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SeaSpineUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________
FORM 10-K
________________________________________________________________________
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐
For the fiscal year ended December 31, 2021
For the transition period from to
Commission file number: 000-32259
________________________________________________________________________
ALIGN TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
________________________________________________________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
94-3267295
(I.R.S. Employer
Identification Number)
410 North Scottsdale Road, Suite 1300
Tempe, Arizona 85281
(Address of principal executive offices)
(602) 742-2000
(Registrant’s telephone number, including area code)
________________________________________________________________________
Title of each class
Common Stock, $0.0001 par value
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol
ALGN
Name of each exchange on which registered
The NASDAQ Stock Market LLC
(NASDAQ Global Market)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ 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 ☒
Securities registered pursuant to Section 12(g) of the Act: None
Indicate 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 (or
for 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
☒
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the Registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $34.7 billion as of June 30, 2021 based on the closing sale price of
the registrant’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 not
necessarily a conclusive determination for other purposes.
On February 21, 2022, 78,795,494 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement relating to its 2022 Annual Stockholders’ Meeting to be filed pursuant to Regulation 14A within 120 days after the registrant’s fiscal
year end of December 31, 2021 are incorporated by reference into Part III of this Annual Report on Form 10-K.
ALIGN TECHNOLOGY, INC.
FORM 10-K
For the Year Ended December 31, 2021
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Signatures
Business
Information about our Executive Officers
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
[Reserved]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
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Invisalign, Align, the Invisalign logo, ClinCheck, Made to Move, Invisalign Assist, Invisalign Teen, Invisalign Go, Vivera, SmartForce, SmartTrack,
SmartStage, SmileView, iTero, iTero Element, Orthocad, iCast, iRecord and exocad, among others, are trademarks and/or service marks of Align
Technology, Inc. or one of its subsidiaries or affiliated companies and may be registered in the United States and/or other countries.
2
In addition to historical information, this annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, among other things, our expectations and
intentions regarding our strategic objectives and the means to achieve them, our estimates regarding the size and opportunities of the markets we are
targeting along with our expectations for growth in those markets, our beliefs regarding the impact of technological innovation in general, and in our
solutions and products in particular, on target markets and patient care, our beliefs regarding digital dentistry and its potential to impact our business, our
intentions regarding expanding our business, including its impact on our operational flexibility and responsiveness to customer demand, our beliefs
regarding the potential for clinical solutions and their utilization to increase sales of our Invisalign system as well as the complementary products and
solutions themselves, our beliefs regarding doctor training and its impact on Invisalign system utilization, our beliefs regarding the importance of our
manufacturing operations on our success, our beliefs regarding the need for and benefits of our technological development on Invisalign treatment, the
areas of development in which we focus our efforts, and the advantages of our intellectual property portfolio, our beliefs regarding our business strategy
and growth drivers, our expectations regarding product mix and product adoption, our expectations regarding the utilization rates for our products,
including the impact of marketing on those rates and causes for periodic fluctuations of the rates, our expectations regarding the existence and impact of
seasonality and the COVID-19 disruptions to seasonality, our expectations regarding the sales growth of our intraoral scanner sales in international
markets, our expectations regarding the productivity impact additional sales representatives will have on our sales and the impact of specialization of those
representatives in sales channels, our expectations regarding the continued expansion of our international markets and their growth, our expectation
regarding customer and consumer purchasing behavior, including expectations related to the consumer demand environment in China especially for U.S.
based products and services, our expectations regarding competition and our ability to compete in our target markets, our beliefs concerning our
compliance with applicable laws and regulations, our beliefs regarding our culture and commitment and its impact on our financial and operational
performance and its importance to our future success, our expectations for future investments in and benefits from consumer demand sales and marketing
activities, our expectations regarding the implications of the COVID-19 pandemic and the health, safety and economic impact from it, on the global
economy, the businesses of our customers, and us, including our preparedness to react to changing circumstances and overall on our revenues, results of
operations and financial condition, our expectations for our expenses and capital obligations and expenditures in particular, the actions we will take to
control spending and for investments, our intentions regarding the investment of our international earnings from operations, our belief regarding the
sufficiency of our cash balances and borrowing capacity, our judgments regarding the estimates used in our revenue recognition, and assessment of
goodwill and intangible assets, our expectations regarding our tax positions and the assumptions we make related to our tax obligations, our expectations
regarding potential additional litigation with SDC Financial LLC and certain affiliates, the level of our operating expenses and gross margin and other
factors beyond our control, as well as other statements regarding our future operations, financial condition and prospects and business strategies and any
other statements that address events or developments that we intend or believe will or may occur in the future. Terminology such as “believe,”
“anticipate,” “should,” “could,” “intend,” “will,” “plan,” “expect,” “estimate,” “project,” “target,” “may,” “possible,” “potential,” “forecast” and
“positioned” and similar references to future periods are intended to identify forward-looking statements, although not all forward-looking statements are
accompanied by such words. These or any forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to,
those discussed in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in particular, the risks
discussed below in Part I, Item 1A “Risk Factors.” We undertake no obligation to revise or update these forward-looking statements. Given these risks and
uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Item 1. Business.
Our Company
PART I
Align Technology, Inc. (“We”, “Our”, “Align”) is a global medical device company primarily engaged in the design, manufacture and marketing of
Invisalign® clear aligners, iTero® intraoral scanners and services for dentistry, and exocad® computer-aided design and computer-aided manufacturing
(“CAD/CAM”) software for dental laboratories and dental practitioners. We also market and sell consumer products that are complementary to our doctor-
prescribed principal products under the Invisalign and other brands, including retainers, aligner cases (clamshells), teeth whitening products and cleaning
solutions (crystals, foam and other material) (collectively “Consumer Products”). Our primary goals are to establish clear aligners as the principal solution
for the treatment of malocclusions, or the misalignment of teeth, and our Invisalign system as the treatment solution of choice by orthodontists, general
dental practitioners and patients globally, our intraoral scanners as the
3
preferred scanning technology for digital dental scans, and our exocad CAD/CAM software as the solution of choice for dental labs.
Align’s corporate headquarters are located at 410 North Scottsdale Road, Suite 1300, Tempe, Arizona 85281. Our telephone number is 602-742-2000.
Our internet address is www.aligntech.com. Our Americas regional headquarters is located in Raleigh, North Carolina, U.S.A.; our European, Middle East
and Africa (“EMEA”) regional headquarters is located in Rotkreuz, Switzerland; and our Asia Pacific (“APAC”) regional headquarters is located in
Singapore.
We have two operating segments: (1) Clear Aligner and (2) Imaging Systems and CAD/CAM Services (“Systems and Services”). For the year ended
December 31, 2021, Clear Aligner net revenues represented approximately 82% of worldwide net revenues, while Systems and Services net revenues
represented the remaining 18%. We sell the majority of our products directly through a dedicated and specialized sales force to our customers:
orthodontists, general practitioner dentists (“GPs”), restorative and aesthetic dentists, including prosthodontists, periodontists, and oral surgeons, and dental
laboratories. We also sell through sales agents and distributors in certain countries. In addition, we sell directly to Dental Support Organizations (“DSOs”)
who contract with dental practices to provide critical business management and support including non-clinical operations, and we sell products used by
dental laboratories who manufacture or customize a variety of products used by licensed dentists to provide oral health care. We sell our Consumer
Products online through our corporate website and large e-commerce websites.
Our clear aligners are sold under the Invisalign brand name. Our Invisalign system is intended mainly for the treatment of malocclusions and is
designed to help dental professionals achieve the clinical outcomes that they expect and the results patients desire. To date, over 12 million people
worldwide have been treated with our Invisalign system. We received 510(k) clearance from the United States (“U.S.”) Food and Drug Administration
(“FDA”) to market the Invisalign system in 1998. In order to provide Invisalign treatment to their patients, orthodontists and GPs must initially complete an
Invisalign training course.
®
Our iTero intraoral scanner is used by dental professionals and/or labs and service providers for restorative and orthodontic digital procedures as well
as Invisalign case submissions. To date, over 68,000 iTero scanners have been sold. We received 510(k) clearance in the U.S. for the caries detection
feature of the iTero Element 5D in 2020. Our Systems and Services products, which includes our iTero intraoral scanners, are primarily sold through our
direct sales force and through sales agents and distributors in certain countries and directly to DSOs.
Our exocad CAD/CAM software products provide restorative dentistry, implantology, guided surgery, and smile design to dental labs and dental
practices through fully integrated workflows, paving the way for new, cross-disciplinary dentistry in labs and at chairside. There are over 200 exocad
strategic distribution partners and over 47,000 software licenses installed worldwide.
Clear Aligner Segment
Malocclusion and Traditional Orthodontic Treatment
Malocclusion is one of the most prevalent clinical dental conditions, affecting approximately 60% to 75% of the global population. Annually,
approximately 21 million people globally elect treatment by orthodontists. Today, most orthodontic patients continue to have their malocclusions treated
with the use of traditional methods such as metal arch wires and brackets, referred to as braces, augmented with elastics, metal expanders, headgear or
functional appliances, and other ancillary devices as needed. Upon completion of the treatment, the dental professional may recommend the patient use a
retainer appliance. Of the 21 million cases started, we estimate that approximately 90% or 19 million could be treated using our Invisalign system. In
addition, globally approximately 500 million people with malocclusion could benefit from straightening their teeth. This represents a significant
opportunity for us as we expand the market for orthodontics by training more doctors, including GPs as well as orthodontists, educating more consumers
about the benefits of straighter teeth using the Invisalign system and connecting consumers with an Invisalign-trained doctor of their choice.
The Invisalign system
The Invisalign system is a proprietary method for treating malocclusion based on a proprietary computer-simulated virtual treatment plan and a series
of doctor-prescribed, custom manufactured, clear polymer removable aligners. The Invisalign system offers a range of treatment options, specialized
services, and access to proprietary software for treatment visualization and is comprised of the following phases:
4
Diagnosis and transmission of treatment data. An Invisalign trained dental professional prepares an online prescription form on our Invisalign Doctor
Site and submits the patient's records, which include a digital intraoral scan or a polyvinyl-siloxane (“PVS”) impression of the relevant dental arches,
photographs of the patient and, at the dental professional’s election, x-rays of the patient’s dentition. Intraoral digital scans may be submitted through
Align’s iTero scanner or certain third-party scanners capable of accurately interfacing with our systems and processes. Globally, more than 85% of
Invisalign system case submissions are now submitted via digital scan, increasing the accuracy of treatments, reducing the time from prescription
submission to patient receipt, and decreasing the carbon footprint resulting from the shipment of the materials used to form PVS impressions to the doctors
and shipping those PVS impressions back to us. Additionally, it is during this stage that exocad’s CAD/CAM software platform can be used to identify,
assess and assist doctors and dental labs to collaborate on any needed ortho-restorative treatment options through comprehensive interdisciplinary
workflows.
Computer-simulated treatment plan. Using the digital scans or PVS impressions, certain doctor preferences and digital data provided, we generate a
proposed custom, three-dimensional treatment plan, called a ClinCheck treatment plan using proprietary software we have developed through significant,
ongoing investments over more than 20 years. A patient’s ClinCheck treatment plan simulates desired tooth movement in stages and details the timing and
placement of any features or attachments to be used during treatment. Attachments are tooth-colored “buttons” that are sometimes used to increase the
biomechanical force on a specific tooth or teeth in order to affect the desired movement(s).
®
Review and approval of the treatment plan by an Invisalign trained doctor. The patient’s ClinCheck treatment plan is then made available to the
prescribing dental professional via Align’s Invisalign Doctor Site, enabling the dental professional to evaluate projected tooth movement from initial
position to final position and compare multiple treatment plan options. By reviewing, modifying as needed and approving the treatment plan, the dental
professional retains control of the patient’s treatment.
Manufacture of custom aligners. Following the dental professional’s approval of a ClinCheck treatment plan, we use the data underlying the
simulation as input for the next stage in which we use stereolithography technology (a form of 3D printing technology) to construct a series of molds
depicting the future position of the patient’s teeth. Each mold is a replica of the patient’s teeth at each stage of the simulated course of treatment. From
these molds, aligners are fabricated by pressure-forming polymeric sheets over each mold. Aligners are thin, clear polymer, removable dental appliances
that are custom manufactured in a series designed to correspond to each stage of the patient's ClinCheck treatment plan.
Shipment to the dental professional and patient aligner wear. Once manufactured, all the aligners for a patient's doctor-approved treatment plan are
typically shipped directly to the dental professional, who then dispenses them to the patient at regular check-up intervals. Aligners are generally worn for a
short period of time corresponding to the stages of the patient’s approved ClinCheck treatment plan and their doctor’s discretion. The patient replaces the
aligners with the next pair in the series when prescribed, advancing tooth movement through each stage. At various points in each patient’s treatment, their
doctor may place attachments or use other auxiliaries to achieve desired tooth movements, per the doctor’s original prescription and the approved
ClinCheck treatment plan. Additionally, for patients treated using many of our Invisalign system treatments, doctors have the option to adjust treatment
plans to achieve desired results by ordering additional clear aligners in accordance with pre-defined terms.
Clear Aligner Products
We offer our Invisalign system in a variety of treatment packages designed to correspond with the case-by-case treatment needs of our doctors and
their patients. The table below provides a general description of the categories of treatment products we offer in various regions as they typically
correspond to the severity of malocclusion and length of anticipated treatment.
5
Malocclusion
Very Mild
Product
Invisalign Express Package
Invisalign Lite Package
Moderate
Invisalign Go Limited
Movement (GP)
Treatment Stages*
7
14
20
Clinical Scope
Relapse and minor
movement, anterior esthetic
alignment
Class I, mild
crowding/spacing, non-
extraction, pre-restorative
* The number of stages can vary by product and region.
Class I, no anterior /
posterior correction, mild to
moderate crowding,
spacing, non-extraction,
pre-restorative Tooth
movement from 2nd
premolar to 2nd premolar
(5x5)
Invisalign Moderate
Packages (& Invisalign Go
Plus)
20-26
Class I, mild Class II, mild
to moderate
crowding/spacing, mild
anterior / posterior and
vertical discrepancies, pre-
restorative, (Go Plus tooth
movement from 1 molar to
st
1 molar (6X6))
st
Severe
Invisalign Comprehensive
Packages
As many as required
Class I, II, III, moderate to
severe crowding/spacing,
anterior / posterior and
vertical discrepancies,
extractions, complex pre-
restorative
Most of our Invisalign system treatment plans described above provide dental professionals with the option to order additional aligners if the patient's
treatment deviates from the original treatment plan. The number and timing of additional aligner orders are subject to certain requirements noted in our
terms and conditions.
Comprehensive Products - Invisalign Treatment Options:
Invisalign Comprehensive Packages. The Invisalign Comprehensive Package is used to treat adults and teens over a wide spectrum of mild to severe
malocclusion and contains a broad variety of Invisalign features to address the desired treatment goals. It also addresses the frequently complex orthodontic
needs of teenage or younger patients with advanced features such as mandibular advancement, compliance indicators and compensation for tooth eruption.
These packages include Invisalign Comprehensive, Invisalign First Phase 1 and Invisalign First Comprehensive Phase 2.
Invisalign First Phase 1 and Invisalign First Comprehensive Phase 2 Packages. Invisalign First Phase 1 Package is designed specifically for younger
patients generally between the ages of seven and ten years, who frequently have a mixture of primary/baby and permanent teeth. Invisalign First Phase 1
treatment provides early interceptive orthodontic treatment, traditionally done through arch expansion, or partial metal braces, before all permanent teeth
have erupted. Invisalign First Phase 1 clear aligners are designed specifically to address a wide range of younger patients' malocclusions, including shorter
clinical crowns, management of erupting dentition and predictable dental arch expansion. Our Invisalign First Comprehensive Phase 2 Package is
complementary to Invisalign First Phase 1 and is generally consistent with our Invisalign Comprehensive Package. After a patient completes Invisalign
First Phase 1, doctors have the option to purchase a Comprehensive Phase 2 Package for that same patient.
Non-Comprehensive Products - Invisalign Treatment Options:
Invisalign Non-comprehensive Packages. We offer a variety of lower priced treatment packages for less complex orthodontic cases, non-
comprehensive relapse cases, or straightening prior to restorative or cosmetic treatments, such as veneers. These treatment packages include Invisalign
Express, Lite, Go, Go Plus and Moderate. These packages may be offered in select countries and/or may differ from region to region.
Invisalign Go Packages. We also offer in various markets Invisalign Go and Invisalign Go Plus, streamlined Non-Comprehensive packages designed
for GPs to more easily identify and treat patients with mild malocclusion. The Invisalign Go and Invisalign Go Plus packages include case assessment
support, simplified ClinCheck treatment plans and a progress assessment feature for case monitoring.
Feature Enhancement / New Products
Invisalign G8 with SmartForce® Activation. Broadly released in early 2021, Invisalign G8 with SmartForce Aligner Activation is a clear aligner
biomechanical innovation designed to optimize tooth movements and further improve predictability for frequently treated crowding, crossbite, and deep
bite cases through the targeted application of force to teeth through surface contours on the aligners that help control the location, direction and intensity of
tooth movement.
6
New Invisalign Innovations in Treatment Planning for Align Digital Platform. Released in early 2022, the new Invisalign system innovations as a part
of the Align digital platform is a combination of software, systems and services designed to provide a seamless experience and workflow that integrates
and connects all users – doctors, labs, patients and consumers. These new innovations include ClinCheck Live Update for 3D controls, the Invisalign
Practice App, Invisalign Personalized Plan and Invisalign Smile Architect.
Non-Case Products:
Clear Aligner non-case products include retention products, Invisalign training, adjusting tools used by dental professionals during the course of
treatment and ancillary Consumer Products and other oral health products available in certain e-commerce channels in the U.S.
Retention. We offer up to four sets of custom clear aligners called Vivera retainers made with proprietary material strong enough to maintain tooth
position and correct minor relapse, if necessary, as well as Invisalign retainers. Retainers are generally available for doctors to offer to any of their patients,
whether they use the Invisalign system or other products, including wires and brackets. In select markets, we also offer single set retainers. Further, in the
third quarter of 2021, we announced a multi-year supply and distribution agreement with Ultradent Products to allow Invisalign trained doctors to
exclusively offer a professional whitening system using Ultradent’s Opalescence PF whitening system with Vivera retainers.
We also offer in the U.S., a Doctor Subscription Program which is a monthly subscription program based on the doctor’s monthly need for retention
or limited treatment. The program allows doctors the flexibility to order both “touch-up” or retention aligners within their subscribed tier and is designed
for a segment of experienced Invisalign doctors who are currently not regularly using our retainers or low-stage aligners.
SmartTrack Aligner Material:
SmartTrack clear aligner material is a patented, custom-engineered Invisalign clear aligner material that delivers gentle, more constant force
considered ideal for orthodontic tooth movements. Conventional aligner materials relax and lose a substantial percent of the force applied in the initial days
of wear. SmartTrack material maintains more constant force over time. The flexible SmartTrack material also more precisely conforms to tooth
morphology, attachments and interproximal spaces to improve control of tooth movement throughout treatment.
Systems and Services Segment
Intraoral scanning is a rapidly evolving technology that is having a substantial impact on the practice of dentistry. By enabling the dental practitioner
to create a 3D image of a patient's teeth (digital scan) using a handheld intraoral scanner, digital scanning is faster, more efficient, precise and comfortable
for patients. Beginning patient care with the early usage of our iTero intraoral scanners and combining the results with digital workflows designed to assist
doctors and patients visualize and evaluate various treatment options with detailed imagery and CAD/CAM solutions is helping patients decide to undergo
treatment and improve treatments, outcomes and satisfaction. The accuracy of digitally scanned models substantially reduces the rate of restoration
"remakes," meaning patients are recalled less often and the appointment time for the restoration is shorter because of fewer adjustments, increasing overall
patient satisfaction. Digital models also reduce the carbon footprint associated with the shipping of the materials used to create PVS impressions, the
shipping of those impressions and their disposal. Moreover, the digital model file can be used for various procedures and services including fabrication of
physical dental models for use by labs to create restorative units such as veneers, inlays, onlays, crowns, bridges and implant abutments; digital records
storage; aid to caries detection; orthodontic diagnosis; orthodontic retainers and appliances; and Invisalign digital impression submission.
iTero Scanner. The iTero Element portfolio of intraoral scanners includes the iTero Element 2, the iTero Element Flex, iTero Element 5D Imaging
System and iTero Element Plus Series which are each available in select regions and countries. These products build on the existing high precision, full-
color imaging and fast scan times of the iTero Element portfolio and are available with software options for orthodontic and restorative procedures. The
iTero scanner is interoperable with our Invisalign treatment such that a full arch or full mouth digital scan can be submitted as part of the Invisalign system
case submission process.
Our iTero Element 5D imaging system is the first integrated dental imaging system that simultaneously records 3D, intraoral color camera images and
near imaging (“NIRI”) technology and enables comparison over time using the iTero TimeLapse technology. NIRI technology, included in our iTero
Element 5D and 5D Plus Imaging Systems, aids in detection and monitoring of interproximal caries lesions above the gingiva without using harmful
radiation. The iTero Element 5D Imaging System is available in the U.S., Canada, China, and the majority of EMEA and select APAC and LATAM
countries
7
and is pending regulatory approval in others.
The iTero Element Plus Series of intraoral scanners and imaging systems was introduced in the first quarter of 2021 and offers restorative and
orthodontic digital workflows that include enhanced visualization for optimized patient experience, including a fully integrated 3D intraoral camera in
certain models,; seamless scanning with reduced processing time, artificial intelligence-based features, and, in certain models, NIRI technology.
Services and Ancillary Products. Our services include subscription software, disposables, rentals, and pay per scan as well as exocad’s CAD/CAM
software solutions that integrate workflows to dental labs and dental practices.
Restorative software for iTero scanners and imaging systems. Our Restorative software is designed for GPs, prosthodontists, periodontists and oral
surgeons and includes restorative workflows providing the ability to send digital impressions to the lab of their choice and communicate seamlessly with
external treatment planning, custom implant abutment, chairside milling and laboratory CAD/CAM systems such as through our exocad Connector. iTero
intraoral scans can enhance the accuracy and precision of a doctor’s downstream restorative process.
Orthodontic software for iTero scanners and imaging systems. Our iTero software is designed for orthodontists for digital records storage, orthodontic
diagnosis, and for the fabrication of printed models and retainers.
CAD/CAM Services. Our exocad CAD/CAM software platform addresses restorative needs in an end-to-end digital platform workflow to facilitate
ortho-restorative and comprehensive dentistry. The platform provides doctors and dental labs with digital clinical solutions that aid general dentists and
dental labs in planning and delivering restorative dental treatments, adding restorative functionality to our comprehensive digital platform to deliver digital
ortho-restorative workflows and interdisciplinary dentistry. Our exocad software is licensed and sold separately.
Ancillary Products. We sell disposable sleeves for the wand and other ancillary products for the iTero scanner.
iTero 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 for completion of the needed restoration. The laboratory also has the option to export the digital file for immediate production of coping and full-
contour restorations on their laboratory CAD/CAM systems. The laboratory then completes the ceramic buildup or staining and glazing and delivers the
end result - a precisely fitting restoration.
Third-Party Scanners and Digital scans. We accept case submissions for our clear aligner products in two ways: (1) PVS impressions of patients’
teeth or (2) intraoral scans of their teeth. With respect to intraoral scans, we accept scans from iTero scanners and certain third-party scanners that have an
interoperability relationship with our systems and processes.
iTero Applications and Tools
Invisalign Outcome Simulator. The Invisalign Outcome Simulator is an exclusive chair-side and cloud-based application for the iTero scanner that
allows doctors to help patients visualize how their teeth may look at the end of Invisalign treatment. This is achieved through a dual view layout that shows
a prospective patient an image of their own current dentition next to a simulated final position after Invisalign treatment.
Invisalign Progress Assessment Tool. The Invisalign Progress Assessment tool provides the ability to compare a patient’s new scan with a specific
stage of their ClinCheck treatment plan, allowing doctors to visually assess and communicate Invisalign treatment progress with an easy to read, color-
coded tooth movement report.
TimeLapse Technology. Our TimeLapse technology allows doctors or practitioners to compare a patient’s historic 3D scans to a present-day scan,
enabling clinicians to identify and measure orthodontic movement, tooth wear, and gingival recession. This highlights areas of diagnostic interest to dental
professionals and helps foster a proactive conversation with the patient regarding potential restorative or orthodontic solutions.
Our iTero Element scanners are offered in a number of software configurations such as Ortho Comprehensive, Restorative Comprehensive and
Restorative Foundation. These software packages are included in the price of the scanner and have a service period of 1 to 5 years. They enable various
orthodontic and restorative workflows as well as provide other applications, including Invisalign Outcome Simulator, Invisalign Case Assessment tool,
Invisalign Progress Assessment tool, and iTero TimeLapse technology. We also recently introduced our 5D Photo uploader enhanced workflow that
simplifies the process for submitting images needed for treatment planning.
Other proprietary software mentioned in this Annual Report on Form 10-K, such as software embedded in our iTero
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scanners, ClinCheck and ClinCheck Pro software, the Invisalign Doctor Site, and feature enhancements included as part of the Invisalign system are not
sold separately, nor do they contribute as individual items to revenues.
Business Strategy
Our technology and innovations are designed to meet the demands of today’s patients with treatment options that are convenient, comfortable, and
affordable, while helping to improve overall oral health. We strive to help doctors and lab technicians move their businesses forward by connecting them
with new patients, providing digital solutions that increase operational speed and efficiency and provide solutions that allow them to deliver the best
possible treatment outcomes and experiences to millions of people around the world. We achieve this by focusing on and executing to our strategic growth
drivers:
•
International Expansion. We continue increasing our presence globally by making our products available in more countries to more customers. In
2021, the number of international doctors trained to prescribe treatment using the Invisalign system grew by approximately 21% compared to
2020. We continue expansion of our sales and marketing by reaching into new countries and regions, including new areas within Africa. By the
end of 2021, we were selling directly or through authorized distributors in more than 100 countries. As our business continues to grow in both
number of new Invisalign trained doctors and customer utilization, we support that growth through targeted investments such as increasing
headcount, clinical support, product improvements, technological innovations, clinical education and advertising. In addition, we are scaling and
expanding our operations and facilities to better support the growing numbers of global customers. For instance, for China and other APAC
markets, we now primarily fabricate our clear aligners in Ziyang, China, and we perform digital treatment planning and interpretation for
restorative cases worldwide, including in Costa Rica, China, Germany, Spain, Poland, and Japan, among others. In 2021, we announced similar
plans to open a clear aligner manufacturing facility in Wroclaw, Poland. Expected to begin serving doctors during the first half of 2022, the new
manufacturing facility will be our third aligner fabrication facility and allow us to more quickly and effectively serve tens of thousands of
customers throughout EMEA. By establishing and expanding our key operational activities in locations closer to our customers, we are creating an
infrastructure that allows us to be responsive to local and regional needs, while providing global operational flexibility and scale needed for
variations in global and regional demand. We expect to continue expanding our business in 2022 by investing in resources, infrastructure and
initiatives that help drive Invisalign treatment growth, our intraoral scanners as the preferred scanning technology for digital dental scans, and our
exocad CAD/CAM software as the solution of choice for dental labs in existing and new international markets.
• GP Adoption. We want to enable GPs, who have access to a large patient base, to more easily identify potential cases they can treat with the
Invisalign system, monitor patient progress or, if needed, help refer cases to an orthodontist while providing high-quality restorative, orthodontic
and dental hygiene care. We believe success with GPs can be achieved through doctor training and clinical education, by offering digital tools
such as the iTero scanner and products like Invisalign Go treatment that address the distinctive needs of GP patients, all delivered by sales and
marketing personnel specifically focused on the unique needs of this customer category. We encourage GPs to scan every patient with intraoral
scanners that are without harmful radiation as a means to diagnose and treat patients over time and as an opportunity to drive future demand for
their services and the Invisalign system. To support our belief in the benefits of using our iTero scanners, in October 2021 we announced the
findings of a clinical study that validates and demonstrates that the NIRI technology of the iTero Element 5D imaging system was 66% more
sensitive than bitewing x-ray radiography for detection of interproximal lesions, without the use of harmful radiation.
•
Patient Demand & Conversion. Our goal is to make the Invisalign brand a highly recognized name brand worldwide by creating awareness for
Invisalign treatment among consumers and motivating the potential 500 million patients who can benefit from treatment of malocclusion to seek
treatment using the Invisalign system. We accomplish this through an integrated consumer marketing strategy that includes television, media,
social networking and event marketing and strategic alliances with professional sports teams, as well as educating patients on treatment options
and directing them to high volume Invisalign trained doctors. We further support our doctor customers as they adopt digital dentistry through
programs such as the Align Digital and Practice Transformation (“ADAPT”). ADAPT is an expert and independent fee-based business consulting
service designed to optimize dental operational workflow and processes to enhance patients' experiences and customer and staff satisfaction with
the goal of increasing practice growth and efficiencies. To further drive consumer awareness, in 2021 we began offering additional dental-related
Consumer Products under the Invisalign brand name available in certain e-commerce channels in the U.S.
• Orthodontist Utilization. We continue to innovate and increase product applicability and predictability to address a wide range of cases, from
simple to complex, thereby enabling doctors to confidently diagnose and treat children and
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adults with the Invisalign system. This is especially important to treating teenage patients who make up the largest portion of the 21 million annual
orthodontic case starts each year. We also continue to make improvements to our Invisalign treatment software, ClinCheck Pro software, designed
to deliver an exceptional user experience and increase treatment control to help our doctors achieve their treatment goals. In combination with the
new Invisalign system innovations that are part of the Align digital platform, we are enhancing the digital treatment planning experience for
orthodontics and restorative dentistry by providing doctors with greater flexibility, consistency of treatment preferences and real-time treatment
plan access and modification capabilities.
Manufacturing and Suppliers
We have manufacturing facilities located in Juarez, Mexico, where we conduct our aligner fabrication, distribution, and certain services and in
Ziyang, China, where we fabricate aligners primarily for China and other APAC markets. In addition, we produce our handheld intraoral scanner wand,
perform final scanner assembly and repair our scanners at our facilities in Ziyang, China and Or Yehuda, Israel and service and repair certain scanners in
Juarez, Mexico. In the second quarter of 2021, we announced the start of a multi-million dollar project to bring operational facilities closer to our customers
through the expansion of our manufacturing operations in Wroclaw, Poland. Expected to begin serving doctors during the first half of 2022, the new aligner
fabrication facility will be our third and allow us to more quickly and effectively serve tens of thousands of customers throughout EMEA. Additionally, in
the third quarter of 2021, we opened our multi-story iTero scanner and services facilities in Petach Tikva, Israel to further the design and development of
our portfolio of iTero intraoral scanners, imaging systems and services.
We also perform digital treatment planning and interpretation for restorative cases based on digital scans generated by our iTero intraoral scanners.
Our digital treatment planning facilities are located worldwide, including in Costa Rica, China, Germany, Spain, Poland and Japan, among other
international locations.
Our quality system is required to be in compliance with the Quality System regulations enforced by the FDA, and similar regulations enforced by
other worldwide regulatory authorities. We are certified to ISO 13485:2016, an internationally recognized standard for medical device quality. We are
routinely audited by third party certification bodies as well as global health authorities for our compliance to this quality standard as well as international
regulations. We have a formal, documented quality system by which quality objectives are defined, understood and achieved. Systems, processes and
procedures are implemented to ensure high levels of product and service quality. We monitor the effectiveness of the quality system based on internal data
and direct customer feedback and strive to 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 capacity and
capabilities are important to our success. In order to produce our highly customized, highly precise, medical quality products in volume, we have developed
a number of proprietary processes and technologies. These technologies include complex software algorithms and solutions, CT scanning,
stereolithography and automated aligner fabrication. To increase the efficiency of our manufacturing processes, we continue to focus our efforts on
software development and the improvement of rate-limiting processes or bottlenecks. We continuously upgrade our proprietary, three-dimensional
treatment planning software to enhance computer analysis of treatment data and to reduce time spent on manual and judgmental tasks for each case, thereby
increasing the efficiency of our technicians. In addition, to improve efficiency and increase the scale of our operations, we continue to invest in the
development of automated systems for the fabrication and packaging of aligners.
We are highly dependent on manufacturers of specialized scanning equipment, rapid prototyping machines, resin and other advanced materials for our
aligners, as well as the optics, electronic and other mechanical components of our intraoral scanners. We maintain single supplier relationships for many of
these machines and materials technologies. In particular, our CT scanning and stereolithography equipment used in our aligner manufacturing and many of
the critical components for the optics of our intraoral scanners are provided by single or sole source suppliers. We also currently purchase our resin and
polymer, the primary raw materials used in our manufacturing process for clear aligners, from a single source. A discussion of the risks of our supply and
manufacturing operations, including foreign operations, may be found in Item 1A of this Annual Report on Form 10-K under the heading "Risk Factors."
Sales and Marketing
Our sales and marketing efforts are focused on increasing adoption and utilization of the Invisalign system and Vivera retainers by orthodontists and
GPs worldwide and integrating the iTero scanner and exocad CAD/CAM products into dental labs and practices. The scanner is an important component to
the customer experience and is central to a digital approach as well as overall customer utilization of Invisalign treatments. In each region, we have direct
sales, marketing and support
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organizations, which include quota carrying sales representatives, sales management and sales administration. We also have distribution partners in certain
markets. Our sales and marketing personnel are organized to support orthodontists and GPs separately, allowing highly trained and specialized personnel to
serve each customer category, thereby increasing our focus and effectiveness on both. We continue to expand in existing markets through targeted
investments in sales resources, professional marketing and education programs. Additionally, our consumer marketing programs are designed to create
awareness and educate consumers on the benefits of Invisalign treatment and Vivera retainers, including where they can find a trained doctor to provide
treatment.
We provide training, marketing and clinical support to orthodontists and GPs. As of December 31, 2021, we had approximately 122,500 active
Invisalign trained doctors. We define doctors as active if they have submitted at least one case in the prior 12-month period.
Research and Development
We are committed to investing in world-class digital technology development, which we believe is critical to achieving our goal of establishing the
Invisalign system as the standard method for treating malocclusion, our intraoral scanners as the preferred scanning technology for digital dental scans, and
our exocad CAD/CAM software as the solution of choice for dental labs.
Our research and development activities are directed toward developing digital technology innovations that we believe will deliver our next
generation of products and solutions to enable the Align digital platform. These activities range from accelerating product and clinical innovation to
developing manufacturing process improvements to researching future technologies, products and software.
In an effort to demonstrate the broad treatment capabilities of the Invisalign system, various clinical case studies and articles have been published that
highlight the clinical applicability of Invisalign treatment to malocclusion cases, including those of severe complexity. Similarly, various studies have also
been published demonstrating the capabilities of our scanners, including advanced features such as our NIRI technology. We undertake pre-
commercialization trials and testing of our technological improvements to our products and manufacturing process. We furthermore fund research in the
field of orthodontics and dentistry through initiatives such as our Annual Research Award Program, which was in its 12th year in 2021, our donations to the
American Association of Orthodontists Foundation and our partnership with MedTech Innovator Asia Pacific, a nonprofit startup accelerator for the
medical technology industry that connects healthcare industry leaders with innovative medical technology startups for mentorship and support.
Intellectual Property
We believe our intellectual property portfolio represents a substantial business advantage. As of December 31, 2021, we had 642 active U.S. patents,
724 active foreign patents, and 736 pending global patent applications. Our active U.S. patents expire between 2022 and 2040. When patents expire, we
lose the protection and competitive advantages they provided, which could negatively impact our operating results; however, as we continue to pursue new
innovations, we seek intellectual property protection for new inventions and know-how through U.S. and foreign patent applications and non-disclosure
agreements. We also seek to protect our software, documentation and other written materials under trade secret and copyright laws. We furthermore have a
broad and diverse trademark portfolio that we use to highlight and protect our universally recognized brands. Information regarding risks associated with
our proprietary technology and our intellectual property rights may be found in Item 1A of this Annual Report on Form 10-K under the heading “Risk
Factors.”
