UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________ 

FORM 10-Q

____________________________ 

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to

Commission file number: 000-32259

____________________________

ALIGN TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

____________________________ 

Delaware	94-3267295
(State or other jurisdiction of incorporation or organization)	(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)

 ____________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.0001 par value	ALGN	The NASDAQ Stock Market LLC
		(NASDAQ Global Market)

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	☒	Accelerated filer	☐
Non-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 13 (a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No ☒

The number of shares outstanding of the registrant’s Common Stock, $0.0001 par value, as of October 28, 2021 was 78,853,069.

1

ALIGN TECHNOLOGY, INC.

INDEX

 

PART I	FINANCIAL INFORMATION	3
ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED):	3
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	3
	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	4
	CONDENSED CONSOLIDATED BALANCE SHEETS	5
	CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY	6
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	8
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	9
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	33
ITEM 4.	CONTROLS AND PROCEDURES	34
PART II	OTHER INFORMATION	34
ITEM 1.	LEGAL PROCEEDINGS	34
ITEM 1A.	RISK FACTORS	34
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	55
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	55
ITEM 4.	MINE SAFETY DISCLOSURES	55
ITEM 5.	OTHER INFORMATION	55
ITEM 6.	EXHIBITS	56
SIGNATURES		57

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

PART I—FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net revenues	$	1,015,906	$	734,144	$	2,921,485	$	1,637,421
Cost of net revenues	260,750		200,056		730,693		484,649
Gross profit	755,156		534,088		2,190,792		1,152,772
Operating expenses:
Selling, general and administrative	428,409		312,492		1,257,445		852,365
Research and development	65,587		44,527		177,839		126,420
Total operating expenses	493,996		357,019		1,435,284		978,785
Income from operations	261,160		177,069		755,508		173,987
Interest income and other income (expense), net:
Interest income	401		329		2,427		2,788
Other income (expense), net	427		7,147		34,476		(12,368)
Total interest income and other income (expense), net	828		7,476		36,903		(9,580)
Net income before provision for (benefit from) income taxes	261,988		184,545		792,411		164,407
Provision for (benefit from) income taxes	81,019		45,174		211,352		(1,452,493)
Net income	$	180,969	$	139,371	$	581,059	$	1,616,900
Net income per share:
Basic	$	2.29	$	1.77	$	7.36	$	20.54
Diluted	$	2.28	$	1.76	$	7.29	$	20.45
Shares used in computing net income per share:
Basic	78,904		78,824		78,971		78,729
Diluted	79,516		79,163		79,677		79,078

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income	$	180,969	$	139,371	$	581,059	$	1,616,900
Change in foreign currency translation adjustment, net of tax	(12,037)		15,810		(25,902)		25,793
Change in unrealized gains (losses) on investments, net of tax	20		—		—		(194)
Other comprehensive income (loss)	(12,017)		15,810		(25,902)		25,599
Comprehensive income	$	168,952	$	155,181	$	555,157	$	1,642,499

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

	September 30, 2021		December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	1,237,822	$	960,843
Accounts receivable, net of allowance for doubtful accounts of $9,174 and $10,239, respectively	855,037		657,704
Inventories	207,116		139,237
Prepaid expenses and other current assets	155,332		91,754
Total current assets	2,455,307		1,849,538
Property, plant and equipment, net	1,002,769		734,721
Operating lease right-of-use assets, net	92,727		82,553
Goodwill	426,594		444,817
Intangible assets, net	115,794		130,072
Deferred tax assets	1,502,250		1,552,831
Other assets	54,668		35,151
Total assets	$	5,650,109	$	4,829,683
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	174,916	$	142,132
Accrued liabilities	545,286		405,582
Deferred revenues	1,070,113		777,887
Total current liabilities	1,790,315		1,325,601
Income tax payable	125,986		105,748
Operating lease liabilities	74,352		64,445
Other long-term liabilities	142,694		100,024
Total liabilities	2,133,347		1,595,818
Commitments and contingencies (Notes 6 and 7)
Stockholders’ equity:
Preferred stock, $0.0001 par value (5,000 shares authorized; none issued)	—		—
Common stock, $0.0001 par value (200,000 shares authorized; 78,852 and 78,860 issued and outstanding, respectively)	8		8
Additional paid-in capital	972,450		974,556
Accumulated other comprehensive income (loss), net	17,599		43,501
Retained earnings	2,526,705		2,215,800
Total stockholders’ equity	3,516,762		3,233,865
Total liabilities and stockholders’ equity	$	5,650,109	$	4,829,683

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss), Net		Retained Earnings		Total
Three Months Ended September 30, 2021	Shares	Amount
Balance as of June 30, 2021	78,948	$	8	$	895,831	$	29,616	$	2,458,955	$	3,384,410
Net income	—	—		—		—		180,969		180,969
Net change in unrealized gains (losses) from investments	—	—		—		20		—		20
Net change in foreign currency translation adjustment	—	—		—		(12,037)		—		(12,037)
Issuance of common stock relating to employee equity compensation plans	69	—		12,490		—		—		12,490
Tax withholdings related to net share settlements of equity awards	—	`		(2,454)		—		—		(2,454)
Common stock repurchased and retired	(165)	—		(1,819)		—		(113,219)		(115,038)
Equity forward contract related to accelerated stock repurchase	—	—		40,000		—		—		40,000
Stock-based compensation	—	—		28,402		—		—		28,402
Balance as of September 30, 2021	78,852	$	8	$	972,450	$	17,599	$	2,526,705	$	3,516,762

