluctuations will not harm our business in the future. We generally sell our products in the local currency of the respective countries. This provides some naturalhedging because most of the subsidiaries’ operating expenses are generally denominated in their local currencies as discussed further below. Regardless of thisnatural hedging, our results of operations may be adversely impacted by exchange rate fluctuations.In September 2015, we entered into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations oncash and certain trade and intercompany receivables and payables. These forward contracts are not designated as hedging instruments and do not subject us tomaterial balance sheet risk due to fluctuations in foreign currency exchange rates. The gains and losses on these forward contracts are intended to offset the gainsand losses in the underlying foreign currency denominated monetary assets and liabilities being economically hedged. These instruments are marked to marketthrough earnings every period and generally are one month in original maturity. We do not enter into foreign currency forward contracts for trading or speculativepurposes. As our international operations grow, we will continue to reassess our approach to managing the risks relating to fluctuations in currency rates. It isdifficult to predict the impact hedging activities could have on our results of operations. The fair value of foreign exchange forward contracts outstanding as ofDecember 31, 2015 was not material.Although we will continue to monitor our exposure to currency fluctuations, and, where appropriate, may use financial hedging techniques in the future tominimize the effect of these fluctuations, the impact of an aggregate change of 10% in foreign currency exchange rates relative to the U.S. dollar on our results ofoperations and financial position could be material.50ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAQuarterly Results of Operations Three Months Ended 2015 2014 December 31, 2015 September 30, 2015 June 30, 2015 March 31,2015 December 31,2014 September 30,2014 June 30,2014 March 31,2014 (in thousands, except per share data)(unaudited )Net revenues$230,276 $207,636 $209,488 $198,086 $198,600 $189,876 $192,531 $180,646Gross profit172,810 157,576 158,634 151,090 150,662 145,054 145,476 137,251Income from operations 159,339 38,046 42,325 48,924 51,493 51,547 48,732 41,804Net income 1 48,877 27,616 31,350 36,177 39,541 38,247 35,600 32,444Net income per share: Basic$0.61 $0.35 $0.39 $0.45 $0.49 $0.47 $0.44 $0.40Diluted$0.60 $0.34 $0.39 $0.44 $0.48 $0.47 $0.43 $0.39Shares used in computingnet income per share: Basic79,481 79,808 80,257 80,459 80,266 80,629 81,027 81,120Diluted81,051 81,092 81,394 81,824 81,691 82,014 82,341 82,817 1 In the three months ended June 30, 2014, we recorded an out of period correction that resulted in an increase in the provision for income taxes of $2.1 million,which $1.8 million related to prior years and $0.3 million related to the three months ended March 31, 2014. The out of period correction was not material tothe consolidated financial statements for any quarter within 2014.51INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Management on Internal Control over Financial Reporting53Report of Independent Registered Public Accounting Firm54Consolidated Statements of Operations55Consolidated Statements of Comprehensive Income56Consolidated Balance Sheets57Consolidated Statements of Stockholders’ Equity58Consolidated Statements of Cash Flows59Notes to Consolidated Financial Statements6052REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTINGManagement of Align is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and15d-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, andeffected by the board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reportingincludes 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 generallyaccepted accounting principles, and that receipts and expenditures of Align are being made only in accordance with authorizations of management anddirectors of Align; and•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Align's assets that could have amaterial 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 anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree ofcompliance with the policies or procedures may deteriorate.Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2015 . In making this assessment, managementused the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).Based on its assessment, management has concluded that, as of December 31, 2015 , our internal control over financial reporting was effective based oncriteria in Internal Control - Integrated Framework (2013) issued by the COSO .The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by PricewaterhouseCoopers LLP, an independentregistered public accounting firm, as stated in their report which is included herein. / S / JOSEPH M. HOGAN Joseph M. HoganPresident and Chief Executive OfficerFebruary 25, 2016 /S/ DAVID L. WHITE David L. WhiteChief Financial OfficerFebruary 25, 201653REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Stockholders and Board of Directors of Align Technology, Inc.:In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) (1), present fairly, in all material respects, the financialposition of Align Technology, Inc. and its subsidiaries at December 31, 2015 and December 31, 2014 , and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Inaddition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the informationset forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31, 2015 , based on criteria established in Internal Control—Integrated Framework (2013) issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statementsand financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal controlover financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to expressopinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integratedaudits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effectiveinternal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal controlover financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal controlbased on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our auditsprovide a reasonable basis for our opinions.As discussed in Note 1 to the consolidated financial statements , the Company changed the manner in which it classifies deferred income tax assets andliabilities in 2015.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection ofunauthorized 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 ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate./s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaFebruary 25, 201654ALIGN TECHNOLOGY, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data) Year Ended December 31, 2015 2014 2013Net revenues$845,486 $761,653 $660,206Cost of net revenues205,376 183,210 162,100Gross profit640,110 578,443 498,106Operating expenses: Selling, general and administrative390,239 332,068 292,798Research and development61,237 52,799 44,083Impairment of goodwill— — 40,693Impairment of long lived assets— — 26,320Total operating expenses451,476 384,867 403,894Income from operations188,634 193,576 94,212Interest and other income (expense), net(2,533) (3,207) (1,073)Net income before provision for income taxes186,101 190,369 93,139Provision for income taxes42,081 44,537 28,844Net income$144,020 $145,832 $64,295 Net income per share: Basic$1.80 $1.81 $0.80Diluted$1.77 $1.77 $0.78Shares used in computing net income per share: Basic79,998 80,754 80,551Diluted81,521 82,283 82,589The accompanying notes are an integral part of these consolidated financial statements.55ALIGN TECHNOLOGY, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands) Year Ended December 31, 2015 2014 2013Net income$144,020 $145,832 $64,295Net change in cumulative translation adjustment(154) (196) 62Change in unrealized gains (losses) on available-for sale securities, net of tax(686) (238) 29Other comprehensive income (loss)(840) (434) 91Comprehensive income$143,180 $145,398 $64,386The accompanying notes are an integral part of these consolidated financial statements.56ALIGN TECHNOLOGY, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except per share data) December 31, 2015 2014ASSETS Current assets: Cash and cash equivalents$167,714 $199,871Marketable securities, short-term359,581 254,787Accounts receivable, net of allowance for doubtful accounts and returns of $2,472 and $1,563, respectively158,550 129,751Inventories19,465 15,928Prepaid expenses and other current assets26,700 19,770Deferred tax assets— 37,053Total current assets732,010 657,160Marketable securities, long-term151,370 147,892Property, plant and equipment, net136,473 90,125Goodwill and intangible assets, net79,162 82,056Deferred tax assets51,416 3,099Other assets8,202 7,665Total assets$1,158,633 $987,997LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable$34,354 $23,247Accrued liabilities107,765 87,880Deferred revenues129,553 90,684Total current liabilities271,672 201,811Income tax payable37,512 30,483Other long-term liabilities1,523 2,932Total liabilities310,707 235,226Commitments and contingencies ( Notes 6 and 8 ) Stockholders’ equity: Preferred stock, $0.0001 par value (5,000 shares authorized; none issued)— —Common stock, $0.0001 par value (200,000 shares authorized; 79,500 and 80,205 issued and outstandingat 2015 and 2014, respectively)8 8Additional paid-in capital821,507 783,410Accumulated other comprehensive income (loss), net(980) (140)Accumulated surplus (deficit)27,391 (30,507)Total stockholders’ equity847,926 752,771Total liabilities and stockholders’ equity$1,158,633 $987,997The accompanying notes are an integral part of these consolidated financial statements.57ALIGN TECHNOLOGY, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYFor the year ended December 31, 2015, 2014 and 2013(in thousands) Common Stock AdditionalPaid inCapital AccumulatedOtherComprehensiveIncome (Loss) AccumulatedSurplus (Deficit) Total Shares Amount Balances at December 31, 201280,611 $8 $670,732 $203 $(89,626) $581,317Net income— — — — 64,295 64,295Net change in unrealized gain from available-for salesecurities— — — 29 — 29Net change in cumulative translation adjustment— — — 62 — 62Issuance of common stock relating to employee equitycompensation plans2,694 — 34,196 — — 34,196Tax withholdings related to net share settlement ofrestricted stock units— — (4,363) — — (4,363)Common stock repurchased and retired(2,722) — (24,528) — (70,579) (95,107)Tax benefits from stock-based awards— — 27,103 — — 27,103Stock based compensation— — 26,438 — — 26,438Balances at December 31, 201380,583 8 729,578 294 (95,910) 633,970Net income— — — — 145,832 145,832Net change in unrealized gain from available-for salesecurities— — — (238) — (238)Net change in cumulative translation adjustment— — — (196) — (196)Issuance of common stock relating to employee equitycompensation plans1,536 — 18,028 — — 18,028Tax withholdings related to net share settlements ofrestricted stock units— — (7,608) — — (7,608)Common stock repurchased and retired(1,914) — (17,804) — (80,429) (98,233)Tax benefits from stock-based awards— — 21,393 — — 21,393Stock based compensation— — 39,823 — — 39,823Balances at December 31, 201480,205 8 783,410 (140) (30,507) 752,771Net income— — — — 144,020 144,020Net change in unrealized gain from available-for salesecurities— — — (686) — (686)Net change in cumulative translation adjustment— — (10) (154) — (164)Issuance of common stock relating to employee equitycompensation plans991 — 11,325 — — 11,325Tax withholdings related to net share settlements ofrestricted stock units— — (20,716) — — (20,716)Common stock repurchased and retired(1,696) — (15,669) — (86,122) (101,791)Tax (shortfalls) benefits from stock-based awards— — 10,224 — — 10,224Stock based compensation— — 52,943 — — 52,943Balances at December 31, 201579,500 $8 $821,507 $(980) $27,391 $847,926The accompanying notes are an integral part of these consolidated financial statements.58ALIGN TECHNOLOGY, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year Ended December 31, 2015 2014 2013CASH FLOWS FROM OPERATING ACTIVITIES: Net income$144,020 $145,832 $64,295Adjustments to reconcile net income to net cash provided by operating activities: Deferred taxes(11,424) 4,088 (5,899)Depreciation and amortization18,004 17,856 16,825Stock-based compensation52,943 39,823 26,438Tax (shortfalls) benefits from stock-based awards10,224 21,393 27,103Excess tax benefit from share-based payment arrangements(10,396) (21,393) (27,103)Impairment of goodwill— — 40,693Impairment of long-lived assets— — 26,320Other non-cash operating activities13,799 10,106 4,142Changes in assets and liabilities, excluding the effects of business combinations: Accounts receivable(40,775) (27,229) (11,981)Inventories(3,563) (1,999) 1,158Prepaid expenses and other assets(3,726) (2,924) (392)Accounts payable7,575 2,887 (186)Accrued and other long-term liabilities19,462 22,692 9,662Deferred revenues41,854 15,767 14,901Net cash provided by operating activities237,997 226,899 185,976CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition, net of cash acquired— — (7,652)Purchase of property, plant and equipment(53,451) (24,092) (19,412)Purchase of marketable securities(447,092) (437,152) (303,917)Proceeds from maturities of marketable securities304,125 176,810 90,917Proceeds from sales of marketable securities30,011 82,990 31,741Other investing activities46 (183) (2,411)Net cash used in investing activities(166,361) (201,627) (210,734)CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock11,325 18,028 34,196Common stock repurchase(101,791) (98,233) (95,107)Excess tax benefit from share-based payment arrangements10,396 21,393 27,103Employees’ taxes paid upon the vesting of restricted stock units(20,716) (7,608) (4,363)Net cash used in financing activities(100,786) (66,420) (38,171)Effect of foreign exchange rate changes on cash and cash equivalents(3,007) (1,934) (504)Net decrease in cash and cash equivalents(32,157) (43,082) (63,433)Cash and cash equivalents, beginning of year199,871 242,953 306,386Cash and cash equivalents, end of year$167,714 $199,871 $242,953The accompanying notes are an integral part of these consolidated financial statements.59ALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1. Summary of Significant Accounting PoliciesBusiness DescriptionAlign Technology, Inc. (“We”, “Our”, or “Align”) was incorporated in April 1997 in Delaware and focuses on designing, manufacturing and marketinginnovative, technology-rich products to help dental professionals achieve the clinical results they expect and deliver effective, convenient cutting-edge dentaltreatment options to their patients. We are headquartered in San Jose, California with offices worldwide. Our international headquarters are located in Amsterdam,the Netherlands. We have two operating segments, (1) Clear Aligner, known as the Invisalign System, and (2) Scanners and Services ("Scanner"), known as theiTero intra-oral scanner and OrthoCAD services.Basis of presentation and preparationThe consolidated financial statements include the accounts of Align and our wholly-owned subsidiaries after elimination of intercompany transactions andbalances. In connection with the preparation of the consolidated financial statements, we evaluated events subsequent to the balance sheet date through the financialstatement issuance date and determined that all material transactions have been recorded and disclosed properly.Out of period adjustmentIn 2013, we recorded an out of period correction that resulted in decreases in cost of net revenues of approximately $1.7 million and operating expense of$0.7 million offset in part by an increase in the provision for income taxes of $0.5 million . We do not believe the increase of $1.9 million to net income related tothe out of period adjustment is material to the consolidated financial statements for the fiscal year ended December 31, 2013 or to any prior years' consolidatedfinancial statements.In 2014, we recorded an out of period correction that resulted in an increase in the provision for income taxes of $1.8 million . We do not believe thedecrease to net income related to the out of period adjustment is material to the consolidated financial statements for the fiscal year ended December 31, 2014 orto any prior years' consolidated financial statements.Use of estimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) requires ourmanagement to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual resultscould differ materially from those estimates. On an ongoing basis, we evaluate our estimates, including those related to the fair values of financial instruments,intangible assets and goodwill, useful lives of intangible assets and property and equipment, stock-based compensation, revenue recognition, income taxes, andcontingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the resultsof which form the basis for making judgments about the carrying values of assets and liabilities.Fair value of financial instrumentsThe carrying amounts of our cash, accounts receivable, accounts payable and other current liabilities approximate their fair value.We measure our cash equivalents, marketable securities, and our Israeli severance fund at fair value. Fair value is the price that would be received fromselling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying thefollowing hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest levelof input that is available and significant to the fair value measurement: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; quotedprices 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 datafor substantially the full term of the asset or liability. 60Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing theasset or liability.Cash and cash equivalentsWe consider currency on hand, demand deposits, time deposits, and all highly liquid investments with an original maturity of three months or less at the dateof purchase to be cash and cash equivalents. Cash and cash equivalents are held in various financial institutions in the U.S. and internationally.Restricted cashOur restricted cash balance as of December 31, 2015 was $3.5 million , of which $3.3 million was classified as a long term asset and $0.2 million as acurrent asset. Our restricted cash balance as of December 31, 2014 was $3.8 million , of which $3.6 million was classified as a long term asset and $0.2 million as acurrent asset. The restricted cash primarily consisted of funds reserved for legal requirements.Marketable securitiesWe invest primarily in money market funds, commercial paper, corporate bonds, U.S. government agency bonds, asset-backed securities, municipalsecurities, U.S. dollar dominated foreign corporate bonds, U.S. government treasury bonds and certificates of deposits.Marketable securities are classified as available-for-sale and are carried at fair value. Marketable securities classified as current assets have maturities of lessthan one year. Unrealized gains or losses on such securities are included in accumulated other comprehensive income, net in stockholders’ equity. Realized gainsand losses from maturities of all such securities are reported in earnings and computed using the specific identification cost method. Realized gains or losses andcharges for other-than-temporary declines in value, if any, on available-for-sale securities are reported in Interest and other income (expense), net as incurred. Weperiodically evaluate these investments for other-than-temporary impairment.Derivative Financial InstrumentsIn September 2015, we began entering into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange ratefluctuations on cash and certain trade and intercompany receivables and payables. These forward contracts are not designated as hedging instruments and do notsubject us to material balance sheet risk due to fluctuations in foreign currency exchange rates. The gains and losses on these forward contracts are intended tooffset the gains and losses in the underlying foreign currency denominated monetary assets and liabilities being economically hedged. We do not enter into foreigncurrency forward contracts for trading or speculative purposes. These instruments are marked to market through earnings every period and generally are one monthin original maturity. The net gain or loss from the settlement of these foreign currency forward contracts is recorded in Interest and other income (expense), net inthe Consolidated Statements of Operations.Foreign currencyFor our international subsidiaries where the U.S. dollar is the functional currency, we analyze on an annual basis or more often if necessary, if a significantchange in facts and circumstances indicate that the primary economic currency has changed. Adjustments from translating certain European and Asia Pacificsubsidiaries’ financial statements from the local currency to the U.S. dollar 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 balancesheet at period end exchange rates, and the income statement at an average exchange rate in effect during the period. As of December 31, 2015 and 2014 , therewere no material amounts in accumulated other comprehensive income, net related to the translation of our foreign subsidiaries’ financial statements.Some of our international entities operate in a U.S. dollar functional currency environment, and therefore, the foreign currency assets and liabilities areremeasured into the U.S. dollar at current exchange rates except for non-monetary assets and liabilities which are remeasured at historical exchangerates. Revenues and expenses are generally remeasured at an average exchange rate in effect during each period. Gains or losses from foreign currencyremeasurement are included in Interest and other income (expense), net. For the year ended December 31, 2015 and 2014, we had foreign currency net losses of$4.0 million and $3.8 million .61Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Certain risks and uncertaintiesOur operating results depend to a significant extent on our ability to market and develop our products. The life cycles of our products are difficult toestimate due, in part, to the effect of future product enhancements and competition. Our inability to successfully develop and market our products as a result ofcompetition or other factors would have a material adverse effect on our business, financial condition and results of operations.Our cash and investments are held primarily by two financial institutions. Financial instruments which potentially expose us to concentrations of credit riskconsist primarily of cash equivalents, marketable securities and accounts receivable. We invest excess cash primarily in money market funds of major financialinstitutions, U.S. government agencies, U.S. dollar dominated foreign corporate bonds and domestic corporate bonds. If the carrying value of our investmentsexceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments, whichcould materially harm our results of operations and financial condition. Moreover, the performance of certain securities in our investment portfolio correlates withthe credit condition of the U.S. economy. We provide credit to customers in the normal course of business. Collateral is not required for accounts receivable, butongoing evaluations of customers’ credit worthiness are performed. We maintain reserves for potential credit losses and such losses have been withinmanagement’s expectations. No individual customer accounted for 10% or more of our accounts receivable at December 31, 2015 or 2014 , or net revenues for theyear ended December 31, 2015 , 2014 , or 2013 .In the U.S., the Food and Drug Administration (“FDA”) regulates the design, manufacture, distribution, pre-clinical and clinical study, clearance andapproval of medical devices. Products developed by us may require approvals or clearances from the FDA or other international regulatory agencies prior tocommercialized sales. There can be no assurance that our products will receive any of the required approvals or clearances. If we were denied approval orclearance or such approval was delayed, it may have a material adverse impact on us.We have manufacturing operations located outside the U.S. We currently rely on our manufacturing facility in Costa Rica to prepare digital treatment plansusing a sophisticated, internally developed computer-modeling program. In addition, we manufacture our clear aligners and distribute our intra-oral scanners at ourfacility in Juarez, Mexico, and we produce our handheld scanner wand in Or Yehuda, Israel. Our reliance on international operations exposes us to related risksand uncertainties, including difficulties in staffing and managing international operations such as hiring and retaining qualified personnel; controlling productionvolume and quality of manufacture; political, social and economic instability, particularly as a result of increased levels of violence in Juarez, Mexico and OrYehuda, Israel; interruptions and limitations in telecommunication services; product and material transportation delays or disruption; trade restrictions and changesin tariffs; import and export license requirements and restrictions; fluctuations in foreign currency exchange rates; and potential adverse tax consequences. If anyof 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 ormanufacturer to fulfill our supply requirements could materially and adversely impact our future operating results.InventoriesInventories are valued at the lower of cost or market, with cost computed using either standard cost, which approximates actual cost, or average cost on afirst-in-first-out basis. Excess and obsolete inventories are determined primarily based on future demand forecasts, and write-downs of excess and obsoleteinventories are recorded as a component of cost of revenues.Property, plant and equipmentProperty, plant and equipment are stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization are computedusing the straight-line method over the estimated useful lives of the assets, generally three to ten years. We amortize leasehold improvements over the shorter ofthe remaining lease term or the estimated useful lives of the assets. We depreciate buildings over periods up to 20 years. Land is not depreciated. Construction inprogress ("CIP") is related to the construction or development of property (including land) and equipment that have not yet been placed in service for their intendeduse. Upon sale or retirement, the asset’s cost and related accumulated depreciation are removed from the general ledger and any related gains or losses are reflectedin expenses. Maintenance and repairs are expensed as incurred.62Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Goodwill and finite-lived acquired intangible assetsGoodwill represents the excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets acquired in businesscombinations 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 the Cadent acquisition. These assets are amortized using the straight-linemethod 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 berealized.Impairment of goodwill and long-lived assetsGoodwillWe evaluate goodwill for impairment at least annually on November 30th or more frequently if indicators are present, an event occurs or circumstanceschanges that 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. Theallocation 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 ismore 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 thesignificance of relevant key factors, events, and circumstances that affect the fair value of our reporting units. These factors include external factors such asmacroeconomic, industry, and market conditions, as well as entity-specific factors, such as our actual and planned financial performance. We also giveconsideration 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, afterassessing 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 carryingvalue and there is no indication of impairment, no further testing is performed; however, if we conclude otherwise, the first step of the two-step impairment test isperformed by estimating the fair value of the reporting unit and comparing it with its carrying value, including goodwill.Step one of the goodwill impairment test consists of a comparison of the fair value of a reporting unit against its carrying amount, including the goodwillallocated to each reporting unit. We determine the fair value of our reporting units based on the present value of estimated future cash flows under the incomeapproach of the reporting units as well as various price or market multiples applied to the reporting unit's operating results along with the appropriate controlpremium under the marketing approach, both of which are classified as level 3 within the fair value hierarchy (as described in Note 2 ). If the carrying amount ofthe reporting unit is in excess of its fair value, step two requires the comparison of the implied fair value of the reporting unit’s goodwill against the carryingamount of the reporting unit’s goodwill. Any excess of the carrying value of the reporting unit’s goodwill over the implied fair value of the reporting unit’sgoodwill is recorded as an impairment loss.Finite-lived intangible assets and long-lived assetsWe evaluate long-lived assets (including finite-lived intangible assets) for impairment whenever events or changes in circumstances indicate that the carryingamount 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 cashflows the asset or asset group is expected to generate. Factors we consider important which could trigger an impairment review include significant negativeindustry or economic trends, significant loss of customers and changes in the competitive environment. If an asset or asset group is considered to be impaired, theimpairment 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 offuture cash flows attributable to our long-lived assets require significant judgment based on our historical and anticipated results and are subject to manyassumptions. The estimation of fair value utilizing a discounted cashflow ("DCF") approach includes numerous uncertainties which require our significantjudgment when making assumptions of expected growth rates and the selection of discount rates, as well as assumptions regarding general economic and businessconditions, and the structure that would yield the highest economic value, among other factors. Refer to Note 5 for details of the impairment analysis.There were no further triggering events in 2015 that would cause further impairments of our long-lived assets.63Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Development costs for internal use softwareInternally developed software includes enterprise-level business software that we are customizing to meet our specific operational needs. Such capitalizedcosts include external direct costs utilized in developing or obtaining the applications and payroll and payroll-related costs for employees, who are directlyassociated with the development of the applications. In 2014, we started an ERP project which we have capitalized $25.4 million of costs as of December 31, 2015which is included in construction in progress ("CIP"). When the ERP is placed into production, these costs will be amortized over 10 years.The costs to develop software that is marketed externally have not been capitalized as we believe our current software development process is essentiallycompleted concurrent with the establishment of technological feasibility. As such, all related software development costs are expensed as incurred and included inresearch and development expense in our Consolidated Statement of Operations. Product WarrantyClear AlignerWe warrant our Invisalign products against material defects until the Invisalign case is complete. We accrue for warranty costs in cost of net revenues uponshipment of products. The amount of accrued estimated warranty costs is primarily based on historical experience as to product failures as well as currentinformation on replacement costs. Actual warranty costs could differ materially from the estimated amounts. We regularly review the accrued balances and updatethese balances based on historical warranty cost trends. Scanners and ServicesWe warrant our intra-oral scanners for a period of one year, which include materials and labor. We accrue for these warranty costs based on averagehistorical repair costs. An extended warranty may be purchased for additional fees.Allowance for Doubtful Accounts and ReturnsWe maintain allowances for doubtful accounts, for customers that are not able to make payments, and for sales returns. We periodically review theseallowances, including an analysis of the customers’ payment history and information regarding the customers’ creditworthiness, as well as historical sales returnsas a percentage of revenue. Actual write-offs have not materially differed from the estimated allowance.Revenue RecognitionWe measure and allocate revenue according to the accounting guidance for multiple-deliverable revenue arrangements in Accounting Standards Update(“ASU”) 2009-13, Multiple-Deliverable Revenue Arrangements-a consensus of the Financial Accounting Standard Board (“FASB”) Emerging Issues Task Force .Multiple-Element Arrangements (“MEAs”): Arrangements with customers may include multiple deliverables, including any combination ofproducts/equipment and services. The deliverables included in the MEAs are separated into more than one unit of accounting when (i) the deliveredproduct/equipment has value to the customer on a stand-alone basis, and (ii) delivery of the undelivered service element(s) is probable and substantially in ourcontrol. Arrangement consideration is then allocated to each unit, delivered or undelivered, based on the relative selling price of each unit of accounting based firston vendor-specific objective evidence (“VSOE”) if it exists, second on third-party evidence (“TPE”) if it exists, or on best estimated selling price (“BESP”) ifneither VSOE or TPE exist.