Seasonal Fluctuations
General economic conditions impact our business and financial results, and we have historically experienced seasonal trends within our two operating
segments, customer channels and the geographic locations that we serve. Sales of the Invisalign system are often weaker in Europe, especially southern
European countries during the summer months due to our customers and their patients being on holiday and seasonally higher in China during the third
quarter. Similarly, other international holidays like Lunar New Year can impact our sales in APAC. In North America, summer is typically the busiest
season for orthodontists with practices that have a high percentage of 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 on vacation during this time and therefore tend to start fewer cases. For our Systems
and Services segment, capital equipment sales are often stronger in the fourth calendar quarter. Consequently, these seasonal trends have caused and may
continue to cause fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates. Moreover, the COVID-19 pandemic with
its consequent office closures or capacity constraints imposed to curtail the spread of the virus and its variants, and the easing and
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reimplementation of those restrictions, has exacerbated the timing and extent of seasonal patterns and it remains unclear when or if they will return to
historical norms.
Competition
Our clear aligner products compete directly against traditional orthodontic treatments that use metal brackets and wires and increasingly against clear
aligner products manufactured and distributed by various companies, both within and outside the U.S. Although the number of competitors varies by
segment, product, geography and customer, they include new and well-established regional competitors in certain foreign markets, as well as larger
companies or divisions of larger companies with substantial sales, marketing, research and financial capabilities. Due in part to the expiration of certain of
our clear aligner key patents beginning in 2017 and the significant benefits of clear aligner treatment over traditional brackets and wires, competition in the
clear aligner market is increasing. In addition, corresponding foreign patents began expiring in 2018 which has increased competition outside the U.S.
These competitors include existing larger companies in certain markets who have the ability to leverage their existing channels in the dental market to
compete directly with us, direct-to-consumer (“DTC”) companies that provide clear aligners requiring little or no in-office care from trained and licensed
doctors, and doctors themselves who can manufacture custom aligners in their offices using modern 3D printing technology. Unlike our DTC competitors,
we are committed to doctors being at the core of our business strategy, and Invisalign treatment requires a doctor's prescription and an in-person physical
examination of the patient’s dentition before treatment can begin.
Additionally, we face competition in the emerging and rapidly evolving markets for intraoral scanners and software solutions, including CAD/CAM.
The global intraoral scanner market is very dynamic with participants spanning from traditional dental conglomerates to companies dedicated primarily to
scanner development and sales with new entrants from South Korea and China playing larger roles. Information regarding risks associated with increased
competition may be found in Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.”
We believe we are well positioned to compete in the markets we target. We have a dedicated sales force of over 4,000 employees who are focused on
key demographics in our target markets that allow us to uniquely address customer needs and thereby enhance the customer experience. Our significant
historical and ongoing investments in research and design around the movement of teeth, SmartTrack aligner materials and design, intraoral scanning, 3D
manufacturing, global scale of manufacturing and treatment planning, strong brand name recognition, and an in depth understanding of the drivers and
motivations within the orthodontic and GP dental markets are among a few of our key competitive factors that compare favorably with our competitors’
products and services.
Government Regulation
Many countries throughout the world have established regulatory frameworks for commercialization of medical devices. As a designer, manufacturer,
and marketer of medical devices, we are obligated to comply with the respective frameworks of these countries to obtain and maintain access to these
global markets. The frameworks often define requirements for marketing authorizations which vary by country. Failure to obtain appropriate marketing
authorization and to meet all local requirements, including specific quality and safety standards in any country in which we currently market our products,
could cause commercial disruption and/or subject us to sanctions and fines. Delays in receipt of, or a failure to receive, such marketing authorizations, or
the loss of any previously received authorizations, could have a material adverse effect on our business, financial condition and results of operations.
With regards to premarket authorization in the U.S., many of our products are classified as medical devices under the U.S. Food, Drug, and Cosmetic
Act (“FD&C Act”). The FD&C Act requires these products, when sold in the U.S., to be safe and effective for their intended use and to comply with
medical device regulations defined by the FDA. The regulatory framework depends on a set of written processes for ensuring consistent quality called a
Quality Management System (“QMS”) coupled with a product marketing authorization which depends on the risk classification of the product. This
regulatory framework is comparable to the framework established in the European Union (“EU”). Within the EU, our products are subject to the
requirements defined by the Medical Device Regulation EU 2017/745 which replaced the Medical Device Directive 93/42/EEC with a final transition date
of May 26, 2021. Similar market access regulations exist in Brazil, China, Japan and other countries. Our QMS is routinely audited by certification bodies
as well as country regulators for compliance with applicable regulations. We believe we are in compliance with all state, federal, and international
regulatory requirements applicable to our products.
We are also subject to various laws around the world that govern interactions with our customers as healthcare professionals or government officials.
The laws govern different interactions and may include prohibiting improper influence of or payments to healthcare professionals and government officials,
setting out rules for when and how to engage healthcare professionals as our vendors, requiring price reporting regulations, requiring proper and on label
promotion, sale and marketing
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of our products and services, importation and exportation of our products, the operation of our facilities and distribution of our products, and disclosure of
payments to healthcare professionals and entities. As we expand our operations footprint, countries to which we sell and invest in new business models,
compliance with applicable laws becomes more complex and the general trend is toward increasingly stringent oversight and enforcement.
Initiatives sponsored by government agencies, legislative bodies, and the 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 the long-term impact of such cost containment measures on our future
business.
Our customers are healthcare providers that may be reimbursed by state or federal funded programs such as Medicaid, a foreign national healthcare
program or private pay insurance, each of which may offer some degree of oversight. As we expand our customer base and product offering, it is
increasingly possible that there will be new opportunities to seek reimbursement from public and private payors for services that include our products, and
additional laws or regulatory enforcement requirements may apply now or in the future. Also, as a medical device manufacturer and seller, we are subject
to transparency reporting laws (also known as sunshine laws) that in certain countries require us to report transfers of value to healthcare professionals that
perform services or receive other items from us (e.g., meals, travel, branded promotional or educational items, or other benefits of value). Many
government agencies, both domestic and foreign, have increased their enforcement activities with respect to healthcare providers and companies in recent
years. Enforcement actions and associated efforts to respond or defend against such actions can be expensive, and any resulting findings carry the risk of
significant civil and criminal penalties.
In addition, we must comply with numerous data protection and storage requirements that span from individual state and national laws in the U.S.,
China and other countries, to multinational requirements in the EU, including laws that regulate or restrict cross border data transfers. In the U.S., we must
comply with final regulations implementing amendments to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and the associated
HIPAA Security Rule. We are also required to comply with the California Consumer Privacy Act and are preparing for a number of state-level laws and
bills in the U.S., including the California Privacy Rights Act of 2020. In the EU, we must comply with the General Data Protection Regulation, which
serves as a harmonization of European data-privacy law and the Swiss Federal Act on Data Protection, where Align has its EMEA headquarters. In
LATAM markets, we must comply with Brazil's Lei Geral de Proteção de Dados. Meanwhile, the APAC and EMEA regions have also seen rapid
development of privacy laws including Turkey, Morocco, Ghana, India, Russia, China, South Korea, Singapore, Hong Kong, Israel, and Australia.
Information regarding risks associated with data security and privacy may be found in Item 1A of this Annual Report on Form 10-K under the heading
“Risk Factors.”
Human Capital
We believe our culture and commitment to employees provide unique value that benefits Align, its stockholders and the communities and other
stakeholders we serve. Every employee, and every job, is important to our success and helps us achieve our purpose of transforming smiles and changing
lives. Fostering open dialogue, open-mindedness, compassion, fairness, recognition, and shared goals allows us to attract and retain the best talent, which
has ultimately led to the growth and success of our company.
As of December 31, 2021, we had approximately 22,540 employees, an increase of approximately 25% and 55% over December 31, 2020, and
December 31, 2019, respectively. Included among our employees as of December 31, 2021, were approximately 14,200 in manufacturing and operations,
4,600 in sales and marketing (which includes customer care), 1,375 in research and development, and 2,365 in general and administrative functions. We are
a global organization with the majority of our employees in direct-labor roles in our manufacturing and clinical treatment planning facilities. Set forth in the
following paragraphs are some of the most important elements of our culture and commitment to our employees.
Governance. Our commitment to improving the lives of our employees and the communities in which we live and work, including conducting our
business ethically, responsibly and transparently through open and clear disclosures that allow us and others to hold us accountable, begins with our Board
of Directors (“Board”) and management team. They set the tone for our organization by establishing and clearly communicating our core values of Agility,
Customer and Accountability that inform our culture. Our Global Code of Conduct (“Code”) and quality policies are designed to enable us to operate with
integrity and deliver superior treatment outcomes and experiences to patients. We seek to create an environment that values the health, safety and well-
being of our teams, and we work to equip them with the knowledge and skills to serve our business and develop in their careers. We believe that by
effectively managing our business with these values as the foundation, we will drive long-term value for our stockholders and all stakeholders.
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To demonstrate our commitment to our environmental, social and governance (“ESG”) efforts, our Board has delegated ESG oversight responsibility
to our Nominating and Governance Committee. In 2021, our Board took further steps to support ESG by amending the charter of our Compensation
Committee to specifically empower the committee to oversee our diversity, equity and inclusion initiatives.
Diversity. Fostering diversity and encouraging inclusion in the workplace makes Align a more welcoming and enjoyable place to work. Our products
and services are used broadly across age groups, gender identities, races, ethnicities, and cultures, so we aim to build a workforce that optimally reflects
this diversity. We believe our success continues to be driven by our focus on integrating employees of all different backgrounds, orientations, beliefs,
perspectives and capabilities into our workforce. Our approximately 22,540 employees bring a positive mix of ethnic and culturally diverse backgrounds to
the more than 40 different countries in which we operate. Our management team is comprised of diverse individuals from varying countries and
nationalities and who are committed to promoting and encouraging the health and well-being of our employees at work, at home and in society in general.
Our work culture is designed to create financial, health, career and personal benefits for our employees and organization. We sponsor diverse and
cultural recognition events to increase awareness of inclusion and diversity, including its importance in creating an environment where every employee can
thrive.
We also sponsor employee resource groups based on shared characteristics or life experiences which are open to all employees, including those who
do not directly identify with other members but are passionate in supporting the group's members in creating an educated, supportive and inclusive culture.
Community. We provide opportunities for and actively encourage employees to support local charitable organizations through volunteerism, team
building, and donation and matching programs and are extremely proud of the generosity and dedication of our employees especially during our annual
Month of Smiles initiative in October. In addition, through our Align Foundation, we support organizations whose visions closely align with our own,
including Operation Smile and America’s ToothFairy. We also provide product donations to the dental community to help patients in need of a healthy,
beautiful smile. For more information on our charitable and community efforts, please refer to the Corporate Social Responsibility portion of our corporate
website located at https://www.aligntech.com/about/corporate_social_responsibility.
Talent Recruitment and Engagement. We employ a variety of career development, employee benefits, compensation and other policies and programs
designed to attract, develop, and retain employees. We focus on building a talent pipeline that nurtures those early in their careers, encourages continuous
learning and growth, and incentivizes our employees to stay and contribute to our success over the long term. Our programs include early recruitment at
high schools and universities, initiatives such as internships, co-ops, apprenticeships, and training programs, quarterly performance management check-ins
focused on individual goals and commitment to values and conducting regular employee surveys to build trust and strengthen relationships. Our efforts
have proven successful, resulting in numerous awards for our positive work environment and culture. In 2021 alone, we were recognized by:
Forbes as one of their World’s Best Employers in 2021
•
• Great Places to Work and Best Places to Work based on our employee-validated great workplaces in the following countries - Brazil, Canada,
•
China, Costa Rica, Germany, India, Poland, Singapore, U.S., and Vietnam
Computerworld as Best Place to Work in IT, based in its survey of organizations across the U.S. to identify those that provide the best benefits and
amenities for IT professionals
Training and Professional Development. Training is an integral part of developing and retaining our employees and creating a culture of leadership
within the Company. In 2021, 54% of our employees engaged in some form of professional development activities. The U.S. Department of Labor uses the
benchmark of 23% as a best practice standard for companies.
Training at Align begins with our Code and our strong commitment to ethical business practices in all aspects of our operations. Every employee and
contractor is required to review the Code and confirm they understand it. We routinely reference the Code in presentations and as part of everyday
operations.
As a further part of our standard onboarding program, we train employees on important environmental health and safety topics to protect them and
our environment as we operate our business. As a general practice, employees are trained to perform their jobs in accordance with any and all applicable
statutory and regulatory requirements and that training is routinely re-administered, updated and refreshed.
Employees are encouraged to participate in a variety of Company-provided learning resources through our corporate platform Align University. The
platform offers a broad range of development tools with more than 1,000 courses available in multiple languages to serve our many employees globally,
including professional development events, external training
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programs based on individual needs, business-led enterprise leader learning events, diversity and inclusion, online business skills courses and onsite
classroom events. This is in addition to opportunities offered for job development such as our Early Leader program as well as the Align Leadership
Journey, for which our program on creativity and curiosity was recognized with a Brandon Hall Innovation Award, and other management skills training
and trainings that create opportunities for advancement.
Compensation and Benefits. Our commitment to our employees starts with benefit and compensation programs that reflect the value and the
contributions our employees make. In addition to competitive base pay, we offer an assortment of benefits that vary by country, including health and
welfare benefit plans, retirement planning services and benefits, holiday and leave policies, equity participation programs such as our Incentive Plan and
Employee Stock Purchase Plan, and charitable and community service opportunities. Besides these, we also offer discounts to our employees and their
dependents when they undergo Invisalign treatment.
We are furthermore committed to pay equity practices. We regularly review our pay equity practices, none of which have shown any systemic
differences in pay or pay practices.
Recognizing that financial security is as important to the emotional health and well-being of our employees as physical precautions against the
COVID-19 virus and its many variants, we committed at the outset of the pandemic to protect our employees and their families financially by declaring we
would not furlough, lay off or cut employee pay. We have honored this commitment throughout the pandemic.
Health and Safety. Our employees are essential to us as a business and their health and well-being is critical to our success and their continuing
achievements. Our objective is to prevent injuries and occupational diseases by focusing first and foremost on creating and maintaining environments that
are safe. We therefore offer a wide variety of robust programs and initiatives designed to promote the overall health and welfare of all our employees and
their families. In addition to the compensation and benefits listed above, we offer family support services, healthcare initiatives and career services support,
among many others. In response to the COVID-19 pandemic and the impacts of remote working, we have encouraged employees to take time away from
work to be with their families and implemented initiatives to promote better work-life balance. In addition, we have several health and safety programs in
place to help protect our employees. For instance, we have training programs and courses that employees exposed to particular risks are required to take
and update periodically. Examples include hazardous material training, emergency response and evacuation training, ergonomics training, biohazard and
personal protective equipment training, and, more recently, COVID-19 related safety training.
We have an Environmental Health, Safety and Sustainability Director who is responsible for ensuring health and safety programs are maintained and
effective at each of our locations. Major worksites, such as our aligner fabrication sites, and large offices have dedicated Environmental Health and Safety
(“EHS”) departments that ensure health and safety programs are maintained while contributing Best Management Practices (“BMP”) and general input to
corporate-wide programs. Each EHS department is responsible for ensuring all employees at their location are properly trained on various EHS topics and
at the appropriate frequencies. A training suite is determined for each employee depending on their responsibilities and function modeled off of ISO 45001.
Available Information
Our corporate website is www.aligntech.com, and our investor relations website is http://investor.aligntech.com. The information on or accessible
through our websites is not part of this Annual Report on Form 10-K. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
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, on
our investor relations website as soon as reasonably practicable after we electronically file or furnish such material with the SEC. Further, the SEC
maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at http://www.sec.gov.
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Information about our Executive Officers
The following table sets forth certain information regarding our executive officers as of February 25, 2022:
Name
Joseph M. Hogan
John F. Morici
Julie Coletti
Stuart Hockridge
Emory M. Wright
Age
64
55
54
50
52
Position
President and Chief Executive Officer
Chief Financial Officer and Executive Vice President, Global Finance
Executive Vice President, Chief Legal and Regulatory Officer
Executive Vice President, Global Human Resources
Executive Vice President, Global Operations
Joseph 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. Prior to working at ABB, Mr. Hogan worked at General Electric Company (GE) in a variety of executive and management roles from 1985
to 2008, including eight years as Chief Executive Officer of GE Healthcare from 2000 to 2008.
John F. Morici served as our Chief Financial Officer beginning in November 2016. His title was changed to Chief Financial Officer and Senior Vice
President, Global Finance in February 2018 and was changed again in February 2022 to Chief Financial Officer and Executive Vice President. Prior to
joining us, Mr. Morici was at NBC Universal from 2007 to 2016 where he held several senior management positions in their Universal Pictures Home
Entertainment U.S. and Canadian business, including Chief Financial Officer, Chief Operating Officer, and most recently, Executive Vice President and
Managing Director from 2014 to 2016. Prior to NBC Universal, Mr. Morici was in various senior financial management positions at GE Healthcare from
1999 to 2007, including Chief Financial Officer for its Diagnostic Imaging and Global Products units from 2002 to 2003.
Julie Coletti served as our Senior Vice President, Chief Legal and Regulatory Officer from May 2019 until February 2022 when her title was changed
to Executive Vice President, Chief Legal and Regulatory Officer. Ms. Coletti joined Align in May 2018, serving as Vice President and Associate General
Counsel, Strategic Commercial Affairs until her promotion in 2019. Prior to Align, Ms. Coletti was Vice President, Global General Counsel and Chief
Compliance Officer for Danaher Corporation, a healthcare, environmental and industrial equipment manufacturer, in its dental platform business. Before
Danaher, Ms. Coletti served in various senior legal management positions, including as Vice President, Chief Legal Officer and Corporate Secretary at
Bayer HealthCare's MEDRAD/Radiology and Interventional Division, a leading manufacturer of pharmaceuticals and medical devices for imaging and
interventional cardiology.
Stuart Hockridge served as our Vice President, Global Human Resources beginning in May 2016. His title was changed to Senior Vice President,
Global Human Resources in February 2018 and was changed again in February 2022 to Executive Vice President, Global Human Resources. Prior to
joining us, Mr. Hockridge was Senior Vice President of Talent at Visa Inc. from 2013 to 2016. Prior to Visa, Mr. Hockridge held a number of human
resource management positions at GE Healthcare from 2002 to 2012 leading HR processes both globally and for various divisions.
Emory M. Wright served as our Vice President, Operations beginning in December 2007. His title changed to Senior Vice President, Global
Operations in February 2018 and was changed again in February 2022 to Executive Vice President, Global Operations. He has been with us since March
2000 predominantly in manufacturing and operations roles including Vice President, Manufacturing and was General Manager of New Product
Development. Prior to joining Align, from 1999 to 2000, Mr. Wright was Senior Manufacturing Manager at Metrika, Inc. a medical device manufacturer.
Mr. Wright also previously served as Manager of Manufacturing and Process Development for Metra Biosystems Inc.
Item 1A. Risk Factors.
The following discussion is divided into two sections. The first, entitled “Risks Relating to our Business Operations and Strategy,” discusses some of
the risks that may affect our business, results of operations and financial condition. The second, captioned “General Risk Factors,” discusses some of the
risks that apply generally to companies and to owning our common stock, in particular. You should carefully review both sections, as well as our
consolidated financial statements and notes thereto and other information appearing in this Annual Report on Form 10-K, for important information
regarding these and other risks that may affect us. The order we have chosen to list the risks below or the sections in which we have identified them should
not be interpreted to mean we deem any risks to be more or less important or likely to occur or, if any do occur, that their impact may be any less
significant than others. These risk factors should be considered in connection with evaluating the
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forward-looking statements contained in this report because they could cause our actual results and conditions to differ materially from those statements.
Before you invest in Align, you should know that investing involves risks, including those described below. The risks below are not the only ones we face. If
any of the risks actually occur, our business, financial condition and results of operations could be negatively affected, the trading price of our common
stock could decline, and you may lose all or part of your investment.
Summary of Risk Factors
The following is a summary of the risks that are more fully described below in this “Risk Factors” section:
Risks Relating to our Business Operations and Strategy
• Our results of operations have been materially adversely affected by global and regional efforts to mitigate the spread of COVID-19 and we expect
this will continue in as yet unknown ways and to varying degrees as the virus evolves and circumstances dictate.
• Our net revenues are dependent primarily on our Invisalign system and iTero scanners and any decline in sales or average selling price of these
products, for any reason, may adversely affect net revenues, gross margin and net income.
• Competition in the markets for our products is increasing and we expect aggressive competition from existing competitors, other companies that
may introduce new technologies in the future and customers who alone or with others create orthodontic appliances and solutions or other
products or services that compete with us.
• An increasingly larger portion of our total revenues are derived from international sales and we are dependent on our international operations,
which exposes us to foreign operational, political, military and other risks that may harm our business.
• Demand for our products may not increase as rapidly as we anticipate or may decrease due to a variety of factors, including changing consumer
demand, inflation, weakness in general economic conditions, recessions and resistance to non-traditional treatment methods.
• Our success depends on our ability to develop, successfully introduce, achieve market acceptance of, and manage new products and services.
• As we continue to grow, we are subject to growth related risks, including risks related to excess or constrained capacity and operational
inefficiencies at our manufacturing and treat facilities.
•
• Our products and information technology systems are critical to our business. Issues with product development or enhancements, IT system
integration, implementation, updates and upgrades along with security and data protection risks have previously and could again in the future
disrupt our operations, which could have a material adverse impact on our business and operating results.
If we are unable or fail to protect our customer or patient information or if we are unable to comply with applicable privacy, security and data
protection laws, our operations may be severely adversely impacted, patient care could suffer, we could be liable for related damages, and our
business, operations and reputation could be harmed.
If we fail to sustain or increase revenue growth while controlling expenses, our profitability may decline.
•
• Our operating results have and will continue to fluctuate in the future, which makes predicting the timing and amount of our revenues, costs and
expenditures difficult.
• A disruption in the operations of a primary freight carrier, higher shipping costs or shipping delays could disrupt our supply chain and cause a
•
decline in our net revenues or a reduction in our earnings.
If we fail to accurately predict our volume growth, hire too many or too few technicians, or manufacture too many or too few products, the
delivery time for our products could be delayed or our costs may exceed our revenues, each of which could adversely affect our results of
operations.
• We are dependent on our marketing activities to deepen our market penetration and raise awareness of our brand and products, which may not
prove successful or may become less effective or more costly to maintain in the long term.
• Our success depends in part on our proprietary technology, and if we fail to successfully obtain or enforce our intellectual property (“IP”) rights,
our competitive position 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 stock price.
If we or any vendors on whose products or services we rely for our products and services infringe the patents or IP rights of other parties or are
subject to a patent infringement claim, our ability to grow our business may be severely limited.
•
• Obtaining approvals and complying with governmental regulations, particularly those related to personal healthcare information, financial
information, quality systems and data privacy, is expensive and time-consuming, and any failure to obtain or maintain approvals or comply with
regulations regarding our products or services or the products and services of our suppliers or customers could materially harm our sales, result in
substantial penalties and cause harm to our reputation.
• We are highly dependent on third-party suppliers, some of whom are sole source suppliers, for certain key machines, components and materials,
and our business and operating results could be harmed if supply is restricted or ends or the price of raw materials used in our manufacturing
process increases.
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• We rely on highly skilled personnel and, if we fail to attract, motivate, train or retain highly skilled personnel, it may be more difficult to grow
effectively and pursue our strategic priorities.
• We use distributors for a portion of the importation, marketing and sales efforts related to our products and services, which exposes us to risks that
may be harmful to our sales and operations, including that these distributors do not comply with applicable laws or our internal procedures.
• Our business exposes us to potential liability for the quality and safety of our products and services, how we advertise and market those products
and services and how and to whom we sell them, and we may incur substantial expenses or be found liable for substantial damages or penalties if
we are subject to claims or litigation.
• Compliance with current or future environmental, social, and governance (“ESG”) laws may materially increase our costs, expose us to potential
liability and otherwise materially impact our business.
General Risk Factors
• We rely on our personnel and, if we fail to attract, motivate or retain personnel, or if our growth harms our corporate culture, it may be more
difficult to grow effectively and pursue our strategic priorities.
Business disruptions could seriously harm our financial condition.
Changes in, or interpretations of, accounting rules and regulations, could result in unfavorable accounting charges.
•
•
• We are required to annually assess our internal control over financial reporting and any adverse results from such assessment may result in a loss
of investor confidence in our financial reports and have an adverse effect on our stock price.
• We are exposed to fluctuations in currency exchange rates and inflation, each of which could negatively affect our financial condition and results
•
of operations.
If we fail to manage our exposure to global financial and securities market risks successfully, our operating results and financial statements could
be materially impacted.
If our goodwill or long-lived assets become impaired, we may be required to record a significant charge to earnings.
•
• Our effective tax rate may vary significantly from period to period.
• New tax laws and practice, changes to existing tax laws and practice, or disputes regarding the positions we take regarding tax laws, could
negatively affect our provision for income taxes as well as our ongoing operations.
• We have in the past and may again in the future invest in or acquire other businesses, products or technologies which may require significant
management attention, disrupt our business, dilute stockholder value and adversely affect our results of operations.
• Historically, the market price for our common stock has been volatile.
• We cannot guarantee that we will continue to repurchase our common stock in the future, and any repurchases that we may make may not achieve
•
•
our desired objectives.
Future sales of significant amounts of our common stock may depress our stock price.
Increased scrutiny of our ESG policies and practices have and will likely continue to result in additional costs and risks, and may adversely impact
our reputation, employee retention, and willingness of customers and suppliers to do business with us.
Risks Relating to our Business Operations and Strategy
Our results of operations have been materially adversely affected by global and regional efforts to mitigate the spread of COVID-19 and we expect
this will continue in as yet unknown ways and to varying degrees as the virus evolves and circumstances dictate.
The broad and extensive impact of the COVID-19 pandemic on virtually all aspects of our business and society has exacerbated many pre-existing
risks to our business by making them more likely to occur or more impactful when they do occur. Accordingly, you should consider the risks described in
this risk factor in addition to, and not in lieu of, the risks described elsewhere throughout these risk factors.
COVID-19 has created significant, widespread and unprecedented volatility, uncertainty, and economic instability, disrupting broad aspects of the
global economy, our operations and the businesses of our customers and suppliers. Many of these effects continue to varying degrees and further mutated
variants and outbreaks globally or regionally continue to harm recovering consumer confidence and have led to renewed implementation of harsh
preventative measures by local and regional governments and businesses. Therefore, comparing our financial results for the reporting periods of 2021 to the
same reporting periods of 2020 or 2019 may not be a useful means by which to evaluate the health of our business and our results of operations.
As a result of the pandemic, customer demand and doctor availability has been inconsistent and difficult to predict. Although the practices of the
doctors, dental service organizations and labs that are our principal customers have largely reopened, many continue to operate at less than pre-pandemic
capacities. In addition, new variants of the virus have caused unpredictable fluctuations in the number of patients seeking treatment and the number of
doctors providing the services and
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treatments. While the pandemic increased demand for digital solutions such as the products and solutions we offer for the dental field, it is unclear whether
increased demand for our products will continue. For instance, if the use of video conferencing declines when employees return to office work
environments or the availability of travel, dining, entertainment and other consumer spending categories rebound, demand for our products or the growth
rates for our products may decline. These fluctuations have adversely impacted our results of operations from time to time in the recent past and are
expected to continue to impact our results, particularly in the near term.
In response to the pandemic, in 2020 we implemented measures aimed at limiting its spread for the health and safety of our employees, customers,
patients and the communities in which we live and work as well as in accordance with orders and decrees of governmental agencies. These measures
included diagnostic screenings at our facilities, increased social distancing mandates, closures of physical offices, manufacturing and treatment planning
facilities, including our U.S. corporate headquarters and regional facilities worldwide, implementing remote working where feasible, and prohibiting non-
essential travel. Many of these actions remain in effect to varying degrees and we may implement new or revise existing measures as circumstances
require. The actions and reactions to voluntary and involuntary protective measures have been highly disruptive to our business and may continue to be
disruptive.
The rules and regulations for reopening and operating our offices will likely increase in complexity, making compliance more difficult. Furthermore,
if employees perceive the protocols and requirements we implement to create a safe and effective work environment to be inadequate, overly burdensome
or no longer necessary, or alternatively, if we require employees to return to the office when they prefer the safety or convenience of working from home,
employees may choose to leave, productivity may decline or we may experience employee unrest, slowdowns, stoppages or other demands. Additionally,
we may fail to timely meet customer demand or fulfill orders, the costs to maintain or implement protective measures or deliver our products may increase,
and we may be subject to increased litigation, including product liability and occupational safety and condition claims. For further discussion or the risks
related to employee satisfaction, retention and engagement see the risk factor “We rely on our personnel and, if we fail to attract, motivate or retain
personnel, or if our growth harms our corporate culture, it may be more difficult to grow effectively and pursue our strategic priorities.”
As the economic and societal impact of the pandemic continues, we are continually evaluating macroeconomic as well as industry-specific factors,
including the extent our business and financial results and the business and financial results of our customers’ and suppliers’ have been and in the future
may be impacted. The financial health and stability of businesses and consumers overall depends on numerous evolving factors, many of which we cannot
control nor accurately predict. Examples include:
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•
•
the duration, scope, and severity of governmental, business and societal actions in response to the pandemic;
the impact on worldwide economic activity, employment rates and actions taken by central banks and governments;
customer and consumer purchasing behavior changes as pandemic-related restrictions are curtailed, lifted or reinstated, and travel and
discretionary spending patterns shift;
the response of employees, customers and suppliers to the reimplementation or easing of social distancing mandates and returning to in-office or
facility working, including anxieties regarding the continuing risks of the spread of the virus or any of its variants, vaccination requirements, and
other mandates that may impact employee productivity and engagement, retention or require additional costly protective measures;
the liquidity of funds and financial stability of consumers, customers, and patients, including their willingness to purchase our products and
services, delays paying for products or services, requests for extended payment terms, or payment defaults;
• disruptions and shortages impacting the cost, availability and timing of the procurement, delivery, manufacturing and overall supply chain for raw
materials, components, parts and products, including semiconductor chips;
•
• delays and cancellations as a result of port congestion and intermittent supplier shutdowns;
•
travel and gathering restrictions, including those that adversely impair or prohibit our sales personnel from interacting with customers or that limit
patients from visiting their doctors or capacity limits on the number of patients doctors can see in their offices;
actions by competitors such as price reductions, aggressive product promotions, changes in or the launch or termination of products or product
lines, and mergers, consolidations and liquidations;
the confidence of our customers and patients that our products and solutions are sanitary and safe to use;
•
• data privacy and cybersecurity risks from new or expanded use of remote working and/or teledentistry by our suppliers, customers, and us,
including new or expanded use of online service platforms, products and solutions such as video conferencing applications, doctor, consumer and
patient apps, inadequately secured computing networks, servers, software or software applications, overheard telephone conversations, viewable
computer screens, stolen passwords or access information, increased phishing and other cyber threats;
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the impact of remote working arrangements on our financial reporting systems and internal control over financial reporting, including our ability
to ensure information required to be disclosed is timely and accurately recorded, processed, summarized, reported, and communicated to
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required
disclosure; and
• diversion of management’s attention as they focus on the short- and long-term ramifications of the pandemic.
The effects of the pandemic continue to linger and evolve and we cannot predict future direct and ancillary impacts on our business or results of
operations, although they may have a material adverse effect on our business, financial condition, results of operations, cash flows and stock price as well
as the businesses of our customers, suppliers and economic activity generally.
Our net revenues are dependent primarily on our Invisalign system and iTero scanners and any decline in sales or average selling price of these
products, for any reason, may adversely affect net revenues, gross margin and net income.
Our net revenues remain largely dependent on sales of our Invisalign system of clear aligners and iTero intraoral scanners. Of the two, we expect net
revenues from the sale of the Invisalign system, primarily our comprehensive products, will continue to account for the majority of our net revenues,
making the continued and widespread acceptance of the Invisalign system by orthodontists, GPs and consumers critical to our future success. Our iTero
scanners have become a material percentage of our overall revenues. Although exocad and its CAD/CAM software solutions are important to the
continuing evolution of the Align digital platform, the contributions to our total net revenues from the exocad solutions remain immaterial. Our operating
results could be harmed if:
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orthodontists and GPs experience a reduction in consumer demand for orthodontic services;
consumers prove unwilling to adopt Invisalign system treatment as rapidly or in the volumes we anticipate and at the prices offered;
orthodontists or GPs choose to continue using wires and brackets or competitive products rather than the Invisalign system or the rates at which
they utilize the Invisalign system fail to increase or increase as rapidly as anticipated;
sales of our iTero scanners decline or fail to grow sufficiently or as expected;
the growth of CAD/CAM solutions does not produce the results expected; or
if the average selling price of our products declines.
The average selling prices of our products, particularly our Invisalign system, are influenced by numerous factors, including the type and timing of
products sold (particularly the timing of orders for additional clear aligners for certain Invisalign products) and foreign exchange rates. In addition, we sell
a number of products at different list prices which may differ based on country. Our average selling prices have been impacted in the past and may be
adversely affected again in the future if:
• we introduce new or change existing promotions, general or volume-based discount programs, product or services bundles, or consumer rebate
programs;
participation in any promotions or programs unexpectedly increases or decreases or drives demand in unexpected and material ways;
our geographic, channel, or product mix shifts to lower priced products or to products that have a higher percentage of deferred revenue;
•
•
• we decrease prices on one or more products or services in response to increasing competitive pricing pressures;
• we introduce new or change existing products or services, or modify how we market or sell any of our new or existing products or services; or
•
our critical accounting estimates materially differ from actual behavior or results.
If any of the foregoing were to occur, our net revenues, gross profit, gross margin and net income may decline.
Competition in the markets for our products is increasing and we expect aggressive competition from existing competitors, other companies that
may introduce new technologies in the future and customers who alone or with others create orthodontic appliances and solutions or other products or
services that compete with us.
The dental industry is in a period of immense and rapid digital transformation involving products, technologies, distribution channels and business
models. While solutions such as our Invisalign system, iTero scanners and CAD/CAM software facilitate this transition, whether our technologies will
achieve market acceptance and, if adopted, whether and when they may become obsolete as new offerings become available remains unclear.
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Currently, the Invisalign system competes directly against traditional metal wires and brackets and increasingly against clear aligners manufactured
and distributed by new market entrants and manufacturers of traditional wires and brackets, both within and outside the U.S., and from traditional medical
device companies, laboratories, startups and, in some cases, doctors and DSOs themselves. Due in part to market opportunities and the expiration of certain
of our key patents beginning in 2017, competition in the clear aligner market is increasing. The number and types of competitors are diverse and growing
rapidly. They vary by segment, geography, and size, and include new and well-established regional competitors, as well as larger companies or divisions of
larger companies with substantial sales, marketing, research financial capabilities, and existing dental market channels. Our competitors also include direct-
to-consumer (“DTC”) companies that provide clear aligners using a remote teledentistry model requiring little or no in-office care from trained and
licensed doctors, and doctors and DSOs who can manufacture custom aligners in their offices using modern 3D printing technology. Large consumer
product companies may also enter the orthodontic supply market.
The manipulation and movement of teeth and bone is a complex and delicate process with potentially painful and debilitating results if improperly
performed or monitored. Accordingly, we are committed to delivering our Invisalign system solutions primarily through trained and skilled doctors.
