Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by Align Technology, Inc. (“we”, “our”, or “Align”) in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) and contain all adjustments, including normal recurring adjustments, necessary to present fairly our results of operations for the three and nine months ended September 30, 2012 and 2011, our comprehensive income for the three and nine months ended September 30, 2012 and 2011, our financial position as of September 30, 2012 and our cash flows for the nine months ended September 30, 2012 and 2011. The Condensed Consolidated Balance Sheet as of December 31, 2011 was derived from the December 31, 2011 audited financial statements.

The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any other future period, and we make no representations related thereto. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk” and the Consolidated Financial Statements and notes thereto included in Items 7, 7A and 8, respectively, in our Annual Report on Form 10-K for the year ended December 31, 2011.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted 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 the fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, stock-based compensation, income taxes, and contingent liabilities, 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.

Revision of Prior Period Financial Statements

In connection with the preparation of our consolidated financial statements for the third quarter of 2012, we determined that we had not correctly recognized the excess tax benefits related to stock-based awards in the first, second, and third quarters of 2011 and the first quarter of 2012.

In accordance with Staff Accounting Bulletin (SAB) No. 99, “Materiality”, and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, we evaluated the materiality of the errors from qualitative and quantitative perspectives, and evaluated the quantified errors under both the iron curtain and the roll-over methods. We concluded that the errors were not material to the financial statements for the first, second and third quarters of 2011 and the first quarter of 2012. We have revised the presentation of the statement of cash flows for the third quarter of 2011 and we will revise the presentation of the first quarter of 2012 statement of cash flows in future periods.

The following tables summarize the effects of the revision on our Condensed Consolidated Balance Sheets and Condensed Consolidated Statement of Cash Flows. The revision did not impact our Condensed Consolidated Statement of Operations for any of the applicable periods.

Balance Sheets



	March 31, 2011
	(in thousands)
	Previously Reported		Adjustment		As Revised
Balance Sheet:
Deferred tax assets	$	38,024	$	2,068	$	40,092
Total assets	496,982		2,068		499,050
Additional paid-in capital	563,878		2,068		565,946
Total stockholders' equity	402,105		2,068		404,173



	June 30, 2011
	(in thousands)
	Previously Reported		Adjustment		As Revised
Balance Sheet:
Deferred tax assets	$	28,546	$	5,374	$	33,920
Total assets	547,049		5,374		552,423
Additional paid-in capital	580,274		5,374		585,648
Total stockholders' equity	429,782		5,374		435,156



	September 30, 2011
	(in thousands)
	Previously Reported		Adjustment		As Revised
Balance Sheet:
Deferred tax assets	$	22,945	$	5,988	$	28,933
Total assets	585,920		5,988		591,908
Additional paid-in capital	588,501		5,988		594,489
Total stockholders' equity	456,876		5,988		462,864



	March 31, 2012
	(in thousands)
	Previously Reported		Adjustment		As Revised
Balance Sheet:
Deferred tax assets	$	17,612	$	8,043	$	25,655
Total assets	670,436		8,043		678,479
Additional paid-in capital	619,991		8,043		628,034
Total stockholders' equity	523,022		8,043		531,065

Cash flows



	Three Months Ended March 31, 2011
	(in thousands)
	Previously Reported		Adjustment			As Revised
Statement of Cash Flows
Net cash provided by operating activities	$	17,248	$	(2,068	)	$	15,180
Net cash provided by financing activities	3,749		2,068			5,817
Net increase cash and cash equivalents	13,944		—			13,944



	Six Months Ended June 30, 2011
	(in thousands)
	Previously Reported			Adjustment			As Revised
Statement of Cash Flows
Net cash provided by operating activities	$	46,944		$	(5,374	)	$	41,570
Net cash provided by financing activities	15,128			5,374			20,502
Net increase (decrease) cash and cash equivalents	(126,057		)	—			(126,057		)



	Nine Months Ended September 30, 2011
	(in thousands)
	Previously Reported			Adjustment			As Revised
Statement of Cash Flows
Net cash provided by operating activities	$	88,479		$	(5,988	)	$	82,491
Net cash provided by financing activities	18,401			5,988			24,389
Net increase (decrease) cash and cash equivalents	(92,435		)	—			(92,435		)



	Three Months Ended March 31, 2012
	(in thousands)
	Previously Reported			Adjustment			As Revised
Statement of Cash Flows
Net cash provided by operating activities	$	15,424		$	(8,043	)	$	7,381
Net cash provided by financing activities	6,248			8,043			14,291
Net increase (decrease) in cash and cash equivalents	(16,314		)	—			(16,314		)

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Accounting Standards Codification “ASC” 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This accounting standard update provides certain amendments to the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for the year beginning after December 15, 2011. We adopted this standard in the first quarter of 2012, and the adoption of this standard did not have an impact on our condensed consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (ASC 220): Presentation of Comprehensive Income.” This accounting standard update eliminated the option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, an entity will be required to present items of net income and other comprehensive income in one continuous statement or in two separate statements. The standard is effective for the year beginning after December 15, 2011. We adopted this standard in the first quarter of 2012 as a separate statement in our condensed consolidated financial statement.

In September 2011, FASB issued ASU 2011-08, “Intangibles—Goodwill and Other (ASC 350): Testing Goodwill for Impairment.” This accounting standard update is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We adopted this standard in the first quarter of 2012, and the adoption of this standard did not have an impact on our condensed consolidated financial statements.

In July 2012, FASB issued ASU 2012-2, "Intangibles—Goodwill and Other (ASC 350): Testing Indefinite-Lived Intangible Assets for Impairment." This accounting standard update applies to long-lived intangible assets, other than goodwill, that are not subject to amortization on the basis that they have indefinite useful lives. This standard is intended to simplify impairment testing by adding a qualitative review step to assess whether the required quantitative impairment analysis is necessary. Under the new standard, a company will not be required to calculate the fair value of the intangible asset unless it concludes, based on the qualitative assessment, that it is more likely than not that the fair value of that asset is less than its book value. If such a decline in fair value is deemed more likely than not to have occurred, then the quantitative impairment test must be completed; otherwise, the asset is deemed to be not impaired and no further testing is required until the next annual test date (or sooner if conditions or events before that date raise concerns of potential impairment of the asset). The amended impairment guidance does not affect the manner in which fair value is determined. The new guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We adopted this standard in the third quarter of 2012, and the adoption of this standard did not have an impact on our condensed consolidated financial statements as we do not have any indefinite-lived intangible assets other than goodwill.