•VSOE - In most instances, this applies to products and services that are sold separately in stand-alone arrangements. We determine VSOE based onpricing and discounting practices for the specific product or service when sold separately, considering geographical, customer, and other economic ormarketing variables, as well as renewal rates or stand-alone prices for the service element(s).•TPE - If we cannot establish VSOE of selling price for a specific product or service included in a multiple-element arrangement, we use third-partyevidence of selling price. We determine TPE based on sales of comparable amount of64Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)similar products or service offered by multiple third parties considering the degree of customization and similarity of product or service sold.•BESP - The best estimated selling price represents the price at which we would sell a product or service if it were sold on a stand-alone basis. WhenVSOE or TPE do not exist for all elements, we determine BESP for the arrangement element based on sales, cost and margin analysis, as well as otherinputs based on our pricing practices. Adjustments for other market and Company-specific factors are made as deemed necessary in determining BESP.We regularly review our estimates of selling price and maintain internal controls over the establishment and update of these estimates.Revenue is recognized when persuasive evidence of the arrangement exists, the price is fixed or determinable, collectability is reasonably assured, title andrisk of loss has passed to customers based on the shipping terms, and allowances for discounts, returns, and customer incentives can be reliablyestimated. Provisions for discounts and rebates to customers are provided for in the same period that the related product sales are recorded.Clear AlignerWe enter into arrangements (“treatment plans”) that involve multiple future product deliverables. Invisalign Full, Invisalign Teen, and Invisalign Assistproducts include optional Additional Aligners at no charge for a period of up to five years after initial shipment. Invisalign Teen also includes up to six optionalreplacement aligners in the price of the product and may be ordered by the dental professional any time throughout treatment. Invisalign Lite includes one optionalcase refinement in the price of the product. Case refinement is a finishing tool used to adjust a patient's teeth to the desired final position and may be elected by thedental professional at any time during treatment, however, it is generally ordered in the last stages of orthodontic treatment. We determined that our treatment plans, except Invisalign Assist with progress tracking, comprise the following deliverables which also represent separateunits of accounting: single-batched aligners, additional aligners, case refinement, and replacement aligners. We allocate revenue for each treatment plan based oneach unit's relative selling price based on BESP and recognize the revenue upon the delivery of each unit in the treatment plan.For Invisalign Assist with the progress tracking feature, aligners and services are provided to the dental professional every nine stages (“a batch”). We areable to reliably estimate the number of batches which are expected to be shipped for each case based upon our historical experience. The amounts allocated to thisdeliverable are recognized on a prorated basis as each batch is shipped.Scanners and ServicesWe recognize revenues from the sales of iTero intra-oral scanners and CAD/CAM services. CAD/CAM services include scanning services, extendedwarranty for the intra-oral scanners, a range of iTero restorative services, and OrthoCAD services such as OrthoCAD iRecord. We sell intra-oral scanners andservices through both our direct sales force and distribution partners. The intra-oral scanner sales price includes one year of warranty, and for additional fees, thecustomer may select an unlimited scanning service agreement over a fixed period of time or extended warranty periods. When intra-oral scanners are sold witheither an unlimited scanning service agreement and/or extended warranty, we allocate revenue based on each element's relative selling price. We estimate theselling price of each element, as if it is sold on a stand-alone basis, taking into consideration historical prices as well as our discounting strategies. Scanner revenue, net of related discounts and allowances, is recognized when products or equipment have been shipped and no significant obligations forinstallation or training remain. For certain distributors who provide installation and training to the customer, we recognize scanner revenue when the intra-oralscanner is shipped to the distributor assuming all of the other revenue recognition criteria have been met. Discounts are deducted from revenue at the time ofsale. Returns of products, excluding warranty related returns, are infrequent and insignificant.Service revenue, including iTero restorative and all OrthoCAD services are recognized upon delivery or ratably over the contract term as the specifiedservices are performed. If a customer selects a pay per use basis for scanning service fees, the revenue is recognized as the service is provided.65Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)We offer customers an option to purchase extended warranties on certain products. We recognize revenue on these extended warranty contracts ratably overthe life of the contract. The costs associated with these extended warranty contracts are recognized when incurred.Shipping and Handling CostsShipping and handling charges to customers are included in net revenues, and the associated costs incurred are recorded in cost of revenues.Legal Proceedings and LitigationsWe 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, weaccrue the estimated liability in our financial statements. If only a range of estimated losses can be determined, we accrue an amount within the range that, in ourjudgment, reflect 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 developmentResearch and development expense is expensed as incurred and includes the costs associated with the research and development of new products andenhancements to existing products. These costs primarily include compensation costs, including stock-based compensation expense, outside consulting expenses,costs associated with conducting clinical and pre-commercialization trial and testing, allocations of corporate overhead expenses including facilities and IT costs,equipment costs and depreciation and amortization.Advertising costsThe cost of advertising and media is expensed as incurred. For the year ended December 31, 2015 , 2014 and 2013 advertising costs totaled $23.4 million ,$26.9 million and $26.0 million , respectively.Common stock repurchaseWe repurchase our own common stock from time to time in the open market when our Board of Directors approve a stock repurchase program. We accountfor these repurchases under the accounting guidance for equity where we allocate the total repurchase value that are in excess over par between additional paid incapital and retained earnings. All shares repurchased are retired.Operating leasesWe currently lease office spaces, automobiles and equipment under operating leases with original lease periods of up to 9 years. Certain of these leases havefree or escalating rent payment provisions and lease incentives provided by the landlord. We recognize rent expense under such leases on a straight-line basis overthe term of the lease as certain leases have adjustments for market provisions.Income taxesWe make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in thecalculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statementpurposes.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 whichwe operate. This process involves us estimating our current tax exposure under the applicable tax laws and assessing temporary differences resulting from differingtreatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated BalanceSheets.We account for uncertainty in income taxes pursuant to authoritative guidance based on a two-step approach to recognize and measure uncertain tax positionstaken 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 taxposition will be sustained on audit based on its technical66Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)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 atax 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, suchdifferences will impact our tax provision in our Consolidated Statements of Operations 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, ourtax 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 allavailable evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income andongoing 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 ourdeferred tax assets, we will increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimatelybe realizable. The available positive evidence at December 31, 2015 included historical operating profits and a projection of future income sufficient to realizemost of our remaining deferred tax assets. As of December 31, 2015 , it was considered more likely than not that our deferred tax assets would be realized with theexception of certain foreign loss carryovers as we are unable to forecast sufficient future profits to realize the deferred tax assets.As of December 31, 2015 , U.S. income taxes and foreign withholding taxes associated with the repatriation of undistributed earnings of foreign subsidiarieswere not provided for on a cumulative total of $359.8 million . We intend to reinvest these earnings indefinitely in our foreign subsidiaries. If these earnings weredistributed in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, we would be subject toadditional U.S. income taxes subject to an adjustment for foreign tax credit, and foreign withholding taxes. Determination of the amount of unrecognized deferredincome tax liability related to these earnings is not practicable.Accounting guidance for stock-based compensation prohibits recognition of a deferred income tax asset for excess tax benefits due to stock option exercisesthat have not yet been realized through a reduction in income taxes payable. We follow the tax law ordering method to determine when excess tax benefits havebeen realized and consider only the direct impacts of awards when calculating the amount of windfalls or shortfalls.Stock-based compensationWe recognize stock-based compensation cost for only those shares ultimately expected to vest on a straight-line basis over the requisite service period of theaward. We use the Black-Scholes option pricing model to determine the fair value of employee stock purchase plan shares. We estimate the fair value of market-performance based restricted stock units using a Monte Carlo simulation model which requires the input of assumptions, including expected term, stock pricevolatility 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 beforfeited. Forfeitures are estimated based on historical experience at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differfrom those estimates. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimatesinvolve inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different assumptions, our stock-basedcompensation expense could be materially different in the future.Medical Device Excise TaxesIn accordance with the Patient Protection and Affordable Care Act, effective January 1, 2013, we began to incur an excise tax on sales of medical devices inthe U.S. In March 2014, we were informed by IRS that our aligners are not subject to the medical device excise tax ("MDET") which we had been paying andexpensing in selling, general and administrative expenses in the Consolidated Statements of Operations since January 1, 2013; however, our scanners are stillsubject to the MDET. Beginning in March 2014, we ceased expensing and paying the MDET for aligners. In the first quarter of 2015, the IRS approved our MDETrefund claim of $6.8 million refund of MDET paid in 2013 related to our aligners; reducing expense for the year ended December 31, 2015.67Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Comprehensive incomeComprehensive income includes all changes in equity during a period from non-owner sources. Comprehensive income, including unrealized gains andlosses on available-for-sale securities and foreign currency translation adjustments, are reported net of their related tax effect.Recent Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (" FASB") released Accounting Standards Update ("ASU") 2014-9 " Revenue from Contracts withCustomers " to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of the standard is to recognize revenues when promisedgoods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for the goods or services. The newstandard defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenuerecognition process than required under existing GAAP including identifying performance obligations in the contract, estimating the amount of variableconsideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In addition, the new standard requiresthat reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.In August 2015, the FASB deferred the effective date of the update by one year, with early adoption on the original effective date permitted. We are requiredto adopt this standard starting in the first quarter of fiscal year 2018 using either of two methods: (i) retrospective to each prior reporting period presented with theoption to elect certain practical expedients as defined within the standard; or (ii) retrospective with the cumulative effect of initially applying the standardrecognized at the date of initial application and providing certain additional disclosures as defined per the standard. We have not yet selected a transition method,and are in the process of determining the impact that the new standard will have on our consolidated financial statements.In April 2015, the FASB issued ASU No. 2015-05, " Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. " providing guidance toentities about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the entity shouldaccount for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does notinclude a software license, the entity should account for the arrangement as a service contract. The new guidance does not change the accounting for an entity'saccounting for service contracts. The updated standard becomes effective for interim and annual reporting periods beginning after December 15, 2015. We adoptedthis ASU in January, 2016, and we do not expect it to have a material impact on our consolidated financial statements and related disclosures.In November 2015, the FASB issued ASU 2015-17 , " Income Taxes" (Topic 740), to simplify the presentation of deferred income taxes. Under the newstandard, both deferred tax liabilities and assets are required to be classified as noncurrent in a classified balance sheet. ASU 2015-17 will become effective forfiscal years, and the interim periods within those years, beginning after December 15, 2016, with early adoption permitted. The new guidance has been adopted ona prospective basis by the Company for the year ended December 31, 2015 , thus resulting in the reclassification of $30.1 million of current deferred tax assets tononcurrent on the accompanying Consolidated Balance Sheets. The prior reporting period was not retrospectively adjusted. The adoption of this guidance had noimpact on our Consolidated Statements of Operations or Consolidated Statements of Comprehensive Income.In February 2016, the FASB issued ASU No. 2016-02, “ Leases ” (topic 842) . The FASB issued this update to increase transparency and comparabilityamong organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updatedguidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the update ispermitted. The Company is evaluating the impact of the adoption of this update on our consolidated financial statements and related disclosures.Note 2. Marketable Securities and Fair Value MeasurementsAs of December 31, 2015 and 2014 , the estimated fair value of our short-term and long-term investments, classified as available for sale, are as follows (inthousands):68Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Short-term December 31, 2015AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses FairValueCommercial paper$38,537 $— $— $38,537Corporate bonds179,765 6 (251) 179,520U.S. dollar dominated foreign corporate bonds510 — (2) 508Municipal securities14,209 7 (2) 14,214U.S. government agency bonds75,172 — (53) 75,119U.S. government treasury bonds51,763 1 (81) 51,683Total Marketable Securities, Short-Term$359,956 $14 $(389) $359,581Long-term December 31, 2015AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses FairValueU.S. government agency bonds$43,853 $— $(178) $43,675Corporate bonds64,012 9 (217) 63,804U.S. government treasury bonds37,673 — (107) 37,566Municipal securities3,993 — (2) 3,991Asset-backed securities2,338 — (3) 2,335Total Marketable Securities, Long-Term$151,869 $9 $(507) $151,371Short-term December 31, 2014AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses Fair ValueCommercial paper$33,998 $— $— $33,998Corporate bonds152,055 27 (116) 151,966U.S. dollar dominated foreign corporate bonds901 — — 901Municipal securities9,147 13 — 9,160U.S. government agency bonds41,574 14 (1) 41,587U.S.government treasury bonds15,770 7 — 15,777Asset-backed securities1,398 — — 1,398Total Marketable Securities, Short-Term$254,843 $61 $(117) $254,787Long-term December 31, 2014AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses Fair ValueU.S. government agency bonds$48,233 $12 $(28) $48,217Corporate bonds57,195 6 (112) 57,089U.S. dollar dominated foreign corporate bonds523 — (2) 521U.S. government treasury bonds20,814 5 (6) 20,813Municipal securities9,552 5 (6) 9,551Asset-backed securities11,713 — (12) 11,701Total Marketable Securities, Long-Term$148,030 $28 $(166) $147,89269Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)For the year ended December 31, 2015 and 2014 , realized losses were immaterial. Cash and cash equivalents were not included in the table above as thegross unrealized gains and losses were not material. We have no material short-term or long-term investments that have been in continuous unrealized losspositions for greater than twelve months as of December 31, 2015 . Amounts reclassified to earnings from unrealized gain or losses were immaterial in 2015 and2014 .Our fixed-income securities investment portfolio consists of corporate bonds, U.S. dollar dominated foreign corporate bonds, commercial paper, municipalsecurities, U.S. government agency bonds, U.S. government treasury bonds and asset-backed securities that have a maximum maturity of two years. Thesecurities 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 thesesecurities, the more susceptible they are to changes in market interest rates and bond yields. As interest rates increase, those securities purchased at a lower yieldshow a mark-to-market unrealized loss. The unrealized losses are due primarily to changes in credit spreads and interest rates. We expect to realize the full value ofall these investments upon maturity or sale. The weighted average remaining duration of these securities was approximately 9 months and 10 months as ofDecember 31, 2015 and 2014, respectively.As the carrying value approximates the fair value for our short-term and long-term marketable securities shown in the tables above, the following tablesummarizes the fair value of our short-term and long-term marketable securities classified by maturity as of December 31, 2015 and 2014 (in thousands): December 31, December 31, 2015 2014One year or less $359,581 $254,787Due in greater than one year 151,370 147,892Total available for short-term and long-term marketable securities $510,951 $402,679Fair Value MeasurementsWe measure the fair value of our cash equivalents and marketable securities as the price that would be received from selling an asset or paid to transfer aliability in an orderly transaction between market participants at the measurement date. We use the U.S. GAAP fair value hierarchy that prioritizes the inputs tovaluation techniques used to measure fair value. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservableinputs 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.Our Level 1 assets consist of money market funds and U.S government treasury bonds. We did not hold any Level 1 liabilities as of December 31, 2015 or2014 .Level 2 —Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quotedprices 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 datafor substantially the full term of the asset or liability.Our Level 2 assets consist of commercial paper, corporate bonds, U.S. dollar denominated foreign corporate bonds, municipal securities, U.S. governmentagency bonds, asset-backed securities, and our Israeli funds that are mainly invested in insurance policies and foreign currency forward contracts. We obtain thesefair values for level 2 investments from our asset manager for each of our portfolios. Our custody bank and asset managers independently use professional pricingservices to gather pricing data which may include quoted market prices for identical or comparable financial instruments, or inputs other than quoted prices that areobservable either directly or indirectly, and we are ultimately responsible for these underlying estimates. The foreign currency forward contracts are valued usingobservable inputs such as quotations on forward foreign exchange rates.Level 3 —Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement ofthe 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 ("DCF") methodologies or similar valuation techniques, as well as significant management judgment or estimation.We did not hold any Level 3 assets or liabilities as of December 31, 2015 and 2014.70Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)The following tables summarizes our financial assets measured at fair value on a recurring basis as of December 31, 2015 and 2014 (in thousands): DescriptionBalance as ofDecember 31, 2015 Quoted Prices inActive Markets forIdentical Assets(Level 1) Significant OtherObservable Inputs(Level 2)Cash equivalents: Money market funds$70,148 $70,148 $—Commercial paper36,887 — 36,887U.S. government Agency bonds3,599 3,599Corporate bonds625 — 625Short-term investments: Commercial paper38,537 — 38,537Corporate bonds179,520 — 179,520U.S. dollar denominated foreign corporate bonds508 — 508Municipal securities14,214 — 14,214U.S. government agency bonds75,119 — 75,119U.S. government treasury bonds51,683 51,683 —Long-term investments: Corporate bonds63,804 — 63,804U.S. government agency bonds43,675 — 43,675U.S. government treasury bonds37,566 37,566 —Municipal securities3,991 — 3,991Asset-backed securities2,335 — 2,335Long-term other assets: Israeli funds2,436 — 2,436 $624,647 $159,397 $465,25071Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)DescriptionBalance as ofDecember 31, 2014 Quoted Prices inActive Markets forIdentical Assets(Level 1) Significant OtherObservable Inputs(Level 2)Cash equivalents: Money market funds$80,786 $80,786 $—Commercial paper21,997 — 21,997 Corporate bonds1,745 1,745Short-term investments: Commercial paper33,998 — 33,998Corporate bonds151,966 — 151,966U.S. dollar denominated foreign corporate bonds901 — 901Municipal securities9,160 — 9,160U.S. government agency bonds41,587 — 41,587U.S. government treasury bonds15,777 15,777 —Certificate of Deposits1,398 1,398Long-term investments: Corporate bonds57,089 — 57,089U.S. government agency bonds48,217 — 48,217U.S. dollar denominated foreign corporate bonds521 — 521U.S. government treasury bonds20,813 20,813 —Municipal securities9,551 — 9,551Asset-backed securities11,701 — 11,701Long-term other assets: Israeli funds2,307 — 2,307 $509,514 $117,376 $392,138Derivative Financial InstrumentsIn September 2015, we began entering into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange ratefluctuations on certain trade and intercompany receivables and payables, which are classified within level 2 of the fair value hierarchy. The net loss on theseforward contracts was immaterial for the year ended December 31, 2015. As of December 31, 2015, the fair value of foreign exchange forward contractsoutstanding was immaterial.The following table presents the gross notional value of all our foreign exchange forward contracts outstanding as of December 31, 2015 (in thousands): As of December 31, 2015 Local CurrencyAmount Notional ContractAmount (USD)US dollar$20,700 $20,700Euro€22,100 24,222Japanese yen¥583,000 4,839Australian dollarA$4,700 3,426Hong Kong dollarHK$51,000 6,579 $59,76672Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Note 3. Balance Sheet ComponentsInventoriesInventories consist of the following (in thousands): December 31, 2015 2014Raw materials$9,950 $8,143Work in process7,067 2,970Finished goods2,448 4,815Total Inventories$19,465 $15,928Work in process includes costs to produce our clear aligner and intra-oral scanner products. Finished goods primarily represent our intra-oral scanners andancillary products that support our clear aligner products.Property, plant and equipmentProperty, plant and equipment consist of the following (in thousands): December 31, 2015 2014Clinical and manufacturing equipment $128,044 $107,707Computer hardware 25,843 24,092Computer software 21,451 22,044Furniture and fixtures 8,855 7,386Leasehold improvements 20,172 15,358Building 4,227 1,868Land 3,072 1,162CIP 42,846 18,310Total 254,510 197,927Less: Accumulated depreciation and amortization and impairment charges (118,037) (107,802)Total Property, plant and equipment, net $136,473 $90,125As of December 31, 2015 , CIP consists primarily of costs for capital equipment to be placed in service in the next year. In late 2014, we started an ERPproject and have capitalized $25.4 million as of December 31, 2015, which we anticipate will be placed in service in 2016. Depreciation and amortization was$18.0 million , $17.9 million , and $16.8 million , for the year ended December 31, 2015 , 2014 and 2013, respectively.73Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Accrued liabilitiesAccrued liabilities consist of the following (in thousands): December 31, 2015 2014Accrued payroll and benefits$55,430 $44,610Accrued accounts payable13,834 5,736Accrued sales rebate8,486 11,110Accrued sales and marketing expenses7,071 5,979Accrued sales tax and value added tax4,801 5,456Accrued professional fees2,775 2,494Accrued income taxes2,646 2,027Accrued warranty2,638 3,148Other accrued liabilities10,084 7,320Total Accrued Liabilities$107,765 $87,880WarrantyWe regularly review the accrued balances and update these balances based on historical warranty trends. Actual warranty costs incurred have not materiallydiffered from those accrued. However, future actual warranty costs could differ from the estimated amounts.Clear AlignerWe warrant our Invisalign products against material defects until the Invisalign case is complete. We accrue for warranty costs in cost of net revenues uponshipment of products. The amount of accrued estimated warranty costs is primarily based on historical experience as to product failures as well as currentinformation on replacement costs.ScannersWe warrant our scanners for a period of one year from the date of training and installation. We accrue for these warranty costs which includes materials andlabor based on estimated historical repair costs. Extended service packages may be purchased for additional fees.Warranty accrual as of December 31, 2015 and 2014 consists of the following activity (in thousands): Warranty accrual, December 31, 2013$3,104Charged to cost of revenues1,990Actual warranty expenditures(1,946)Warranty accrual, December 31, 20143,148Charged to cost of revenues1,796Actual warranty expenditures(2,306)Warranty accrual, December 31, 2015$2,638Note 4. Business CombinationsICA Holdings Pty LimitedOn April 30, 2013, we completed the acquisition of ICA Holdings Pty Limited ("ICA") upon the expiration of the distribution agreement between certainsubsidiaries of ICA and Align Technology B.V., for a total cash consideration of approximately $8.6 million , of which $7.4 million was attributed to assetsacquired, $2.4 million in liabilities assumed and $3.6 million to goodwill.74Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Goodwill as a result of this acquisition represents the excess of the purchase price over the fair value of the underlying net assets acquired and represents theknowledge and experience of the workforce in place. None of this goodwill will be deductible for tax purposes. Under the applicable accounting guidance,goodwill will not be amortized but will be tested for impairment on an annual basis or more frequently if certain indicators are present. Pro forma results of operations for this acquisition have not been presented as it is not material to our results of operations, either individually or in aggregate,for the year ended 2013 .Note 5. Goodwill and Intangible AssetsGoodwillThe change in the carrying value of goodwill for the year ended December 31, 2015 for the Clear Aligner segment, which are also our reporting units, are asfollows (in thousands): TotalBalance as of December 31, 2013$61,623Adjustments 1(254)Balance as of December 31, 201461,369Adjustments 1(295)Balance as of December 31, 2015$61,0741 The adjustments to goodwill were a result of foreign currency translation.Impairment of GoodwillWe evaluate goodwill for impairment at least annually on November 30th or more frequently if indicators are present, an event occurs or circumstanceschanges that 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. Theallocation of goodwill to the respective reporting unit is based on relative synergies generated as a result of an acquisition. 