Invisalign system treatment requires a doctor's prescription and an in person physical examination of the patient’s dentition before beginning treatment;
however, with the advent of DTC providers, there has been a shift away from traditional dental practices that may impact our primary selling channels.
Doctors and DSOs are sampling alternative products and taking advantage of competitive promotions and sale opportunities. In addition, we face
competition from companies that introduce new technologies and we may be unable to compete with these competitors or they may render our technology
obsolete or economically unattractive. If we are unable to compete effectively with existing products or respond effectively to any new technologies, our
business could be harmed.
To stimulate product and services demand, we have a history of offering volume discounts, price reductions and other promotions to targeted
customers and consumers. Whether or not successful, these promotional campaigns have had and may in the future again have unexpected and unintended
consequences, including reduced gross margins, profitability and average selling prices, net revenues, volume growth, and net income.
We cannot assure that we will be able to compete successfully against our current or future competitors or that competitive pressures will not have a
material adverse effect on our business, results of operations and financial condition.
An increasingly larger portion of our total revenues are derived from international sales and we are dependent on our international operations,
which exposes us to foreign operational, political, military and other risks that may harm our business.
We earn an increasingly larger portion of our total revenues from international sales generated through our foreign direct and indirect operations and
we expect to increase our sales and presence outside the U.S., particularly in markets we believe have high-growth potential. Moreover, we perform many
of our key production steps in locations outside of the U.S. For instance, our digital treatment planning and aligner fabrication are performed in multiple
international locations, including large-scale operations in Mexico, Costa Rica and China and we continue to establish additional sites closer to our
international customers, such as our manufacturing facility in Poland currently under construction. Also, we maintain significant regional sales and
marketing operations in Switzerland, Singapore and China along with research and development operations globally, including in the U.S., Russia, Israel
and Germany. Our reliance on international operations exposes us to risks and uncertainties that may affect our business or results of operations, including:
• difficulties managing international operations, including any travel restrictions on us or our customers;
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fluctuations in currency exchange rates;
import and export risks, including shipping delays, cost increases, penalties, controls, license requirements and restrictions;
controlling production volume and quality of the manufacturing process;
the engagement in activities by our employees, contractors, partners and agents prohibited by our policies and procedures as well as international
and local trade, labor and other laws such as those prohibiting bribery and corrupt payments to government officials, including the U.S. Foreign
Corrupt Practices Act, the U.K. Bribery Act of 2010 and export control laws;
• delays, disruptions and increasing costs to us and our suppliers for raw materials or components, manufacturing, and transportation, including as a
result of customs clearance, port congestion, workforce unrest or labor shortages, slowdowns or stoppages, unionization efforts, or disasters,
whether natural forces or human caused;
increased expense of developing, testing, manufacturing and marketing localized versions of our products;
threats, tensions, actions and responses to any social, economic, business, geopolitical, military, terrorism, or acts of war, including the possibility,
threat of, imposition of, or changes in sanctions, trade restrictions and tariffs, as well as
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retaliatory military actions, sanctions, trade restrictions and tariffs particularly involving key customers, development or manufacturing markets
such as China, Mexico, Russia, the Middle East, Eastern Europe or other countries;
• Some of our employees in Israel are obligated to perform annual reserve duty in the Israeli military and may be called for additional active duty
under emergency circumstances which may materially impair all or a portion of our business critical to our iTero operations. Additionally, we have
significant research and development activities in Russia that may be impaired should any threatened or actual military actions occur in the
Ukraine or other countries. If any of these events or conditions occur, the impact to us, our employees and customers is uncertain, particularly if
emergency circumstances, armed conflicts or an escalation in political instability or violence disrupts our product development, data or
information exchange, payroll or banking operations, product or materials shipping by us or our suppliers and other unanticipated business
disruptions, interruptions and limitations in telecommunication services or critical systems or applications reliant on a stable and uninterrupted
communications infrastructure. Moreover, we have developed a multi-dimensional business continuity plan designed to mitigate the impact of
potential actions and reactions to a military incursion in Ukraine and other areas, but it is unclear if it will successfully and adequately mitigate
against any actions taken or sanctions imposed;
• burdens of complying with a wide variety of regional and local laws, including anti-trust, fair competition and environmental laws;
•
the impact of initiatives to encourage the purchase or support of domestic vendors, which can influence customers to purchase products from, or
collaborate to promote interoperability of products with, companies whose headquarters or primary operations are not domestic;
reduced IP rights protections as compared to the protections afforded under the laws of the U.S.;
longer customer payment cycles and greater difficulty in accounts receivable collection; and
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•
• potential adverse tax consequences.
The potential impacts of the United Kingdom’s (“UK”) withdrawal from the EU are still unfolding and have impacted varying parts of its economy at
different times since the withdrawal. As the UK negotiates new trade deals and implements new laws and regulations following its withdrawal, the UK’s
actions could, among other potential outcomes, adversely affect the tax, tax treaty, currency, operational, legal and regulatory regimes to which our
businesses are subject, including those involving data privacy and the regulation of medical devices. The withdrawal could also, among other potential
outcomes, disrupt the free and timely movement of goods, services, people, data and information and significantly disrupt trade. Further, uncertainty
around these and related issues could lead to adverse effects on the economies and political stability of the UK, EU and the other economies in which we
operate.
Should any of these factors, either individually or in combination, occur they could materially impact our international operations and adversely affect
our business as a whole.
Demand for our products may not increase as rapidly as we anticipate or may decrease due to a variety of factors, including changing consumer
demand, inflation, weakness in general economic conditions, recessions and resistance to non-traditional treatment methods.
Consumer spending habits are affected by, among other things, pandemics, inflation, weakness in general economic conditions, recessions, levels of
employment, salaries and wage rates, debt obligations, discretionary income, consumer confidence and consumer perception of current and future
economic conditions. Declines in, or uncertain economic outlooks for, the U.S. or certain international economies could adversely affect consumer
spending habits which may, among other things, result in a decrease in the number of overall orthodontic and dental case starts, reduce patient traffic in
dentists’ offices, reduce or shift spending away from elective, non-urgent, or higher value procedures or reduce demand for dental services generally, any of
which could materially adversely affect our revenues and operating results. Conversely, to the extent social distancing, travel, work and other restrictions
have limited options for consumer spending, demand for our products may decline once any or all of these restrictions ease. Inflation, weakness in the
global or regional economies and recessions can decrease demand for dental technologies, causing dentists to postpone investments in capital equipment,
such as intraoral scanners and CAD/CAM software. In addition, Invisalign treatment represents a significant change from traditional metal wires and
brackets orthodontic treatment, and customers and consumers may not find it cost-effective or preferable to traditional treatment. For instance, a number of
dental professionals continue to believe the Invisalign treatment is appropriate for only a limited percentage of patients. Increased market acceptance of our
products depends in part upon the recommendations of dental professionals, as well as other factors including effectiveness, safety, ease of use, reliability,
aesthetics, and price compared to competing products and treatment methods.
Our success depends on our ability to develop, successfully introduce, achieve market acceptance of, and manage new products and services.
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Our success depends on our ability to profitably and quickly develop, manufacture, market and obtain regulatory approval or clearance of new
products and services along with improvements to existing products and services. There is no assurance we can successfully develop, sell and achieve
market acceptance of our new products and services. The extent of, and rate at which, new products or offerings may achieve market acceptance and
penetration is a function of many variables, including our ability to:
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successfully predict and timely innovate and develop new technologies and applications with the features and functionality customers desire or
expect;
successfully and timely obtain approval or clearance of new products or services from government agencies such as the FDA and analogous
agencies in other countries;
cost effectively manufacture, bring to market, market, and sell new products and services offerings;
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• properly forecast the amount and timing of new product demand;
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• differentiate our products and product offerings from our competitors as well as other products in our own portfolio and successfully articulate the
allocate our research and development funding to products with higher growth prospects;
ensure compatibility of our technology, services and systems with those of our customers;
anticipate and rapidly innovate in response to new competitive products, product offerings and technologies;
benefits to our customers;
• qualify for third-party reimbursement for procedures involving our products; and
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encourage customers to adopt new technologies and provide the needed technical, sales and marketing support to make new product and services
launches successful.
If we fail to accurately predict customer needs and preferences or fail to produce viable technologies, we may invest heavily in research and
development of products that do not lead to significant revenues. Even if we successfully innovate and develop new products and product enhancements,
we may incur substantial costs doing so and our profitability may suffer. It may be difficult to gain market share and acceptance for new or enhance
products. Introduction and acceptance of new products may take significant time and effort if the products or services require doctor education and training
to understand the benefits of the new products or they measure the success of a product only after using it to treat patients. For instance, it can take up to 24
months or longer to treat patients using our Invisalign system. Consequently, doctors may be unwilling to adopt our products until they successfully
complete one or more cases or until more historical clinical results are available.
In addition, as part of our effort to accommodate our customers’ needs and demands, we periodically introduce new business and sales initiatives,
such as our commercial teeth whitening products announced in 2021. In general, our internal resources support these new businesses or sales initiatives,
and we frequently provide such support without clear indications it will prove successful or be without short-term execution challenges.
As we continue to grow, we are subject to growth related risks, including risks related to excess or constrained capacity and operational
inefficiencies at our manufacturing and treat facilities.
We are subject to growth related risks, including excess or constrained capacity and pressure on our internal systems, personnel and suppliers. In
order to manage current operations and future growth effectively, we must continue implementing and improving our operational, financial and
management information systems, hire, train, motivate, manage and retain employees, and ensure our suppliers remain diverse and capable of meeting
growing demand for the systems, raw materials, parts and components essential to the manufacture and delivery of our products. We may be unable to
manage such growth effectively while balancing near-term efforts to meet existing demand, including adding personnel, creating scalable, secure and
robust systems and operations, and automating processes needed for long term efficiencies. Any such failure could have a material adverse impact on our
business, operations and prospects.
We continue to establish treatment planning and manufacturing facilities closer to our international customers in order to provide them with better
experiences, improve their confidence in using the Invisalign system and iTero intraoral scanners to treat more patients, and provide redundancy should
other facilities be temporarily or permanently unavailable. Our ability to obtain regulatory clearance and certifications for, move into, plan, construct and
equip additional facilities is subject to significant risk and uncertainty, including risks related to establishing facilities, hiring and retaining employees and
delays and cost overruns, any of which may be all or partially out of our control and can negatively impact our gross margin. In addition, operating
facilities located in higher cost regions compared to Mexico, China and Costa Rica negatively impacts our gross margin. If the construction or transition
into additional facilities is significantly delayed, if a facility is required to temporarily or permanently, partially or fully shut down, or demand for our
products outpaces our ability to hire qualified personnel and effectively implement systems and infrastructure, we may be unable to fulfill orders timely, or
at all, which may negatively impact our financial results, reputation and overall business.
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In addition, because adapting production capacity and related cost structures to changing market conditions takes time, our facilities’ capacity may at
times exceed or fall short of our production requirements. For instance, as a result of the COVID-19 pandemic, sales in the final weeks of the first quarter
of 2020 declined substantially and operations at our manufacturing facilities declined shortly thereafter. Then, as dental practices reopened we experienced
a rapid increase in demand. These fluctuations in demand and sales have recurred several times since the first quarter of 2020 corresponding with increases
in the number of people infected with COVID-19 and variants such as Delta and Omicron, and may continue to arise in the future. If product demand
decreases or increases more than forecast, we could be required to write off inventory or record excess capacity charges, we may be required to purchase or
lease additional or larger facilities and additional equipment, or we may be unable to fulfill customer demand in the time frames and with the quantities
required, any of which may take time to accomplish, lower our gross margin, inhibit sales or harm our reputation. Additionally, if we are required to
implement new or modify existing health and safety protocols to safeguard our employees, customers or their patients, productivity could decline.
Production of our clear aligners and intraoral scanners are also limited by capacity constraints due to a variety of factors, including labor shortages,
shipping delays, our dependency on third-party vendors for key materials, parts, components and equipment, and limited production yields. Any or all of
these problems could result in the loss of customers, provide an opportunity for competing products to gain market acceptance and otherwise harm our
business and financial results.
Our products and information technology systems are critical to our business. Issues with product development or enhancements, IT system
integration, implementation, updates and upgrades along with security and data protection risks have previously and could again in the future disrupt
our operations, which could have a material adverse impact on our business and operating results.
We rely on the efficient, uninterrupted and secure operation of our own complex information technology systems (“IT systems”) and are dependent on
key software of third parties embedded in our products and IT systems as well as third-party hosted IT systems to support our operations. All software and
IT systems are vulnerable to damage, attack or interruption from a variety of sources. As our business has grown in size and complexity, including through
the integration of acquired businesses, which to date have been smaller organizations with less-mature or less sophisticated systems, securities practices or
training, the growth has placed, and will continue to place, significant demands on our operations and such systems and have increased the risk of security
incidents. To effectively manage our existing operations and continue to grow, our IT systems and applications require an ongoing commitment of
significant resources to maintain, protect, enhance and restore existing systems and develop new systems to keep pace with continuing changes in
information processing technology, evolving industry and regulatory standards, increasingly sophisticated cyber threats, and changing customer
preferences. Expanded remote working and increased usage of online and hosted technology platforms by us, our customers and suppliers have increased
the demands on and risks to our IT systems and personnel. Moreover, we continue to transform certain business processes, extend established processes to
new subsidiaries and/or implement additional functionality in our enterprise resource planning (“ERP”), product development, manufacturing, and other
software and IT systems which entails certain risks, including disruption of our operations, such as our ability to develop and update products that are safe
and secure, track orders and timely ship products, manage our supply chain and aggregate financial and operational data.
System upgrades, development of new releases and enhancements require significant expenditures and allocation of valuable employee resources.
Delays in integration or disruptions to our business 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 and issue new releases of our products and customer facing software applications, such as our iTero intraoral
scanners, exocad CAD/CAM solutions, my iTero, our ClinCheck software, MyAligntech and the Invisalign Doctor Site as well as our internal software
applications upon which customer facing, manufacturing and treatment planning operations are dependent. Software applications and products containing
software frequently contain errors or defects, especially when first introduced or when new versions are released. Additionally, the third-party software
integrated into or interoperable with our products and services will routinely reach end of life, and as a consequence, certain models of our intraoral
scanners may be exposed to additional vulnerabilities, including increased security risks, errors and malfunctions that may be irreparable or difficult to
repair. The discovery of a defect, error or security vulnerability in our products, software applications or IT systems, incompatibility with customers’
computer operating systems and hardware configurations with a new release or upgraded version or the failure of our products or primary IT systems may
cause adverse consequences, including: delay or loss of revenues, significant remediation costs, delay in market acceptance, loss of data, disclosure of
financial, health or other personal information of our customers or their patients, product recalls, damage to our reputation, loss of market share or
increased service costs, any of which could have a material adverse effect on our business, financial condition or results of operations.
A significant portion of our clear aligner production is dependent on digital scans from our iTero and third-party intraoral scanners. Failures of all or
any portion of ours or third-party software or other components or systems to interoperate with iTero
24
or third-party scanners, termination of interoperability with third-party scanners, malware or ransomware attacks, product or system vulnerabilities or
defects, or a system outage for any reason have harmed our operations previously and in the future could affect materially and adversely our ability to
accept scans, manufacture clear aligners or restorative procedures or treatments and services or otherwise service our customers which may, amongst other
things, harm our sales, damage our reputation, adversely impact our strategic partners or result in litigation.
Additionally, our globally-dispersed installed base of iTero intraoral scanners at customer, strategic business partner or other locations may be
independently or collectively the target of a cybersecurity incident or attack or subject to the intrusion of a virus, bug, or other similar negative intruder.
Due to the large and growing number of these decentralized locations, we may not be able to, or not have the capacity, knowledge, or infrastructure to,
respond to or remedy a cybersecurity issue in a timely manner or sufficiently, either of which may cause loss or damage to us or our customers or strategic
business partners or may cause further malfunctions in, or damage to, our servers, databases, systems or products and services, loss or damage of our data,
interruption or temporary cessation of our operations, or an overall negative impact to our business or reputation.
If the information we rely on to run our businesses is inaccurate or unreliable, or if the data governance controls in place fail or change, or if
compliance with such controls fails, or if we fail to properly maintain, secure or restore our IT systems, or if the integrity of our products or IT systems is
compromised or questioned or data is lost, or if we fail to develop new capabilities to meet our business needs in a timely manner, we could suffer
operational disruptions, have customer disputes, and fail to produce timely, accurate or complete reports. We may also be required to respond to regulatory
inquiries or actions, forced to defend against litigation or pay damages, penalties or fines, experience increases in operating and administrative expenses,
find it necessary to recall or repair products, rebuild networks or systems, lose existing customers or strategic business partners, experience difficulties
attracting new customers or implementing our growth strategies, or suffer other adverse consequences. In addition, experienced computer programmers and
hackers may be able to penetrate the security features of our products, IT systems or our cloud-based software servers hosted by third parties and
misappropriate, destroy or damage our confidential information or that of third parties, expose health, financial data, or other personal information of our
customers and their patients, create system disruptions or cause shutdowns. Furthermore, sophisticated hardware and operating system software and
applications that we either internally develop or procure from third parties may contain defects or present risks in design, development, manufacture or
distribution, including “bugs,” security vulnerabilities, and other problems that can unexpectedly interfere with the operation of the system or compromise
or exploit the safety and security of our products, networks or data. The costs to eliminate, mitigate or recover from security problems, viruses and bugs
could be significant and depending on the nature and extent of the problem and the networks or products impacted, may result in network or systems
interruptions, decreased product sales, or data loss that may have a material adverse impact on our operations, net revenues and operating results.
There can be no assurance that our process of improving existing or developing new products or IT systems, integrating new IT systems, protecting
confidential patient health information, and improving service levels will not be delayed or that additional product or IT systems issues will not arise in the
future. Failure to adequately protect and maintain the integrity of our products and IT systems and data may result in a material adverse effect on our
financial position, results of operations and cash flows.
If we are unable or fail to protect our customer or patient information or if we are unable to comply with applicable privacy, security and data
protection laws, our operations may be severely adversely impacted, patient care could suffer, we could be liable for related damages, and our business,
operations and reputation could be harmed.
We retain confidential customer financial as well as patient health information in addition to our own proprietary information and data essential to our
business operations. Therefore, it is critical that the facilities and infrastructure on which we depend to run our business and the products we develop
remain secure and are also perceived by the marketplace and our customers to be secure. Despite the implementation of security features in our products
and security measures in our IT systems, our products as well as the infrastructure and IT systems on which we depend are vulnerable to physical break-ins,
computer viruses, programming errors or other technical malfunctions, hacking or phishing attacks by third parties, malware and ransomware, employee
error or malfeasance or similar disruptive problems. For example, we have experienced cybersecurity incidents and may again in the future. Further, the
frequency of third-party cyber attacks has increased since the onset of the COVID-19 pandemic. Significant service disruptions, breaches in our
infrastructure and IT systems or other cybersecurity incidents could expose us to litigation or regulatory investigations, impair our reputation and
competitive position, be distracting to our management, and require significant time and resources to address. Affected parties or regulatory agencies could
initiate legal or regulatory action against us, which could prevent us from resolving the issues quickly or in unanticipated ways, cause us to incur significant
expense and liability, or result in judicial or governmental orders forcing us to cease operations or modify our business practices in ways that could
materially limit or restrict the products and services we provide. Concerns over our privacy practices could adversely affect others’ perception of us and
deter customers, patients and partners from using our products. In addition, patient care could suffer, and we could be liable if our products or IT systems
fail
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to deliver accurate and complete information in a timely manner. We have cybersecurity and other forms of insurance coverage related to a breach event
covering expenses for notification, credit monitoring, investigation, crisis management, public relations and legal advice. The policy also provides coverage
for regulatory action defense including oversight, investigations and disclosure obligations as well as fines and penalties, potential payment card industry
fines and penalties and costs related to cyber extortion; however, damages and claims arising from such incidents may not be covered or may exceed the
amount of any coverage and do not cover the time and effort we incur investigating and responding to any incidents, which may be significant.
We are also subject to federal, state and foreign laws and regulations, including ones relating to privacy, data security and protection, content
regulation, and consumer protection among others. We are subject to various national and regional data localization or data residency laws which generally
require that certain types of data collected within a country be stored and processed only within that country or approved countries and other countries are
considering enacting similar data localization or data residency laws. We have and likely will again in the future be required to implement new or expand
existing data storage protocols, build new storage facilities, and/or devote additional resources to comply with such laws, any of which could be costly. We
are also subject to data export restrictions and international transfer laws which prohibit or impose conditions upon the transfer of such data from one
country to another. These laws and regulations are constantly evolving and may be interpreted, applied, created or amended in a manner that could
adversely affect our business.
In addition, we must comply with numerous data privacy and data security requirements that span from individual state and national laws in the U.S.
and China to multinational requirements in the EU. For instance, China has enacted complex and highly restrictive cybersecurity, data localization, and
cross border data transfer laws. In the EU, we must comply with the General Data Protection Regulation which serves as a harmonization of EU data-
privacy laws, and in the U.S., we must comply with data privacy and data security provisions of the U.S. Health Insurance Portability and Accountability
Act regulations. Moreover, the number of local and national governments enacting data privacy laws continues to increase and we expect this trend to
continue. Maintaining compliance with these laws and regulations is costly and could require complex changes in the way we do business or provide
services to our customers and their patients. Additionally, our success may be dependent on the success of healthcare providers, many of whom are
comprised of individual or small operations with limited IT experience and inadequate or untested security protocols, in managing data privacy and data
security requirements.
If we fail to sustain or increase revenue growth while controlling expenses, our profitability may decline.
If we are to sustain or increase profitability in future periods, we need to continue increasing our net revenues while controlling expenses. Because
our business and the markets we target are evolving, it is difficult to predict our future operating results or levels of growth or declines. We have not in the
past and may be unable in the future to sustain or regain our historical growth rates which may cause our profitability to decline.
Our operating results have and will continue to fluctuate in the future, which makes predicting the timing and amount of our revenues, costs and
expenditures difficult.
Our quarterly and annual operating results have and will continue to fluctuate for a variety of reasons, including as a result of changing doctor and
consumer product demand. Some of the factors that have historically and in the future could cause our operating results to fluctuate include:
•
•
limited visibility into, and difficulty predicting from quarter to quarter, the types of procedures and level of activities in our customers’ practices;
fluctuations in the number of patients seeking treatment and the number of doctors providing services and treatment as a result of the pandemic
and new variants in the virus;
changes in demand based on geographies, channels, or product mix;
the level of confidence of doctors in our products and changes in the rates at which they recommend or utilize our products for their patients;
•
•
• weakness in consumer spending and confidence, inflation, a slowdown or recession in domestic or international economies;
• higher manufacturing, delivery and inventory costs;
• unanticipated delays and disruptions in the manufacturing process caused by insufficient capacity or availability of raw materials, parts or
components, shortages or turnover in the labor force or the introduction of new production processes, power outages or insufficient power, natural
or other disasters, pandemics or general economic conditions impacting the solvency of vendors in our supply chain;
competition in general and competitive developments in our target markets;
•
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• new programs or business models, new product or services introductions or changes or modifications to existing products and services offerings,
•
•
including any impacts related to the timing of orders, product mix or market cannibalization;
changes in relationships with DSOs and distributors, including the timing of orders;
changes in the timing of revenue recognition and changes in our average selling prices, including as a result of the timing of receipt of product
orders and shipments, product and services mix, geographic mix, product and services deferrals, the introduction of new products and software
releases, product pricing, bundling and promotions, pricing for fees or expenses, modifications to our terms and conditions such as payment terms,
or as a result of new accounting pronouncements or changes to critical accounting estimates including, without limitation, those estimates based
on such matters as our predicted usage of additional aligners;
the creditworthiness, liquidity and solvency of our customers and their ability to timely make payments when due;
fluctuations in currency exchange rates against the U.S. dollar;
•
•
• our inability to scale, suspend or reduce production and treatment operations based on variations in product demand;
•
seasonal fluctuations, including those related to patient demographics such as the seasonality of teen treatments in the U.S., China and Europe as
well as the number of doctors in their offices and their availability to take appointments;
costs and expenditures in connection with such things as the establishment of new treatment planning and fabrication facilities, the hiring and
deployment of personnel, and litigation, and the success of or changes to our marketing programs from quarter to quarter;
timing and fluctuation of spending around marketing and brand awareness campaigns and industry trade shows;
•
• our reliance on our contract manufacturers for the production of sub-assemblies for our intraoral scanners;
•
•
• major changes in available technology or the preferences of customers may cause our current product offerings to become less competitive or
increased advertising or marketing efforts or aggressive price competition from competitors;
changes to our effective tax rate;
•
obsolete;
• unanticipated delays or disruptions in our receipt of patient records made through intraoral scanners for any reason;
• disruptions to our business due to political, economic or other social instability or any governmental regulatory or similar actions, including the
impact of epidemics and pandemics such as COVID-19, any of which results in changes in consumer spending habits, limiting or restricting
patient visits to orthodontists or general practitioners, as well as any impact on workforce absenteeism;
inaccurate forecasting of net revenues, production and other operating costs;
investments in research and development to develop new products and enhancements; and
•
•
• material impairments of goodwill and long-lived assets.
To respond to these and other factors, we may make business decisions that adversely affect our operating results such as modifications to our pricing
policy and payment terms, promotions, development efforts, product releases, business structure or operations. Most of our expenses, such as employee
compensation and lease obligations, are relatively fixed in the short term. Moreover, our expense levels are based, in part, on our expectations for future
revenues. As a result, if our net revenues for a particular period fall below expectations, we may be unable to timely or effectively reduce spending to offset
any shortfall in net revenues. Due to these and other factors, we do not believe that quarter-to-quarter comparisons of our operating results are meaningful.
A disruption in the operations of a primary freight carrier, higher shipping costs or shipping delays could disrupt our supply chain and cause a
decline in our net revenues or a reduction in our earnings.
We are dependent on commercial freight carriers, primarily UPS, to deliver our products. If the operations of these carriers are disrupted for any
reason, we may be unable to timely deliver our products to our customers who may choose alternative products causing our net revenues and gross margin
to decline, possibly materially. When fuel costs increase, our freight costs generally do so as well. In addition, we earn an increasingly larger portion of our
total revenues from international sales. International sales carry higher shipping costs which could negatively impact our gross margin and results of
operations. If freight costs materially increase and we are unable to successfully pass all or significant portions of the increase along to our customers, or
we cannot otherwise offset such increases in our cost of net revenues, our gross margin and financial results could be adversely affected.
If we fail to accurately predict our volume growth, hire too many or too few technicians, or manufacture too many or too few products, the delivery
time for our products could be delayed or our costs may exceed our revenues, each of which could adversely affect our results of operations.
If we fail to accurately predict our volume growth, we may inaccurately estimate the staffing, materials or storage required to manufacture our
products. If we underestimate volume growth, our growth may exceed our manufacturing capacity of one or more of our suppliers or manufacturing
facilities, we may be understaffed and we may not have sufficient materials.
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Specifically, our manufacturing process relies on sophisticated computer software and requires new technicians to undergo a relatively long training
process, often 120 days or longer. As a result, if we are unable to accurately predict our volume growth, we may have an insufficient number of trained
technicians to ensure products are manufactured and delivered within the time frames our customers expect. Without sufficient capacity, trained personnel
or materials, we may be unable to provide our products to customers in a timely manner, which could damage our relationships with our existing customers
or harm our ability to attract new customers. This could cause a decline in our net revenues and net income and could adversely affect our results of
operations.
Conversely, if we over estimate our growth, we may have excess expenses caused by excess staffing, materials, and capacity. If we hire and train too
many technicians in anticipation of volume growth that does not materialize, materializes at a rate slower than anticipated, or if volumes decline, our costs
and expenditures may outpace our revenues or revenue growth, harming our gross margin and financial results. Additionally, in order to secure supplies for
production of products, we sometimes enter into non-cancelable minimum purchase commitments with vendors, which could impact our ability to adjust
our inventory to reflect declining market demands. If demand for our products is less than we expect, we may experience additional excess and obsolete
inventories and be forced to incur additional charges and our profitability may suffer.
We are dependent on our marketing activities to deepen our market penetration and raise awareness of our brand and products, which may not
prove successful or may become less effective or more costly to maintain in the long term.
Our marketing efforts and costs are significant and include national and regional campaigns in multiple countries involving television, print media,
social media and, more recently, alliances with professional sports teams, social media influencers and other strategic partners. We attempt to structure our
advertising campaigns to increase brand awareness, adoption and goodwill; however, there is no assurance our campaigns will achieve the returns on
advertising spend desired, increase brand or product awareness sufficiently to sustain or increase our growth goals or generate goodwill and positive
reputational goals. Moreover, should any entity or individual endorsing us or our products take actions, make or publish statements in support of, or lend
support to events or causes which may be perceived by all or any portion of society negatively, our sponsorships or support of these entities or individuals
may be called into question, boycotts of our products announced, and our reputation may be harmed, any of which could have an adverse effect on our
gross margin and business overall.
In addition, various countries prohibit certain types of marketing activities. For example, some countries restrict direct to consumer advertising of
medical devices. We could run afoul of restrictions and be ordered to stop certain marketing activities. Moreover, competitors do not always follow these
restrictions, creating an unfair advantage and making it more difficult and costly for us to compete.
Additionally, we rely heavily on data generated from our campaigns to target specific audiences and evaluate their effectiveness, particularly data
generated from internet activities on mobile devices. To obtain this data, we are dependent on third parties and popular mobile operating systems, networks,
technologies, products, and standards that we do not control, such as the Android and iOS operating systems and mobile browsers. Any changes in such
systems that degrade, reduce or eliminate our ability to target or measure the results of ads or increase costs to target audiences could adversely affect the
effectiveness of our campaigns. For example, Apple has released mobile operating systems that include significant data privacy changes that may limit our
ability to interpret, target and measure ads effectively.
Our success depends in part on our proprietary technology, and if we fail to successfully obtain or enforce our intellectual property (“IP”) rights,
our competitive position 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 stock price.
Our success depends in part on our ability to maintain existing IP rights and to obtain and maintain further IP protection for our products. Our
inability to do so could harm our competitive position.
We rely on our portfolio of issued and pending patent applications in the U.S. and other countries to protect a large part of our IP and our competitive
position; however, these patents may be insufficient to protect our IP rights because our patents may be challenged, invalidated, held unenforceable,
circumvented, or may not be sufficiently broad to prevent third parties from producing competing products similar in design to our products and foreign
patents protections may be more limited than those provided under U.S. patents and IP laws.
We may not be afforded the protection of a patent if our currently pending or future patent filings do not result in the issuance of patents or we fail to
apply for patent protection. We may fail to apply for a patent if our personnel fail to disclose or recognize new patentable ideas or innovations. Remote
working can decrease the opportunities for our personnel to collaborate, thereby reducing the opportunities for effective invention disclosures and patent
application filings. We may choose not to file a
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foreign patent application if the limited protections provided by a foreign patent outweigh the costs to obtain it. Our foreign patent portfolio is less
extensive than our U.S. portfolio.
We also rely on protection of our copyrights, trademarks, trade secrets, know-how and proprietary information. We generally enter into confidentiality
agreements with our employees, consultants and collaborative partners upon commencement of a relationship with us; however, these agreements may not
provide meaningful protection against the unauthorized use or disclosure of our trade secrets or other confidential information, and adequate remedies may
not exist when unauthorized uses or disclosures occur.
Our inability to maintain the proprietary nature of our technology through patents, copyrights or trade secrets would impair our competitive
advantages and could have a material adverse effect on our operating results, financial condition and future growth prospects. In particular, a failure to
protect our IP rights might allow competitors to copy our technology or create counterfeit or pirated versions of our products, which could adversely affect
our reputation, pricing and market share.
Litigation, interferences, oppositions, re-exams, inter partes reviews, post grant reviews or other proceedings have been necessary and will likely be
needed in the future to determine the validity and scope of certain of our IP rights and the IP rights claimed by third parties to determine the validity, scope
or non-infringement of certain patent rights pertinent to the manufacture, use or sale of our products and the products of competitors. Asserting or
defending these types of proceedings can be unpredictable, protracted, time consuming, expensive and distracting to management and technical personnel.
The outcome of such proceedings could adversely affect the validity and scope of our patent or other IP rights, hinder our ability to manufacture and market
our products, require us to seek a license for infringing products or technologies or result in the assessment of significant monetary damages. An
unfavorable ruling could include monetary damages, an injunction prohibiting us from selling our products, or an exclusion order preventing us from
importing our products in one or more countries. Moreover, independent actions by competitors, customers or others have been brought alleging that our
efforts to assert or attempt to enforce our patent or other IP rights constitute unfair competition or violations of antitrust laws in the U.S. and other
jurisdictions and investigations and additional litigation based on the same or similar claims may be brought in the future. The potential effects on our
business operations resulting from litigation, whether or not ultimately determined in our favor or settled by us, are costly and could adversely affect our
results of operations and stock price.
If we or any vendors on whose products or services we rely for our products and services infringe the patents or IP rights of other parties or are
subject to a patent infringement claim, our ability to grow our business may be severely limited.
Extensive litigation over patents and other IP rights is common in the medical device, optical scanner, 3D printing and other technologies and
industries on which our products and services are based. We have been sued for infringement of third parties’ patents in the past and we are currently
defending patent infringement lawsuits and other legal claims. In addition, we periodically receive letters from third parties drawing our attention to their
patent rights. While we do not believe we infringe upon any valid and enforceable rights that have been brought to our attention, there may be other more
pertinent rights of which we are presently unaware. The defense and prosecution of IP lawsuits, interference proceedings and related legal and
administrative proceedings could result in substantial expense to us and significant diversion of effort by our technical and management personnel. An
adverse determination in any legal proceeding to which we may become a party could subject us to significant liabilities, exclusion orders or injunctions
that may prevent or limit our rights to sell or import our products in one or more countries. An adverse determination of this nature could require us to seek
licenses from third parties. Licenses may not be available on commercially reasonable terms or at all, in which event, our business would be materially
adversely affected.
Obtaining approvals and complying with governmental regulations, particularly those related to personal healthcare information, financial
information, quality systems and data privacy, is expensive and time-consuming, and any failure to obtain or maintain approvals or comply with
regulations regarding our products or services or the products and services of our suppliers or customers could materially harm our sales, result in
substantial penalties and cause harm to our reputation.
As a supplier of medical devices and solutions, we and many of our healthcare provider customers, suppliers and distributors are subject to extensive
and frequently changing regulations under numerous federal, state, local and foreign laws, including those regulating:
the 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 induce
the order, purchase or recommendation of our products; and
the marketing and advertising of our products.
•
The healthcare market itself is also highly regulated and subject to changing political, economic and regulatory influences. For instance, regulations
affecting the security and privacy of patient healthcare information applicable to healthcare providers
29
and their business associates, such as HIPAA, may require us to make significant and unplanned enhancements of software applications or services, result
in delays or cancellations of orders, or result in the revocation of endorsement of our products and services by healthcare participants. Our critical vendors
and service providers are similarly subject to various regulations. Our failure or the failure of our suppliers, customers, advertisers and influencers to
strictly adhere to clearances or approvals in the labeling, marketing and sales of our products and services could subject us to claims or litigation, including
actions alleging false or misleading advertising, unfair or anti-competitive business practices or other violations of laws or regulations, which may result in
costly investigations, fines, penalties, as well as material judgments, settlements or decrees. There can be no assurance that we will adequately address the
business risks associated with the implementation and compliance with such laws or that we will be able to take advantage of any resulting business
opportunities.
Furthermore, in general before we can sell a new medical device or market a new use of or claim for an existing product, we must obtain clearance or
approval to gain market access unless an exemption applies. For instance, in the U.S., FDA regulations are wide ranging and govern, 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.
It takes significant time, effort and expense to obtain and maintain FDA clearances or approvals of products and services and there is no guarantee we
will successfully or timely obtain or maintain approvals in all or any of the countries in which we do business now or in the future. In other countries, the
requirements to obtain and maintain similar approvals may differ materially from those of the FDA and may require additional time and expense.
Moreover, these laws may change resulting in additional time and expense or loss of approvals. Additionally, the impact of the COVID-19 pandemic on
normal governmental operations may delay our efforts to obtain and maintain approvals, possibly significantly. If approvals to market our products or
services are delayed, whether in the U.S. or other countries, we may be unable to offer them in markets we deem important to our business. Failure or
delays to obtain or maintain regulatory approvals may materially harm our domestic or international operations, and our business as a whole adversely
impacted.
Any failure to comply with applicable regulatory requirements could result in enforcement actions in the U.S. and other countries. For example,
enforcement actions by the FDA may include one or more of the following sanctions:
repair, replacement, refunds, recall or seizure of our products;
• warning letters, fines, injunctions, consent decrees and civil penalties;
•
• operating restrictions or partial suspension or total shutdown of production;
•
• withdrawing clearance or pre-market approvals previously granted; and
•
criminal prosecution.
refusing our requests for 510(k) clearance or pre-market approval of new products, new intended uses, or modifications to existing products;
We and certain of our vendors must also comply with facility registration and product listing requirements of the FDA and adhere to applicable
Quality System regulations. The FDA enforces its Quality System regulations through periodic unannounced inspections. Our failure to satisfactorily
correct an adverse inspection finding or to comply with applicable manufacturing regulations could result in enforcement actions, and we may be required
to find alternative manufacturers, which could be a long and costly process. Any enforcement action by the FDA or foreign governments could have a
material adverse effect on us.
In addition, while we provide significant training to our personnel, they may not properly adhere to our policies or applicable laws or regulations. If
our employees fail to comply with any or all laws or regulations or our policies or procedures, it could result in violations of laws or regulations and subject
us to harm to our reputation, loss of customers, loss or revenues, or regulatory investigations and actions.
Consequently, if we cannot successfully obtain approval for our products or services or timely and cost-effectively maintain compliance with laws
regulating our products and services, our results of operations and financial condition could be harmed.
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We are highly dependent on third-party suppliers, some of whom are sole source suppliers, for certain key machines, components and materials,
and our business and operating results could be harmed if supply is restricted or ends or the price of raw materials used in our manufacturing process
increases.
We are highly dependent on our supply chain, particularly manufacturers of specialized scanning equipment, rapid prototyping machines, resin and
other advanced materials, as well as the optics, electronic and other mechanical components of our intraoral scanners.
We maintain single supply relationships for many of these machines and materials. In particular, our CT scanning and stereolithography equipment
used in our aligner manufacturing and many of the critical components for the optics of our scanners are provided by single suppliers. We rely on a single
third-party manufacturer to supply key sub-assemblies for our iTero Element scanner. We purchase the vast majority of our resin and polymer, the primary
raw materials used in our manufacturing process for clear aligners, from a single source. By using single suppliers for materials and manufacturing in a
limited number of locations, we risk multiple supply chain vulnerabilities. For example, damage or destruction of a facility can materially disrupt our
ability to timely deliver key components and materials or products or a supplier could encounter financial, operating or other difficulties, be unable to hire
or maintain personnel, fail to timely obtain supplies, fail to maintain manufacturing standards or controls, or fail to timely deliver materials, parts or
components. Any one of these occurrences would impact our supply chain.
Restrictions in response to the pandemic and other macroeconomic factors have affected and are expected to continue to affect our supply chain. The
manufacture of product components, the final assembly of our products and other critical operations are concentrated in certain geographic locations,
including China. A significant portion of our finished goods product distribution occurs through China and EMEA. Each of these areas has been affected
by the pandemic and has implemented measures to try to contain its spread, including restrictions on manufacturing facilities, commerce, travel, our
support operations and workforce, and our customers, strategic partners, vendors and suppliers. There is considerable uncertainty regarding the current and
future impact of such measures, including reduced availability or increased cost of air transport, port closures and increased border controls and closures.
Any or all restrictions can limit our manufacturers’ capacity to produce our parts or products and have a material adverse effect on our supply chain.
The effects of climate change on regional and global economies could change the supply, demand or availability of sources of energy or other
resources material to our products and operations and affect the availability or cost of natural resources and goods and services on which we and our
suppliers rely.
Because of our dependence on our suppliers, changes in one or more of our relationships with them or changes in their circumstances can result in
disruptions to the supply chain, which can materially impact our business. For instance, we may be unable to quickly establish or qualify replacement
suppliers creating production interruptions, delays and inefficiencies. Finding substitute manufacturers may be expensive, time-consuming or impossible
and could result in a significant interruption in the supply of one or more products causing us to lose revenues and suffer damage to our customer
relationships. Technology changes by our vendors could disrupt access to required manufacturing capacity or require expensive, time consuming
development efforts to adapt and integrate new equipment or processes. In the event of technology changes, delivery delays, labor stoppages or shortages,
or shortages of, or increases in price for these items, sales may decrease and our business and growth prospects may be harmed.
We rely on highly skilled personnel and, if we fail to attract, motivate, train or retain highly skilled personnel, it may be more difficult to grow
effectively and pursue our strategic priorities.
We are highly dependent on the talent and effort of highly skilled employees, including orthodontists and production technicians in our treatment
planning facilities, and employees on our clinical engineering, technology development and sales teams. To be successful, we must effectively manage our
growth through our ability to identify, hire, develop, motivate, train and retain these skilled employees as well as personnel throughout our organization.
We provide significant training to our personnel and our business will be impacted if our training fails to properly prepare our personnel to perform
the work required, we are unable to successfully instill technical expertise in new and existing personnel or if our techniques prove unsuccessful or not
cost-effective.
Moreover, for certain roles, this training and experience can make key personnel, such as our sales personnel, highly desirable by competitors and
lead to increased attrition. The loss of the services and knowledge from our highly skilled employees may significantly delay or prevent the achievement of
our development and business objectives and could harm our
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business. For example, it can take up to twelve months or more to train sales representatives to successfully market and sell our products and for them to
establish strong customer relationships.
For more discussion related to our personnel and corporate culture see the risk factor, “We rely on our personnel and, if we fail to attract, motivate or
retain personnel, or if our growth harms our corporate culture, it may be more difficult to grow effectively and pursue our strategic priorities.”
If we are unable to expand our workforce, including key sales and other skilled personnel, retain key personnel or quickly replace personnel with
individuals of equivalent technical expertise and qualifications, our net revenues and our ability to maintain market share could be materially harmed.
We use distributors for a portion of the importation, marketing and sales efforts related to our products and services, which exposes us to risks that
may be harmful to our sales and operations, including that these distributors do not comply with applicable laws or our internal procedures.
In addition to our direct sales force, we have and expect to continue to use distributors to import, market, sell, service and support our products. Our
agreements with these distributors are generally non-exclusive and terminable by either party with little notice. If any of these relationships are terminated
and if alternative distributors must be quickly found and trained in the use, marketing, sales and support of our products and services, our revenues and
ability to sell or service our products in markets key to our growth and expansion could be adversely affected. These distributors may also choose to sell
alternative or competing products or services. In addition, we may be held responsible for the actions of these distributors and their employees and agents
for compliance with laws and regulations, including fair competition, bribery and corruption, trade compliance, and marketing and sales activities. A
distributor may also affect our ability to effectively market our products in certain foreign countries or regulatory jurisdictions if it holds the regulatory
authorization in such countries or within such regions and causes, by action or inaction, the suspension of such marketing authorization or sanctions for
non-compliance or prevents us from taking control of any such authorization. It may be difficult, expensive, and time-consuming for us to re-establish
market access or regulatory compliance in such cases.
Our business exposes us to potential liability for the quality and safety of our products and services, how we advertise and market those products
and services and how and to whom we sell them, and we may incur substantial expenses or be found liable for substantial damages or penalties if we
are subject to claims or litigation.
Our products and services involve an inherent risk of claims concerning their design, manufacture, safety and performance, how they are marketed
and advertised in a complex framework of highly regulated domestic and international laws and regulations, how we package, bundle or sell them to
customers who may be private individuals or companies or public entities such as hospitals and clinics and how we train and support doctors, their staffs
and patients who administer or use our products. Moreover, consumer products and services are routinely subject to claims of false, deceptive or misleading
advertising, consumer fraud and unfair business practices. Additionally, we may be held liable if any product we develop or manufacture or services we
offer or perform causes injury or is otherwise found unhealthy. If our products are safe but they are promoted for use or used in unintended or unexpected
ways or for which we have not obtained clearance or approvals (“off-label” usage), we may be investigated, fined or have our products or services enjoined
or approvals rescinded or we may be required to defend ourselves in litigation. Although we maintain insurance for product liability, business practices and
other types of activities we make or offer, coverage may not be available on acceptable terms, if at all, and may be insufficient for actual liabilities. Any
claim for product liability, sales, advertising and business practices, regardless of its merit or eventual outcome, could result in significant legal defense
costs and damage our reputation, increase our expenses and divert management’s attention.
Compliance with current or future environmental, social, and governance (“ESG”) laws may materially increase our costs, expose us to potential
liability and otherwise materially impact our business.
Our operations are subject to a variety of existing local, regional and global ESG laws and regulations, and we will likely be required to comply with
new, broader, more complex and costly laws and regulations that focus on ESG matters in the future. Our compliance obligations will likely span all
aspects of our business and operations, including product design and development, materials sourcing and other procurement activities, energy and natural
resources usage, facilities design and utilization, recycling and collection, transportation, disposal activities and workers’ rights.
The environmental regulations related to greenhouse gases may have an impact on our or our suppliers’ energy sources. Many U.S. and foreign
regulators have enacted or are considering enacting new or additional limits on the emissions of greenhouse gases, including, but not limited to, carbon
dioxide and methane, from power generation units using fossil fuels like
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coal and natural gas. The effects of greenhouse gas emission limits on power generation that have been enacted already or that may be enacted in the future
are subject to significant uncertainties, including the timing of any new requirements and levels of emissions reductions. Initiatives and legislation designed
to reduce, restrict or eliminate greenhouse gas emissions from power generation may have the effect of increasing our costs and those of our suppliers and
could result in manufacturing, transportation and supply chain disruptions and delays if clean energy alternatives are not readily available in adequate
supply when required. Moreover, alternative energy sources that supply the power to meet our current and future demands as well as those of our suppliers
and the global and regional economies in general, coupled with reduced investments in traditional energy sources and infrastructure, may fail to provide the
predictable, reliable, and consistent energy that we, our suppliers and other businesses need for operations.
Regulations related to sourcing of certain metals may have an impact on our business. For instance, the sourcing and availability of metals that may
be used in the manufacture of, or contained in, our products may be affected by laws and regulations in the U.S. or internationally regarding the use of
minerals obtained from certain regions of the world like the Democratic Republic of Congo and adjoining countries. Although we do not believe that we or
our suppliers source minerals from this region, these laws and regulations may decrease the number of suppliers capable of supplying our needs for certain
metals, thereby negatively affecting our ability to manufacture products in sufficient quantities or at competitive prices, leading customers to potentially
choose competitive goods and services.
Meeting our obligations under existing laws, rules, or regulations is already costly to us and our suppliers, and we expect those costs to increase in the
future, possibly materially. Additionally, we expect regulators to perform investigations, inspections and periodically audit our compliance with these laws
and regulations, and we cannot provide assurance that our efforts or operations will be compliant. If we fail to comply with any requirements, we could be
subject to significant penalties or liabilities and we may be required to implement new and significantly more costly processes and procedures to come into
compliance. Further these laws are subject to unpredictable changes. Even if we successfully comply with these laws and regulations, our suppliers may
fail to comply. We may also suffer financial and reputational harm if customers require, and we are unable to deliver, certification that our products are
conflict free. In all of these situations, customers may stop purchasing products from us, and may take legal action against us, which could harm our
reputation, revenues and results of operations.
General Risk Factors
We rely on our personnel and, if we fail to attract, motivate or retain personnel, or if our growth harms our corporate culture, it may be more
difficult to grow effectively and pursue our strategic priorities.
We believe a key factor in our success has been the culture we have created that emphasizes a shared vision and values focusing on agility, customer
success and accountability. We believe this culture fosters an environment of integrity, innovation, creativity, and teamwork. We have also experienced in
the past and expect to experience in the future, difficulties attracting and retaining employees that meet the qualifications, experience, compliance mindset
and values we expect. If we are unable to attract and retain personnel that meet our selection criteria or relax our standards in order to meet the demands of
our growth or if our growth is not managed effectively, our corporate culture, ability to achieve our strategic objectives, and our compliance with
obligations under our internal controls and other requirements may be harmed.
We are considering adjusting our remote working policies, which may cause our culture to change, cause us to incur additional costs, or cause us to
lose talent or fail to attract talent. Many of our employees have worked remotely during the COVID-19 pandemic, which makes it difficult to maintain or
enhance our culture, especially for new employees onboarded remotely. As we evaluate when and how to return employees to our offices globally, we
continue to assess the impact various return-to-office plans may have on our culture, morale, and hiring and retention, particularly considering tight labor
markets and generous or broad remote working policies being adopted by companies against whom we compete for talent. Should we choose to require
employees to return to the office, implement or modify a remote working policy, and/or allow or modify a hybrid approach in which employees can
continue to work from home or other remote locations on a limited or part time basis only, it may materially increase our costs or create unforeseen
challenges or complications, including:
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difficulties maintaining our corporate culture, disruption of morale or decreased loyalty;
negative impacts to collaboration, performance and productivity;
increased employee stress, fatigue or “burn out” by employees unable to disengage their work life from the home life;
increased operational, governance, compliance, and tax risks;
increased attrition or limits to our ability to attract employees who prefer for convenience or for safety reasons to continue working remotely full
time, or in offices or geographies different from where they were hired to work or are expected to work;
problems managing office space requirements;
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concerns regarding favoritism or discrimination;
strains to our business continuity plans and difficulties achieving our strategic objectives; and
increased labor and employment claims and litigation.
Furthermore, our compensation and benefit arrangements, such as our equity award programs, may not always be successful in attracting new
employees and retaining and motivating existing employees. In addition, other internal and external factors can impact our ability to hire and retain talent,
including insufficient advancement or career opportunities, restrictive immigration policy and regulatory changes, an increase in employees choosing to
retire or quit with no immediate intentions to continue working and significantly higher demand for technical and digital talent.
If we are unable to attract and retain personnel that meet our selection criteria or relax our standards in order to meet the demands of our growth or if
our growth is not managed effectively, our corporate culture, ability to achieve our strategic objectives, and our compliance with obligations under our
internal controls and other requirements may be harmed.
Business disruptions could seriously harm our financial condition.
Our global operations have been disrupted in the past and will likely be disrupted and harmed again in the future. The occurrence of any material or
prolonged business disruptions could harm our growth and expansion, result in significant losses, seriously harm our revenues, profitability and financial
condition, adversely affect our competitive position, increase our costs and expenses, and require substantial expenditures and recovery time in order to
fully resume operations.
Human error can have a significant effect on our business. While we train our employees and perform our due diligence when contracting with third
parties, mistakes and accidents still occur. For instance, in March 2021, a container ship carrying some of our products was stuck in the Suez Canal for six
days. Although this did not have a material adverse effect on our business, there is no assurance that such incidents may not impact us in a material way in
the future.
Natural disasters can impact our business, including as a result of earthquakes, tsunamis, floods, droughts, hurricanes, wildfires, extreme weather
conditions, power outages, restrictions and shortages, telecommunications failures, materials scarcity and price volatility, and medical epidemics or health
pandemics. Climate change is likely to increase both the frequency and severity of natural disasters and, consequently, risks to our operations and growth.
Our digital dental modeling and certain of our customer facing operations are primarily processed in our facilities located in Costa Rica. Our aligner molds
and finished aligners are fabricated in Mexico and China. Our locations in Costa Rica and Mexico as well as others are in earthquake zones and may be
subject to other natural disasters. Moreover, a significant portion of our research and development activities are located in California, which suffers from
earthquakes, periodic droughts, power shortages and wildfires. If there is a major earthquake or any other natural disaster in a region where one of these
facilities is located, our employees could be impacted, our research could be lost, and our ability to create ClinCheck treatment plans, respond to customer
inquiries or manufacture and ship our aligners could be compromised which could result in our customers experiencing significant delays receiving their
aligners and a decrease in service levels.
When human induced or natural disasters occur, they may, individually or in the aggregate, affect our ability to provide products, services and
solutions to our customers, and could cause production delays or limitations, create adverse effects on distributors, disrupt supply chains, result in shipping
and distribution disruptions and reduce the availability of or access to one or more facilities, any of which could materially and adversely affect our
business, financial condition and results of operations.
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 bodies formed to interpret and create appropriate accounting policies. A change in these policies or in the way these policies are interpreted by us or
regulators can have a significant effect on our reported results and may even retroactively affect previously reported transactions.
We are required to annually assess our internal control over financial reporting and any adverse results from such assessment may result in a loss
of investor confidence in our financial reports and have an adverse effect on our stock price.
We are required to furnish in our Form 10-K a report by our management regarding the effectiveness of our internal control over financial reporting
that includes, among other things, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year,
including a statement as to whether our internal control over financial reporting is effective. Our internal controls may become inadequate because of
changes in personnel, updates and upgrades to existing software including our ERP software system, changes in accounting standards or interpretations of
existing standards,
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and, as a result, 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 our management and our finance staff, may require additional staffing and infrastructure investments and increases our costs of doing
business. If we are unable to 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 of our internal controls or conclude that our internal controls are ineffective), the timely filing of our financial reports could
be delayed or we could be required to restate past reports, and cause us to lose investor confidence in the accuracy and completeness of our financial
reports in the future, which could have an adverse effect on our stock price.
We are exposed to fluctuations in currency exchange rates and inflation, each of which could negatively affect our financial condition and results
of operations.
Although the U.S. dollar is our reporting currency, a growing portion of our net revenues and net income are generated in foreign currencies. Net
revenues and net income generated by subsidiaries operating outside of the U.S. are translated into U.S. dollars using constantly, often substantially,
fluctuating exchange rates. As a result, negative movements in exchange rates against the U.S. dollar have and may increasingly adversely affect our net
revenues and net income in our consolidated financial statements. We enter into currency forward contract transactions in an effort to cover some of our
exposure to currency fluctuations, but there is no assurance these transactions will fully or effectively hedge our exposure to currency fluctuations, and,
under certain circumstances, these transactions could have an adverse effect on our financial condition.
We also experienced rising inflationary pressures in 2021 and expect such pressures to continue in 2022. Cost inflation, including increases in ocean
container rates, raw material prices, labor rates, and domestic transportation costs threaten to impact our profitability and our ability to recover these cost
increases through price increases may continue to lag, resulting in downward pressure on our gross margin and operating margin. Any attempts to offset
cost increases with price increases may result in reduced sales, increase customer dissatisfaction or otherwise harm our reputation.
If we fail to manage our exposure to global financial and securities market risks successfully, our operating results and financial statements could
be materially impacted.
The primary objective of our investment activities is to preserve principal. To achieve this objective, a majority of our marketable investments are
investment grade, liquid, fixed-income securities and money market instruments denominated in U.S. dollars. If the carrying value of an investment
exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we are required to write down the value of the investment, which
could materially harm our results of operations and financial condition. Moreover, the performance of certain securities in our investment portfolio
correlates with the credit condition of the U.S. financial sector. In an unstable credit or economic environment, it is necessary to assess the value of our
investments more frequently and we might incur significant realized, unrealized or impairment losses associated with these investments.
Additionally, in July 2017, the United Kingdom Financial Conduct Authority announced that it would stop compelling banks to submit interest rates
for the calculation of the London Interbank Offered Rate (“LIBOR”) after 2021. Although we do not have any outstanding debt under our 2020 Credit
Facility, were we to draw on it, the outstanding amounts would bear interest at fluctuating interest rates on an approved replacement benchmark. We also
have other contracts indexed to LIBOR. We continue to monitor this matter and evaluate the related risks and potential impact of LIBOR’s expiration. Any
indebtedness that we incur may be indexed to a replacement benchmark, such as the Secured Overnight Financing Rate (“SOFR”). Any such change could
cause the effective interest rate under an agreement, including our 2020 Credit Facility, and our overall interest expense to increase, adversely affecting our
cash flows and results of operations.
If our goodwill or long-lived assets become impaired, we may be required to record a significant charge to earnings.
Under GAAP, we review our goodwill and long-lived asset group for impairment when events or changes in circumstances indicate the carrying value
may not be recoverable. Additionally, goodwill is required to be tested for impairment at least annually. The qualitative and quantitative analysis used to
test goodwill are dependent upon various assumptions and reflect management’s best estimates. Changes in certain assumptions including revenue growth
rates, discount rates, earnings multiples and future cash flows may cause a change in circumstances indicating that the carrying value of goodwill or the
asset group may be impaired and assessing these assumptions and predicting and forecasting future events can be difficult. Goodwill and purchased assets
require periodic fair value assessments to determine if they have become impaired. Consequently, we may be required to record a significant charge to
earnings in the financial statements during the period in which any impairment of goodwill or long-lived asset group is determined.
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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 the global economic environment, changes in legal entity structure or activities performed within our entities, changes in tax laws,
regulations and/or rates, new or changes to accounting pronouncements, changing interpretations of existing tax laws or regulations, changes in the relative
proportions of revenues and income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates, changes in overall
levels of pretax earnings, the future levels of tax benefits of stock-based compensation, settlement of income tax audits and non-deductible goodwill
impairments. For example, our effective tax rate varied significantly in the first quarter of fiscal 2020 due to the relocation of our EMEA regional
headquarters from the Netherlands to Switzerland.
Our effective tax rate is also dependent in part on forecasts of full year results which can vary materially. Furthermore, we may continue to experience
significant variation in our effective tax rate related to excess tax benefits on stock-based compensation, particularly in the first quarter of each year when
the majority of our equity awards vest.
New tax laws and practice, changes to existing tax laws and practice, or disputes regarding the positions we take regarding tax laws, could
negatively affect our provision for income taxes as well as our ongoing operations.
As a U.S. multinational corporation, we are subject to tax laws both within and outside of the U.S. and significant judgment is required in determining
our worldwide provision for income taxes. Changes in tax laws or changes to how those laws are applied to our business in practice, could affect the
amount of tax to which we are subject and the manner in which we operate. Additionally, the Organization for Economic Cooperation and Development’s
(“OECD”) Base Erosion and Profit Shifting (“BEPS”) project has resulted in considerable new reporting obligations worldwide as OECD member
countries have implemented its guidance. The OECD continues to publish guidance pursuant to the BEPS and other projects which, if adopted by member
countries, may affect our tax positions in many of the countries in which we do business.
Moreover, the application of indirect taxes (such as sales and use tax (“SUT”), value-added tax (“VAT”), goods and services tax (“GST”), and other
indirect taxes) to our operations is complex and evolving. U.S. states, local and foreign taxing jurisdictions have differing rules and regulations governing
differing types of taxes, and these rules and regulations are subject to varying interpretations and exemptions that may change over time. We collect and
remit SUT, VAT, GST and other taxes in many jurisdictions and we are routinely subject to audits. The positions we take regarding taxes as well as the
amounts we collect or remit may be challenged and we may be liable for failing to collect or remit all or any portion of taxes deemed owed or the taxes
could exceed our estimates. One or more U.S. states or countries may seek to impose incremental or new sales, use, or other tax collection obligations on us
or may determine that such taxes should have but have not been paid by us.
We are routinely subject to audits regarding our tax reporting and remissions by local and national governments. We may also be subject to audits in
U.S. states, local and foreign jurisdictions for which we have not accrued tax liabilities. The positions we take and assumptions we make regarding taxes as
well as the amounts we collect or remit may be challenged and we may be liable for failing to collect or remit all or any portion of taxes deemed owed or
the taxes could exceed our estimates. If we dispute rulings or positions taken by tax authorities, we may incur expenses and expend significant time and
effort to defend our positions, which may be costly.
The application of existing, new, or future tax laws, and results of audits, whether in the U.S. or internationally, could harm our business. Furthermore
there have been and will continue to be substantial ongoing costs associated with complying with the various tax requirements and defending our positions
in the numerous markets in which we conduct or will conduct business.
We have in the past and may again in the future invest in or acquire other businesses, products or technologies which may require significant
management attention, disrupt our business, dilute stockholder value and adversely affect our results of operations.
Periodically, we may acquire, or make investments in, complementary companies, products or technologies like our acquisition of exocad in 2020.
Alternatively, we may be unable to find suitable investment or acquisition targets in the future, and we may not be able to complete investments or
acquisitions on favorable terms, if at all. If we do make investments or complete acquisitions, we may not ultimately strengthen our competitive position or
achieve our goals or desired synergies, and any investments that we make or acquisitions we complete could be viewed negatively by our customers,
securities analysts and investors. Moreover, to the extent we make strategic investments, the companies in which we invest may fail or we may ultimately
own less than a majority of the outstanding shares of the company and be outvoted on critical matters or issues that could harm us or the value of our
investment.
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Additionally, as an organization we do not have a history of significant acquisitions or integrating their operations and cultures with our own. As such
we are subject to multiple vulnerabilities and risks when making a strategic investment or acquisition, including we may:
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fail to perform proper due diligence and inherit or fail to uncover material issues of the acquired company or assets, including IP or other litigation
or ongoing investigations, accounting irregularities or improprieties, bribery, corruption or other compliance liabilities;
fail to comply with regulations, governmental orders or decrees;
create IT security and privacy compliance issues;
invest in companies that generate net losses and the market for their products, services or technologies may be slow to develop;
not realize a positive return on investment or determine that our investments have declined in value, such that we may be required to record
impairments which could be material and could have an adverse impact on our financial results;
have to pay cash, incur debt or issue equity securities to pay for an acquisition, adversely affecting our liquidity, financial condition or the value of
our common stock. The sale of equity or issuance of debt to finance any acquisition could result in dilution to our stockholders. The occurrence of
indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede our ability to
manage our operations;
find it difficult to implement and harmonize company-wide financial reporting, forecasting and budgeting, accounting, billing, information
technology and other systems due to inconsistencies in standards, internal controls, procedures and policies;
require significant time and resources to effectuate the transition;
fail to retain key personnel;
inaccurately forecast the financial impact of an acquired business;
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• not realize any or all or material portions of the expected synergies and benefits of the acquisition; or
• unsuccessfully evaluate or utilize the acquired technology or acquired company’s know-how or fail to successfully integrate any acquisitions or
the technologies acquired.
Moreover, opposition to one of more acquisitions could lead to negative ratings by analysts or investors, give rise to objections by one or more
stockholders or result in stockholder activism, any of which could harm our stock price. Acquisitions can also lead to large non-cash charges that can have
an adverse effect on our results of operations as a result of write-offs for items such as future impairments of intangible assets and goodwill or the recording
of stock-based compensation.
Historically, the market price for our common stock has been volatile.
The market price of our common stock is subject to rapid and wide price fluctuations in response to various factors, many of which are beyond our
control. The factors include:
the impact on global and regional economies as a result of the COVID-19 pandemic;
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• quarterly variations in our results of operations and liquidity or changes in our forecasts and guidance;
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changes in recommendations by the investment community or speculation in the press or investment community regarding estimates of our net
revenues, operating results or other performance indicators;
announcements by us or our competitors or new market entrants, including strategic actions, management changes, and material transactions or
acquisitions;
technical factors in the public trading markets for our stock that may produce price movements that may or may not comport with macro, industry
or company-specific fundamentals, including, without limitation, the sentiment of retail investors (including as it may be expressed on financial
trading and other social media sites), the amount and status of short interest in our securities, access to margin debt, trading in options and other
derivatives on our common stock, fractional share trading, and other technical trading factors or strategies;
announcements regarding stock repurchases, sales of our common stock, credit agreements and debt issuances;
announcements of technological innovations, new, additional or revised programs, business models, products or product offerings by us, our
customers or competitors;
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• key decisions in pending litigation, new litigation, settlements, judgments or decrees;
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• general economic market conditions.
sales of stock by us, our officers or directors; and
In addition, the stock market in general, and the market for technology and medical device companies, in particular, have experienced extreme price
and volume fluctuations that are often unrelated to or disproportionate to the operating performance of those companies. These broad market and industry
factors may include market expectations of, or actual changes in, monetary policies that have the goal of easing or tightening interest rates such as the
federal funds rate in the U.S. and austerity measures of governments intended to control budget deficits. Historically, our stock has fluctuated materially
based on broad
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economic and industry factors unrelated to our actual performance and future changes in monetary policies, austerity, and other market factors may
seriously harm the market price of our common stock, regardless of our operating performance. Historically, securities litigation, including securities class
action lawsuits and securities derivative lawsuits, is often brought against an issuing company following periods of volatility in the market price of its
securities and we have not been excepted from such litigation.
We cannot guarantee that we will continue to repurchase our common stock in the future, and any repurchases that we may make may not achieve
our desired objectives.
We have a history of recurring stock repurchase programs intended to return capital to our investors. Future stock repurchase programs are contingent
on a variety of factors, including our financial condition, results of operations, business requirements, and our Board of Directors' continuing determination
that stock repurchases are in the best interests of our stockholders and in compliance with all applicable laws and agreements. There is no assurance that we
will continue repurchasing our common stock in the future, consistent with historical levels or at all, or that our stock repurchase programs will have a
beneficial impact on our stock price.
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 the past, 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 the public market by existing stockholders may adversely affect the market price of our common stock by creating the perception of difficulties or
problems with our business that may depress our stock price.
Increased scrutiny of our ESG policies and practices have and will likely continue to result in additional costs and risks, and may adversely impact
our reputation, employee retention, and willingness of customers and suppliers to do business with us.
Investor advocacy groups, institutional investors, investment funds, proxy advisory services, stockholders, and customers are increasingly focused on
ESG practices of companies. Additionally, public interest and legislative pressure related to public companies’ ESG practices continues to grow. If our ESG
practices fail to meet regulatory requirements or investor or other industry stakeholders' evolving expectations and standards for responsible corporate
citizenship in areas including environmental stewardship, support for local communities, board of director and employee diversity, human capital
management, employee health and safety practices, product quality, supply chain management, corporate governance and transparency and employing ESG
strategies in our operations, our brand, reputation and employee retention may be negatively impacted and customers and suppliers may be unwilling to do
business with us. In addition, as we work to align our ESG practices with industry standards, we have expanded and, in the future, will likely continue to
expand our disclosures in these areas. We also expect to incur additional costs and require additional resources to monitor, report, and comply with our
various ESG practices. If we fail to adopt ESG standards or practices as quickly as stakeholders desire or regulators require, report on our ESG efforts or
practices accurately, or satisfy the disclosure and other expectations of stakeholders or regulators, our reputation, business, financial performance, growth,
and stock price may be adversely impacted.
Item 1B. Unresolved Staff Comments.
None.
38
Item 2. Properties.
We occupy several leased and owned facilities. As of December 31, 2021, the significant facilities occupied were as follows:
Location
Tempe, Arizona, U.S.A.
San Jose, California, U.S.A.
Raleigh, North Carolina, U.S.A.
San Jose, Costa Rica
Moscow, Russia
Petah Tikva, Israel
Rotkreuz, Switzerland
Juarez, Mexico
Ziyang, China
Lease/Own
Lease
Own
Own
Lease and Own
Lease
Lease and Own
Lease
Own
Own
Primary Use
Office for corporate headquarters
Office for research & development and administrative personnel
Office for Americas regional headquarters
Office for administrative personnel, treatment personnel, and customer care
Office for research & development
Manufacturing and office for research & development and administrative personnel
Office for EMEA regional headquarters
Manufacturing and office for administrative personnel
Manufacturing and office for administrative personnel
We believe our existing facilities are in good operating condition and are suitable for the conduct of our business. The significant facilities noted
above are used mostly by all our reportable segments. We also own property in Wroclaw, Poland where we expect to open a new aligner fabrication facility
that will begin serving doctors during the first half of 2022.
Item 3. Legal Proceedings.
For a discussion of legal proceedings, refer to Note 10 "Legal Proceedings" of the Notes to Consolidated Financial Statements in Part II, Item 8 of
this Form 10-K.
Item 4. Mine Safety Disclosures.
Not applicable.
39
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
PART II
Our common stock is traded on the NASDAQ Global Market under the symbol ALGN. As of February 21, 2022, there were approximately 53
holders of record of our common stock. Because the majority of our shares of outstanding common stock are held by brokers and other institutions on
behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Performance Graph
Notwithstanding any statement to the contrary in any of our previous or future filings with the SEC, the following information relating to the price
performance of our common stock shall not be deemed “filed” with the SEC or “Soliciting Material” under the Securities Exchange Act of 1934, as
amended, or subject 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 as soliciting material or to the extent we specifically incorporate this information by reference.
The graph below matches our cumulative 5-year total stockholder return on common stock with the cumulative total returns of the NASDAQ
Composite index, the S&P 500 index and the S&P 1500 Composite Health Care Equipment & Supplies index. The graph tracks the performance of a $100
investment in our common stock and each index (with the reinvestment of all dividends) from December 31, 2016 to December 31, 2021.
40
Unregistered Sales of Equity Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table summarizes the stock repurchase activity for the three months ended December 31, 2021:
Period
Total Number of
Shares Repurchased
Average Price
Paid per Share
Total Number of Shares
Repurchased as Part of
Publicly Announced
Programs
Approximate Dollar Value of
Shares that May Yet Be
Repurchased Under the
Programs
(1)
October 1, 2021 through October 31, 2021
November 1, 2021 through November 30, 2021
December 1, 2021 through December 31, 2021
Total
— $
150,031 $
— $
150,031
—
666.53
—
— $
150,031 $
— $
150,031
824,962,500
724,962,500
724,962,500
1
May 2021 Repurchase Program. On May 13, 2021, we announced that our Board of Directors had authorized a plan to repurchase up to $1.0 billion of our
common stock. See Note 13 “Common Stock Repurchase Programs” of the Notes to Consolidated Financial Statements for details on the May 2021
Repurchase Program.
Item 6. [Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial
statements and related notes included elsewhere in this Annual Report on Form 10-K.
A discussion regarding our financial condition and results of operations for fiscal 2021 compared to fiscal 2020 is presented under Results of
Operations of this Form 10-K. Discussions regarding our financial condition and results of operations for fiscal 2020 compared to 2019 have been omitted
from this Annual Report on Form 10-K, but can be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 26, 2021, which is available
without charge on the SEC's website at www.sec.gov and on our investor relations website at investor.aligntech.com.
Executive Overview of Results
Trends and Uncertainties
Our business strategic priorities remain focused on four principal pillars of growth: (i) international expansion; (ii) GP adoption; (iii) patient demand
and conversion; and (iv) orthodontic utilization.
We strive to deliver on each of our strategic growth drivers through a variety of interrelated enterprise-wide efforts including:
• Our growth depends on the continued penetration and adoption of Invisalign products, intraoral scanners and CAD/CAM solutions in international
markets. We continue to invest in manufacturing operations, research and development, clinical treatment planning, sales and marketing and
building our quality and regulatory capabilities in existing and emerging markets globally. For instance, in 2021, we:
◦
◦
opened new offices in Israel to support the long-term growth of iTero scanner and services business for treatment planning and other
operations;
announced plans to open an aligner fabrication facility in Wroclaw, Poland as a part of our strategy to bring operational facilities closer to
customers and thereby serve them more quickly and respond to their needs more effectively as well as new treatment planning operations
in targeted regional geographies; and
41
◦
expanded our sales and marketing efforts into new countries and regions, including establishing offices in the African countries of Ghana
and Morocco.