2013 ImpairmentDuring March 2013, changes in the competitive environment for intra-oral scanners, including announcements from our competitors of new low-pricedscanners targeted at orthodontists and general practitioner dentists in North America, caused us to lower our expectations for growth and profitability for ourScanner reporting unit. As a result, we determined that goodwill related only to our Scanner reporting unit should be tested for impairment as of March 2013.There was no triggering event related to the Clear Aligner goodwill.We performed a step one analysis for our Scanner reporting unit which consists of a comparison of the fair value of the Scanner reporting unit against itscarrying amount, including the goodwill allocated to it. In deriving the fair value of the Scanner reporting unit, we utilized the income approach which is classifiedas Level 3 within the fair value hierarchy. As a result of our step one analysis, we concluded that the fair value of the Scanner reporting unit was less than itscarrying value; therefore, we proceeded to step two of the goodwill impairment analysis. We use a discounted cash flow (“DCF”) approach to estimate the fairvalue of a reporting unit, utilizing the harvest model, which we believe is the most reliable indicator of fair value of this business, and is most consistent with theapproach a market place participant would use. Based on our analysis, there was no implied goodwill for the Scanner reporting unit; therefore, we recorded agoodwill impairment charge of $40.7 million in March, 2013, which represents the remaining goodwill balance in the Scanner reporting unit. None of thegoodwill impairment charge was deductible for tax purposes.75Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Annual Impairment TestThe remaining goodwill is entirely attributable to our Clear Aligner reporting unit. During the fourth quarter of fiscal 2015, we performed the annualgoodwill impairment testing and found no impairment events as the fair value of our Clear Aligner reporting unit was significantly in excess of the carrying value.Acquired Intangible AssetsWe amortize our intangible assets over their estimated useful lives. We evaluate long-lived assets, which includes property, plant and equipment andintangible assets, for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The carrying value isnot recoverable if it exceeds the undiscounted cash flows resulting from the use of the asset and its eventual disposition. Our estimates of future cash flowsattributable to our long-lived assets require significant judgment based on our historical and anticipated results and are subject to many factors. Factors we considerimportant which could trigger an impairment review include significant negative industry or economic trends, significant loss of customers and changes in thecompetitive environment of our intra-oral scanning business.During March 2013, changes in the competitive environment for intra-oral scanners, including announcements from our competitors of new low-pricedscanners targeted at orthodontists and general practitioner dentists in North America, that caused us to lower our expectations for growth and profitability for ourScanner reporting unit. As a result, we determined that the carrying value of the Scanner long-lived assets was not recoverable as compared to the value of theundiscounted cash flows of our revised projections for the asset group. In order to determine the impairment amount of our long-lived assets, we fair valued eachkey component of our long-lived assets within the asset group, which involved the use of significant estimates and assumptions including replacement costs,revenue growth rates, operating margins, and plant and equipment cost trends. Upon completion of this analysis, we recorded a total impairment charge of $26.3million of which $19.3 million represented the impairment related to our Scanner intangible assets and $7.0 million related to plant and equipment. There was notriggering event related to the Clear Aligner asset group.There were no triggering events in 2015 that would cause further impairments of our long-lived assets.Intangible assets arising either as a direct result from the Cadent acquisition or individually acquired are being amortized as follows (in thousands): WeightedAverageAmortizationPeriod (in years) Gross Carrying Amountas ofDecember 31, 2015 AccumulatedAmortization Impairment Charge Net CarryingValue as ofDecember 31, 2015Trademarks15 $7,100 $(1,492) $(4,179) $1,429Existing technology13 12,600 (3,577) (4,328) 4,695Customer relationships11 33,500 (10,957) (10,751) 11,792Other8 285 (113) — 172Total Intangible Assets $53,485 $(16,139) $(19,258) $18,088 WeightedAverageAmortizationPeriod (in years) Gross CarryingAmount as ofDecember 31, 2014 AccumulatedAmortization Impairment Charge Net CarryingValue as ofDecember 31, 2014Trademarks15 $7,100 $(1,354) $(4,179) $1,567Existing technology13 12,600 (3,015) (4,328) 5,257Customer relationships11 33,500 (9,095) (10,751) 13,654Other8 285 (76) — 209Total Intangible Assets $53,485 $(13,540) $(19,258) $20,68776Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)The total estimated annual future amortization expense for these acquired intangible assets as of December 31, 2015 is as follows (in thousands):Fiscal Year 2016$2,60020172,60020182,60020192,59220202,582Thereafter5,114Total$18,088Note 6. Legal Proceedings Securities Class Action Lawsuit On November 28, 2012, plaintiff City of Dearborn Heights Act 345 Police & Fire Retirement System filed a lawsuit against Align, Thomas M. Prescott (“Mr.Prescott”), Align’s former President and Chief Executive Officer, and Kenneth B. Arola (“Mr. Arola”), Align’s former Vice President, Finance and Chief FinancialOfficer, in the United States District Court for the Northern District of California on behalf of a purported class of purchasers of our common stock (the “SecuritiesAction”). On July 11, 2013, an amended complaint was filed, which named the same defendants, on behalf of a purported class of purchasers of our common stockbetween January 31, 2012 and October 17, 2012. The amended complaint alleged that Align, Mr. Prescott and Mr. Arola violated Section 10(b) of the SecuritiesExchange Act of 1934 and Rule 10b-5 promulgated thereunder, and that Mr. Prescott and Mr. Arola violated Section 20(a) of the Securities Exchange Act of 1934.Specifically, the amended complaint alleged that during the purported class period defendants failed to take an appropriate goodwill impairment charge related tothe April 29, 2011 acquisition of Cadent Holdings, Inc. in the fourth quarter of 2011, the first quarter of 2012 or the second quarter of 2012, which rendered ourfinancial statements and projections of future earnings materially false and misleading and in violation of U.S. GAAP. The amended complaint sought monetarydamages in an unspecified amount, costs and attorneys’ fees. On December 9, 2013, the court granted defendants’ motion to dismiss with leave for plaintiff to filea second amended complaint. Plaintiff filed a second amended complaint on January 8, 2014 on behalf of the same purported class. The second amended complaintstates the same claims as the amended complaint. On August 22, 2014, the court granted our motion to dismiss without leave to amend. On September 22, 2014,Plaintiff filed a notice of appeal to the Ninth Circuit Court of Appeals. Align intends to vigorously defend itself against these allegations. Align is currently unableto predict the outcome of this amended complaint and therefore cannot determine the likelihood of loss nor estimate a range of possible loss, if any. Shareholder Derivative Lawsuit On February 1, 2013, plaintiff Gary Udis filed a shareholder derivative lawsuit against several of Align’s current and former officers and directors in theSuperior Court of California, County of Santa Clara. The complaint alleges that our reported income and earnings were materially overstated because of a failure totimely write down goodwill related to the April 29, 2011 acquisition of Cadent Holdings, Inc., and that defendants made allegedly false statements concerning ourforecasts. The complaint asserts various state law causes of action, including claims of breach of fiduciary duty, unjust enrichment, and insider trading, amongothers. The complaint seeks unspecified damages on behalf of Align, which is named solely as nominal defendant against whom no recovery is sought. Thecomplaint also seeks an order directing Align to reform and improve its corporate governance and internal procedures, and seeks restitution in an unspecifiedamount, costs, and attorneys’ fees. On July 8, 2013, an Order was entered staying this derivative lawsuit until an initial ruling on our first motion to dismiss theSecurities Action. On January 15, 2014, an Order was entered staying this derivative lawsuit until an initial ruling on our second motion to dismiss the SecuritiesAction. On October 14, 2014, an Order was entered staying this derivative lawsuit until a ruling by the Ninth Circuit in the Securities Action discussed above.Align is currently unable to predict the outcome of this complaint and therefore cannot determine the likelihood of loss nor estimate a range of possible losses.In addition, in the course of Align's operations, Align is involved in a variety of claims, suits, investigations, and proceedings, including actions with respect tointellectual property claims, patent infringement claims, government investigations, labor and employment claims, breach of contract claims, tax, and othermatters. Regardless of the outcome, these proceedings can have an77adverse impact on us because of defense costs, diversion of management resources, and other factors. Although the results of complex legal proceedings aredifficult 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 thatthese matters, individually or in the aggregate, will materially affect Align's financial position, results of operations or cash flows.Note 7. Credit FacilityOn March 22, 2013, we entered into a credit facility with Wells Fargo Bank. The credit facility provides for a $50.0 million revolving line of credit, with a$10.0 million letter of credit sublimit, and has a maturity date on March 22, 2016. The credit facility also requires us to maintain a minimum unrestricted cashbalance of $50.0 million and comply with specific financial conditions and performance requirements. The loans bear interest, at our option, at a fluctuating rateper annum equal to the daily one-month adjusted LIBOR rate plus a spread of 1.75% or an adjusted LIBOR rate (based on one, three, six or twelve-month interestperiods) plus a spread of 1.75% . As of December 31, 2015, we had no outstanding borrowings under this credit facility and were in compliance with theconditions and performance requirements.Note 8. Commitments and ContingenciesOperating leasesWe lease our facilities and certain equipment and automobiles under non-cancelable operating lease arrangements that expire at various dates through 2022and provide for pre-negotiated fixed rental rates during the terms of the lease. The terms of some of our leases provide for rental payments on a graduated scale.We recognize rent expense on a straight-line basis over the lease period and accrue for any rent expense incurred but not paid. Total rent expense was $8.2 million ,$7.6 million and $7.3 million , for the year ended December 31, 2015 , 2014 and 2013 , respectively. Minimum future lease payments for non-cancelable leases as of December 31, 2015 , are as follows (in thousands): Fiscal YearOperating leases2016$10,23620176,07820182,47520195272020326Thereafter108Total minimum lease payments$19,750Off-balance Sheet ArrangementsAs of December 31, 2015 , we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on ourconsolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.Indemnification ProvisionsIn the normal course of business to facilitate transactions in our services and products, we indemnify certain parties: customers, vendors, lessors, and otherparties with respect to certain matters, including, but not limited to, services to be provided by us and intellectual property infringement claims made by thirdparties. In addition, we have entered into indemnification agreements with our directors and certain of our officers that will require us, among other things, toindemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. Several of these agreements limit the timewithin 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 andcircumstances involved in each particular agreement. Additionally, we have a limited history of prior indemnification claims and the payments we have madeunder such agreements have not had a material adverse effect on our results of operations, cash flows, or financial position. However, to the extent that validindemnification 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 cashflows in78Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)a particular period. As of December 31, 2015 , we did not have any material indemnification claims that were probable or reasonably possible.Note 9. Stockholders’ EquityCommon StockThe holders of common stock are entitled to receive dividends whenever funds are legally available and when and if declared by the Board ofDirectors. We have never declared or paid dividends on our common stock.Stock-based Compensation PlansOur 2005 Incentive Plan, as amended, provides for the granting of incentive stock options, non-statutory stock options, restricted stock units, market stockunits, stock appreciation rights, performance units and performance shares to employees, non-employee directors, and consultants. Shares granted on or after May16, 2013 as an award of restricted stock, restricted stock unit, market stock units, performance share or performance unit ("full value awards") are counted againstthe 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 oneand nine-tenths against the plan reserve will be returned at the same ratio. Full value awards granted prior to May 16, 2013 were counted against the authorizedshare reserve as one and one half (1 1/2 ) share for every one (1) share subject to the award, and any shares canceled that were counted as one and one half againstthe plan reserve will be returned at this same ratio.As of December 31, 2015, the 2005 Incentive Plan (as amended) has a total reserve of 23,283,379 shares for issuance of which 4,869,639 shares areavailable for issuance. No shares were added to the plan in 2015 or 2014. We issue new shares from our pool of authorized but unissued shares to satisfy theexercise and vesting obligations of our stock-based compensation plans.Stock-based CompensationStock-based compensation is based on the estimated fair value of awards, net of estimated forfeitures, and recognized over the requisite service period.Estimated forfeitures are based on historical experience at the time of grant and may be revised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. The stock-based compensation related to all of our stock-based awards and employee stock purchases for the year ended December 31, 2015 ,2014 and 2013 is as follows (in thousands): For the Year Ended December 31, 2015 2014 2013Cost of net revenues$3,938 $3,616 $2,565Selling, general and administrative40,813 29,625 20,354Research and development8,192 6,582 3,519Total stock-based compensation$52,943 $39,823 $26,438Stock OptionsWe have not granted options since 2011, thus all options outstanding are fully vested. Activity for the year ended December 31, 