• We continue to see growth opportunities with international orthodontists and GP customers, particularly with adopters of digital dentistry
platforms as we continue to tailor our sales and marketing strategies and resources around the unique needs of each customer channel. As we
continue growing, we intend to opportunistically expand our research, development, manufacturing, treatment planning, sales and marketing
operations to meet local and regional demand thoughtfully and deliberately. Over the longer-term, we expect international revenues to grow faster
than Americas' revenues as a result of growing international demand, our continued investment in international market expansion, the size of the
market opportunities and our relatively low market penetration of these regions.
• We believe our training and education efforts are important to building the confidence within the GP and orthodontic communities needed to
increase their adoption and utilization of clear aligner treatment. Accordingly, we continue to expand our Invisalign customer base by educating
new doctors on the benefits of digital dentistry through the Invisalign system and demonstrating to GPs and orthodontists how the iTero portfolio
of intraoral scanners and CAD/CAM restorative services and workflows can increase the profitability of their dental practices by enhancing
patient experiences.
However, training and education alone are insufficient to drive adoption and utilization growth sufficiently. We need to continue to innovate,
develop and bring to market products and solutions that deliver the ever-increasing clinical precision and predictability doctors expect with the
speed and convenience their patients require. For this reason, we expect to continue to invest in research and development and open facilities
closer to our customers and their patients to timely and conveniently support them.
•
Patient demand and conversion depends on making targeted investments in advertising and public relations through social media, influencers and
other forms of digital communications to encourage patients to seek treatment from Invisalign trained doctors. We believe that well-designed,
targeted sales and marketing promotions that build on our strong brand awareness and allow us to differentiate our products and solutions from
traditional and emerging competitors. Accordingly, we continue to increase investments intended to grow consumer demand. For instance, in
2021, we introduced the “Invis-is” consumer advertising campaign with new creative content and influencers focused on teens, moms and young
adults. We expect to make further investments to create additional demand for Invisalign system treatment driving more consumers to dental
professionals for those treatments.
In addition, we are pursuing new lines of Consumer Products that are complementary to our doctor-prescribed principal products currently
available in certain e-commerce channels in the U.S. Similarly, in order to grow our retainer business, which is significantly underpenetrated, we
have begun investing more directly in marketing strategies focused on driving adoption and increasing market share in the U.S.
• We expect global orthodontic utilization rates to continue increasing overall as doctors’ clinical confidence in the efficacy and predictability of the
Invisalign system increases with advancements in products and technology and as patients and doctors demand treatments that emphasize
convenience and safety through fewer in office visits and less invasive and quicker treatments rise. In addition, the teenage and younger market
makes up 75% of the approximately 21 million total annual global orthodontic case starts each year. As we continue to emphasize the benefits of
the Invisalign system for teenage and younger patient treatments through education, training and sales and marketing programs, we expect
utilization rates to rise. However, our utilization rates will fluctuate from period to period due to a variety of factors, which may include seasonal
trends in our business, office closures or slowdowns related to COVID-19-related preventative measures and adoption rates for new products and
features. Refer to “COVID-19 Pandemic Update” below for further details.
•
To achieve these strategic pillars, we expect to continue hiring skilled employees in our clinical engineering, technology development,
manufacturing, sales and management teams. Expanding our workforce will require that we offer competitive compensation and result in
increasing costs which we expect to offset with increasing revenues.
COVID-19 Pandemic Update
The COVID-19 pandemic continues to cause significant volatility and uncertainty in the global and regional economies, leading to changes in
consumer and business behavior, fear and market fluctuations, materials and product shortages and restrictions on business and individual activities, all of
which is materially impacting supply and demand in broad sectors of the world markets. During 2021, many businesses and countries, including the U.S.,
continued imposing preventative and precautionary measures to mitigate the spread of the virus and its variants. As a result of the restrictive measures
imposed, the
42
demand for digital solutions has increased. Society and businesses continue to adapt to practices such as social distancing and remote working that further
the need for greater flexibility and convenience of digital solutions. Our efforts to promote the digital transformation of dental practices with our clear
aligners, intraoral scanners, clinical treatment planning and other offerings has allowed us to quickly respond to fluctuating demands in the dental field in
various regions.
Consequently, despite the economic challenges caused by the pandemic, our revenue grew by 59.9% in 2021 compared to 2020. The growth was a
combination of non-COVID related increases as well as lower revenues in 2020 as the initial preventative measures to combat the spread of the virus
resulted in significant office closures and materially reduced operating capacities for many of our customers. Our overall business performance has been
strong, and we believe the digital transition to dentistry that began before the pandemic will continue to be positive for our business, results of operations,
cash flows, and financial condition, although we intend to adjust spending to coincide with the fluctuating pace of recovery and changes in demand. As
such, our recent operating results and levels of growth may not be indicative of our future performance.
The continuing evolution of the pandemic remains highly fluid and unpredictable, including the setbacks occurring as a result of new virus strains and
new or additional operating restrictions imposed on businesses, supply chain shortages and delays, the positive impacts of vaccinations, the uncertainties
regarding consumer spending as demand for entertainment, dining, and travel returns and remote working diminishes. Our top priority continues to be the
health and safety of our employees and their families, our customers and their staff. In addition, new variants of the virus have caused unpredictable
fluctuations in the number of patients seeking treatment and the number of doctors providing the services and treatments. These fluctuations have adversely
impacted our results of operations from time to time in the recent past and are expected to continue to impact our results, particularly in the near term.
We continue to follow recommended safety measures, including encouraging employees to work from home when possible, suspending non-essential
work travel, and implementing various access controls at our facilities. In order to overcome the supply chain shortages and delays, we are also proactively
communicating with our suppliers and distributors and modifying our purchase order commitments to mitigate the risks of supply chain interruptions and
maintaining inventory levels greater than historically required.
Further discussion of the impact of the COVID-19 pandemic on our business may be found in Part I, Item 1A of this Annual Report on Form 10-K
under the heading “Risk Factors.”
Key financial and operating metrics
We measure our performance against these strategic priorities by the achievement of key financial and operating metrics. For the year ended
December 31, 2021, we achieved the following, taking into consideration that percentage changes from prior year financial results include the impact of
COVID-19 and do not necessarily reflect our future growth rates:
◦
◦
◦
Revenues of $3,952.6 million, an increase of 59.9% year-over-year;
Clear Aligner revenues of $3,247.1 million, an increase of 54.5% year-over-year reflecting the expanding opportunity for Invisalign
system treatment among adults globally, as well as the underlying orthodontic market as we continue to build awareness of the Invisalign
brand and drive utilization among teens and younger patients through increased consumer marketing.
▪ Americas Clear Aligner revenues of $1,544.8 million, an increase of 52.9% year-over-year;
▪
▪
International Clear Aligner revenues of $1,498.7 million, an increase of 55.2% year-over-year;
Clear Aligner volume increase of 54.8% year-over-year and Clear Aligner volume increase for teenage patients of 47.3% year-
over-year;
Imaging Systems and CAD/CAM Services revenues of $705.5 million, an increase of 90.4% year-over-year reflecting strong growth
across all regions with continued adoption of the iTero Element 5D and 5D Plus Series of next generation scanners and imaging systems
launched in February 2021, as well as increased average selling prices (“ASP”) predominately due to favorable product mix shift towards
higher priced scanners;
Income from operations of $976.4 million and operating margin of 24.7%;
Effective tax rate of 23.7%;
◦
◦
◦ Net income of $772.0 million with diluted net income per share of $9.69;
◦
◦ Operating cash flow of $1,172.5 million;
◦
◦ Number of employees was 22,540 as of December 31, 2021, an increase of 24.7% year-over-year.
Cash, cash equivalents and marketable securities of $1,296.7 million as of December 31, 2021;
Capital expenditures of $401.1 million, predominantly related to increases in our manufacturing capacity and facilities; and
43
Other Statistical Data and Trends
• Our primary goal is to establish clear aligners as the principal solution for the treatment of malocclusions and our Invisalign system as the
treatment solution of choice by orthodontists, GPs and patients globally, our intraoral scanning platform as the preferred scanning protocol for
digital dental scans, and our exocad CAD/CAM software as the solution of choice for dental labs. As of December 31, 2021, over 12 million
people worldwide have been treated with our Invisalign system, over 68,000 iTero scanners have been sold and over 47,000 exocad software
licenses have been installed. Management measures these results by comparing to the estimated 500 million people who can benefit from
straighter teeth, 21 million annual orthodontic case starts and 2 million dental practices that could use intraoral scanners and uses this data to target
opportunities to expand the market for orthodontics by educating consumers about the benefits of straighter teeth using the Invisalign system,
dental professionals and/or labs and service providers to use iTero intraoral scanners, and dental labs and practitioners to install exocad
CAD/CAM software.
•
For the fourth quarter of 2021, total Invisalign cases submitted with a digital scanner in the Americas increased to 89.1%, up from 84.0% in the
fourth quarter of 2020 and international scans increased to 80.8%, up from 73.7% in the fourth quarter of 2020. For the fourth quarter of 2021,
96.4% of Invisalign cases submitted by North American orthodontists were submitted digitally. Our annual utilization rates for the last three fiscal
years are as follows:
*
Invisalign utilization rates are calculated by the number of cases shipped divided by the number of doctors to whom cases were shipped. Our International region includes EMEA,
APAC. Latin America (“LATAM”) is excluded from the International region based on its immateriality to the year, however is included in the Total utilization.
• Total utilization rate in 2021 increased to 20.8 cases per doctor compared to 16.1 cases per doctor in 2020 and 15.9 cases per doctor in 2019.
• North America: Utilization rate among our North American orthodontist customers increased to 98.1 cases per doctor in 2021 compared
to 67.3 cases per doctor in 2020 and 65.0 cases per doctor in 2019 and the utilization rate among our North American GP customers
increased to 14.3 cases per doctor in 2021 compared to 9.6 cases per doctor in 2020 and 9.5 cases per doctor in 2019.
•
International: International doctor utilization rate increased to 17.5 cases per doctor in 2021 compared to 14.5 cases per doctor in 2020
and 13.8 cases per doctor in 2019.
44
Results of Operations
Net Revenues by Reportable Segment
We group our operations into two reportable segments: Clear Aligner segment and Systems and Services segment.
• Our Clear Aligner segment consists of Comprehensive Products, Non-Comprehensive Products and Non-Case revenues as defined below:
• Comprehensive Products include, but are not limited to, Invisalign Comprehensive and Invisalign First.
• Non-Comprehensive Products include, but are not limited to, Invisalign Moderate, Lite and Express packages and Invisalign Go and
Invisalign Go Plus.
• Non-Case products include, but are not limited to, retention products, Invisalign training, adjusting tools used by dental professionals
during the course of treatment and, more recently, Consumer Products that are complementary to our doctor-prescribed principal products
such as aligner cases (clamshells), teeth whitening products, cleaning solutions (crystals, foam and other material) and other oral health
products available in certain e-commerce channels in the U.S.
• Our Systems and Services segment consists of our iTero intraoral scanning systems, which includes a single hardware platform and restorative or
orthodontic software options. Our services include subscription software, disposables, rentals, pay per scan services, as well as exocad’s
CAD/CAM software solutions that integrate workflows to dental labs and dental practices.
Net revenues for our Clear Aligner and Systems and Services segments by region for the year ended December 31, 2021, 2020 and 2019 are as
follows (in millions):
Net Revenues
Clear Aligner revenues:
Americas
International
Non-case
Total Clear Aligner net
revenues
Systems and Services net
revenues
Total net revenues
$
$
$
Year Ended December 31,
2021
2020
Change
Year Ended December 31,
2020
2019
Change
1,544.8 $
1,498.7
203.7
1,010.2 $
965.4
125.8
534.5
533.2
77.8
52.9 % $
55.2 %
61.9 %
1,010.2 $
965.4
125.8
1,022.1 $
881.4
122.3
(11.9)
84.1
3.5
(1.2)%
9.5 %
2.9 %
3,247.1 $
2,101.5 $
1,145.6
54.5 % $
2,101.5 $
2,025.8 $
75.7
3.7 %
705.5
3,952.6 $
370.5
2,471.9 $
335.0
1,480.6
90.4 %
59.9 % $
370.5
2,471.9 $
381.0
2,406.8 $
(10.6)
65.1
(2.8)%
2.7 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Clear Aligner Case Volume
Case volume data which represents Clear Aligner case shipments for the year ended December 31, 2021, 2020 and 2019 is as follows (in thousands):
Year Ended December 31,
2020
2021
Change
Year Ended December 31,
2019
2020
Change
Total case volume
2,547.7
1,645.3
902.4
54.8 %
1,645.3
1,537.1
108.3
7.0 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Total net revenues increased by $1,480.6 million in 2021 as compared to 2020 primarily as a result of increases in Clear Aligner volume of 54.8% and
an increase in the number of scanners recognized across most regions.
Clear Aligner - Americas
Americas net revenues increased by $534.5 million in 2021 as compared to 2020 primarily due to a 57.6% increase in volume which resulted in
higher net revenues of $582.1 million, partially offset by lower ASP that decreased net revenues by
45
$47.7 million. Lower ASP was mostly due to higher promotional discounts which decreased revenue by $52.1 million and net deferrals which decreased
revenues by $40.3 million. The decreases in ASP were partially offset by favorable product mix shift which increased net revenues by $34.2 million and
favorable exchanges rates which increased net revenues by $12.2 million.
Clear Aligner - International
International net revenues increased by $533.2 million in 2021 as compared to 2020 primarily due to a 51.6% increase in volume which resulted in
higher net revenues by $497.8 million. Higher ASP increased net revenues by $35.4 million mostly due to favorable exchange rates which increased net
revenues by $61.8 million and favorable product mix shift which increased net revenues by $27.6 million. The increases in ASP were partially offset by
higher net deferrals which decreased net revenues by $49.6 million.
Clear Aligner - Non-Case
Non-case net revenues increased by $77.8 million in 2021 compared to 2020 due to increased volume for retention products across all regions
primarily driven by Vivera retainers.
Systems and Services
Systems and Services net revenues increased by $335.0 million in 2021 as compared to 2020 due to a higher number of scanners recognized which
increased net revenues by $186.3 million. Net revenues also increased by $97.7 million as a result of higher iTero service revenues mostly due to a larger
scanner install base and additional exocad CAD/CAM revenues. Additionally, higher scanner ASP increased net revenues by $51.0 million mostly due to
favorable product mix shift towards higher priced scanners such as the iTero Element Plus Series.
Cost of net revenues and gross profit (in millions):
Clear Aligner
Cost of net revenues
% of net segment revenues
Gross profit
Gross margin %
Systems and Services
Cost of net revenues
% of net segment revenues
Gross profit
Gross margin %
Total cost of net revenues
% of net revenues
Gross profit
Gross margin %
Year Ended December 31,
2020
2021
Change
Year Ended December 31,
2019
2020
Change
$
$
$
$
$
$
772.7
23.8 %
2,474.4
76.2 %
244.5
34.7 %
461.0
65.3 %
1,017.2
25.7 %
2,935.4
74.3 %
$
$
$
$
$
$
569.3
27.1 %
1,532.1
72.9 %
139.4
37.6 %
231.1
62.4 %
708.7
28.7 %
1,763.2
71.3 %
$
$
$
$
$
$
203.4 $
569.3
27.1 %
942.2 $
1,532.1
105.1 $
229.9 $
308.5 $
72.9 %
139.4
37.6 %
231.1
62.4 %
708.7
28.7 %
1,172.1 $
1,763.2
71.3 %
$
$
$
$
$
$
526.0
26.0 %
1,499.7
74.0 %
136.9
35.9 %
244.2
64.1 %
662.9
27.5 %
1,743.9
72.5 %
$
$
$
$
$
$
43.3
32.4
2.5
(13.1)
45.8
19.3
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Cost of net revenues includes personnel-related costs including payroll and stock-based compensation for staff involved in the production process, the
cost of materials, packaging, freight and shipping related costs, depreciation on capital equipment and facilities used in the production process, amortization
of acquired intangible assets and training costs.
Clear Aligner
The gross margin percentage increased in 2021 as compared to 2020 primarily due to manufacturing efficiencies driven by higher production
volumes.
46
Systems and Services
The gross margin percentage increased in 2021 as compared to 2020 as a result of higher ASP from a product mix shift and an increase in service
revenues which was partially offset by higher freight costs.
Selling, general and administrative (in millions):
Selling, general and administrative
% of net revenues
Year Ended December 31,
2020
2021
1,200.8
1,708.6
$
43.2 %
48.6 %
$
Change
$
507.9 $
Year Ended December 31,
2019
2020
1,072.1
1,200.8
$
48.6 %
44.5 %
Change
$
128.7
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Selling, general and administrative expense generally includes personnel-related costs, including payroll, stock-based compensation and commissions
for our sales force, marketing and advertising expenses including media, public relations, marketing materials, clinical education, trade shows and industry
events, legal and outside service costs, equipment, software and maintenance costs, depreciation and amortization expense and allocations of corporate
overhead expenses including facilities and Information Technology (“IT”).
Selling, general and administrative expense increased in 2021 compared to 2020 primarily due to higher compensation related costs of $235.0 million
from higher salaries, fringe benefits, incentive bonuses and commissions due to increased headcount as we continue to invest in sales and marketing to
penetrate into new markets as well as higher advertising and marketing costs of $183.4 million.
Research and development (in millions):
Research and development
% of net revenues
$
250.3
$
175.3
$
75.0 $
175.3
$
157.4
$
17.9
6.3 %
7.1 %
7.1 %
6.5 %
Year Ended December 31,
2020
2021
Change
Year Ended December 31,
2019
2020
Change
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Research and development expense generally includes personnel-related costs, including payroll and stock-based compensation, outside service costs
associated with the research and development of new products and enhancements to existing products, software, equipment, material and maintenance
costs, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and IT.
Research and development expense increased in 2021 compared to 2020 primarily due to higher compensation costs including higher salaries, fringe
benefits and incentive bonuses mainly from increased headcount as we continue to focus our investments in innovation and research.
Income from operations (in millions):
Clear Aligner
Income from operations
Operating margin %
Systems and Services
Income from operations
Operating margin %
1
Total income from operations
Operating margin %
Year Ended December 31,
2020
2021
Change
Year Ended December 31,
2019
2020
Change
$
$
$
1,325.9
40.8 %
259.1
36.7 %
976.4
24.7 %
$
$
$
768.0
36.5 %
96.1
25.9 %
387.2
15.7 %
$
$
$
557.8 $
163.1 $
589.2 $
768.0
36.5 %
96.1
25.9 %
387.2
15.7 %
$
$
$
836.0
41.3 %
137.7
36.1 %
542.5
22.5 %
$
$
$
(67.9)
(41.7)
(155.3)
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
1
Refer to Note 18 “Segments and Geographical Information” of the Notes to Consolidated Financial Statements for details on unallocated corporate expenses and
the reconciliation to Consolidated Income from Operations.
47
Clear Aligner
Operating margin percentage increased in 2021 compared to 2020 due to higher gross margins and operating leverage on higher net revenues.
Systems and Services
Operating margin percentage increased in 2021 compared to 2020 due to operating leverage on higher net revenues and higher gross margins due to a
favorable mix shift towards higher priced scanners.
Interest income (in millions):
Interest income
% of net revenues
Year Ended December 31,
2020
2021
$
$
3.1
0.1 %
$
3.1
0.1 %
Change
— $
Year Ended December 31,
2019
2020
$
3.1
0.1 %
12.5
$
0.5 %
Change
(9.4)
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Interest income generally includes interest earned on cash, cash equivalents and investment balances. In 2021, there was no change to interest income
compared to 2020.
Other income (expense), net (in millions):
Other income (expense), net
% of net revenues
Year Ended December 31,
2020
2021
$
32.9
$
0.8 %
(11.3)
(0.5)%
$
Change
44.3 $
Year Ended December 31,
2019
2020
(11.3)
(0.5)%
$
$
7.7
0.3 %
Change
(19.0)
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Other income (expense), net, generally includes foreign exchange gains and losses, gains and losses on foreign currency forward contracts, interest
expense, gains and losses on equity investments and other miscellaneous charges.
Other income (expense), net, increased in 2021 compared to 2020 primarily due to a $43.4 million gain related to the SDC arbitration award
recognized in the first quarter of 2021, a $10.2 million loss on a foreign currency forward contract related to the exocad acquisition recognized in 2020 and
an increase due to fair value changes relating to our investments in privately held companies recognized during 2021 compared to 2020. These increases
were partially offset by net foreign exchange losses in 2021 as compared to net foreign exchange gains in 2020.
Provision for (benefit from) income taxes (in millions):
Provision for (benefit from) income taxes
Effective tax rates
$
Year Ended December 31,
2020
2021
(1,396.9)
$
240.4
23.7 %
Change
$
1,637.3 $
Year Ended December 31,
2020
2019
(1,396.9)
$
(368.6)%
(368.6)%
Change
$
(1,509.3)
112.3
20.0 %
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
The increase in our effective tax rate for the year ended December 31, 2021 compared to 2020 is primarily attributable to the recognition of tax
benefits associated with the intra-entity transfer of certain intellectual property rights and fixed assets during the year ended December 31, 2020.
During 2020, we completed an intra-entity transfer of certain intellectual property rights and fixed assets to our Swiss entity. The transfer of
intellectual property rights did not result in a taxable gain; however, it did result in a step-up of the Swiss tax deductible basis in the transferred assets, and
accordingly, created a temporary difference between the book basis and the tax basis of such intellectual property rights. Consequently, this transaction
resulted in the recognition of a deferred tax asset and related one-time tax benefit of approximately $1,493.5 million during the year ended December 31,
2020, which is the net impact of the deferred tax asset recognized as a result of the additional Swiss tax deductible basis in the transferred assets and certain
costs related to the transfer of fixed assets and inventory. The amortization of this deferred tax asset depends on the
48
profitability of our Swiss headquarters and the recognition of this tax benefit is allowed for a maximum recovery period of 15 years.
Liquidity and Capital Resources
Liquidity and Trends
As of December 31, 2021 and 2020, we had the following cash and cash equivalents and short-term and long-term marketable securities (in
thousands):
Cash and cash equivalents
Marketable securities, short-term
Marketable securities, long-term
Total
December 31,
2021
2020
$
$
1,099,370 $
71,972
125,320
1,296,662 $
960,843
—
—
960,843
As of December 31, 2021 and 2020, approximately $713.8 million and $412.5 million, respectively, of cash, cash equivalents and marketable
securities was held by our foreign subsidiaries. Our intent is to permanently reinvest our earnings from our international operations going forward, and our
current plans do not require us to repatriate them to fund our U.S. operations as we generate sufficient domestic operating cash flow and have access to
external funding under our $300.0 million revolving line of credit. We believe that our current cash balances and the borrowing capacity under our credit
facility, if necessary, will be sufficient to fund our business for at least the next 12 months.
Our material cash requirements as of December 31, 2021 are as below:
• Our purchase commitments for goods and services, excluding capital expenditures, totaled $1,278.0 million, of which $731.0 million will be
payable within the next 12 months. These commitments primarily relate to agreements with contract manufacturers and suppliers, sales and
marketing services, research and development services and technological services.
• We expect our investments in capital expenditures to exceed $350.0 million for the next 12 months. Capital expenditures primarily relate to
building construction and improvements as well as additional manufacturing capacity to support our international expansion. This includes our
planned investment in an aligner fabrication facility in Wroclaw, Poland, which is expected to begin serving doctors in 2022, as a part of our
strategy to bring operational facilities closer to customers. As we continue growing, we intend to expand our investments in research and
development, manufacturing, treatment planning, sales and marketing operations to meet local and regional demand.
• We have future operating lease payments of $160.8 million, which includes $17.8 million for leases that have not yet commenced as of
December 31, 2021. Refer to Note 4 “Leases” of the Notes to Consolidated Financial Statements for details on the lease payments.
• We have $725.0 million available for repurchase under the stock repurchase program authorized by our Board of Directors in May 2021. Our
stock repurchase program is subject to periodic evaluations to determine when and if repurchases are in the best interests of our stockholders,
taking into account prevailing market conditions. Refer to Note 13 “Common Stock Repurchase Programs” of the Notes to Consolidated Financial
Statements for details on our stock repurchase programs. Subsequent to year end, during February 2022, we repurchased on the open market
approximately 0.1 million shares of our common stock at an average price of $522.35 per share, including commissions, for an aggregate purchase
price of $75.0 million.
49
Sources and Use of Cash
The following table summarizes our Consolidated Statements of Cash Flows for the year ended December 31, 2021, 2020 and 2019 (in thousands):
2021
Year Ended December 31,
2020
2019
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effects of foreign exchange rate changes on cash, cash equivalents, and
restricted cash
$
Net increase (decrease) in cash, cash equivalents, and restricted cash $
1,172,544 $
(563,430)
(458,332)
(12,117)
138,665 $
662,174 $
(231,506)
(30,808)
10,480
410,340 $
747,270
(350,444)
(485,540)
2,282
(86,432)
Operating Activities
For the year ended December 31, 2021, cash flows from operations of $1,172.5 million resulted primarily from our net income of approximately
$772.0 million as well as the following:
Significant adjustments to net income
• Stock-based compensation of $114.3 million related to equity awards granted to employees and directors;
• Depreciation and amortization of $108.7 million related to our investments in property, plant and equipment and intangible assets; and
• Gain related to our SDC arbitration award of $43.4 million.
Significant changes in working capital
•
•
•
•
Increase of $462.6 million in deferred revenues primarily related to increased case volumes in our Clear Aligner segment, increased scanner
volumes in our Systems and Services segment and timing of revenue recognition;
Increase of $262.1 million in accounts receivable which is primarily a result of the increase in sales;
Increase of $158.5 million in accrued and other long-term liabilities and an increase of $124.6 million in prepaid expenses and other assets due to
the timing of payment and activities; and
Increase of $112.5 million in inventories to support our demand, including safety stock, due to shipping delays during the COVID-19 pandemic as
well as long lead times with our suppliers.
For the year ended December 31, 2020, cash flows from operations of $662.2 million resulted primarily from our net income of approximately
$1,775.9 million as well as the following:
Significant adjustments to net income
• Deferred taxes of $1,491.6 million related to the one-time tax benefit associated with the intra-entity sale of certain intellectual property rights;
• Stock-based compensation of $98.4 million related to equity awards granted to employees and directors; and
• Depreciation and amortization of $93.5 million related to our investments in property, plant and equipment and intangible assets.
Significant changes in working capital
•
•
•
Increase of $228.1 million in deferred revenues primarily related to increased case volumes in our Clear Aligner segment and timing of revenue
recognition;
Increase of $139.8 million in accounts receivable which is primarily a result of the increase and timing in our sales; and
Increase of $52.2 million in accounts payable due to timing of certain invoice payments.
50
Investing Activities
Net cash used in investing activities was $563.4 million for the year ended December 31, 2021 and primarily consisted of purchases of property, plant
and equipment of $401.1 million and purchases of marketable securities of $200.9 million, which were partially offset by $43.4 million of proceeds from
our SDC arbitration award.
Net cash used in investing activities was $231.5 million for the year ended December 31, 2020, which primarily consisted of cash paid for the
acquisition of exocad of $420.8 million, net of cash acquired and purchases of property, plant and equipment of $154.9 million. These outflows were
partially offset by maturities and sales of marketable securities of $321.5 million and $26.9 million received from payments on an unsecured promissory
note issued by SDC in exchange for tendering our shares to them.
Financing Activities
Net cash used in financing activities was $458.3 million for the year ended December 31, 2021 which consisted of payments related to our accelerated
stock repurchase agreements of $375.0 million and payroll taxes paid for equity awards through share withholdings of $108.9 million which were partially
offset by $25.6 million of proceeds from the issuance of common stock.
Net cash used in financing activities was $30.8 million for the year ended December 31, 2020 consisted of payroll taxes paid for equity awards
through share withholdings of $51.1 million which was partially offset by $20.3 million of proceeds from the issuance of common stock.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements
requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures at
the date of the financial statements. We evaluate our estimates on an on-going basis and use authoritative pronouncements, historical experience and other
assumptions as the basis for making the estimates. Actual results could differ from those estimates.
We believe the following critical accounting policies and estimates affect our more significant judgments used in the preparation of our consolidated
financial statements. For further information on all of our significant accounting policies, see Note 1 “Summary of Significant Accounting Policies” of the
Notes to Consolidated Financial Statements under Item 8.
Revenue Recognition
Our revenues are derived primarily from the sale of aligners, scanners, and services from our Clear Aligner and Systems and Services segments. We
enter into sales contracts that may consist of multiple distinct performance obligations where certain performance obligations of the sales contract are not
delivered in one reporting period. We measure and allocate revenues according to ASC 606-10, “Revenues from Contracts with Customers.”
Determining the standalone selling price (“SSP”), allocation of consideration from the contract to the individual performance obligations and the
appropriate timing of revenue recognition is the result of significant qualitative and quantitative judgments. While changes in the allocation of the SSP
between performance obligations will not affect the amount of total revenues recognized for a particular contract, any material changes could impact the
timing of revenue recognition, which would have a material effect on our financial position and result of operations. This is because the contract
consideration is allocated to each performance obligation, delivered or undelivered, at the inception of the contract based on the SSP of each distinct
performance obligation.
We allocate revenues for each clear aligner treatment plan based on each unit’s SSP. Management considers a variety of factors such as same or
similar product historical sales, costs, and gross margin, which may vary over time depending upon the unique facts and circumstances related to each
performance obligation in making these estimates. For treatment plans with multiple future performance obligations, we also consider usage rates, which is
the number of times a customer is expected to order more aligners after the initial shipment. Our process for estimating usage rates requires significant
judgment and evaluation of inputs, including historical usage data by region, country and channel.
We estimate the SSP of each element in a scanner system and services sale taking into consideration same or similar product historical prices as well
as our discounting strategies.
51
Unfulfilled Performance Obligations for Clear Aligners and Scanners
The estimated revenues expected to be recognized in the future related to our unfulfilled performance obligations, including deferred revenues and
backlog, as of December 31, 2021 is $1,307.3 million. This estimate includes both product and service unfulfilled performance obligations and the time
range reflects our best estimate of when we will transfer control to the customer and may change based on customer usage patterns, timing of shipments,
readiness of customers' facilities for installation, and manufacturing availability all of which involve significant judgement. Generally, our deferred revenue
will be recognized over a period of one to five years.
Goodwill and Finite-Lived Acquired Intangible Assets
Goodwill and acquired intangible assets with finite lives are subject to impairment testing and are reviewed for impairment when events or
circumstances indicate that the carrying value of an asset is not recoverable and the carrying amount exceeds its fair value. We evaluate the recoverability
of the carrying value of these identifiable intangible assets based on estimated undiscounted cash flows to be generated from such assets. If the cash flow
estimates or the significant operating assumptions upon which they are based change in the future, we may be required to record impairment charges.
Assumptions and estimates about future values and remaining useful lives of our acquired intangible assets are complex and subjective. They can be
affected by external factors such as industry and economic trends and internal factors such as changes in our business strategy and internal forecasts. Our
ongoing consideration of all these factors could result in impairment charges in the future.
If we were to have impairments to goodwill or finite-lived acquired intangible assets, it could adversely affect our operating results. During the fiscal
year 2021 and 2020, we did not have any impairment charges related to our goodwill or acquired intangible assets.
Accounting for Income Taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. The evaluation of our uncertain tax positions involves significant
judgment in the interpretation and application of U.S. GAAP and complex domestic and international tax laws related to the allocation of international
taxation rights between countries. We are also required to evaluate the realizability of our deferred tax assets on an ongoing basis in accordance with U.S.
GAAP, which requires the assessment of both of our historical and future performance as well as other relevant factors. Realization of our deferred tax
assets is dependent on our ability to generate future taxable income which is determined based on assumptions such as estimated growth rates in revenues,
gross margins, future cash flows and discount rates. The accuracy of these estimates could be affected by unforeseen events or actual results, and the
sustainability of our future tax benefits is dependent upon the acceptance of these valuation estimates and assumptions by the taxing authorities.
Accounting for Legal Proceedings and Litigation
Estimates of probable losses resulting from litigation are inherently difficult to make, particularly when the matters are in early procedural stages with
incomplete facts and information. The final outcome of legal proceedings is dependent on many variables difficult to predict and, therefore, the ultimate
cost to entirely resolve such matters may be materially different than the amount of current estimates. Consequently, new information or changes in
judgments and estimates could have a material adverse effect on our business, financial condition, and results of operations or cash flows.
Recent Accounting Pronouncements
See Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Item 8 for a discussion of recent
accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is
incorporated herein.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of business, we are exposed to foreign currency exchange rate and interest rate risks that could impact our financial position and
results of operations. In addition, we are subject to the broad market risk that is created by the global market disruptions and uncertainties resulting from
the COVID-19 pandemic. Further discussion of the impact of the COVID-19 pandemic on our business may be found in Item 1A of this Annual Report on
Form 10-K under the heading “Risk Factors”.
52
Interest Rate Risk
Changes in interest rates could impact our anticipated interest income on our cash equivalents and investments in marketable securities. Our
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 in
interest 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 if forced to sell securities which have declined in market value due to changes in interest rates. As of December 31, 2021, we had approximately
$197.3 million invested in available-for-sale marketable securities. An immediate 10% change in interest rates would not have a material adverse impact on
our future operating results and cash flows.
We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest
rate risk exposure. Based on interest bearing liabilities we have as of December 31, 2021, we are not subject to risks from immediate interest rate increases.
Currency Rate Risk
As a result of our international business activities, our financial results could be affected by factors such as changes in foreign currency exchange
rates or economic conditions in foreign markets, and there is no assurance that exchange rate fluctuations will not harm our business in the future. We
generally sell our products in the local currency of the respective countries. This provides some natural hedging because most of the subsidiaries’ operating
expenses are generally denominated in their local currencies. Regardless of this natural hedging, our results of operations may be adversely impacted by
exchange rate fluctuations.
We primarily enter into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations on cash
and certain trade and intercompany receivables and payables. These forward contracts are not designated as hedging instruments and do not subject us to
material balance sheet risk due to fluctuations in foreign currency exchange rates. The gains and losses on these forward contracts are intended to offset the
gains and losses in the underlying foreign currency denominated monetary assets and liabilities being economically hedged. These instruments are marked
to market through earnings every period and generally are one month in original maturity. We do not enter into foreign currency forward contracts for
trading or speculative purposes. As our international operations grow, we will continue to reassess our approach to managing the risks relating to
fluctuations in currency rates. It is difficult to predict the impact forward contracts could have on our results of operations.
Although we will continue to monitor our exposure to currency fluctuations, and, where appropriate, may use forward contracts to minimize 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 of operations
and financial position could be material.
53
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Management on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm (PCAOB ID 238)
Consolidated Statements of Operations for the year ended December 31, 2021, 2020 and 2019
Consolidated Statements of Comprehensive Income for the year ended December 31, 2021, 2020 and 2019
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Stockholders’ Equity for the year ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for the year ended December 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
54
Page
55
56
58
59
60
61
62
63
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Align is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed by, or under supervision of, our CEO
and CFO, and effected by the board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control
over financial reporting includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Align;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of Align are being made only in accordance with authorizations of management
and directors of Align; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Align’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment,
management used the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO").
Based on our assessment, management has concluded that, as of December 31, 2021, our internal control over financial reporting was effective based
on criteria in Internal Control - Integrated Framework (2013) issued by the COSO.
The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which is included herein.