2015 , under the stockoption plans are set forth below (in thousands, except years and per share amounts): 79Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Stock Options Number ofSharesUnderlyingStock Options WeightedAverageExercisePrice per Share Weighted AverageRemainingContractual Term(in years ) AggregateIntrinsicValueOutstanding as of December 31, 2014668 15.57 Granted— — Exercised(172) 16.82 Cancelled or expired— — Outstanding as of December 31, 2015496 $15.14 2.05 $25,163Vested and expected to vest at December 31, 2015496 $15.14 2.05 $25,163Exercisable at December 31, 2015496 $15.14 2.05 $25,163The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price on the lasttrading day in 2015 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all optionholders exercised their options on December 31, 2015 . This amount will fluctuate based on the fair market value of our stock. The total intrinsic value of stockoptions exercised for the year ended December 31, 2015 , 2014 and 2013 was $ 7.4 million , $24.5 million and $46.7 million , respectively. The total fair value ofthe options vested during the year ended December 31, 2015 , 2014 and 2013 was $0.1 million , $0.7 million , $3.7 million , respectively. All compensation costs relating to stock options have been recognized as of December 31, 2015 , the total recognized tax effect from exercised optionswas $0.5 million .Restricted Stock UnitsThe fair value of nonvested restricted stock units (“RSUs”) is based on our closing stock price on the date of grant. A summary for the year endedDecember 31, 2015 , is as follows (in thousands, except years and per share amounts): SharesUnderlying RSUs Weighted Average GrantDate Fair Value WeightedRemainingVesting Period(in years) AggregateIntrinsicValueNonvested as of December 31, 20142,124 $42.08 Granted843 57.78 Vested and released(781) 38.41 Forfeited(107) 49.42 Nonvested as of December 31, 20152,079 $49.45 1.16 $136,857The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (calculated by multiplying our closing stock price on the lasttrading day of 2015 by the number of nonvested RSUs) that would have been received by the unit holders had all RSUs been vested and released on December 31,2015 . This amount will fluctuate based on the fair market value of our stock. During 2015 , of the 781,232 shares vested and released, 269,634 vested shares werewithheld for employee minimum statutory tax obligations, resulting in a net issuance of 511,598 shares.The total intrinsic value of RSUs vested and released during 2015 , 2014 and 2013 was $45.9 million , $38.9 million and $20.3 million , respectively. Thetotal fair value RSUs vested during the year ended December 31, 2015 , 2014 and 2013 was $30.0 million , $22.0 million , $13.2 million , respectively. As ofDecember 31, 2015 , there was $65.2 million of total unamortized compensation costs, net of estimated forfeitures, related to RSUs, and these costs are expected tobe recognized over a weighted average period of 2.0 years.On an annual basis, we grant market-performance based restricted stock units (“MSUs”) to our executive officers. Each MSU represents the right to oneshare of Align’s common stock and will be issued through our amended 2005 Incentive Plan. The actual number of MSUs which will be eligible to vest will bebased on the performance of Align’s stock price relative to the80Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)performance of the NASDAQ Composite Index over the vesting period, generally two to three years , up to 150% of the MSUs initially granted.The following table summarizes the MSU performance as of December 31, 2015 : Number of SharesUnderlying MSUs(in thousands) Weighted Average GrantDate Fair Value Weighted AverageRemainingVesting Period(in years ) AggregateIntrinsic Value(in thousands)Nonvested as of December 31, 2014498 42.00 Granted289 55.92 Vested and released(162) 30.28 Forfeited(14) 53.69 Nonvested as of December 31, 2015611 51.41 1.30 $40,244 The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (calculated by multiplying our closing stock price on the lasttrading day of 2015 by the number of non-vested MSUs) that would have been received by the unit holders had all MSUs been vested and released onDecember 31, 2015 . This amount will fluctuate based on the fair market value of our stock. During 2015 , of the 161,502 shares vested and released 83,842 shareswere withheld for tax payments, resulting in a net issuance of 77,660 shares.The total intrinsic value of MSUs vested and released during 2015 , 2014 and 2013 was $9.2 million , $2.9 million and $3.2 million . The total fair valueMSUs vested during the year ended December 31, 2015 , 2014 and 2013 was $4.9 million , $1.2 million and $1.5 million , respectively. As of December 31, 2015 ,we expect to recognize $14.0 million of total unamortized compensation cost, net of estimated forfeitures, related to MSUs over a weighted average period of 1.3years.The fair value of the MSUs is estimated at the grant date using a Monte Carlo simulation that includes factors for market conditions. The followingweighted-average assumptions used in the Monte Carlo simulation were as follows: Year Ended December 31, 2015 2014 2013Expected term (in years)3 3 3Expected volatility36.9% 46.0% 47.0%Risk-free interest rate1.0% 0.7% 0.4%Expected dividends— — —Weighted average fair value per share at grant date$61.73 $50.46 $35.49Total payments to tax authorities for payroll taxes related to RSUs, including MSUs, that vested during the period, were $20.7 million , $7.6 million and$4.4 million in 2015 , 2014 and 2013 , respectively, reflected as a financing activity in the Consolidated Statements of Cash Flows.Employee Stock Purchase PlanIn May 2010, our shareholders approved the 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”), replacing our 2001 Employee StockPurchase Plan, which consists of consecutive overlapping twenty-four month offering periods with four six-month purchase periods in each offeringperiod. Employees purchase shares at 85% of the fair market value of the common stock at either the beginning of the offering period or the end of the purchaseperiod, whichever is lower. The 2010 Purchase Plan will continue until terminated by either the Board or its administrator. The maximum number of sharesavailable for issuance under the 2010 Purchase Plan is 2,400,000 shares. During the year ended December 31, 2015 , 2014 and 2013 , we issued 230,078 , 247,343, and 288,675 shares, respectively, at average prices of $36.66 , $29.24 and $21.96 , respectively. As of December 31, 2015 , 1,133,749 shares remain available forfuture issuance.The fair value of the option component of the Purchase Plan shares was estimated at the grant date using the Black-Scholes option pricing model with thefollowing weighted average assumptions:81Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Year Ended December 31, 2015 2014 2013Employee Stock Purchase Plan: Expected term (in years)1.2 1.2 1.2Expected volatility31.1% 38.8% 44.9%Risk-free interest rate0.3% 0.2% 0.2%Expected dividends— — —Weighted average fair value at grant date$16.19 $17.15 $11.69We recognized stock-based compensation expense of $4.1 million , $2.6 million , $3.4 million related to our employee stock purchase plans for the yearended December 31, 2015 , 2014 and 2013, respectively. As of December 31, 2015 , there was $1.9 million of total unamortized compensation costs related toemployee stock purchases. These costs are expected to be recognized over a weighted average period of 0.5 years.Note 10. Common Stock Repurchase ProgramIn 2013, we repurchased approximately 2.7 million shares of our common stock at an average price of $34.95 per share under our October 27, 2011 stockrepurchase program , including commissions, for an aggregate purchase price of approximately $95.1 million . The common stock retirements reduced additionalpaid-in capital by approximately $24.5 million and increased accumulated deficit by $70.6 million . All repurchased shares were retired. No further authorizationfor repurchases remains outstanding as we completed the repurchases under this program as of December 31, 2013.On April 23, 2014, we announced that our Board of Directors had authorized a stock repurchase program pursuant to which we may purchase up to $300.0million of our common stock over three years, with $100.0 million of that amount authorized to be purchased during each twelve month period. Any purchasesunder this stock repurchase program may be made, from time-to-time, pursuant to open market purchases (including pursuant to Rule 10b5-1 plans), privately-negotiated transactions, accelerated stock repurchases, block trades or derivative contracts or otherwise in accordance with applicable federal securities laws,including Rule 10b-18 of the Securities Exchange Act of 1934.As part of our $300.0 million stock repurchase program, we entered into an accelerated share repurchase agreement ("ASR") with Goldman, Sachs & Co. onApril 28, 2014 to repurchase $70.0 million of our common stock. We paid $70.0 million on April 29, 2014 and received an initial delivery of approximately 1.0million shares. The ASR was completed on July 29, 2014 with a final delivery of approximately 0.4 million shares. We received a total of approximately 1.4million shares under the ASR for an average purchase price per share of $51.46 , which all shares were retired. The final number of shares repurchased was basedon our volume-weighted average stock price during the term of the transaction, less an agreed upon discount.During 2014, we repurchased on the open market approximately 0.6 million shares of our common stock at an average price of $50.93 per share, includingcommissions, for an aggregate purchase price of approximately $28.2 million . All repurchased shares were retired. As of December 31, 2014, we have $201.8million remaining under the April 2014 stock repurchase program, of which $1.8 million was repurchased in January 2015.In January 2015, our Board of Directors authorized the repurchase of the next $100.0 million under the repurchase program which we anticipate completingwithin twelve months. On April 28, 2015, we entered into an accelerated share purchase agreement ("2015 ASR") to repurchase $70.0 million of our commonstock. Under the terms of the 2015 ASR, we paid $70.0 million on April 29, 2015 and received an initial delivery of approximately 0.8 million shares. The 2015ASR was completed on July 23, 2015 with a final delivery of approximately 0.3 million shares. We received a total of approximately 1.2 million shares under the2015 ASR for an average share price of $60.52 . The final number of shares repurchased was based on our volume-weighted average stock price during the term ofthe transaction, less an agreed upon discount.During 2015, we repurchased on the open market approximately 0.5 million shares of our common stock at an average price of $58.89 per share, includingcommissions, for an aggregate purchase price of approximately $31.8 million . All repurchased shares were retired. As of December 31, 2015, we have $100.0million remaining under the April 2014 stock repurchase program.82Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Note 11. Employee Benefit Plans401(k) PlanIn January 1999, we adopted a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code for our U.S. employees. This plancovers substantially all U.S. employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensationon a pre-tax basis. In 2009, our Board of Directors authorized us to match 50% of our employee’s salary deferral contributions up to a 6% of the employee’seligible compensation effective 2010. We contributed approximately $2.7 million , $2.2 million and $2.1 million to the 401(k) plan during 2015 , 2014 and 2013 ,respectively.Israeli FundsUnder the Israeli severance fund law, we are required to make payments to dismissed employees and employees leaving employment in certaincircumstances. The funding is calculated based on the salary of the employee multiplied by the number of years of employment as of the applicable balance sheetdate. Our Israeli employees are entitled to one month’s salary for each year of employment, or a pro-rata portion thereof. We fund the liability through monthlydeposits into funds, and the values of these contributions are recorded in other long-term current assets.As of December 31, 2015 and 2014 , the accrued funds liability was approximately $2.7 million and $2.5 million , respectively.83Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Note 12. Income TaxesIncome before provision for income taxes consisted of the following (in thousands): Year ended December 31, 2015 2014 2013Domestic$87,803 $94,784 $31,993Foreign98,298 95,585 61,146Total Income before provision for income taxes$186,101 $190,369 $93,139The provision for income taxes consisted of the following (in thousands): Year Ended December 31, 2015 2014 2013Federal Current$28,596 $1,569 $26Deferred6,679 37,570 24,262 35,275 39,139 24,288State Current3,271 2,162 1,235Deferred(703) 971 1,158 2,568 3,133 2,393Foreign Current4,305 1,596 3,113Deferred(67) 669 (950) 4,238 2,265 2,163Provision for income taxes$42,081 $44,537 $28,844The differences between income taxes using the federal statutory income tax rate of 35% and our effective tax rate were as follows: Year Ended December 31, 2015 2014 2013U.S. federal statutory income tax rate35.0 % 35.0 % 35.0 %State income taxes, net of federal tax benefit1.5 1.6 2.5Impact of differences in foreign tax rates(16.2) (16.4) (20.4)Goodwill Impairment— — 15.3Stock-based compensation1.6 1.0 0.5Other items not individually material0.7 2.2 (1.9) 22.6 % 23.4 % 31.0 %As of December 31, 2015 , U.S. income taxes and foreign withholding taxes associated with the repatriation of undistributed earnings of foreign subsidiarieswere not provided for on a cumulative total of $359.8 million . We intend to reinvest these earnings indefinitely in our foreign subsidiaries. If these earnings weredistributed in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, we would be subject toadditional U.S. income taxes and foreign withholding taxes, net of related foreign tax credits. Determination of the amount of unrecognized deferred income taxliability related to these earnings is not practicable.In June 2009, the Costa Rica Ministry of Foreign Trade, an agency of the Government of Costa Rica, granted a twelve year extension of certain taxincentives, which were previously granted in 2002. The incentive tax rates will expire in various years beginning in 2017 . Under these incentives, all of the incomein Costa Rica during these twelve year incentive periods is subject to reduced rates of Costa Rica income tax. In order to receive the benefit of the incentives, wemust hire specified numbers of84Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)employees and maintain minimum levels of fixed asset investment in Costa Rica. If we do not fulfill these conditions for any reason, our incentive could lapse andour income in Costa Rica would be subject to taxation at higher rates, which could have a negative impact on our operating results. The Costa Rica corporateincome tax rate that would apply, absent the incentives, is 30% for 2015 , 2014 and 2013. As a result of these incentives, income taxes were reduced by $32.7million , $32.5 million , and $27.7 million in 2015 , 2014 , and 2013 , respectively. The benefit of the tax holiday on diluted net income per share was $0.40 , $0.40, and $0.34 in 2015 , 2014 and 2013 , respectively.As of December 31, 2015 and 2014 , the significant components of our deferred tax assets and liabilities were (in thousands): Year Ended December 31, 2015 2014Deferred tax assets: Net operating loss and capital loss carryforwards$31,247 $33,202Credit carryforwards1,932 1,446Deferred revenue24,432 15,685Reserves and accruals17,455 17,203Translation gains649 637Stock-based compensation16,523 11,964 92,238 80,137Deferred tax liabilities: Prepaid expenses601 709Depreciation and amortization8,555 6,878 9,156 7,587Net deferred tax assets before valuation allowance83,082 72,550Valuation allowance(31,685) (32,498)Net deferred tax assets$51,397 $40,052We assess the likelihood that we will be able to realize our deferred tax assets quarterly. 