/S/ JOSEPH M. HOGAN
Joseph M. Hogan
President and Chief Executive Officer
February 25, 2022
/S/ JOHN F. MORICI
John F. Morici
Chief Financial Officer and Executive Vice President, Global Finance
February 25, 2022
55
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Align Technology, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Align Technology, Inc. and its subsidiaries (the “Company”) as of December 31,
2021 and 2020, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 2021, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2)
(collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of
December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as
of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on
Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the
Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether
effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our
audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
56
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated
financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition – Determination of Standalone Selling Price of Distinct Performance Obligations in Clear Aligner Contracts
As described in Notes 1 and 18 to the consolidated financial statements, the Company recognized net revenues of $3.2 billion from its Clear Aligner
segment for the year ended December 31, 2021. The Company enters into contracts (“treatment plans”) that involve multiple future performance
obligations. Management identifies a performance obligation as distinct if both of the following criteria are met: the customer can benefit from the good or
service either on its own or together with other resources that are readily available to the customer, and the entity’s promise to transfer the good or service
to the customer is separately identifiable from other promises in the contract. Determining the standalone selling price, allocation of consideration from the
contract to the individual performance obligations, and the appropriate timing of revenue recognition is the result of significant qualitative and quantitative
judgments. Management considers a variety of factors such as same or similar product historical sales, costs, and gross margin, which may vary over time
depending upon the unique facts and circumstances related to each performance obligation in making these estimates. Management also considers usage
rates, which is the number of times a customer is expected to order additional aligners. Management’s process for estimating usage rates requires
significant judgment and evaluation of inputs, including historical usage data by region, country and channel.
The principal considerations for our determination that performing procedures related to revenue recognition and the determination of standalone
selling price of distinct performance obligations in Clear Aligner contracts is a critical audit matter are the significant judgment by management in
determining the estimate of standalone selling price, which includes significant assumptions related to usage rates for each distinct performance obligation.
This in turn led to significant auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s determination of the estimates
of standalone selling price and usage rates for each distinct performance obligation.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the
consolidated financial statements. These procedures included testing the effectiveness of controls relating to revenue recognition, including controls over
the determination of standalone selling price for each distinct performance obligation in the Company’s Clear Aligner contracts. These procedures also
included, among others, (i) testing management’s process for determining the estimate of standalone selling price, which included testing the completeness
and accuracy of inputs used and evaluating the reasonableness of factors considered by management related to same or similar product historical sales and
usage rates, and (ii) testing management’s process for estimating usage rates, which included evaluating the reasonableness of inputs evaluated by
management related to historical usage data by region, country and channel.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 25, 2022
We have served as the Company’s auditor since 1997.
57
ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Net revenues
Cost of net revenues
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Impairments and other charges (gains), net
Litigation settlement gain
Total operating expenses
Income from operations
Interest income and other income (expense), net:
Interest income
Other income (expense), net
Total interest income and other income (expense), net
Net income before provision for (benefit from) income taxes and
equity in losses of investee
Provision for (benefit from) income taxes
Equity in losses of investee, net of tax
Net income
Net income per share:
Basic
Diluted
Shares used in computing net income per share:
Basic
Diluted
$
$
$
$
2021
Year Ended December 31,
2020
2019
3,952,584 $
1,017,229
2,935,355
2,471,941 $
708,706
1,763,235
1,708,640
250,315
—
—
1,958,955
976,400
3,103
32,920
36,023
1,012,423
240,403
—
772,020 $
9.78 $
9.69 $
78,917
79,670
1,200,757
175,307
—
—
1,376,064
387,171
3,125
(11,347)
(8,222)
378,949
(1,396,939)
—
1,775,888 $
22.55 $
22.41 $
78,760
79,230
2,406,796
662,899
1,743,897
1,072,053
157,361
22,990
(51,000)
1,201,404
542,493
12,482
7,676
20,158
562,651
112,347
7,528
442,776
5.57
5.53
79,424
80,100
The accompanying notes are an integral part of these consolidated financial statements.
58
ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income
Other comprehensive income (loss):
Change in foreign currency translation adjustment, net of tax
Change in unrealized gains (losses) on investments, net of tax
Other comprehensive income (loss)
Comprehensive income
2021
Year Ended December 31,
2020
2019
772,020 $
1,775,888 $
442,776
(38,680)
(495)
(39,175)
732,845 $
44,383
(194)
44,189
1,820,077 $
1,787
299
2,086
444,862
$
$
The accompanying notes are an integral part of these consolidated financial statements.
59
ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
2021
2020
ASSETS
Current assets:
Cash and cash equivalents
Marketable securities, short-term
Accounts receivable, net of allowance for doubtful accounts of $9,245 and $10,239, respectively
Inventories
Prepaid expenses and other current assets
Total current assets
Marketable securities, long-term
Property, plant and equipment, net
Operating lease right-of-use assets, net
Goodwill
Intangible assets, net
Deferred tax assets
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenues
Total current liabilities
Income tax payable
Operating lease liabilities
Other long-term liabilities
Total liabilities
Commitments and contingencies (Notes 10 and 11)
Stockholders’ equity:
Preferred stock, $0.0001 par value (5,000 shares authorized; none issued)
Common stock, $0.0001 par value (200,000 shares authorized; 78,710 and 78,860 issued and
outstanding, respectively)
Additional paid-in capital
Accumulated other comprehensive income (loss), net
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
$
1,099,370 $
71,972
897,198
230,230
195,305
2,494,075
125,320
1,081,926
121,257
418,547
109,709
1,533,767
57,509
5,942,110 $
163,886 $
607,315
1,152,870
1,924,071
118,072
102,656
174,597
2,319,396
—
8
999,006
4,326
2,619,374
3,622,714
5,942,110 $
960,843
—
657,704
139,237
91,754
1,849,538
—
734,721
82,553
444,817
130,072
1,552,831
35,151
4,829,683
142,132
405,582
777,887
1,325,601
105,748
64,445
100,024
1,595,818
—
8
974,556
43,501
2,215,800
3,233,865
4,829,683
The accompanying notes are an integral part of these consolidated financial statements.
60
ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Balance as of December 31, 2018
Net income
Net change in unrealized gains (losses) from investments
Net change in foreign currency translation adjustment
Issuance of common stock relating to employee equity
compensation plans
Tax withholdings related to net share settlements of
equity awards
Common stock repurchased and retired
Stock-based compensation
Balance as of December 31, 2019
Net income
Net change in unrealized gains (losses) from investments
Net change in foreign currency translation adjustment
Issuance of common stock relating to employee equity
compensation plans
Tax withholdings related to net share settlements of
equity awards
Stock-based compensation
Balance as of December 31, 2020
Net income
Net change in unrealized gains (losses) from investments
Net change in foreign currency translation adjustment
Issuance of common stock relating to employee equity
compensation plans
Tax withholdings related to net share settlements of
equity awards
Common stock repurchased and retired
Stock-based compensation
Balance as of December 31, 2021
Common Stock
Shares
79,778 $
—
—
—
542
—
(1,887)
—
78,433
—
—
—
427
—
—
78,860
—
—
—
442
—
(592)
—
78,710 $
Amount
8 $
—
—
—
—
—
—
—
8
—
—
—
—
—
—
8
—
—
—
—
—
—
—
8 $
Additional
Paid-In
Capital
877,514 $
—
—
—
Accumulated
Other
Comprehensive
Income (Loss), Net
Retained
Earnings
(2,774) $
—
299
1,787
378,143 $
442,776
—
—
Total
1,252,891
442,776
299
1,787
17,907
(57,676)
(18,992)
88,184
906,937
—
—
—
20,314
(51,122)
98,427
974,556
—
—
—
25,623
—
—
—
—
(688)
—
(194)
44,383
—
—
—
43,501
—
(495)
(38,680)
—
17,907
—
(381,007)
—
439,912
1,775,888
—
—
(57,676)
(399,999)
88,184
1,346,169
1,775,888
(194)
44,383
—
20,314
—
—
2,215,800
772,020
—
—
(51,122)
98,427
3,233,865
772,020
(495)
(38,680)
—
—
25,623
(108,917)
(6,592)
114,336
999,006 $
—
—
—
4,326 $
—
(368,446)
—
2,619,374 $
(108,917)
(375,038)
114,336
3,622,714
The accompanying notes are an integral part of these consolidated financial statements.
61
ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes
Depreciation and amortization
Stock-based compensation
Non-cash operating lease cost
Allowance for doubtful accounts provisions
Arbitration award gain
Impairments on long-lived assets
Equity in losses of investee
Gain on lease terminations
Gain from sale of equity method investment
Other non-cash operating activities
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued and other long-term liabilities
Long-term income tax payable
Deferred revenues
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition, net of cash acquired
Purchase of property, plant and equipment
Purchase of marketable securities
Proceeds from maturities of marketable securities
Proceeds from sales of marketable securities
Repayment on unsecured promissory note
Proceeds from arbitration award
Other investing activities
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock
Common stock repurchases
Payroll taxes paid upon the vesting of equity awards
Purchase of finance lease
Net cash used in financing activities
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash
Net increase (decrease) in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of year
Cash, cash equivalents, and restricted cash at end of year
Year Ended December 31,
2020
2019
2021
$
772,020 $
1,775,888 $
442,776
15,455
108,729
114,336
26,807
2,814
(43,403)
—
—
—
—
21,549
(262,066)
(112,450)
(124,626)
19,747
158,543
12,449
462,640
1,172,544
(8,002)
(401,098)
(200,928)
498
3,114
4,594
43,403
(5,011)
(563,430)
(1,491,577)
93,538
98,427
22,467
12,073
—
—
—
—
—
21,670
(139,777)
(29,110)
(21,130)
52,206
42,168
(2,802)
228,133
662,174
(420,788)
(154,916)
(5,341)
42,641
278,817
26,925
—
1,156
(231,506)
25,623
(375,038)
(108,917)
—
(458,332)
(12,117)
138,665
961,474
1,100,139 $
$
20,314
—
(51,122)
—
(30,808)
10,480
410,340
551,134
961,474 $
307
78,990
88,184
18,475
5,853
—
28,498
7,528
(6,792)
(15,769)
24,007
(121,014)
(58,269)
(31,529)
22,099
60,240
14,611
189,075
747,270
—
(149,707)
(693,284)
290,754
194,677
21,820
—
(14,704)
(350,444)
17,907
(399,999)
(57,675)
(45,773)
(485,540)
2,282
(86,432)
637,566
551,134
The accompanying notes are an integral part of these consolidated financial statements.
62
ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Business Description
Align Technology, Inc. (“We”, “Our”, or “Align”) was incorporated in April 1997 in Delaware. Align is a global medical device company primarily
engaged in the design, manufacture and marketing of Invisalign® clear aligners, iTero® intraoral scanners, services for orthodontics, restorative and
aesthetic dentistry and exocad® computer-aided design and computer-aided manufacturing (“CAD/CAM”) software for dental laboratories and dental
practitioners. We also market and sell consumer products that are complementary to our doctor-prescribed principal products under the Invisalign brand,
including retainers, aligner cases (clamshells), teeth whitening products and cleaning solutions (crystals, foam and other material) (collectively “Consumer
Products”). Our primary goal is to establish clear aligners as the principal solution for the treatment of malocclusions and our Invisalign system as the
treatment solution of choice by orthodontists, general dental practitioners and patients globally, our intraoral scanning platform as the preferred scanning
protocol for digital dental scans, and our exocad CAD/CAM software as the solution of choice for dental labs. Our corporate headquarters is located in
Tempe, Arizona, which moved from San Jose, California effective January 1, 2021, and we have offices worldwide. Our Americas regional headquarters is
located in Raleigh, North Carolina; our European, Middle East and Africa (“EMEA”) regional headquarters is located in Rotkreuz, Switzerland; and our
Asia Pacific (“APAC”) regional headquarters is located in Singapore. We have two operating segments: (1) Clear Aligner, known as the Invisalign system,
and (2) Imaging Systems and CAD/CAM services (“Systems and Services”), known as the iTero intraoral scanner and CAD/CAM services.
Basis of Presentation and Preparation
The consolidated financial statements include the accounts of Align and our wholly-owned subsidiaries after elimination of intercompany transactions
and balances.
Out-of-Period Adjustments
For the year ended December 31, 2021 and 2020, we recorded out-of-period corrections that resulted in tax benefits of $16.0 million and
$12.7 million, respectively, in our Consolidated Statement of Operations. We do not believe these out-of-period adjustments are material to the interim or
annual consolidated financial statements for the respective reporting period or to any of the related prior periods.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America
(“U.S.”) requires our management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates, including those related to
revenue recognition, useful lives of intangible assets and property and equipment, long-lived assets and goodwill, income taxes and contingent liabilities,
the fair values of financial instruments, stock-based compensation and valuation of investments in privately held companies among others. We base our
estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making
judgments about the carrying values of assets and liabilities.
Fair Value of Financial Instruments
Fair value is an exit price, representing the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. We use the GAAP fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The three levels of inputs that may be used to measure fair value:
Level 1 - Quoted (unadjusted) prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the asset or liability. We obtain fair values for our Level 2 investments. Our custody bank and asset
managers independently use
63
professional pricing services to gather pricing data which may include quoted market prices for identical or comparable financial instruments, or inputs
other than quoted prices that are observable either directly or indirectly, and we are ultimately responsible for these underlying estimates.
Level 3 - Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the
measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using
pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.
Cash and Cash Equivalents
We consider currency on hand, demand deposits, time deposits, and all highly liquid investments with an original maturity of three months or less at
the date of purchase to be cash and cash equivalents. Cash and cash equivalents are held in various financial institutions in the U.S. and internationally.
Restricted Cash
The restricted cash primarily consists of funds reserved for legal requirements. Restricted cash balances are primarily included in other assets within
our Consolidated Balance Sheets.
Marketable Securities
Our marketable securities consist of marketable debt securities which are classified as available-for-sale and are carried at fair value. Our fixed-
income securities investment portfolio allows for investments with a maximum effective maturity of up to 40 months on any individual security.
Marketable securities classified as current assets have maturities within one year from the balance sheet date. Unrealized gains or losses on such securities
are included in accumulated other comprehensive income (loss), net in stockholders’ equity. Realized gains and losses from sales and maturities of all such
securities are reported in earnings and computed using the specific identification cost method.
All of our marketable securities are subject to a periodic impairment review. We evaluate if an allowance for credit loss is necessary by considering
available information relevant to the collectibility of the security and information about credit rating changes, past events, current conditions, and
reasonable and supportable forecasts. Any allowance for credit loss is recorded as a charge to other income (expense), net, in our Consolidated Statement of
Operations. If we have an intent to sell, or if it is more likely than not that we will be required to sell the security in an unrealized loss position before
recovery of its amortized cost basis, we will write down the security to its fair value and record the corresponding charge as a component of other income
(expense), net in our Consolidated Statement of Operations.
Variable Interest Entities
We evaluate whether an entity in which we have made an investment is considered a variable interest entity (“VIE”). If we determine we are the
primary beneficiary of a VIE, we would consolidate the VIE into our financial statements. In determining if we are the primary beneficiary, we evaluate
whether we have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the
right to receive benefits of the VIE that could potentially be significant to the VIE. Our evaluation includes identification of significant activities and an
assessment of our ability to direct those activities based on governance provisions and arrangements to provide or receive product and process technology,
product supply, operations services, equity funding, financing, and other applicable agreements and circumstances. Our assessments of whether we are the
primary beneficiary of a VIE require significant assumptions and judgments. We have concluded that we are not the primary beneficiary of our VIE
investments; therefore, we do not consolidate their results into our consolidated financial statements.
Investments in Privately Held Companies
Investments in privately held companies in which we can exercise significant influence but do not own a majority equity interest or otherwise control
are accounted for under the equity method. We record our share of their operating results within equity in losses of investee, net of tax, in our Consolidated
Statement of Operations.
Investments in privately held companies in which we cannot exercise significant influence and do not own a majority equity interest or otherwise
control are accounted for under the measurement alternative. Under the measurement alternative, the carrying value of our equity investment is adjusted to
fair value for observable transactions for identical or similar investments of the same issuer. Investments in equity securities are reported on our
Consolidated Balance Sheet as other assets,
64
and we periodically evaluate them for impairment. We record any change in carrying value of our equity securities, in other income (expense), net in our
Consolidated Statement of Operations.
Derivative Financial Instruments
We enter into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations associated with
certain assets and liabilities. These forward contracts are not designated as hedging instruments and do not subject us to material balance sheet risk due to
fluctuations in foreign currency exchange rates. The gains and losses on these forward contracts are intended to offset the gains and losses in the underlying
foreign currency denominated monetary assets and liabilities being economically hedged. We do not enter into foreign currency forward contracts for
trading or speculative purposes. The net gain or loss from the settlement of these foreign currency forward contracts is recorded in other income (expense),
net in the Consolidated Statement of Operations.
Foreign Currency
For our international subsidiaries, we analyze on an annual basis or more often if necessary, if a significant change in facts and circumstances indicate
that the functional currency has changed. For international subsidiaries where the local currency is the functional currency, adjustments from translating
financial statements from the local currency to the U.S. dollar reporting currency are recorded as a separate component of accumulated other
comprehensive income (loss), net in the stockholders’ equity section of the Consolidated Balance Sheet. This foreign currency translation adjustment
reflects the translation of the balance sheet at period end exchange rates, and the income statement at the transaction date or average exchange rate in effect
during the period. The foreign currency revaluation that are derived from monetary assets and liabilities stated in a currency other than functional currency
are included in other income (expense), net. For the year ended December 31, 2021, 2020 and 2019, we had foreign currency net gains (losses) of $(13.3)
million, $6.8 million and $(2.0) million, respectively.
Certain Risks and Uncertainties
Our operating results depend to a significant extent on our ability to market and develop our products. The life cycles of our products are difficult to
estimate due, in part, to the effect of future product enhancements and competition. Our inability to successfully develop and market our products as a
result of competition or other factors would have a material adverse effect on our business, financial condition and results of operations.
The U.S. Food and Drug Administration (“FDA”) and similar international agencies regulate the design, manufacture, distribution, pre-clinical and
clinical study, clearance and approval of medical devices. Products developed by us may require approvals or clearances from the FDA or other
international regulatory agencies prior to commercialized sales. There can be no assurance that our products will receive any of the required approvals or
clearances. If we were denied approval or clearance or such approval was delayed, it may have a material adverse impact on us.
Our cash and investments are held primarily by four financial institutions. Financial instruments which potentially expose us to concentrations of
credit risk consist primarily of cash equivalents and marketable securities. We invest excess cash primarily in money market funds, commercial paper,
certificates of deposits, corporate bonds, asset-backed securities, municipal bonds and U.S. government agency bonds and treasury bonds and periodically
evaluate them for credit losses. Such credit losses have not been material to our financial statements.
We provide credit to customers in the normal course of business. Collateral is not required for accounts receivable but ongoing evaluations of
customers’ credit worthiness are performed. We maintain an allowance for potential credit losses for uncollectible accounts and such losses have been
within management’s expectations. No individual customer accounted for 10% or more of our accounts receivable at December 31, 2021 or 2020 or net
revenues for the year ended December 31, 2021, 2020 or 2019.
We have manufacturing facilities located in Juarez, Mexico where we conduct our aligner fabrication, distribution and perform certain services and in
Ziyang, China where we fabricate aligners primarily for China and other APAC markets. In addition, we produce our handheld intraoral scanner wand,
perform final scanner assembly and repair our scanners at our facilities in Ziyang, China and Or Yehuda, Israel and service and repair certain scanners in
Juarez, Mexico. In the second quarter of 2021, we announced the start of a multi-million dollar project to bring operational facilities closer to our customers
through the expansion of our manufacturing operations in Wroclaw, Poland. Expected to begin serving doctors during the first half of 2022, the new aligner
fabrication facility will be our third and allow us to more quickly and effectively serve tens of thousands of customers throughout EMEA. Additionally, in
the third quarter of 2021, we opened our multi-story iTero scanner and services facilities in Petach Tikva, Israel to further the design and development of
our portfolio of iTero intraoral scanners, imaging systems and services. Our digital treatment plans using a sophisticated, internally developed computer-
modeling
65
program are located in multiple international locations to support our customers within the regions. Our reliance on international operations exposes us to
related risks and uncertainties, including difficulties in staffing and managing international operations such as hiring and retaining qualified personnel;
controlling production volume and quality of manufacture; political, social and economic instability; interruptions and limitations in telecommunication
services; product and material transportation delays or disruption; trade restrictions and changes in tariffs; import and export license requirements and
restrictions; fluctuations in foreign currency exchange rates; and potential adverse tax consequences. If any of these risks materialize, our international
manufacturing operations, as well as our operating results, may be harmed.
We purchase certain inventory from sole suppliers. Additionally, we rely on a limited number of hardware manufacturers. The inability of any
supplier or manufacturer to fulfill our supply requirements could materially and adversely impact our future operating results.
Due to the COVID-19 pandemic, we are subject to a greater degree of uncertainty than normal in making the judgments and estimates needed to
apply our significant accounting policies. The full extent to which the pandemic, including as a result of any new variants, business restrictions or
lockdowns, and the impact of vaccinations, will directly or indirectly impact our business, results of operations, cash flows, and financial condition will
depend on future developments that are highly uncertain and cannot be accurately determined. Further, we could also be materially adversely affected by
supply chain disruptions, including shortages and inflationary pressures, uncertain or reduced demand, labor shortages, delays in collection of outstanding
receivables and the impact of any initiatives or programs that we may undertake to address financial and operational challenges faced by our customers.
Accounts Receivable, net
Trade accounts receivable are recorded at the invoiced amount. Accounts receivable, net includes allowances for doubtful accounts for any potentially
uncollectible amounts. We periodically assess the adequacy of the allowance for doubtful accounts by reviewing the accounts receivable on a collective
basis by considering factors such as aging of the receivables and customers’ expected ability to pay, and on an individual basis for specific customers with
known disputes or collectability issues. In determining the amount of the allowance for doubtful accounts, we also evaluate the creditworthiness of
customers, current market conditions and forecasts of future economic conditions to make any adjustments. Actual write-offs have not materially differed
from the estimated allowances.
Inventories
Inventories are valued at the lower of cost or net realizable value, with cost computed using standard cost which approximates actual cost on a first-
in-first-out basis. Excess and obsolete inventories are determined primarily based on future demand forecasts, and write-downs of excess and obsolete
inventories are recorded as a component of cost of net revenues.
Property, Plant and Equipment, net
Property, plant and equipment, net are stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the assets. Construction in progress is related to the construction or development
of property (including land) and equipment that have not yet been placed in service for their intended use. Upon sale or retirement, the asset’s cost and
related accumulated depreciation are removed from the balance sheet and any related gains or losses are reflected in income from operations. Maintenance
and repairs are expensed as incurred. Refer to Note 3 "Balance Sheet Components" of the Notes of Consolidated Financial Statements for details on
estimated useful lives.
Leases
We determine if an arrangement is a lease at inception. Leases with a term of 12 months or less are not recorded on the balance sheet. Right-of-use
(“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising
from the lease. ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use
our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments as the rate
implicit in our leases is not readily determinable. We determine lease terms as the noncancellable period of the lease and may include options to extend or
terminate the lease when it is reasonably certain that we will exercise that option. We have lease agreements with lease and non-lease components which
are accounted for as a single lease component. Payments under our lease arrangements are primarily fixed; however, certain lease agreements contain
variable payments which are expensed as incurred and not included in the operating lease ROU assets and liabilities.
66
Business Combinations
We allocate the fair value of the purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values at the
acquisition date. When determining the fair value of assets acquired and liabilities assumed, management is required to make certain estimates and
assumptions, especially with respect to intangible assets. The estimates and assumptions used in valuing intangible assets include, but are not limited to, the
amount and timing of projected future cash flows including forecasted revenues, the discount rate used to determine the present value of these cash flows,
and the determination of the assets’ life cycle. Amounts recorded in a business combination may change during the measurement period, which is a period
not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available.
Goodwill and Finite-Lived Acquired Intangible Assets
Goodwill represents the excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets acquired in business
combinations and is allocated to the respective reporting units based on relative synergies generated.
Our intangible assets primarily consist of intangible assets acquired as part of our acquisitions. These assets are amortized using the straight-line
method over their estimated useful lives ranging from one to fifteen years reflecting the period in which the economic benefits of the assets are expected to
be realized.
Impairment of Goodwill and Long-Lived Assets
Goodwill
We evaluate goodwill for impairment at least annually on November 30th or more frequently if indicators are present, an event occurs or changes in
circumstances suggest an impairment may exist and that it would more likely than not reduce the fair value of a reporting unit below its carrying
amount. The allocation of goodwill to the respective reporting unit is based on relative synergies generated as a result of an acquisition.
We perform an initial assessment of qualitative factors to determine whether the existence of events and circumstances leads to a determination that it
is more likely than not that the fair value of a reporting unit is less than its carrying amount. In performing the qualitative assessment, we identify and
consider the significance of relevant key factors, events, and circumstances that affect the fair value of our reporting units. These factors include external
factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such as our actual and planned financial performance.
We also give consideration to the difference between the reporting unit fair value and carrying value as of the most recent date a fair value measurement
was performed. If, after assessing the totality of relevant events and circumstances, we determine that it is more likely than not that the fair value of the
reporting unit exceeds its carrying value and there is no indication of impairment, no further testing is performed; however, if we conclude otherwise, then
we will perform the quantitative impairment test which compares the estimated fair value of the reporting unit to its carrying value, including goodwill. If
the carrying amount of the reporting unit is in excess of its fair value, an impairment loss would be recorded in the Consolidated Statement of Operations.
Long-Lived Assets
We evaluate long-lived assets (including finite-lived intangible assets) for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset group may not be recoverable. An asset or asset group is considered impaired if its carrying amount exceeds the future
undiscounted net cash flows that the asset or asset group is expected to generate. Factors we consider important which could trigger an impairment review
include significant negative industry or economic trends, significant loss of customers and changes in the competitive environment. If an asset or asset
group is considered to be impaired, the impairment to be recognized is calculated as the amount by which the carrying amount of the asset or asset group
exceeds its fair market value. Our estimates of future cash flows attributable to our long-lived assets require significant judgment based on our historical
and anticipated results and are subject to many assumptions. The estimation of fair value utilizing a discounted cash flow approach includes numerous
uncertainties which require our significant judgment when making assumptions of expected growth rates and the selection of discount rates, as well as
assumptions regarding general economic and business conditions, and the structure that would yield the highest economic value, among other factors. Refer
to Note 6 “Goodwill and Intangible Assets” of Notes to Consolidated Financial Statements for details on intangible long-lived assets.
67
Development Costs for Internal Use Software
Internally developed software includes enterprise-level business software that we customize to meet our specific operational needs. Such capitalized
costs include external direct costs utilized in developing or obtaining the applications and payroll and payroll-related costs for employees, who are directly
associated with the development of the applications. There were no significant internally developed software costs capitalized in 2021 or 2020.
The costs to develop software that is marketed externally have not been capitalized as we believe our current software development process is
essentially completed concurrent with the establishment of technological feasibility. As such, all related software development costs are expensed as
incurred and included in research and development expense in our Consolidated Statement of Operations.
Product Warranty
We offer assurance warranties on our products which provide the customer assurance that the product will function as the parties intended because it
complies with agreed-upon specifications; therefore, warranties are not treated as a separate revenue performance obligation and are accounted for as
guarantees under GAAP.
Clear Aligner
We warrant our Invisalign products against material defects until the treatment plan is complete except in the case of retainers, which are warranted
up to three months from expected first use. We accrue for warranty costs, which are primarily based on historical experience as to product failures as well
as current information on replacement costs.
Systems and Services
We warrant our intraoral scanners for a period of one year, which includes materials and labor. We accrue for these warranty costs based on average
historical repair costs. An extended warranty may be purchased for additional fees. We warrant our CAD/CAM software for a one year period to perform in
accordance with agreed product specifications. As we have not historically incurred any material warranty costs, we do not accrue for these software
warranties.
Warranty costs are recorded in cost of net revenues upon shipment of products. We regularly review our warranty liability and update these balances
based on historical warranty cost trends. Actual warranty costs incurred have not materially differed from those accrued; however future actual warranty
costs could differ from the estimated amounts.
Revenue Recognition
Our revenues are derived primarily from the sale of aligners, scanners, and services from our Clear Aligner and Systems and Services segments. We
enter into sales contracts that may consist of multiple distinct performance obligations where certain performance obligations of the sales contract are not
delivered in one reporting period. We measure and allocate revenues according to ASC 606-10, “Revenues from Contracts with Customers.”
We identify a performance obligation as distinct if both of the following criteria are met: the customer can benefit from the good or service either on
its own or together with other resources that are readily available to the customer and the entity’s promise to transfer the good or service to the customer is
separately identifiable from other promises in the contract. Determining the standalone selling price (“SSP”), allocation of consideration from the contract
to the individual performance obligations and the appropriate timing of revenue recognition is the result of significant qualitative and quantitative
judgments. While changes in the allocation of the SSP between performance obligations will not affect the amount of total revenues recognized for a
particular contract, any material changes could impact the timing of revenue recognition, which would have a material effect on our financial position and
result of operations. This is because the contract consideration is allocated to each performance obligation, delivered or undelivered, at the inception of the
contract based on the SSP of each distinct performance obligation.
Clear Aligner
We enter into contracts (“treatment plan(s)”) that involve multiple future performance obligations. Invisalign Comprehensive, Invisalign First,
Invisalign Moderate, and Lite and Express Packages include optional additional aligners at no charge for a certain period of time ranging from six months
to five years after initial shipment, and Invisalign Go and Invisalign Go Plus includes optional additional aligners at no charge for a period of up to two
years after initial shipment.
68
Our treatment plans comprise the following performance obligations that also represent distinct deliverables: initial aligners, the option of additional
aligners, case refinement, and replacement aligners. We take the practical expedient to consider shipping and handling costs as activities to fulfill the
performance obligation. We allocate revenues for each treatment plan based on each unit’s SSP. Management considers a variety of factors such as same or
similar product historical sales, costs, and gross margin, which may vary over time depending upon the unique facts and circumstances related to each
performance obligation in making these estimates. We also consider usage rates, which is the number of times a customer is expected to order additional
aligners. Our process for estimating usage rates requires significant judgment and evaluation of inputs, including historical usage data by region, country
and channel. We recognize the revenues upon shipment, as the customers obtain physical possession and we have enforceable rights to payment. As we
collect most consideration upfront, we consider whether a significant financing component exists; however, as the delivery of the performance obligations
are at the customer’s discretion, we conclude that no significant financing component exists.
Systems and Services
We sell intraoral scanners and CAD/CAM services through both our direct sales force and distribution partners. The intraoral scanner sales price
includes one year of warranty and unlimited scanning services. The customer may also select, for additional fees, extended warranty and unlimited
scanning services for periods beyond the initial year. When intraoral scanners are sold with an unlimited scanning service agreement and/or extended
warranty, we allocate revenues based on the respective SSP of the scanner and the subscription service. We estimate the SSP of each element, taking into
consideration same or similar historical prices as well as our discounting strategies. Revenues are then recognized over time as the monthly services are
rendered and upon shipment of the scanner, as that is when we deem the customer to have obtained control. CAD/CAM services, where sold separately,
include the initial software license and maintenance and support. We allocate revenues based upon the respective SSPs of the software license and the
maintenance and support. We estimate the SSP of each element using historical prices. Revenues related to the software license are recognized upfront and
revenues related to the maintenance and support are recognized over time. For both scanner and service sales, most consideration is collected upfront and in
cases where there are payment plans, consideration is collected within one year and, therefore, there are no significant financing components.
Volume Discounts
In certain situations, we offer promotions in which the discount will increase depending upon the volume purchased over time. We concluded that in
these situations, the promotions can represent either variable consideration or options, depending upon the specifics of the promotion. In the event the
promotion contains an option, the option is considered a material right and, therefore, included in the accounting for the initial arrangement. We estimate
the average anticipated discount over the lifetime of the promotion or contract, and apply that discount to each unit as it is sold. On a quarterly basis, we
review our estimates and, if needed, updates are made and changes are applied prospectively.
Accrued Sales Return Reserve
We provide a reserve for sales returns based on historical sales returns as a percentage of revenues.
Costs to Obtain a Contract
We offer a variety of commission plans to our salesforce; each plan has multiple components. To match the costs to obtain a contract to the associated
revenues, we evaluate the individual components and capitalize the eligible components, recognizing the costs over the treatment period. The costs to
obtain contracts were $31.1 million and $22.8 million as of December 31, 2021 and 2020, respectively, and are included in other assets in our Consolidated
Balance Sheets. We recognized amortization on our costs to obtain a contract of $17.0 million, $10.1 million, and $7.2 million during the year ended
December 31, 2021, 2020, and 2019, respectively, which is included in selling, general and administrative expenses in our Consolidated Statements of
Operations.
Unfulfilled Performance Obligations for Clear Aligners and Scanners
Our unfulfilled performance obligations, including deferred revenues and backlog, as of December 31, 2021 and the estimated revenues expected to
be recognized in the future related to these performance obligations are $1,307.3 million. This includes performance obligations from the Clear Aligner
segment, primarily the shipment of additional aligners, which are fulfilled over six months to five years. This also includes the performance obligations
from the Systems and Services segment, primarily services and support, which are fulfilled over one to five years, and contracted deliveries of additional
scanners. The estimate includes both product and service unfulfilled performance obligations and the time range reflects our best estimate of
69
when we will transfer control to the customer and may change based on customer usage patterns, timing of shipments, readiness of customers' facilities for
installation, and manufacturing availability.
Contract Balances
The timing of revenue recognition results in deferred revenues being recognized on our Consolidated Balance Sheet. For both aligners and scanners,
we usually collect the total consideration owed prior to all performance obligations being performed with payment terms generally varying from net 30 to
net 180 days. Contract liabilities are recorded as deferred revenue balances, which are generated based upon timing of invoices and recognition patterns,
not payments. If the revenue recognition exceeds the billing, the exceeded amount is considered unbilled receivable and a contract asset. Conversely, if the
billing occurs prior to the revenue recognition, the amount is considered deferred revenue and a contract liability.
Shipping and Handling Costs
Shipping and handling charges to customers are included in net revenues, and the associated costs incurred are recorded in cost of net revenues.
Legal Proceedings and Litigations
We are involved in legal proceedings on an ongoing basis. If we believe that a loss arising from such matters is probable and can be reasonably
estimated, we accrue the estimated loss in our consolidated financial statements. If only a range of estimated losses can be determined, we accrue an
amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other
amount, we accrue the low end of the range.
Research and Development
Research and development costs are expensed as incurred and includes the costs associated with the research and development of new products and
enhancements to existing products. These costs primarily include personnel-related costs, including payroll and stock-based compensation, equipment,
material and maintenance costs, outside consulting expenses, depreciation and amortization expense and allocations of corporate overhead expenses
including facilities and information technology (“IT”).
Advertising Costs
The cost of advertising and media is expensed as incurred. For the year ended December 31, 2021, 2020 and 2019, we incurred advertising costs of
$325.6 million, $161.0 million and $119.1 million, respectively.
Stock-Based Compensation
We recognize stock-based compensation cost for shares expected to vest on a straight-line basis over the requisite service period of the award, net of
estimated forfeitures. We use the Black-Scholes option pricing model to determine the fair value of stock awards and employee stock purchase plan shares.
We use a Monte Carlo simulation model to estimate the fair value of market-performance based restricted stock units (“MSUs”) which requires the input of
assumptions, including expected term, stock price volatility and the risk-free rate of return. In addition, judgment is also required in estimating the number
of stock-based awards that are expected to be forfeited. Forfeitures are estimated based on historical experience at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates. The assumptions used in calculating the fair value of share-based payment
awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a
result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.
Income Taxes
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur
in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenues and expenses for tax and
financial statement purposes.
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in
which we operate. This process involves us estimating our current tax exposure under the applicable
70
tax laws and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities which are included in our Consolidated Balance Sheets.
We account for uncertainty in income taxes pursuant to authoritative guidance based on a two-step approach to recognize and measure uncertain tax
positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than
not that the tax position will be sustained on audit based on its technical merits, including resolution of any related appeals or litigation processes. The
second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We adjust reserves for
our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit or refinement of estimates due to new information. To
the extent that the final outcome of these matters is different than the amounts recorded, such differences will impact our tax provision in our Consolidated
Statement of Operation in the period in which such determination is made.
We assess the likelihood that we will be able to realize our deferred tax assets. Should there be a change in our ability to realize our deferred tax
assets, our tax provision would increase in the period in which we determine that it is more likely than not that we cannot realize our deferred tax assets.
We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of
future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If it is more likely than not
that we will not realize our deferred tax assets, we will increase our provision for taxes by recording a valuation allowance against the deferred tax assets
that we estimate will not ultimately be realizable.
During fiscal 2020, we completed an intra-entity transfer of certain intellectual property rights and fixed assets to our Swiss subsidiary, which resulted
in the recognition of deferred tax assets and related tax benefits. Refer to Note 15 “Income Taxes” of Notes to Consolidated Financial Statements for more
information. The establishment of deferred tax assets from the intra-entity transfer of intangible assets required us to make significant estimates and
assumptions to determine the fair value of intellectual property rights transferred which include, but are not limited to, our expectations of growth rates in
revenue, margins, future cash flows, and discount rates. The accuracy of these estimates could be affected by unforeseen events or actual results, and the
sustainability of our future tax benefits is dependent upon the acceptance of these valuation estimates and assumptions by the taxing authorities.
The U.S. Tax Cuts and Jobs Act includes provisions for certain foreign-sourced earnings referred to as Global Intangible Low-Taxed Income
(“GILTI”) which imposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. We have made the election to
record GILTI tax using the period cost method.
Common Stock Repurchase
We repurchase our own common stock from time to time under stock repurchase programs approved by our Board of Directors. We account for these
repurchases under the accounting guidance for equity where we allocate the total repurchase value that is in excess over par value between additional paid-
in capital and retained earnings. All shares repurchased are retired.
Recent Accounting Pronouncements
(i) New Accounting Updates Recently Adopted
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2019-12, “Income Taxes (Topic
740) Simplifying the Accounting for Income Taxes,” to enhance and simplify various aspects of the income tax accounting guidance. The amendment
removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The
amendments are effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020. Adoption of this standard in the
first quarter of fiscal year 2021 did not have a material impact on our consolidated financial statements or related disclosures.
(ii) Recent Accounting Updates Not Yet Effective
We continue to monitor new accounting pronouncements issued by the FASB and do not believe any of the recently issued accounting
pronouncements will have an impact on our consolidated financial statements or related disclosures.
71
Note 2. Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The following table summarizes our cash and cash equivalents, and marketable securities on our Consolidated Balance Sheet as of December 31,
2021 (in thousands):
December 31, 2021
Cash
Money market funds
Corporate bonds
U.S. government treasury bonds
Asset-backed securities
Municipal bonds
U.S. government agency bonds
Total
Amortized
Cost
754,802 $
343,012
115,507
42,976
32,031
7,628
1,201
1,297,157 $
$
$
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Cash and Cash
Equivalents
Reported as:
Marketable
securities, short-
term
Marketable
securities, long-
term
— $
—
9
—
—
—
—
9 $
— $
(2)
(398)
(48)
(40)
(15)
(1)
(504) $
754,802 $
343,010
115,118
42,928
31,991
7,613
1,200
1,296,662 $
754,802 $
343,010
1,042
—
—
516
—
1,099,370 $
— $
—
35,065
22,251
10,999
3,657
—
71,972 $
—
—
79,011
20,677
20,992
3,440
1,200
125,320
As of December 31, 2020, we held $441.6 million of cash and $519.2 million of money market funds which were reported as cash and cash
equivalents on our Consolidated Balance Sheet. We had no short-term or long-term marketable securities as of December 31, 2020. Net realized and
unrealized gains and losses were not material for the year ended December 31, 2021, 2020 and 2019.
The following table summarizes the fair value of our available-for-sale marketable securities classified by contractual maturity as of December 31,
2021 (in thousands):
Due in 1 year or less
Due in 1 year through 5 years
Total
December 31, 2021
$
$
59,737
139,113
198,850
The securities that we invest in are generally deemed to be low risk based on their credit ratings from the major rating agencies. The longer the
duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. As interest rates increase, those securities
purchased at a lower yield show a mark-to-market unrealized loss. Our unrealized losses as of December 31, 2021 are primarily due to changes in interest
rates and credit spreads. We had no marketable securities that have been in a continuous material unrealized loss position for greater than twelve months as
of December 31, 2021.
72
Fair Value Measurements
The following tables summarize our financial assets measured at fair value as of December 31, 2021 and 2020 (in thousands):
Description
Cash equivalents:
Money market funds
Corporate bonds
Municipal bonds
Short-term investments:
U.S. government treasury bonds
Corporate bonds
Municipal bonds
Asset-backed securities
Long-term investments:
U.S. government treasury bonds
Corporate bonds
Municipal bonds
U.S. government agency bonds
Asset-backed securities
Prepaid expenses and other current assets:
Israeli funds
Other assets:
1
Investments in privately held companies
Balance as of December
31, 2021
Level 1
Level 2
Level 3
$
$
343,010 $
1,042
516
343,010 $
—
—
— $
1,042
516
22,251
35,065
3,657
10,999
20,677
79,011
3,440
1,200
20,992
3,841
22,251
—
—
—
20,677
—
—
—
—
—
—
35,065
3,657
10,999
—
79,011
3,440
1,200
20,992
3,841
—
—
—
—
—
—
—
—
—
—
—
—
—
8,621
554,322 $
—
385,938 $
—
159,763 $
8,621
8,621
1
The adjustment to the carrying value of our equity investments in privately held companies without readily determinable fair value are not material during the
year ended December 31, 2021, 2020 and 2019.
Description
Cash equivalents:
Money market funds
Prepaid expenses and other current assets:
Israeli funds
Current unsecured promissory note
Balance as of December
31, 2020
Level 1
Level 2
Level 3
$
$
519,228 $
519,228 $
—
3,500
5,408
528,136 $
—
—
519,228 $
3,500
—
3,500 $
—
—
5,408
5,408
Derivatives Not Designated as Hedging Instruments
Recurring foreign currency forward contracts
We enter into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations on certain trade
and intercompany receivables and payables. These forward contracts are classified within Level 2 of the fair value hierarchy. As a result of the settlement
of foreign currency forward contracts, during the year ended December 31, 2021, 2020 and 2019, we recognized a net gain of $18.8 million, a net loss of
$22.1 million and a net gain of $3.2 million, respectively. As of December 31, 2021 and 2020, the fair value of foreign exchange forward contracts
outstanding were not material.
73
The following table presents the gross notional value of all our foreign exchange forward contracts outstanding as of December 31, 2021 and 2020 (in
thousands):
Euro
Canadian Dollar
Chinese Yuan
Polish Zloty
Brazilian Real
Japanese Yen
British Pound
Israeli Shekel
Mexican Peso
Swiss Franc
Australian Dollar
Euro
Chinese Yuan
Canadian Dollar
British Pound
Japanese Yen
Brazilian Real
Israeli Shekel
Mexican Peso
Australian Dollar
Swiss Franc
December 31, 2021
Local Currency
Amount
Notional Contract
Amount (USD)
€165,110 $
C$99,800
¥494,500
PLN219,800
R$286,500
¥5,548,700
£34,740
ILS54,110
M$311,500
CHF9,950
A$6,900
$
186,358
78,018
77,358
54,014
50,894
48,206
46,881
17,416
15,133
10,883
5,009
590,170
December 31, 2020
Local Currency
Amount
Notional Contract
Amount (USD)
€126,300 $
¥936,000
C$65,000
£32,300
¥4,249,000
R$142,000
ILS74,000
M$140,000
A$5,800
CHF3,700
$
155,125
143,393
50,791
43,879
41,222
27,264
23,094
7,002
4,447
4,191
500,408
Other foreign currency forward contract
Prior to the closing of the exocad acquisition on April 1, 2020, we entered into a Euro foreign currency forward contract with a notional contract
amount of €376.0 million. Relating to this forward contract, in 2020, we recognized a loss of $10.2 million within other income (expense), net in our
Consolidated Statement of Operations.
Note 3. Balance Sheet Components
Inventories consist of the following (in thousands):
Raw materials
Work in progress
Finished goods
Total inventories
December 31,
2021
2020
$
$
123,234 $
51,706
55,290
230,230 $
76,404
31,393
31,440
139,237
74
Prepaid expenses and other current assets consist of the following (in thousands):
Prepaid expenses
Other current assets
Total prepaid expenses and other current assets
Property, plant and equipment consist of the following (in thousands):
Clinical and manufacturing equipment
Building
Leasehold improvements
Computer software and hardware
Land
Furniture, fixtures and other
Construction in progress
Total
Less: Accumulated depreciation and impairment charges
Total property, plant and equipment, net
December 31,
2021
2020
$
$
70,218 $
125,087
195,305 $
30,069
61,685
91,754
Generally Used Estimated
Useful Life
Up to 10 years
20 years
1
Lease term
3 years
—
2-5 years
—
December 31,
2021
2020
$
$
452,876 $
310,344
61,289
117,986
58,869
71,977
367,686
1,441,027
(359,101)
1,081,926 $
372,077
244,166
63,541
108,068
34,598
50,031
163,492
1,035,973
(301,252)
734,721
Shorter of the remaining lease term or the estimated useful lives of the assets
1
Depreciation was $92.1 million, $80.1 million and $73.1 million for the year ended December 31, 2021, 2020 and 2019, respectively.
Accrued liabilities consist of the following (in thousands):
Accrued payroll and benefits
Accrued expenses
Accrued property, plant and equipment
Accrued sales and marketing expenses
Accrued professional fees
Accrued income taxes
Current operating lease liabilities
Other accrued liabilities
Total accrued liabilities
December 31,
2021
2020
$
$
288,355 $
67,169
46,561
41,387
31,457
33,838
22,719
75,829
607,315 $
170,106
42,536
27,692
34,488
20,617
30,130
21,735
58,278
405,582
Accrued warranty as of December 31, 2021 and 2020, which is included in the “Other accrued liabilities” category of the accrued liabilities table
above, consists of the following activity (in thousands):
Accrued warranty as of December 31, 2019
Charged to cost of net revenues
Actual warranty expenditures
Accrued warranty as of December 31, 2020
Charged to cost of net revenues
Actual warranty expenditures
Accrued warranty as of December 31, 2021
$
$
11,205
12,581
(11,171)
12,615
18,213
(14,659)
16,169
75
Deferred revenues consist of the following (in thousands):
Deferred revenues - current
Deferred revenues - long-term
1
1
Included in Other long-term liabilities within our Consolidated Balance Sheet
December 31,
2021
2020
$
1,152,870 $
136,684
777,887
62,551
During the year ended December 31, 2021 and 2020, we recognized $3,952.6 million and $2,471.9 million of net revenues, respectively, of which
$481.1 million and $341.9 million was included in the deferred revenues balance at December 31, 2020 and December 31, 2019, respectively.
Note 4. Leases
We have operating leases for manufacturing facilities, office and retail spaces, vehicles and office equipment. The components of lease expenses
consist of following (in thousands):
Lease Cost
1
Operating lease cost
2
Variable lease cost
Total lease cost
Year Ended December 31,
2021
2020
2019
$
$
33,241 $
11,134
44,375 $
27,825 $
1,429
29,254 $
22,778
1,899
24,677
Includes expense associated with short term leases of less than 12 months which is not material
1
Includes payments related to agreements with embedded leases that are not otherwise reflected on the balance sheet. These costs are associated with our
2
manufacturing supply arrangements and fluctuate based on factory output and material price changes.
The following table provides a summary of our operating lease terms and discount rates:
Remaining Lease Term and Discount Rate
Weighted average remaining lease term (in years)
Weighted average discount rate
December 31,
2021
2020
7.8
3.2 %
7.4
4.2 %
As of December 31, 2021, the future payments related to our operating lease liabilities are as follows (in thousands):
Fiscal Year Ending December 31,
2022
2023
2024
2025
2026
Thereafter
Total lease payments
Less: Imputed interest
Total lease liabilities
Operating Leases
26,035
24,620
18,284
15,517
13,113
45,461
143,030
(17,655)
125,375
$
$
As of December 31, 2021, we had additional leases that have not yet commenced with future lease payments of $17.8 million. These leases will
commence during 2022 with non-cancelable lease terms of two to seven years.
Note 5. Business Combination
On April 1, 2020, we completed the acquisition of privately-held exocad for a total purchase consideration of $430.0 million and exocad became a
wholly-owned subsidiary. exocad is a German dental CAD/CAM software company that offers fully integrated workflows to dental labs and dental
practices.
76
The allocation of purchase price to assets acquired and liabilities assumed based on estimated fair values is as follows (in thousands):
1
Goodwill
Identified intangible assets
Cash and cash equivalents
Deferred tax liabilities
Other assets (liabilities), net
Total
1
None of this goodwill is deductible for tax purposes.
The following table presents details of the identified intangible assets acquired (in thousands, except years):
$
$
340,181
118,700
9,190
(35,419)
(2,674)
429,978
Intangible assets subject to amortization:
Existing technology
Customer relationships
Tradenames
Intangible assets not subject to amortization:
In-process Research and Development (“IPR&D”)
Total intangible assets
Weighted Average
Amortization Period (in
years)
Fair Value
10 $
10
7
N/A
$
87,000
21,500
9,800
400
118,700
We believe the amount of purchased intangible assets recorded above represent the fair values and approximate the amount a market participant
would pay for these intangible assets as of the acquisition date.
Existing technology represents the estimated fair value of exocad’s core technology that has reached technological feasibility. We valued the existing
technology using the multi-period excess earnings method under the income approach. The economic useful life of existing technology was determined by
considering the life cycle of the technology and related cash flows.
Customer relationships represent the fair value of future projected revenue that will be derived from sales of products to existing customers. Customer
relationships were valued using the with-and-without method under the income approach. The economic useful life for customer relationships was based on
historical customer attrition rates.
Tradenames relates to the exocad tradenames that are recognized within the industry. The fair value was determined using the relief-from-royalty
method under the income approach. The economic useful life of tradenames was determined by benchmarking against similar transactions entered into by
peer companies.
IPR&D refers to the fair value of projects that are not yet completed but have potential value to the company.
77
Note 6. Goodwill and Intangible Assets
During the year ended December 31, 2021, we completed an immaterial business combination which increased goodwill and existing technology
intangible assets.
Goodwill
The change in the carrying value of goodwill for the year ended December 31, 2021 and 2020, categorized by reportable segments, is as follows (in
thousands):
Balance as of December 31, 2019
Additions from acquisition
Foreign currency translation adjustments
Balance as of December 31, 2020
Additions from acquisition
Foreign currency translation adjustments
Balance as of December 31, 2021
Clear Aligner
Systems and Services
Total
$
$
63,924 $
43,500
5,267
112,691
3,646
(4,129)
112,208 $
— $
296,681
35,445
332,126
—
(25,787)
306,339 $
63,924
340,181
40,712
444,817
3,646
(29,916)
418,547
We completed our annual goodwill impairment assessments in 2021 and 2020 and determined there were no impairments.
Intangible Long-Lived Assets
Acquired intangible long-lived assets were as follows, excluding intangibles that were fully amortized (in thousands):
Existing technology
Customer relationships
Trademarks and tradenames
Patents and other
Foreign currency translation
Total intangible assets
Existing technology
Customer relationships
Trademarks and tradenames
Patents and other
Foreign currency translation
Total intangible assets
Weighted Average
Amortization Period (in
years)
10
11
10
8
Weighted Average
Amortization Period (in
years)
10
11
10
8
Gross Carrying Amount
as of
December 31, 2021
Accumulated
Amortization
Accumulated
Impairment Loss
Net Carrying
Value as of
December 31, 2021
$
$
$
$
104,531 $
55,000
17,200
6,511
183,242 $
(22,495) $
(25,891)
(4,547)
(4,495)
(57,428) $
(4,328) $
(10,751)
(4,179)
—
(19,258)
$
77,708
18,358
8,474
2,016
106,556
3,153
109,709
Gross Carrying
Amount as of
December 31, 2020
Accumulated
Amortization
Accumulated
Impairment Loss
Net Carrying
Value as of
December 31, 2020
99,400 $
55,000
16,600
6,610
177,610 $
(12,719) $
(21,879)
(2,934)
(3,785)
(41,317) $
(4,328) $
(10,751)
(4,179)
—
(19,258)
$
82,353
22,370
9,487
2,825
117,035
13,037
130,072
There were no triggering events in 2021 or 2020 that would cause impairments of our intangible long-lived assets.
78
The total estimated annual future amortization expense for these acquired intangible assets as of December 31, 2021 is as follows (in thousands):
Amortization
$
$
15,692
14,997
13,831
13,455
12,849
35,732
106,556
Fiscal Year
2022
2023
2024
2025
2026
Thereafter
Total
Amortization expense was $16.6 million, $13.4 million and $5.9 million for the year ended December 31, 2021, 2020 and 2019, respectively.
Note 7. Equity Method Investments
On July 25, 2016, we acquired a 17% equity interest, on a fully diluted basis, in SmileDirectClub, LLC (“SDC”) for $46.7 million. Concurrently with
the investment, we also entered into a supply agreement to manufacture clear aligners for SDC, which expired on December 31, 2019. The sale of aligners
to SDC and the income from the supply agreement were reported in our Clear Aligner business segment. On July 24, 2017, we purchased an additional 2%
equity interest in SDC for $12.8 million. The investment was accounted for as an equity method investment and recorded in our Consolidated Balance
Sheet. We recorded our proportional share of SDC’s losses within equity in losses of investee, net of tax, in our Consolidated Statement of Operations
within our Clear Aligner reportable segment.
As a result of the arbitrator’s decision regarding SDC announced on March 5, 2019, we were ordered to tender our SDC equity interest by April 3,
2019 for a purchase price equal to the “capital account” balance as of October 31, 2017 under the terms of the investment. In April 2019, based on the
“capital account” value provided by SDC, we entered into an unsecured promissory note with SDC to receive $54.2 million through February 1, 2021 in
exchange for the tender of our membership interests. As a result, we derecognized the equity method investment balance of $38.4 million in exchange for
an unsecured promissory note of $54.2 million and we recorded the difference of $15.8 million as a gain in 2019 in other income in our Consolidated
Statement of Operations. The unsecured promissory note was paid in full by SDC during the year ended December 31, 2021.
Although we tendered our membership interests pursuant to the arbitrator’s decision, the parties did not agree on the amount of the “capital account”
balance as of October 31, 2017 or the appropriate repurchase price for the membership units. On July 3, 2019, we filed a demand for arbitration regarding
SDC’s calculation of the “capital account” balance. On March 12, 2021, the Arbitrator ruled in favor of Align and against SDC and issued an award of
$43.4 million along with interest. The gain of $43.4 million was recognized as a part of our other income (expense), net in our Consolidated Statement of
Operation during the year ended December 31, 2021. Refer to Note 10 “Legal Proceedings” of the Notes to Consolidated Financial Statements included for
more information on the arbitration.
Note 8. Credit Facility
On July 21, 2020 we entered into a credit facility for a $300.0 million unsecured revolving line of credit, with a $50.0 million letter of credit sublimit,
and a maturity date of July 21, 2023 (“2020 Credit Facility”). The 2020 Credit Facility requires us to comply with specific financial conditions and
performance requirements. Loans under the 2020 Credit Facility bear interest, at our option, at either a rate based on the reserve adjusted LIBOR for the
applicable interest period or a base rate, in each case plus a margin. The base rate is the highest of the credit facility’s publicly announced prime rate, the
federal funds rate plus 0.50% and one-month LIBOR plus 1.0%. The margin ranges from 1.50% to 2.25% for LIBOR loans and 0.50% to 1.25% for base
rate loans. The 2020 Credit Facility allows for an alternative rate to be identified if LIBOR is no longer available. Interest on the loans is payable quarterly
in arrears with respect to base rate loans and at the end of an interest period (and at three month intervals if the interest period exceeds three months) in the
case of LIBOR loans. The outstanding principal, together with accrued and unpaid interest, is due on the maturity date. As of December 31, 2021, we had
no outstanding borrowings under the 2020 Credit Facility and were in compliance with the conditions and performance requirements.
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Note 9. Impairments and Other Charges (Gains), net
On March 5, 2019, we announced the outcome of the arbitration regarding SDC (Refer to Note 10 “Legal Proceedings” of the Notes to Consolidated
Financial Statements for SDC legal proceedings discussion) which required Align to close its Invisalign stores and tender Align’s equity interest in SDC by
April 3, 2019. Accordingly, Align evaluated the ongoing value of the Invisalign stores’ operating lease right-of-use assets and related leasehold
improvements and other fixed assets and determined that the carrying value of these assets were not recoverable. Align evaluated the fair value of these
assets and we considered the market participant’s ability to generate economic benefits by using these assets in its highest and best use or by selling it to
another market participant that would use the asset in its highest and best use. As a result, in 2019, we recorded impairment losses of $14.2 million for
operating lease right-of-use assets and $14.3 million of leasehold improvements and other fixed assets. In addition, we also recorded $1.3 million of
employee severance costs and other charges. During 2019, we also negotiated early termination of our Invisalign store leases and recorded lease
termination gains of $6.8 million.
Note 10. Legal Proceedings
2018 Securities Class Action Lawsuit
On November 5, 2018, a class action lawsuit against Align and three of our executive officers was filed in the U.S. District Court for the Northern
District of California on behalf of a purported class of purchasers of our common stock. The complaint generally alleged claims under the federal securities
laws and sought monetary damages in an unspecified amount and costs and expenses incurred in the litigation. On December 12, 2018, a similar lawsuit
was filed in the same court on behalf of a purported class of purchasers of our common stock. On November 29, 2019, the lead plaintiff filed an amended
consolidated complaint against Align and two of our executive officers alleging similar claims as the initial complaints on behalf of a purported class of
purchasers of our common stock from May 23, 2018 and October 24, 2018. On September 9, 2020, Defendants’ motion to dismiss the amended
consolidated complaint was granted in part and denied in part. On June 30, 2021, counsel for the parties signed a Stipulation and Agreement of Settlement
to resolve all claims for $16 million. The settlement amount will be funded by insurance proceeds and consequently, we recorded a short term liability and
a receivable for this amount in our consolidated financial statements. The Court granted preliminary approval of the settlement on November 2, 2021. A
final settlement approval hearing is currently set for April 28, 2022. The settlement is subject to notice to class members and final approval by the Court.
2019 Shareholder Derivative Lawsuit
In January 2019, three derivative lawsuits were filed in the U.S. District Court for the Northern District of California which were later consolidated,
purportedly on behalf of Align, naming as defendants the then current members of our Board of Directors along with certain of our executive officers. The
allegations in the complaints are similar to those asserted in the 2018 Securities Class Action Lawsuit, but the complaints assert various state law causes of
action, including for breaches of fiduciary duty, insider trading, and unjust enrichment. The complaints seek unspecified monetary damages on behalf of
Align, which is named solely as a nominal defendant against whom no recovery is sought, as well as disgorgement and the costs and expenses associated
with the litigation, including attorneys’ fees. The consolidated action has been stayed pending final disposition of the 2018 Securities Class Action Lawsuit.
On April 12, 2019, a derivative lawsuit was also filed in California Superior Court for Santa Clara County, purportedly on behalf of Align, naming as
defendants the members of our Board of Directors along with certain of our executive officers. The allegations in the complaint are similar to those in the
derivative suits described above. The matter has been similarly stayed pending final disposition of the 2018 Securities Class Action Lawsuit.
Align believes these claims are without merit. Align is currently unable to predict the outcome of these lawsuits and therefore cannot determine the
likelihood of loss nor estimate a range of possible loss.
2020 Securities Class Action Lawsuit
On March 2, 2020, a class action lawsuit against Align and two of our executive officers was filed in the U.S. District Court for the Southern District
of New York (later transferred to the U.S. District Court for the Northern District of California) on behalf of a purported class of purchasers of our common
stock. The complaint alleged claims under the federal securities laws and sought monetary damages in an unspecified amount and costs and expenses
incurred in the litigation. The lead plaintiff filed an amended complaint on August 4, 2020 against Align and three of our executive officers alleging similar
claims as in the initial complaint on behalf of a purported class of purchasers of our common stock from April 25, 2019 to July 24, 2019. On March 29,
2021, defendants’ motion to dismiss the amended complaint was granted with leave for the lead plaintiff to file a further amended complaint. On April 22,
2021, lead plaintiff filed a notice stating it would not file a further amended
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complaint. On April 23, 2021, the Court dismissed the action with prejudice and judgment was entered. Lead plaintiff filed a notice of appeal on April 28,
2021 and filed its opening appeal brief with the United States Court of Appeals for the Ninth Circuit on September 1, 2021. The defendants-appellees filed
their answering brief on November 22, 2021. The lead plaintiff-appellant’s reply brief was filed on January 12, 2022, and oral argument is set for March 10,
2022. Align believes these claims are without merit and intends to vigorously defend itself. Align is currently unable to predict the outcome of this lawsuit
and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.
2020 Shareholder Derivative Lawsuit
On May 4, 2020, a derivative lawsuit was filed in the U.S. District Court for the Northern District of California, purportedly on behalf of Align,
naming as defendants the members of our Board of Directors along with certain of our executive officers. The allegations in the complaint are similar to
those presented in the 2020 Securities Class Action Lawsuit, but this complaint asserts state law claims for breach of fiduciary duty and insider trading. The
complaint seeks unspecified monetary damages on behalf of Align, which is named solely as a nominal defendant against whom no recovery is sought, as
well as disgorgement and the costs and expenses associated with the litigation, including attorneys’ fees. This action is stayed pending resolution of the
appeal in the 2020 Securities Class Action Lawsuit. Align believes these claims are without merit. Align is currently unable to predict the outcome of this
lawsuit and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.
3Shape Litigation
On February 7, 2022, Align and 3Shape, a Danish corporation, settled their outstanding patent infringement and antitrust litigation, which began in
November 2017. The terms of the settlement are confidential, and the settlement is not expected to have a material effect on Align’s ongoing operations and
financial results. The parties have filed stipulations to stay all proceedings pending completion of the settlement.
Antitrust Class Actions
On June 5, 2020, a dental practice named Simon and Simon, PC doing business as City Smiles brought an antitrust action in the U.S. District Court
for the Northern District of California on behalf of itself and a putative class of similarly situated practices seeking monetary damages and injunctive relief
relating to Align’s alleged market activities in alleged clear aligner and intraoral scanner markets. Plaintiff filed an amended complaint and added VIP
Dental Spas as a plaintiff on August 14, 2020. A jury trial is scheduled to begin in this matter on November 20, 2023. Align believes the plaintiffs’ claims
are without merit and intends to vigorously defend itself.
On May 3, 2021, an individual named Misty Snow brought an antitrust action in the U.S. District Court for the Northern District of California on
behalf of herself and a putative class of similarly situated individuals seeking monetary damages and injunctive relief relating to Align’s alleged market
activities in alleged clear aligner and intraoral scanner markets. Plaintiff filed an amended complaint on July 30, 2021 adding new plaintiffs and various
state law claims. Align moved to dismiss the first amended complaint. On September 30, 2021, the Court dismissed the complaint and granted Plaintiffs
leave to amend. Plaintiffs filed a second amended complaint on October 21, 2021. Align filed a motion to dismiss the second amended complaint, which
the Court granted in part and denied in part. Align believes the plaintiffs’ claims are without merit and intends to vigorously defend itself.
Align is currently unable to predict the outcome of these lawsuits and therefore cannot determine the likelihood of loss, if any, nor estimate a range of
possible loss.
SDC Dispute
In April 2018, SDC Financial LLC, SmileDirectClub LLC, and the Members of SDC Financial LLC other than the Company (collectively, the “SDC
Entities”) initiated confidential arbitration proceedings against Align. In an award dated March 4, 2019, (“Award”) an arbitrator found that Align breached
a restrictive covenant and that Align misused the SDC Entities’ confidential information and violated fiduciary duties to SDC Financial LLC. As part of the
Award, Align was enjoined from opening new Invisalign stores or providing certain services in physical retail establishments in connection with the
marketing and sale of clear aligners in the U.S., and enjoined from using the SDC Entities’ confidential information. The arbitrator extended the expiration
date of specified aspects of the restrictive covenant to August 18, 2022. The arbitrator also ordered Align to tender its SDC Financial LLC membership
interests to the SDC Entities for a purchase price equal to the “capital account” balance as of October 31, 2017, to be determined in accordance with the
applicable provisions of the SDC Operating Agreements. No financial damages were awarded to the SDC Entities. The Circuit Court for Cook County,
Illinois confirmed the Award on April 29, 2019.
81
As required by the Award, Align tendered its membership interests for a purchase price that SDC claimed to be Align’s “capital account” balance.
Align disputed that the SDC Entities properly determined the value of Align’s “capital account” balance as of October 31, 2017. Consequently, on July 3,
2019, Align filed a confidential demand for arbitration challenging the propriety of the SDC Entities’ determination. On March 12, 2021 the Arbitrator
issued a final award in favor of Align and against SDC finding that the SDC entities owed Align an additional $43.4 million plus interest. SDC paid the
amount due to Align on March 17, 2021.
On August 27, 2020, Align initiated a confidential arbitration proceeding against the SDC entities before the American Arbitration Association in San
Jose, California. This arbitration relates to the Strategic Supply Agreement (“Supply Agreement”) entered into between the parties in 2016. The complaint
alleges that the SDC Entities breached the Supply Agreement’s terms, causing damages to Align in an amount to be determined. On January 19, 2021, SDC
filed a counterclaim alleging that Align breached the Supply Agreement. Align denies the SDC Entities’ allegations in the counterclaim and will vigorously
defend itself against them. This arbitration hearing is set for July 18-29, 2022.
Align is currently unable to predict the outcome of these disputes and therefore cannot determine the likelihood of loss or success nor estimate a range
of possible loss or success, if any.
In addition to the above, in the ordinary course of Align’s operations, Align is involved in a variety of claims, suits, investigations, and proceedings,
including actions with respect to intellectual property claims, patent infringement claims, government investigations, labor and employment claims, breach
of contract claims, tax, and other matters. Regardless of the outcome, these proceedings can have an adverse impact on us because of defense costs,
diversion of management resources, and other factors. Although the results of complex legal proceedings are difficult to predict and Align’s view of these
matters may change in the future as litigation and events related thereto unfold; Align currently does not believe that these matters, individually or in the
aggregate, will materially affect Align’s financial position, results of operations or cash flows.
Note 11. Commitments and Contingencies
Unconditional Purchase Obligations
On May 29, 2018, we entered into a purchase agreement, as amended, with an existing single source supplier which requires us to purchase aligner
material for a minimum amount of approximately $425.9 million over five years through 2022. On June 24, 2021, we amended the agreement which
requires an additional minimum align material purchase of approximately $348.0 million from 2023 through 2026. As of December 31, 2021, our
remaining commitment under this agreement totaled $419.6 million.
On October 30, 2020, we entered into a subscription agreement with a software company to renew our license for a total consideration of
$95.2 million. As of December 31, 2021, we had a remaining commitment of $47.6 million which is expected to be paid through 2024.
On December 6, 2020, we entered into a supply agreement for certain components used for our manufacturing operations. As of December 31, 2021,
we had purchase commitments of $140.5 million which is expected to be paid through 2025.
On December 14, 2021, we entered into a letter of intent to amend a promotional rights agreement with a third-party which includes advertising and
media coverage. As of December 31, 2021, we had a remaining commitment of $79.2 million which is expected to be paid through 2026.
Off-Balance Sheet Arrangements
As of December 31, 2021, we had no material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material
effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources other than certain items disclosed in
the Unconditional Purchase Obligations section above.
Indemnification Provisions
In the normal course of business to facilitate transactions in our services and products, we indemnify certain parties: customers, vendors, lessors, and
other parties with respect to certain matters, including, but not limited to, services to be provided by us and intellectual property infringement claims made
by third parties. In addition, we have entered into indemnification agreements with our directors and our executive officers that will require us, among other
things, to indemnify
82
them against certain liabilities that may arise by reason of their status or service as directors or officers. Several of these agreements limit the time within
which an indemnification claim can be made and the amount of the claim.
It is not possible to make a reasonable estimate of the maximum potential amount under these indemnification agreements due to the unique facts and
circumstances involved in each particular agreement. Additionally, we have a limited history of prior indemnification claims and the payments we have
made under such agreements have not had a material adverse effect on our results of operations, cash flows or financial position. However, to the extent
that valid indemnification claims arise in the future, future payments by us could be significant and could have a material adverse effect on our results of
operations or cash flows in a particular period. As of December 31, 2021, we did not have any material indemnification claims that were probable or
reasonably possible.
Note 12. Stockholders’ Equity
Common Stock
The holders of common stock are entitled to receive dividends whenever funds are legally available and when and if declared by the Board of
Directors. We have never declared or paid dividends on our common stock.
Stock-Based Compensation Plans
Our 2005 Incentive Plan, as amended, provides for the granting of incentive stock options, non-statutory stock options, restricted stock units
(“RSUs”), market-performance based restricted stock units (“MSUs”), stock appreciation rights, performance units and performance shares to employees,
non-employee directors and consultants. Shares granted on or after May 16, 2013 as an award of restricted stock, restricted stock unit, market-performance
based restricted stock units, performance share or performance unit (“full value awards”) are counted against the authorized share reserve as one and nine-
tenths (1 9/10) shares for every one (1) share subject to the award, and any shares canceled that were counted as one and nine-tenths against the plan reserve
will be returned at the same ratio.
As of December 31, 2021, the 2005 Incentive Plan, as amended, has a total reserve of 27,783,379 shares for issuance of which 4,244,723 shares are
available for issuance. We issue new shares from our pool of authorized but unissued shares to satisfy the exercise and vesting obligations of our stock-
based compensation plans.
Summary of Stock-Based Compensation Expense
The stock-based compensation related to our stock-based awards and employee stock purchase plan for the year ended December 31, 2021, 2020 and
2019 is as follows (in thousands):
Cost of net revenues
Selling, general and administrative
Research and development
Total stock-based compensation
2021
Year Ended December 31,
2020
2019
$
$
5,633 $
90,659
18,044
114,336 $
4,719 $
78,500
15,208
98,427 $
5,154
69,817
13,213
88,184
The income tax benefit related to stock-based compensation was $13.8 million, $11.9 million and $10.3 million for the year ended December 31,
2021, 2020 and 2019, respectively.
83
Restricted Stock Units
The fair value of RSUs is based on our closing stock price on the date of grant. RSUs granted generally vest over a period of four years. A summary
for the year ended December 31, 2021 is as follows:
Unvested as of December 31, 2020
Granted
Vested and released
Forfeited
Unvested as of December 31, 2021
Weighted Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic Value
(in thousands)
Number of Shares
Underlying RSUs
(in thousands)
Weighted Average
Grant Date Fair Value
243.55
600.10
216.73
350.75
632 $
166
(265)
(41)
492 $
369.17
1.1 $
323,239
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (calculated by multiplying our closing stock price on the
last trading day of 2021 by the number of unvested RSUs) that would have been received by the unit holders had all RSUs been vested and released as of
the last trading day of 2021. This amount will fluctuate based on the fair market value of our stock. During 2021, of the 264,655 shares vested and released,
78,930 shares were withheld for employee statutory tax obligations, resulting in a net issuance of 185,725 shares.