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 planningstrategies in assessing the need for a valuation allowance. If it is more likely than not that we do not expect to realize our deferred tax assets, we will increase ourprovision for income taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be realizable. As of December 31,2015, we believed, except for the items noted in the subsequent paragraph, that it was more likely than not that the amount of deferred tax assets recorded on thebalance sheet will be realized.As of December 31, 2015, we maintained a valuation allowance of $31.7 million against our deferred tax assets which primarily relate to Israel operating losscarryforwards and Australia capital loss carryforwards. These net operating and capital loss carryforwards would result in an income tax benefit if we were toconclude it is more likely than not that the related deferred tax assets will be realized. The valuation allowance decreased from December 31, 2014 by $0.8 milliondue to the decrease of foreign tax rate which resulted in lower tax impact on net operating and capital loss carryforwards.In November 2015, the FASB issued ASU 2015-17 , Income Taxes (Topic 740), to simplify the presentation of deferred income taxes. Under the newstandard, both deferred tax liabilities and assets are required to be classified as noncurrent in a classified balance sheet. ASU 2015-17 will become effective forfiscal years, and the interim periods within those years, beginning after December 15, 2016, with early adoption permitted. The new guidance has been adopted ona prospective basis by the Company for the year ended December 31, 2015 , thus resulting in the reclassification of $30.1 million of current deferred tax assets tononcurrent on the accompanying Consolidated Balance Sheets. The prior reporting period was not retrospectively adjusted. The adoption of this guidance had noimpact on our Consolidated Statements of Operations or Consolidated Statements of Comprehensive Income.As of December 31, 2015 , we have California net operating loss carryforwards of $20.5 million , which if not utilized, will begin to expire in 2016. As ofDecember 31, 2015, we have California research credit carryforwards of approximately $3.9 million85Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)which can be carried forward indefinitely. In addition, we had foreign net operating loss carryforwards of approximately $127.6 million , which, if not utilized willexpire beginning in 2017.Our net operating loss carryforwards due to the excess tax benefits associated with share-based compensation deductions totaled $17.3 million as ofDecember 31, 2015 for California state tax purposes, which was not included in our deferred tax assets. The reduction of income taxes payable by the excess taxbenefits associated with the share-based compensation deductions during the fiscal year, and utilization of net operating loss carryover applicable to excess taxbenefits were approximately $10.2 million , $21.4 million , and $27.1 million in 2015, 2014, and 2013, respectively. The excess tax benefits were credited directlyto stockholders’ equity when realized. We follow the tax law ordering method to determine when excess tax benefits have been realized and consider only thedirect impacts of awards when calculating the amount of windfalls or shortfalls.In the event of a change in ownership, as defined under federal and state tax laws, our net operating loss and tax credit carryforwards may be subject toannual limitations. The annual limitations may result in the expiration of the net operating loss and tax credit carryforwards before utilization.The changes in the balance of gross unrecognized tax benefits, which exclude interest and penalties, for fiscal year ended December 31, 2015 , 2014 , and2013 , is as follows (in thousands):Unrecognized tax benefit as of December 31, 2012$20,639Tax positions related to current year: Additions for uncertain tax positions6,110Tax positions related to prior year: Additions for uncertain tax positions(81)Unrecognized tax benefit as of December 31, 201326,668Tax positions related to current year: Additions for uncertain tax positions6,659Tax positions related to prior year: Decreases for uncertain tax positions(260)Unrecognized tax benefit as of December 31, 201433,067Tax positions related to current year: Additions for uncertain tax positions6,346Tax positions related to prior year: Decreases for uncertain tax positions—Unrecognized tax benefit as of December 31, 2015$39,413We account for uncertain tax positions pursuant to authoritative guidance based on a two-step approach to recognize and measure uncertain tax positionstaken or expected to be taken in a tax return. We first determine whether it is more likely than not that a tax position will be sustained upon audit based on itstechnical merits. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize in thefinancial statements. The tax position is measured as the largest amount of benefit that is more than 50 percent likely to be realized upon ultimate settlement. Weadjust 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. Tothe extent the final outcome of these matters is different than the amounts recorded, such differences will impact our tax provision in our Consolidated Statementsof Operations in the period in which such determination is made.During fiscal year 2015 , the amount of gross unrecognized tax benefits increased by $6.3 million . The total amount of unrecognized tax benefits, excludinginterest, was $39.4 million as of December 31, 2015 , all of which would impact our effective tax rate if recognized. We have elected to recognize interest andpenalties related to unrecognized tax benefits as a component of income tax expense. The interest accrued as of December 31, 2015 is $0.7 million . As ofDecember 31, 2014, the interest accrued was immaterial. We do not expect any significant changes to the amount of unrecognized tax benefits within the nexttwelve months.86Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)We file U.S. federal, U.S. state, and non-U.S. income tax returns. Our major tax jurisdictions are U.S. federal and the State of California. For U.S. federal andstate tax returns, we are no longer subject to tax examinations for years before 2000. With few exceptions, we are no longer subject to examination by foreign taxauthorities for years before 2007. Our subsidiary in Israel is under audit by the local tax authorities for calendar years 2006 through 2012. We are currently underaudit by the California Franchise Tax Board for fiscal year 2011, 2012 and 2013. Note 13. Net Income per ShareBasic net income per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net incomeper share is computed using the weighted average number of shares of common stock, adjusted for any dilutive effect of potential common stock. Potentialcommon stock, computed using the treasury stock method, includes stock options, RSU, MSU, stock options 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 shareamounts): Year Ended December 31, 2015 2014 2013Numerator: Net income$144,020 $145,832 $64,295Denominator: Weighted-average common shares outstanding, basic79,998 80,754 80,551Dilutive effect of potential common stock1,523 1,529 2,038Total shares, diluted81,521 82,283 82,589Net income per share, basic$1.80 $1.81 $0.80Net income per share, diluted$1.77 $1.77 $0.78For the year ended December 31, 2015 , 2014 and 2013 , the anti-dilutive effect on net income per share from RSUs, MSUs and ESPP was not material.Note 14. Supplemental Cash Flow InformationThe supplemental cash flow information consists of the following (in thousands): Year Ended December 31, 2015 2014 2013Taxes paid$40,621 $5,666 $4,125Non-cash investing activities: Fixed assets acquired with accounts payable or accrued liabilities$9,285 $4,899 $2,308 Note 15. Segments and Geographical InformationSegment InformationOperating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the ChiefOperating Decision Maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is our ChiefExecutive Officer. We report segment information based on the management approach. The management approach designates the internal reporting used byCODM for decision making and performance assessment as the basis for determining our reportable segments. The performance measures of our reportablesegments include net revenues and gross profit.87Table of ContentsALIGN TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)We have grouped our operations into two reportable segments which are also our reporting units: Clear Aligner segment and Scanner segment.•Our Clear Aligner segment consists of our Invisalign System which includes Invisalign Full, Express/Lite, Teen, Assist, Vivera Retainers, along withour training and ancillary products for treating malocclusion.•Our Scanner and Services ("Scanner") segment consists of intra-oral scanning systems and additional services available with the intra-oral scannersthat provide digital alternatives to the traditional cast models. This segment includes our iTero scanner and OrthoCAD services.These reportable operating segments are based on how our CODM views and evaluates our operations as well as allocation of resources. The followinginformation relates to these segments (in thousands): For the Year Ended December 31,Net Revenues2015 2014 2013 Clear Aligner$800,186 $712,549 $614,649 Scanner45,300 49,104 45,557Total net revenues$845,486 $761,653$660,206Gross Profit Clear Aligner$628,187 $562,889 $484,835 Scanner11,923 15,554 13,271Total gross profit$640,110 $578,443 $498,106 Geographical InformationNet revenues and tangible long-lived assets are presented below by geographic area (in thousands): For the Year Ended December 31, 2015 2014 2013Net revenues 1 : United States$585,874 $532,569 $491,410the Netherlands167,128 156,817 122,494Other international92,484 72,267 46,302Total net revenues$845,486 $761,653 $660,2061 Net revenues are attributed to countries based on location of where revenue is recognized. As of December 31, 2015 2014Long-lived assets 2 : United States$112,632 $76,511Mexico15,422 6,229Other international8,419 7,385Total long-lived assets$136,473 $90,125 2 Long-lived assets are attributed to countries based on entity that owns the assets.88ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone ITEM 9A. CONTROLS AND PROCEDURESEvaluation of disclosure controls and procedures.Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we haveevaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the ExchangeAct). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures areeffective as of December 31, 2015 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under theExchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, toallow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission rules and forms.Management's annual report on internal control over financial reporting.See “Report of Management on Internal Control over Financial Reporting” of this Annual Report on Form 10-K.Changes in internal control over financial reporting.There have been no changes in our internal control over financial reporting during the quarter ended December 31, 2015 that have materially affected or arereasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATIONNone.89PART IIICertain information required by Part III is omitted from this Form 10-K because we intend to file a definitive Proxy Statement for our 2016 Annual Meetingof Stockholders (the “Proxy Statement”) not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certaininformation to be included therein is incorporated herein by reference. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by Item 401 of Regulation S-K concerning our directors is incorporated by reference to the Proxy Statement under the sectioncaptioned “Election of Directors.” The information required by Item 401 of Regulation S-K concerning our executive officers is set forth in Item 1—“Business” ofthis Annual Report on Form 10-K . The information required by Item 405 of Regulation S-K is incorporated by reference to the section entitled “Section 16(a)Beneficial Ownership Reporting Compliance” contained in the Proxy Statement. The information required by Item 407(c)(3), 407(d)(4) and 407(d)(5) ofRegulation S-K is incorporated by reference to the Proxy Statement under the section entitled “Corporate Governance”.Code of EthicsWe have a code of ethics that applies to all of our employees, including our principal executive officer, principal financial officer and principal accountingofficer. This code of ethics is posted on our Internet website. The Internet address for our website is www.aligntech.com , and the code of ethics may be found onthe “Corporate Governance” section of our “Investor Relations” webpage.We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethicsby posting such information on our website, at the address and location specified above, or as otherwise required by the NASDAQ Global Market. ITEM 11. EXECUTIVE COMPENSATIONThe information required by Item 402 of Regulation S-K is incorporated by reference to the Proxy Statement under the section captioned “ExecutiveCompensation.” The information required by Items 407(e)(4) and (e)(5) is incorporated by reference to the Proxy Statement under the section captioned “CorporateGovernance—Compensation Committee Interlocks” and “Compensation Committee Report,” respectively.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSThe information required by Item 403 of Regulation S-K is incorporated by reference to the Proxy Statement under the section captioned “SecurityOwnership of Certain Beneficial Owners and Management.”Equity Compensation Plan InformationThe following table provides information as of December 31, 2015 about our common stock that may be issued upon the exercise of options and rightsgranted to employees, consultants or members of our Board of Directors under all existing equity compensation plans, including the 1997 Equity Incentive Plan,the Employee Stock Purchase Plan ("ESPP"), the 2001 Stock Incentive Plan and the 2005 Incentive Plan, each as amended, and certain individual arrangements.Please see Note 9 “Stockholders’ Equity” in the Notes to consolidated financial statements for a description of equity compensation plans. Plan CategoryNumber of securitiesto be issued upon exerciseof outstanding optionsand restricted stockunits(a) Weighted averageexercise price ofoutstandingoptions(b) Number of securitiesremaining available forfuture issuance underequity compensation plans(excluding securitiesreflected in column(a)) Equity compensation plans approved by security holders3,185,5091 $15.14 6,550,3072, 3 Equity compensation plans not approved by security holders— — — Total3,185,509 $15.14 6,550,307 90 1 Includes 2,078,136 restricted stock units, including 611,150 market-performance based restricted stock units at target, which have an exercise price ofzero.2 Includes 1,133,749 shares available for issuance under our ESPP. We are unable to ascertain with specificity the number of securities to be issued uponexercise of outstanding rights or the weighted average exercise price of outstanding rights under the ESPP.3 Excludes 546,933 of potentially issuable MSUs if performance targets are achieved at maximum payout.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by Item 404 and Item 407 of Regulation S-K is incorporated by reference to the Proxy Statement under the sections captioned“Certain Relationships and Related Party Transactions” and “Corporate Governance—Director Independence,” respectively. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by Item 9(e) of Schedule 14A of the Securities Act of 1934, as amended, is incorporated by reference to the Proxy Statement underthe section captioned “Ratification of Appointment of Independent Registered Public Accountants.”91PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES(a)Financial Statements1.Consolidated financial statementsThe following documents are filed as part of this Annual Report on Form 10-K: Report of Independent Registered Public Accounting Firm54Consolidated Statement of Operations for the year ended December 31, 2015, 2014 and 201355Consolidated Statement of Comprehensive Income for the year ended December 31, 2015, 2014 and 201356Consolidated Balance Sheet as of December 31, 2015 and 201457Consolidated Statement of Stockholders’ Equity for the year ended December 31, 2015, 2014 and 201358Consolidated Statement of Cash Flows for the year ended December 31, 2015, 2014 and 201359Notes to Consolidated Financial Statements60 2.The following financial statement schedule is filed as part of this Annual Report on Form 10-K:Schedule II—Valuation and Qualifying Accounts and ReservesAll other schedules have been omitted as they are not required, not applicable, or the required information is otherwise included.SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Balance atBeginningof Period Additions(reductions)to CostsandExpenses Writeoffs Charged toOtherAccounts ReclassfromOtherAccounts Balance atEnd of Period (in thousands)Allowance for doubtful accounts andreturns: Year ended December 31, 2013$3,167 $2,116 $(3,550) $— $— $1,733Year ended December 31, 2014$1,733 $6,563 $(6,733) $— $— $1,563Year ended December 31, 2015$1,563 $8,944 $(8,035) $— $— $2,472Valuation Allowance for deferred taxassets: Year ended December 31, 2013$27,056 $9,806 $(1,754) $— $— $35,108Year ended December 31, 2014$35,108 $(1,793) $(817) $— $— $32,498Year ended December 31, 2015$32,498 $(813) $— $— $— $31,68592(b)The following Exhibits are included in this Annual Report on Form 10-K:ExhibitNumberDescriptionFormDateExhibitNumberIncorporatedby referenceherein Filedherewith3.1Amended and Restated Certificate of Incorporation of registrantForm S-1, asamended (FileNo. 333-49932)12/28/20003.1 3.2Amended and Restated Bylaws of registrantForm 8-K2/29/20123.2 3.3Certificate of Designations of Rights, Preferences and Privileges of Series AParticipating Preferred Stock registrantForm 8-K10/27/20053.1 4.1Form of Specimen Common Stock CertificateForm S-1, asamended (FileNo. 333-49932)1/17/20014.1 10.1†Registrant’s 2001 Stock Incentive PlanForm S-1as amended (FileNo. 333-49932)12/28/200010.13 10.2†Form of option agreement under Align’s 2001 Stock Incentive PlanForm 10-Q11/5/200410/13/2001 10.3† Registrant’s Employee Stock Purchase Plan.Form S-82/5/200199.2 10.4Align’s 2010 Employee Stock Purchase PlanForm 8-K5/25/201010.2 10.5†Form of Indemnification Agreement by and between registrant and its Boardof Directors and its executive officersForm S-1 asamended (FileNo. 333-49932)1/17/200110.15 10.6†Amended and restated 2005 Incentive Plan (as amended May 19, 2011Form 8-K5/25/201010.1 10.7†Form of restricted stock unit award agreement under registrant’s 2005Incentive Plan (General Form; Officer Form: Director Form)Form 10-Q11/5/200710.1A, 10.1B, 10.1C 10.8†Form of option award agreement under registrant’s 2005 Incentive PlanForm 10-Q8/4/200510.4 10.9†Form of restricted stock unit award agreement under registrant’s 2005Incentive Plan with Thomas M. PrescottForm 10-K3/12/200710.14C 10.10†Form of restricted stock unit award agreement amendment under registrant’s2005 Incentive Plan with Thomas M. PrescottForm 10-K3/12/200710.14D 10.11†Amended and Restated Employment Agreement dated November 8, 2012between Thomas M. Prescott and registrantForm 10-Q5/8/200810.3 10.12†Form of Amended and Restated Employment Agreement entered into by andbetween registrant and each of executive officer (other than CEO)Form 10-Q5/8/200810.2 10.13Credit Agreement dated March 22, 2013 between registrant and Wells FargoNational AssociationForm 8-K3/27/201310.1 10.14Lease Agreement dated February 26, 2003 between KPMG FIDES (CostaRica) S.A., Parque Global S.A.A. and registrantForm 10-Q5/13/200310.36 93ExhibitNumberDescriptionFormDateExhibitNumberIncorporatedby referenceherein Filedherewith10.15Omnibus Amendment to Lease and Service Agreement between KPMGFIDES (Costa Rica) S.A., Parque Global S.A. and Align dated June 24, 2008Form 8-K6/26/200810.1 10.16Lease Agreement between Align and Carr N.P. Properties, L.L.C. datedJanuary 26, 2010Form 8-K1/29/201010.1 10.17†Summary of 2015 Incentive Awards for Named Executive Officers.Form 8-K2/5/2016 10.18†Form of Market Stock Unit Agreement (officer)Form 8-K2/23/201110.1 10.19†Form of Market Stock Unit Agreement (CEO)Form 8-K2/23/201110.2 10.20†Description of Executive Officer Incentive PlanForm 8-K2/23/2011Item 5.02 10.21Employment Agreement between Align Technology, Inc. and David L.WhiteForm 8-K8/5/201310.1 10.22Fixed Dollar Accelerated Repurchase Transaction Agreement dated April 28,2014 between Goldman, Sachs & Co. and registrantForm 10-Q7/31/201410.29 10.23Amended and Restated Chief Executive Officer Employment Agreementbetween Align Technology, Inc. and Joseph HoganForm 10-Q5/1/201510.30 10.242005 Incentive Plan Notice of Grant of Restricted Stock units (ChiefExecutive Officer)Form 10-Q7/30/201510.31 10.25Transition Agreement between Thomas M. Prescott and registrantForm 10-Q7/30/201510.32 10.26Fixed Dollar Accelerated Repurchase Transaction Agreement dated April 28,2015 between Morgan Stanley & Co. and registrantForm 10-Q7/30/201510.33 10.27Amended and Restated 2005 Incentive Plan Notice of Grant of Market StockUnits (Chief Executive Officer)Form 10-Q7/30/201510.34 21.1Subsidiaries of Align Technology, Inc. *23.1Consent of PricewaterhouseCoopers LLP, Independent Registered PublicAccounting Firm *31.1Certifications of Chief Executive Officer pursuant to Exchange ActRules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2003 *31.2Certifications of Chief Financial Officer pursuant to Exchange ActRules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2003 *32Certification of Chief Executive Officer and Chief Financial Officer pursuantto 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2003 *101.INSXBRL Instance Document *101.SCHXBRL Taxonomy Extension Schema Document *101.CALXBRL Taxonomy Extension Calculation Linkbase Document *101.DEFXBRL Taxonomy Extension Definition Linkbase Document *101.LABXBRL Taxonomy Extension Label Linkbase Document *101.PREXBRL Taxonomy Extension Presentation Linkbase Document *__________________________________ 94†Management contract or compensatory plan or arrangement filed as an Exhibit to this form pursuant to Items 14(a) and 14(c) of Form 10-K.††Portions of the exhibit have been omitted pursuant to a request for confidential treatment. The confidential portions have been filed with the SEC.95SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, on February 25, 2016 . ALIGN TECHNOLOGY, INC. By:/ S / JOSEPH M. HOGAN Joseph M. Hogan President and Chief Executive OfficerKnow All Men By These Presents, that each person whose signature appears below constitutes and appoints Joseph M. Hogan, his or her attorney-in-fact,with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K and to file the same, with exhibitsthereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of saidattorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrantand in the capacities and on the dates indicated.Signature Title Date /S/ JOSEPH M. HOGAN President and Chief Executive Officer (Principal ExecutiveOfficer) February 25, 2016Joseph M. Hogan /S/ DAVID L.WHITE Chief Financial Officer (Principal Financial Officer andPrincipal Accounting Officer) February 25, 2016David L. White /S/ JOSEPH LACOB Director February 25, 2016Joseph Lacob /S/ C. RAYMOND LARKIN Director February 25, 2016 C. Raymond Larkin /S/ GEORGE J. MORROW Director February 25, 2016George J. Morrow /S/ DAVID C. NAGEL Director February 25, 2016David C. Nagel /S/ ANDREA L. SAIA Director February 25, 2016 Andrea L. Saia /S/ GREG J. SANTORA Director February 25, 2016Greg J. Santora /S/ THOMAS M. PRESCOTT Director February 25, 2016Thomas M. Prescott /S/ WARREN S. THALER Director February 25, 2016Warren S. Thaler 96Exhibit IndexExhibitNumberDescriptionFormDateExhibitNumberIncorporatedby referenceherein Filedherewith3.1Amended and Restated Certificate of Incorporation of registrantForm S-1, asamended (FileNo. 333-49932)12/28/20003.1 3.2Amended and Restated Bylaws of registrantForm 8-K2/29/20123.2 3.3Certificate of Designations of Rights, Preferences and Privileges of Series AParticipating Preferred Stock registrantForm 8-K10/27/20053.1 4.1Form of Specimen Common Stock CertificateForm S-1, asamended (FileNo. 333-49932)1/17/20014.1 10.1†Registrant’s 2001 Stock Incentive PlanForm S-1 as amended (File No. 333-49932)12/28/200010.13 10.2†Form of option agreement under Align’s 2001 Stock Incentive PlanForm 10-Q11/5/200410/13/2001 10.3† Registrant’s Employee Stock Purchase Plan.Form S-82/5/200199.2 10.4Align’s 2010 Employee Stock Purchase PlanForm 8-K5/25/201010.2 10.5†Form of Indemnification Agreement by and between registrant and its Boardof Directors and its executive officersForm S-1 asamended (FileNo. 333-49932)1/17/200110.15 10.6†Amended and restated 2005 Incentive Plan (as amended May 19, 2011Form 8-K5/25/201010.1 10.7†Form of restricted stock unit award agreement under registrant’s 2005Incentive Plan (General Form; Officer Form: Director Form)Form 10-Q11/5/200710.1A, 10.1B, 10.1C 10.8†Form of option award agreement under registrant’s 2005 Incentive PlanForm 10-Q8/4/200510.4 10.9†Form of restricted stock unit award agreement under registrant’s 2005Incentive Plan with Thomas M. PrescottForm 10-K3/12/200710.14C 10.10†Form of restricted stock unit award agreement amendment under registrant’s2005 Incentive Plan with Thomas M. PrescottForm 10-K3/12/200710.14D 10.11†Amended and Restated Employment Agreement dated November 8, 2012between Thomas M. Prescott and registrantForm 10-Q5/8/200810.3 10.12†Form of Amended and Restated Employment Agreement entered into by andbetween registrant and each of executive officer (other than CEO)Form 10-Q5/8/200810.2 10.13Credit Agreement dated March 22, 2013 between registrant and Wells FargoNational AssociationForm 8-K3/27/201310.1 10.14Lease Agreement dated February 26, 2003 between KPMG FIDES (CostaRica) S.A., Parque Global S.A.A. and registrantForm 10-Q5/13/200310.36 10.15Omnibus Amendment to Lease and Service Agreement between KPMGFIDES (Costa Rica) S.A., Parque Global S.A. and Align dated June 24, 2008Form 8-K6/26/200810.1 97ExhibitNumberDescriptionFormDateExhibitNumberIncorporatedby referenceherein Filedherewith10.16Lease Agreement between Align and Carr N.P. Properties, L.L.C. datedJanuary 26, 2010Form 8-K1/29/201010.1 10.17†Summary of 2015 Incentive Awards for Named Executive Officers.Form 8-K2/5/2016 10.18†Form of Market Stock Unit Agreement (officer)Form 8-K2/23/201110.1 10.19†Form of Market Stock Unit Agreement (CEO)Form 8-K2/23/201110.2 10.20†Description of Executive Officer Incentive PlanForm 8-K2/23/2011Item 5.02 10.21Employment Agreement between Align Technology, Inc. and David L.WhiteForm 8-K8/5/201310.1 10.22Fixed Dollar Accelerated Repurchase Transaction Agreement dated April 28,2014 between Goldman, Sachs & Co. and registrantForm 10-Q7/31/201410.3 10.23Amended and Restated Chief Executive Officer Employment Agreementbetween Align Technology, Inc. and Joseph HoganForm 10-Q5/1/201510.30 10.242005 Incentive Plan Notice of Grant of Restricted Stock units (ChiefExecutive Officer)Form 10-Q7/30/201510.3 10.25Transition Agreement between Thomas M. Prescott and registrantForm 10-Q7/30/201510.3 10.26Fixed Dollar Accelerated Repurchase Transaction Agreement dated April 28,2015 between Morgan Stanley & Co. and registrantForm 10-Q7/30/201510.3 10.27Amended and Restated 2005 Incentive Plan Notice of Grant of Market StockUnits (Chief Executive Officer)Form 10-Q7/30/201510.3 21.1Subsidiaries of Align Technology, Inc. *23.1Consent of PricewaterhouseCoopers LLP, Independent Registered PublicAccounting Firm *31.1Certifications of Chief Executive Officer pursuant to Exchange ActRules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2003 *31.2Certifications of Chief Financial Officer pursuant to Exchange ActRules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2003 *32Certification of Chief Executive Officer and Chief Financial Officer pursuantto 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2003 *101.INSXBRL Instance Document *101.SCHXBRL Taxonomy Extension Schema Document *101.CALXBRL Taxonomy Extension Calculation Linkbase Document *101.DEFXBRL Taxonomy Extension Definition Linkbase Document *101.LABXBRL Taxonomy Extension Label Linkbase Document *101.PREXBRL Taxonomy Extension Presentation Linkbase Document *__________________________________ †Management contract or compensatory plan or arrangement filed as an Exhibit to this form pursuant to Items 14(a) and 14(c) of Form 10-K.††Portions of the exhibit have been omitted pursuant to a request for confidential treatment. The confidential portions have been filed with the SEC.98Exhibit 21.1Subsidiaries of Align Technology, Inc.The registrant’s principal subsidiaries as of December 31, 2015 , are as follows:EntityAlign Technology De Costa Rica, SRL, Costa RicaAlign Technology, B.V., the NetherlandsAligntech de Mexico, S. de R.L. de C.V.Cadent, Inc.Align Technology, Ltd.Invisalign Australia Pty Ltd Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-134477, No. 333-143319, No. 333-161054, No. 333-82874, No. 333-116912, No. 333-125586, No. 333-168548, No. 333-176134 and No. 333-190351) of Align Technology, Inc. of our report dated February 25,2016, relating to the financial statements, financial statement schedule, and the effectiveness of internal control over financial reporting, which appears in thisForm 10-K./s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaFebruary 25, 2016Exhibit 31.1CERTIFICATIONSI, Joseph M. Hogan, certify that:1.I have reviewed this annual report on Form 10-K of Align Technology, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this annual report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: February 25, 2016 / S / JOSEPH M. HOGAN Joseph M. HoganPresident and Chief Executive OfficerExhibit 31.2I, David L. White, certify that:1.I have reviewed this annual report on Form 10-K of Align Technology, Inc.;2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a)Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this annual report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: February 25, 2016 / S / DAVID L. WHITE David L. White Chief Financial OfficerExhibit 32906 CertificationCERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2003I, Joseph M. Hogan, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, that the AnnualReport of Align Technology, Inc. on Form 10-K for the fiscal year ended December 31, 2015 fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934 and that information contained in this Form 10-K fairly presents in all material respects the financial condition and results ofoperations of Align Technology, Inc. By:/S/ JOSEPH M. HOGAN Date: February 25, 2016Name:Joseph M. Hogan Title:President and Chief Executive OfficerI, David L. White, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, that the AnnualReport of Align Technology, Inc. on Form 10-K for the fiscal year ended December 31, 2015 fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934 and that information contained in this Form 10-K fairly presents in all material respects the financial condition and results ofoperations of Align Technology, Inc. By:/ S / DAVID L. WHITE Date: February 25, 2016Name:David L White Title:Chief Financial Officer

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