The total fair value of RSUs vested as of their respective vesting dates during 2021, 2020 and 2019 was $158.8 million, $89.6 million and $112.4
million, respectively. The weighted average grant date fair value of RSUs granted during 2021, 2020 and 2019 was $600.10, $267.24 and $255.42,
respectively. As of December 31, 2021, we expect to recognize $116.8 million of total unamortized compensation costs, net of estimated forfeitures, related
to RSUs over a weighted average period of 2.1 years.
Market-Performance Based Restricted Stock Units
We grant MSUs to our executive officers. Each MSU represents the right to one share of Align’s common stock. The actual number of MSUs which
will be eligible to vest will be based on the performance of Align’s stock price relative to the performance of a stock market index over the vesting period.
MSUs vest over a period of three years and the maximum number of eligible to vest in the future is 250% of the MSUs initially granted.
The following table summarizes the MSU performance for the year ended December 31, 2021:
Unvested as of December 31, 2020
1
Granted
Vested and released
Unvested as of December 31, 2021
Weighted Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic Value
(in thousands)
Number of Shares
Underlying MSUs
(in thousands)
Weighted Average
Grant Date Fair Value
430.50
658.02
513.73
227 $
177
(230)
174 $
551.57
1.0 $
114,414
1
Includes MSUs vested during the period above 100% of the grant as actual shares released is based on Align’s stock performance over the vesting period
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (calculated by multiplying our closing stock price on the
last trading day of 2021 by the number of unvested MSUs) that would have been received by the unit holders had all MSUs been vested and released as of
the last trading day of 2021. This amount will fluctuate based on the fair market value of our stock. During 2021, of the 229,877 shares vested and released,
104,317 shares were withheld for employee statutory tax obligations, resulting in a net issuance of 125,560 shares.
The total fair value of MSUs vested as of their respective vesting dates during 2021, 2020 and 2019 was $135.6 million, $47.1 million and $47.7
million, respectively. As of December 31, 2021, we expect to recognize $38.5 million of total unamortized compensation costs, net of estimated forfeitures,
related to MSUs over a weighted average period of 1.0 year.
84
The fair value of MSUs is estimated at the grant date using a Monte Carlo simulation that includes factors for market conditions. The weighted
average assumptions used in the Monte Carlo simulation were as follows:
Expected term (in years)
Expected volatility
Risk-free interest rate
Expected dividends
Weighted average fair value per share at grant date
Employee Stock Purchase Plan (“ESPP”)
2021
Year Ended December 31,
2020
2019
3.0
56.3 %
0.2 %
—
1,102.09
$
$
3.0
44.4 %
1.4 %
—
392.67
$
3.0
37.3 %
2.5 %
—
392.03
In May 2010, our stockholders approved the 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”) which consists of consecutive
overlapping twenty-four month offering periods with four six-month purchase periods in each offering period. Employees purchase shares at 85% of the
lower of the fair market value of the common stock at either the beginning of the offering period or the end of the purchase period. The 2010 Purchase Plan
will continue until terminated by either the Board of Directors or its administrator. In June 2019, the 2010 Purchase Plan was amended to include a non-
Code Section 423 component to grant purchase rights to employees outside the U.S. and Canada with six-month offering periods and purchase periods. In
May 2021, the 2010 Purchase Plan was amended and restated to increase the maximum number of shares available for purchase to 4,400,000 shares.
The following table summarizes the ESPP shares issued:
Number of shares issued (in thousands)
Weighted average price
2021
Year Ended December 31,
2020
$
131
195.44 $
116
175.69 $
2019
130
136.73
As of December 31, 2021, 2,194,566 shares remain available for future issuance.
The fair value of the option component of the 2010 Purchase Plan shares was estimated at the grant date using the Black-Scholes option pricing
model with the following weighted average assumptions:
Expected term (in years)
Expected volatility
Risk-free interest rate
Expected dividends
Weighted average fair value at grant date
Year Ended December 31,
2021
2020
2019
1.1
52.7 %
0.1 %
—
246.84
$
$
1.0
55.0 %
0.9 %
—
96.94
$
1.4
50.0 %
2.2 %
—
86.02
We recognized stock-based compensation related to our employee stock purchase plan of $12.2 million, $10.5 million and $12.1 million for the year
ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, we expect to recognize $10.4 million of total unamortized
compensation costs related to future employee stock purchases over a weighted average period of 0.5 year.
Note 13. Common Stock Repurchase Programs
In May 2018, our Board of Directors authorized a plan to repurchase up to $600.0 million of our common stock (“May 2018 Repurchase Program”).
As of December 31, 2021, the authorization under the May 2018 Repurchase Program was completed. In May 2021, our Board of Directors authorized a
plan to repurchase up to $1.0 billion of our common stock (“May 2021 Repurchase Program”). As of December 31, 2021, we have $725.0 million available
for repurchase under the May 2021 Repurchase Program.
85
Accelerated Stock Repurchase Agreements (“ASRs”)
We entered into the following ASRs providing for the repurchase of our common stock based on the volume-weighted average price during the term
of the agreement, less an agreed upon discount. The following table summarizes the information regarding repurchases of our common stock under ASRs:
Agreement
Date
Q3 2019
Q2 2021
Q2 2021
Q3 2021
Q4 2021
Repurchase
Program
May 2018
May 2018
May 2021
May 2021
May 2021
$
$
$
$
$
Amount Paid
(in millions)
200.0
100.0
100.0
75.0
100.0
Completion
Date
Q3 2019
Q3 2021
Q3 2021
Q3 2021
Q4 2021
Total Shares
Received
Average Price per
Share
1,132,464 $
171,322 $
161,707 $
109,239 $
150,031 $
176.61
583.70
618.40
686.91
666.53
Open Market Common Stock Repurchases
During the year ended December 31, 2019, we repurchased on the open market approximately 0.8 million shares of our common stock at an average
price of $264.93 per share, including commissions, for an aggregate purchase price of $200.0 million.
Subsequent to year end, during February 2022, we repurchased on the open market approximately 0.1 million shares of our common stock at an
average price of $522.35 per share, including commissions, for an aggregate purchase price of $75.0 million.
Note 14. Employee Benefit Plans
We have defined contribution retirement plan under Section 401(k) of the Internal Revenue Code for our U.S. employees which covers substantially
all U.S. employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax
basis. We match 50% of our employee’s salary deferral contributions up to 6% of the employee’s eligible compensation. We contributed approximately
$8.5 million, $6.9 million and $6.2 million to the 401(k) plan during the year ended December 31, 2021, 2020 and 2019, respectively. We also have defined
contribution retirement plans outside of the U.S. to which we contributed $42.3 million, $28.9 million and $25.4 million during the year ended
December 31, 2021, 2020 and 2019, respectively.
Note 15. Income Taxes
Net income before provision for (benefit from) income taxes and equity in losses of investee consists of the following (in thousands):
Domestic
Foreign
Net income before provision for (benefit from) income taxes and equity in losses of
investee
$
$
2021
Year Ended December 31,
2020
2019
378,478 $
633,945
173,099 $
205,850
1,012,423 $
378,949 $
184,956
377,695
562,651
86
The provision for (benefit from) income taxes consists of the following (in thousands):
Federal
Current
Deferred
State
Current
Deferred
Foreign
Current
Deferred
Provision for (benefit from) income taxes
2021
Year Ended December 31,
2020
2019
$
$
157,383 $
(25,598)
131,785
28,365
(5,860)
22,505
42,681
43,432
86,113
240,403 $
55,291 $
(11,749)
43,542
8,862
(2,121)
6,741
29,399
(1,476,621)
(1,447,222)
(1,396,939) $
76,528
1,235
77,763
9,169
209
9,378
28,364
(3,158)
25,206
112,347
The differences between income taxes using the federal statutory income tax rate for 2021, 2020 and 2019 and our effective tax rates are as follows:
U.S. federal statutory income tax rate
State income taxes, net of federal tax benefit
U.S. tax on foreign earnings
Impact of differences in foreign tax rates
Stock-based compensation
Impact of expiration of statute of limitations
Impact of intra-entity intellectual property rights transfer
Settlement on audits
Impact of U.S. Tax Cuts and Jobs Act
Change in valuation allowance
Other items not individually material
Effective tax rate
Year Ended December 31,
2021
2020
2019
21.0 %
2.2
2.7
(2.0)
(0.3)
(0.7)
—
—
—
1.1
(0.3)
23.7 %
21.0 %
1.8
—
5.6
1.1
(0.3)
(395.6)
(1.4)
(0.5)
0.1
(0.4)
(368.6)%
21.0 %
1.7
1.9
(5.1)
(0.3)
—
—
—
—
0.1
0.7
20.0 %
As of December 31, 2021, substantially all of the earnings previously determined to be not indefinitely reinvested have been repatriated. U.S. income
taxes have already been provided on the $1,257.5 million undistributed earnings that is indefinitely reinvested in our international operations, therefore, the
tax impact upon distribution is limited to mainly state income and withholding taxes and is not significant.
During the year ended December 31, 2020, we completed an intra-entity transfer of certain intellectual property rights and fixed assets to our new
Swiss subsidiary, where our EMEA regional headquarters is located beginning January 1, 2020. The transfer of intellectual property rights did not result in
a taxable gain; however, it did result in a step-up of the Swiss tax deductible basis in the transferred assets, and accordingly, created a temporary difference
between the book basis and the tax basis of such intellectual property rights. Consequently, this transaction resulted in the recognition of a deferred tax
asset and related one-time tax benefit of approximately $1,493.5 million during the year ended December 31, 2020, which is the net impact of the deferred
tax asset recognized as a result of the additional Swiss tax deductible basis in the transferred assets and certain costs related to the transfer of fixed assets
and inventory.
87
As of December 31, 2021 and 2020, the significant components of our deferred tax assets and liabilities are (in thousands):
Deferred tax assets:
Net operating loss and capital loss carryforwards
Reserves and accruals
Stock-based compensation
Deferred revenue
Amortizable tax basis in intangibles
Net translation losses
Credit carryforwards
Total deferred tax assets
Deferred tax liabilities:
Depreciation and amortization
Acquisition-related intangibles
Prepaid expenses
Total deferred tax liabilities
Net deferred tax assets before valuation allowance
Valuation allowance
Net deferred tax assets
December 31,
2021
2020
$
$
11,069 $
47,641
13,576
83,514
1,392,471
10,008
5,637
1,563,916
11,915
28,989
6,931
47,835
1,516,081
(12,938)
1,503,143 $
20,728
34,469
10,842
32,562
1,468,159
2,939
905
1,570,604
14,730
35,689
1,720
52,139
1,518,465
(1,325)
1,517,140
The available positive evidence at December 31, 2021 included historical operating profits and a projection of future income sufficient to realize most
of our remaining deferred tax assets. As of December 31, 2021, it was considered more likely than not that our deferred tax assets would be realized with
the exception of certain net operating loss, capital loss carryovers and unrealized translation losses as we are unable to forecast sufficient future profits to
realize the deferred tax assets. The total valuation allowance as of December 31, 2021 was $12.9 million. During the year ended December 31, 2021, the
valuation allowance increased by $11.6 million primarily due to deferred tax assets related to unrealized translation losses and net operating loss from one
of our German subsidiaries that are not more likely than not to be realized.
As of December 31, 2021, we have foreign net operating loss carryforwards of approximately $44.8 million, attributed mainly to losses in Israel,
China and Germany. The losses in Israel and Germany can be carried forward indefinitely. The operating loss carryforwards in China, if not utilized, will
expire beginning 2026.
The changes in the balance of gross unrecognized tax benefits, which exclude interest and penalties, for the year ended December 31, 2021, 2020 and
2019, are as follows (in thousands):
Gross unrecognized tax benefits at January 1,
Increases related to tax positions taken during the current year
Increases related to tax positions taken during a prior year
Decreases related to tax positions taken during a prior year
Decreases related to expiration of statute of limitations
Decreases related to settlement with tax authorities
Gross unrecognized tax benefits at December 31,
2021
Year Ended December 31,
2020
2019
$
$
46,320 $
27,710
5,471
(5,804)
(8,986)
(1,416)
63,295 $
46,650 $
20,592
10,201
(29,977)
—
(1,146)
46,320 $
33,262
19,012
143
(3,783)
(1,984)
—
46,650
The total amount of gross unrecognized tax benefits as of December 31, 2021 was $63.3 million, of which $61.9 million would impact our effective
tax rate if recognized.
We file U.S. federal, U.S. state, and non-U.S. income tax returns. Our major tax jurisdictions include U.S. federal, the State of California and
Switzerland. For U.S. federal and state tax returns, we are no longer subject to tax examinations for years before 2018 and 2014, respectively. Our Israeli
subsidiary is under tax audit for years 2016 through 2019. During the fourth quarter of 2021, the Israel Tax Authority issued a tax assessment in connection
with a 2016 transaction to which our Israeli subsidiary was a party. We intend to file an administrative appeal during the first quarter of 2022 and will
continue to
88
vigorously defend our Israeli subsidiary’s tax return position. Based on our assessment of the information currently available, we have not derecognized or
remeasured our tax positions with respect to this matter during the year. With few exceptions, we are no longer subject to examination by foreign tax
authorities for years before 2014.
We have elected to recognize interest and penalties related to unrecognized tax benefits as a component of income taxes. Interest and penalties
included in tax expense for the year ended December 31, 2021, 2020 and 2019 as well as accrued as of December 31, 2021 and 2020 were not material.
While we defend income tax audits in various jurisdictions and the results of such audits may differ materially from the amounts accrued for each year, we
cannot currently ascertain the bases on which any given audit will be ultimately resolved. Accordingly, we are unable to estimate the range of possible
adjustments to our balance of gross unrecognized tax benefits in the next 12 months.
Note 16. Net Income per Share
Basic net income per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net
income per share is computed using the weighted average number of shares of common stock, adjusted for any dilutive effect of potential common
stock. Potential common stock, computed using the treasury stock method, includes RSUs, MSUs and our ESPP.
The following table sets forth the computation of basic and diluted net income per share attributable to common stock (in thousands, except per share
amounts):
Numerator:
Net income
Denominator:
Weighted average common shares outstanding, basic
Dilutive effect of potential common stock
Total shares, diluted
Net income per share, basic
Net income per share, diluted
$
$
$
2021
Year Ended December 31,
2020
2019
772,020 $
1,775,888 $
442,776
78,917
753
79,670
9.78 $
9.69 $
78,760
470
79,230
22.55 $
22.41 $
79,424
676
80,100
5.57
5.53
79
Anti-dilutive potential common shares
1
1
280
1
Represents RSUs and MSUs not included in the calculation of diluted net income per share as the effect would have been anti-dilutive.
89
Note 17. Supplemental Cash Flow Information
The supplemental cash flow information consists of the following (in thousands):
Taxes paid
Non-cash investing and financing activities:
Acquisition of property, plant and equipment in accounts payable and
accrued liabilities
Issuance of promissory note in exchange for sale of equity method
investment
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
(1)
Investing cash flows from finance leases
Financing cash flows from finance leases
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
Finance leases
$
$
$
$
$
$
$
$
2021
Year Ended December 31,
2020
2019
203,309 $
76,332 $
71,746
64,135 $
37,267 $
— $
— $
29,769 $
— $
— $
68,463 $
— $
26,022 $
— $
— $
47,981 $
— $
16,488
54,154
26,337
10,896
45,773
32,723
51,064
1
A portion of finance lease purchase payment relates to leasing a part of the building to a third party as a lessor. This amount is included in Other Investing Activities
in our Consolidated Statement of Cash Flows.
Note 18. Segments and Geographical Information
Segment Information
We report segment information based on the management approach. The management approach designates the internal reporting used by our Chief
Operating Decision Maker for decision making and performance assessment as the basis for determining our reportable segments. The performance
measures of our reportable segments include net revenues, gross profit and income from operations. Income from operations for each segment includes all
geographic revenues, related cost of net revenues and operating expenses directly attributable to the segment. Certain operating expenses are attributable to
operating segments and each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Costs not
specifically allocated to segment income from operations include various corporate expenses such as stock-based compensation and costs related to IT,
facilities, human resources, accounting and finance, legal and regulatory, and other separately managed general and administrative costs outside the
operating segments.
We group our operations into two reportable segments: Clear Aligner segment and Systems and Services segment.
• Our Clear Aligner segment consists of Comprehensive Products, Non-Comprehensive Products and Non-Case revenues as defined below:
• Comprehensive Products include, but are not limited to, Invisalign Comprehensive and Invisalign First.
• Non-Comprehensive Products include, but are not limited to, Invisalign Moderate, Lite and Express packages and Invisalign Go and
Invisalign Go Plus.
• Non-Case products include, but are not limited to, retention products, Invisalign training, adjusting tools used by dental professionals
during the course of treatment and Consumer Products that are complementary to our doctor-prescribed principal products, such as
aligner cases (clamshells), teeth whitening products, cleaning solutions (crystals, foam and other material) and other oral health products
available in certain e-commerce channels in the U.S.
• Our Systems and Services segment consists of our iTero intraoral scanning systems, which includes a single hardware platform and restorative or
orthodontic software options. Our services include subscription software, disposables, rentals, pay per scan services, as well as exocad’s
CAD/CAM software solutions that integrate workflows to dental labs and dental practices.
90
Summarized financial information by segment is as follows (in thousands):
2021
Year Ended December 31,
2020
2019
Net revenues
Clear Aligner
Systems and Services
Total net revenues
Gross profit
Clear Aligner
Systems and Services
Total gross profit
Income from operations
Clear Aligner
Systems and Services
Unallocated corporate expenses
Total income from operations
Stock-based compensation
Clear Aligner
Systems and Services
Unallocated corporate expenses
Total stock-based compensation
Depreciation and amortization
Clear Aligner
Systems and Services
Unallocated corporate expenses
Total depreciation and amortization
Impairments and other charges (gains), net
Clear Aligner
Total impairments and other charges (gains), net
Litigation settlement gain
Clear Aligner
Total litigation settlement gain
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,247,080 $
705,504
3,952,584 $
2,474,373 $
460,982
2,935,355 $
1,325,866 $
259,127
(608,593)
976,400 $
10,648 $
705
102,983
114,336 $
50,723 $
21,581
36,425
108,729 $
— $
— $
— $
— $
2,101,459 $
370,482
2,471,941 $
1,532,130 $
231,105
1,763,235 $
768,045 $
96,052
(476,926)
387,171 $
8,975 $
734
88,718
98,427 $
41,371 $
16,798
35,369
93,538 $
— $
— $
— $
— $
2,025,750
381,046
2,406,796
1,499,713
244,184
1,743,897
835,957
137,720
(431,184)
542,493
9,220
255
78,709
88,184
38,979
7,441
32,570
78,990
22,990
22,990
(51,000)
(51,000)
The following table reconciles total segment income from operations in the table above to net income before provision for (benefit from) income
taxes and equity in losses of investee (in thousands):
Total segment income from operations
Unallocated corporate expenses
Total income from operations
Interest income
Other income (expense), net
Net income before provision for (benefit from) income taxes and equity in
losses of investee
$
$
91
2021
Year Ended December 31,
2020
2019
1,584,993 $
(608,593)
976,400
3,103
32,920
864,097 $
(476,926)
387,171
3,125
(11,347)
1,012,423 $
378,949 $
973,677
(431,184)
542,493
12,482
7,676
562,651
Geographical Information
Net revenues are presented below by geographic area (in thousands):
Net revenues :
1
U.S.
2
Switzerland
China
2
The Netherlands
Other International
Total net revenues
2021
Year Ended December 31,
2020
2019
$
$
1,724,296 $
1,353,229
275,503
—
599,556
3,952,584 $
1,099,564 $
809,080
199,851
—
363,446
2,471,941 $
1,161,959
—
196,733
760,444
287,660
2,406,796
1
Net revenues are attributed to countries based on the location of where revenues are recognized by our legal entities.
2
In 2020, we implemented a new international corporate structure. This changed the structure of international procurement and sales operations from the Netherlands
to Switzerland.
Tangible long-lived assets, which includes Property, plant and equipment, net, and Operating lease right-of-use assets, net, are presented below by
geographic area (in thousands):
1
Long-lived assets :
Switzerland
U.S.
China
Costa Rica
Other International
Total long-lived assets
As of December 31,
2021
2020
$
$
444,205 $
210,582
125,346
92,204
330,846
1,203,183 $
257,337
180,539
113,918
97,804
167,676
817,274
1
Long-lived assets are attributed to countries based on the location of our entity that owns or leases the assets.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures.
Evaluation 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 have
evaluated 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
Exchange Act). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and
procedures are effective as of December 31, 2021 to provide reasonable assurance that information required to be disclosed by us in the reports that we file
or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported
within the time periods specified in 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, 2021 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
92
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
None.
PART III
Certain information required by Part III is omitted from this Form 10-K because we intend to file a definitive Proxy Statement for our 2022 Annual
Meeting of 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
certain information to be included therein is incorporated herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by Item 401 of Regulation S-K concerning our directors is incorporated by reference to the Proxy Statement under the
section captioned “Election of Directors.” The information required by Item 401 of Regulation S-K concerning our executive officers is set forth in Item 1
— “Business” of this Annual Report on Form 10-K. The information required by Item 405 of Regulation S-K is incorporated by reference to the section
entitled “Delinquent Section 16(a) Reports” contained in the Proxy Statement. The information required by Item 407(c)(3), 407(d)(4) and 407(d)(5) of
Regulation S-K is incorporated by reference to the Proxy Statement under the section entitled “Corporate Governance”.
Code of Ethics
We have a code of ethics (which we call our Global Code of Conduct) that applies to all of our employees, including our principal executive officer,
principal financial officer and controller. Our Global Code of Conduct is posted on the investor relations portion of our website at
http://investor.aligntech.com within the section captioned “Corporate Governance”.
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
ethics by 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 Compensation.
The information required by Item 402 of Regulation S-K is incorporated by reference to the Proxy Statement under the section captioned “Executive
Compensation.” The information required by Items 407(e)(4) and (e)(5) is incorporated by reference to the Proxy Statement under the section captioned
“Corporate Governance - Compensation Committee Interlocks and Insider Participation” and “Compensation Committee of the Board Report,”
respectively.
93
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by Item 403 of Regulation S-K is incorporated by reference to the Proxy Statement under the section captioned “Principal
Stockholders”.
Equity Compensation Plan Information
The following table provides information as of December 31, 2021 about our common stock that may be issued upon the awards granted to
employees, consultants or members of our Board of Directors under all existing equity compensation plans, including the 2005 Incentive Plan and the
Employee Stock Purchase Plan (“ESPP”), each as amended, and certain individual arrangements (Refer to Note 12 "Stockholders’ Equity” of the Notes to
Consolidated Financial Statements for a description of our equity compensation plans).
Plan Category
Equity compensation plans approved by
security holders
Equity compensation plans not approved
by security holders
Total
Number of securities to be issued
upon exercise of outstanding
options and restricted stock units
(a)
Weighted average
exercise price of
outstanding options (b)
Number of securities remaining available for
future issuance under equity compensation
plans (excluding securities reflected in column
(a))
665,957
1
—
665,957
$
$
—
—
—
6,439,289
2, 3
—
6,439,289
1
Includes 491,858 RSUs and 174,099 MSUs at target
2
Includes 2,194,566 shares available for issuance under our ESPP. We are unable to ascertain with specificity the number of securities to be issued upon exercise of
outstanding rights or the weighted average exercise price of outstanding rights under the ESPP.
3
Includes additional 496,182 of potentially issuable MSUs above target if performance targets are achieved at maximum payout (counted one and nine-tenths (1 9/10)
shares for every one (1) issuable share against the authorized share reserve)
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The 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 Accountant Fees and Services.
The 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 under the section captioned “Ratification of Appointment of Independent Registered Public Accountants.”
94
Item 15. Exhibit and Financial Statement Schedules.
(a)
Financial Statements
1.
Consolidated financial statements
PART IV
The following documents are filed as part of this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the year ended December 31, 2021, 2020 and 2019
Consolidated Statements of Comprehensive Income for the year ended December 31, 2021, 2020 and 2019
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Stockholders’ Equity for the year ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for the year ended December 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
56
58
59
60
61
62
63
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 Reserves for the year ended December 31, 2021, 2020 and 2019
All 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 at
Beginning
of Period
Additions
(Reductions)
to Costs and
Expenses
Write
Offs
Balance at
End of Period
Allowance for doubtful accounts:
Year Ended December 31, 2019
Year Ended December 31, 2020
Year Ended December 31, 2021
Valuation allowance for deferred tax assets:
Year Ended December 31, 2019
Year Ended December 31, 2020
Year Ended December 31, 2021
$
$
$
$
$
$
(in thousands)
5,853 $
12,073 $
2,814 $
835 $
239 $
11,613 $
(1,475) $
(8,590) $
(3,808) $
— $
— $
— $
6,756
10,239
9,245
1,086
1,325
12,938
2,378 $
6,756 $
10,239 $
251 $
1,086 $
1,325 $
95
(b)
The following Exhibits are included in this Annual Report on Form 10-K:
Exhibit
Number
Description
3.1
Amended and Restated Certificate of Incorporation of registrant
3.1A
3.2
3.2A
4.1
4.2
10.1A†
10.2†
10.3†
10.3A†
10.4†
10.5†
10.6†
10.7†
10.8†
10.8A†
10.9†
10.9A†
10.10†
10.11†
10.12†
10.13†
10.14†
10.15†
10.16†
10.17
Certificate of Amendment to the Amended and Restated Certificate of
Incorporation
Amended and Restated Bylaws of registrant
Amendment to Amended and Restated Bylaws of registrant
Form of Specimen Common Stock Certificate
Description of the Capital Stock of registrant
Amended Registrant’s 2010 Employee Stock Purchase Plan
Registrant's 2005 Incentive Plan (as amended May 2016)
Form of RSU agreement under Registrant's 2005 Incentive Plan (Officer Form
for officers appointed after September 2016)
Form of RSU agreement under Registrant's 2005 Incentive Plan (Officer Form
for officers appointed prior to September 2016)
Form of RSU agreement (CEO)
Form of RSU agreement under Registrant's 2005 Incentive Plan (Non-employee
Director Form)
Align 2019 Global RSU Agreement
Form of option award agreement under registrant’s 2005 Incentive Plan
Form of Market Stock Unit Agreement under Registrant's 2005 Incentive Plan
(Officer Form for MSU awards granted in 2018, 2019 and 2020 to officers
appointed after September 2016)
Form of Market Stock Unit Agreement under Registrant's 2005 Incentive Plan
(Officer Form for MSU awards granted in 2018, 2019 and 2020 to officers
appointed prior to September 2016)
Form of Market Stock Unit Agreement under Registrant's 2005 Incentive Plan
(Officer Form for MSU awards granted in 2021 to officers appointed after
September 2016)
Form of Market Stock Unit Agreement under Registrant's 2005 Incentive Plan
(Officer Form for MSU awards granted in 2021 to officers appointed prior to
September 2016)
Form of Market Stock Unit Agreement for CEO (Focal grants)
Form of Market Stock Unit Agreement for CEO Special MSU Award June 2018
Form of Employment Agreement entered into by and between registrant and
each executive officer (other than CEO for executives appointed prior to
September 2016)
Form of Employment Agreement entered into by and between registrant and
each executive officer (other than CEO for executives appointed after
September 2016)
Amended and Restated Chief Executive Officer Employment Agreement
between Align Technology, Inc. and Joseph Hogan
Employment Agreement between registrant and John F. Morici (Chief Financial
Officer)
Form of Indemnification Agreement by and between registrant and its Board of
Directors and its executive officers
Sale and Purchase Agreement between CETP III Ivory S.a.r.l., and Align
Technology, Inc. and its indirect wholly owned German subsidiary, mertus
602.GmbH, dated March 3, 2020
96
Form
S-1, as amended (File
No. 333-49932)
8-K
8-K
Def 14A
S-1, as amended (File
No. 333-49932)
10-K
Def 14A
10-K
10-K
Date
12/28/2000
5/20/2016
2/29/2012
4/7/2021
1/17/2001
2/28/2020
4/7/2021
2/26/2021
2/28/2020
Exhibit
Number
Incorporated
by Reference
herein
3.1
Filed
herewith
3.01
3.2
1.0
4.1
4.2
2.0
10.2
10.3
10-K
10-K
10-K
10-K
10-Q
10-K
10-K
10-K
10-K
10-K
8-K
10-Q
10-K
10-Q
10-Q
S-1 as amended (File
No. 333-49932)
10-Q
2/28/2020
10.3A
2/28/2020
2/28/2020
2/28/2019
8/4/2005
2/28/2020
10.4
10.5
10.6
10.4
10.8
2/28/2020
10.8A
2/26/2021
10.9
2/26/2021
10.9A
2/28/2020
6/25/2018
5/8/2008
2/28/2017
5/1/2015
11/8/2016
1/17/2001
5/5/2020
10.9
10.1
10.3
10.8
10.30
10.2
10.15
10.1
Exhibit
Number
10.18
10.19
21.1
23.1
31.1
31.2
32t
101.INS
Description
Credit Agreement between Align Technology, Inc. and the lenders party thereto
from time to time and Citibank, N.A., as administrative agent, dated July 21,
2020
Fixed Dollar Accelerated Share Repurchase Transaction dated October 29, 2021
Subsidiaries of Align Technology, Inc.
Consent of PricewaterhouseCoopers LLP, Independent Registered Public
Accounting Firm
Certifications of Chief Executive Officer pursuant to Exchange Act Rules 13a-
14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2003
Certifications of Chief Financial Officer pursuant to Exchange Act Rules 13a-
14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2003
Certification of Chief Executive Officer and Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2003
Inline XBRL Instance Document (the instance document does not appear in the
Interactive Data File because its XBRL tags are embedded within the Inline
XBRL document).
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL
101.DEF
101.LAB
101.PRE
104
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Inline XBRL Taxonomy Extension Label Linkbase Document
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (formatted as inline XBRL and contained in
Exhibit 101)
Form
10-Q
Date
10/30/2020
Exhibit
Number
Incorporated
by Reference
herein
10.1
Filed
herewith
*
*
*
*
*
*
*
*
*
*
*
*
*
__________________________________
†
t
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.
Furnished herewith
Item 16. Form 10-K Summary.
Not applicable.
97
Pursuant 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
its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
ALIGN TECHNOLOGY, INC.
By:
Date:
/S/ JOSEPH M. HOGAN
Joseph M. Hogan
President and Chief Executive Officer
February 25, 2022
Each person whose signature appears below constitutes and appoints Joseph M. Hogan or John F. Morici, 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 exhibits thereto and
other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-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
Registrant and in the capacities and on the dates indicated.
Signature
Title
/S/ JOSEPH M. HOGAN
Joseph M. Hogan
/S/ JOHN F. MORICI
John F. Morici
/S/ KEVIN J. DALLAS
Kevin J. Dallas
/S/ JOSEPH LACOB
Joseph Lacob
/S/ C. RAYMOND LARKIN, JR.
C. Raymond Larkin, Jr.
/S/ GEORGE J. MORROW
George J. Morrow
/S/ ANNE M. MYONG
Anne M. Myong
/S/ ANDREA L. SAIA
Andrea L. Saia
/S/ GREG J. SANTORA
Greg J. Santora
/S/ SUSAN E. SIEGEL
Susan E. Siegel
/S/ WARREN S. THALER
Warren S. Thaler
President and Chief Executive Officer (Principal
Executive Officer)
Chief Financial Officer and Executive Vice
President, Global Finance (Principal Financial Officer and
Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
98
Date
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
Citibank, N.A.
388 Greenwich Street, 4 Floor
New York, NY 10013 Attention: Equity Derivatives Opening Transaction
th
Exhibit 10.19
Align Technology, Inc.
410 N. Scottsdale Road, Suite 1300
Tempe, Arizona 85281
________________
Citibank, N.A.
Fixed Dollar Accelerated Share Repurchase Transaction
October 29, 2021
To:
A/C:
From:
Re:
Date:
Dear Sir/Madam:
The purpose of this letter agreement (this “Confirmation”) is to confirm the terms and conditions of the Transaction entered into between Citibank,
N.A. (“Dealer”) and Align Technology, Inc. (“Issuer”) on the Trade Date specified below (the “Transaction”). This confirmation constitutes a
“Confirmation” as referred to in the Agreement specified below.
The definitions and provisions contained in the 2002 ISDA Equity Derivatives Definitions (as published by the International Swaps and
Derivatives Association, Inc. (“ISDA”)) (the “Equity Definitions”) are incorporated into this Confirmation. The Transaction is a Share Forward Transaction
for purposes of the Equity Definitions. Any reference to a currency shall have the meaning contained in Section 1.7 of the 2006 ISDA Definitions, as
published by ISDA.
1. This Confirmation evidences a complete and binding agreement between Dealer and Issuer as to the terms of the Transaction to which this
Confirmation relates and shall supersede all prior or contemporaneous written or oral communications with respect thereto. This Confirmation shall be
subject to an agreement (the “Agreement”) in the form of the 2002 ISDA Master Agreement as if Dealer and Issuer had executed an agreement in such
form without any Schedule but with the elections set forth in this Confirmation (and (1) the election of USD as the Termination Currency, (2) the election
that subparagraph (ii) of Section 2(c) will not apply to the Transactions and (3) the election that the “Cross Default” provisions of Section 5(a)(vi) shall
apply to Dealer, with a “Threshold Amount” of 3% of Dealer shareholders’ equity for Dealer (provided that (a) the phrase “or becoming capable at such
time of being declared” shall be deleted from clause (1) of such Section 5(a)(vi) of the Agreement and (b) the following sentence shall be added to the end
thereof: “Notwithstanding the foregoing, a default hereunder shall not constitute an Event of Default if (i) the default was caused solely by error or
omission of an administrative or operational nature; (ii) funds were available to enable the party to make the payment when due; and (iii) the payment is
made within two Local Business Days of such party’s receipt of written notice of its failure to pay)”.
The Transaction shall be the only transaction under the Agreement. If there exists any ISDA Master Agreement between Dealer and Issuer or any
confirmation or other agreement between Dealer and Issuer pursuant to which an ISDA Master Agreement is deemed to exist between Dealer and Issuer,
then, notwithstanding anything to the contrary in such ISDA Master Agreement, such confirmation or agreement or any other agreement to which Dealer
and Issuer are parties, the Transaction shall not be considered a transaction under, or otherwise governed by, such existing or deemed to be existing ISDA
Master Agreement.
If there is any inconsistency between the Agreement, this Confirmation and the Equity Definitions, the following will prevail for purposes of the
Transaction in the order of precedence indicated: (i) this Master Confirmation; (ii) the Equity Definitions; and (iii) the Agreement.
2. The terms of the particular Transaction to which this Confirmation relates are as follows:
GENERAL TERMS:
Trade Date:
As specified in Schedule I
Buyer:
Seller:
Shares:
Forward Price:
Discount:
10b-18 VWAP:
Observation Dates:
Calculation Period:
Final Termination Date:
Trading Day:
Initial Shares:
Initial Share Delivery Date:
Prepayment:
Prepayment Amount:
Prepayment Date:
Exchange:
Related Exchange:
Issuer
Dealer
Common Stock, par value USD 0.0001 per share, of Issuer (Ticker: ALGN)
A price per Share (as determined by the Calculation Agent) equal to the greater of (A) (i) the
arithmetic mean (not a weighted average, subject to “Market Disruption Event” below) of the 10b-
18 VWAP on each Observation Date that is a Trading Day during the Calculation Period minus (ii)
the Discount and (B) $5.00.
As specified in Schedule I
On any Trading Day, a price per Share equal to the volume- weighted average price of the Rule
10b-18 eligible trades in the Shares for the entirety of such Trading Day as determined by the
Calculation Agent by reference to the screen entitled “ALGN
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