	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss), Net		Retained Earnings		Total
Nine Months Ended September 30, 2021	Shares	Amount
Balance as of December 31, 2020	78,860	$	8	$	974,556	$	43,501	$	2,215,800	$	3,233,865
Net income	—	—		—		—		581,059		581,059
Net change in foreign currency translation adjustment	—	—		—		(25,902)		—		(25,902)
Issuance of common stock relating to employee equity compensation plans	434	—		25,623		—		—		25,623
Tax withholdings related to net share settlements of equity awards	—	—		(107,343)		—		—		(107,343)
Common stock repurchased and retired	(442)	—		(4,884)		—		(270,154)		(275,038)
Stock-based compensation	—	—		84,498		—		—		84,498
Balance as of September 30, 2021	78,852	$	8	$	972,450	$	17,599	$	2,526,705	$	3,516,762

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)

(in thousands)

(unaudited)

	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss), Net		Retained Earnings		Total
Three Months Ended September 30, 2020	Shares	Amount
Balance as of June 30, 2020	78,781	$	8	$	918,495	$	9,101	$	1,917,441	$	2,845,045
Net Income	—	—		—		—		139,371		139,371
Net change in foreign currency translation adjustment	—	—		—		15,810		—		15,810
Issuance of common stock relating to employee equity compensation plans	68	—		9,652		—		—		9,652
Tax withholdings related to net share settlements of equity awards	—	—		(1,636)		—		—		(1,636)
Stock-based compensation	—	—		25,229		—		—		25,229
Balance as of September 30, 2020	78,849	$	8	$	951,740	$	24,911	$	2,056,812	$	3,033,471

	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss), Net		Retained Earnings		Total
Nine Months Ended September 30, 2020	Shares	Amount
Balance as of December 31, 2019	78,433	$	8	$	906,937	$	(688)	$	439,912	$	1,346,169
Net income	—	—		—		—		1,616,900		1,616,900
Net change in unrealized gains (losses) from investments	—	—		—		(194)		—		(194)
Net change in foreign currency translation adjustment	—	—		—		25,793		—		25,793
Issuance of common stock relating to employee equity compensation plans	416	—		20,314		—		—		20,314
Tax withholdings related to net share settlements of equity awards	—	—		(48,674)		—		—		(48,674)
Stock-based compensation	—	—		73,163		—		—		73,163
Balance as of September 30, 2020	78,849	$	8	$	951,740	$	24,911	$	2,056,812	$	3,033,471

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7

ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	581,059	$	1,616,900
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes	48,104		(1,502,459)
Depreciation and amortization	79,141		68,769
Stock-based compensation	84,498		73,163
Non-cash operating lease cost	19,364		16,819
Allowance for doubtful accounts provisions	1,559		13,090
Arbitration award gain	(43,403)		—
Other non-cash operating activities	14,092		14,189
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable	(216,081)		(101,888)
Inventories	(83,249)		(11,774)
Prepaid expenses and other assets	(74,736)		(28,251)
Accounts payable	13,495		21,837
Accrued and other long-term liabilities	107,159		(28,343)
Long-term income tax payable	20,263		119
Deferred revenues	348,430		128,585
Net cash provided by operating activities	899,695		280,756
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition, net of cash acquired	(8,002)		(420,788)
Purchase of property, plant and equipment	(292,002)		(101,757)
Purchase of marketable securities	—		(5,341)
Proceeds from maturities of marketable securities	—		42,641
Proceeds from sales of marketable securities	—		278,817
Repayment on unsecured promissory note	4,594		17,828
Proceeds from arbitration award	43,403		—
Other investing activities	(3,712)		1,760
Net cash used in investing activities	(255,719)		(186,840)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock	25,623		20,314
Common stock repurchases	(275,038)		—
Payroll taxes paid upon the vesting of equity awards	(107,344)		(48,674)
Net cash used in financing activities	(356,759)		(28,360)
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash	(10,241)		(568)
Net increase in cash, cash equivalents, and restricted cash	276,976		64,988
Cash, cash equivalents, and restricted cash at beginning of the period	961,474		551,134
Cash, cash equivalents, and restricted cash at end of the period	$	1,238,450	$	616,122

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

8

ALIGN TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by Align Technology, Inc. (“we”, “our”, or “Align”) in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and contains all adjustments, including normal recurring adjustments, necessary to state fairly our results of operations for the three and nine months ended September 30, 2021 and 2020, our comprehensive income for the three and nine months ended September 30, 2021 and 2020, our financial position as of September 30, 2021, our stockholders’ equity for the three and nine months ended September 30, 2021 and 2020, and our cash flows for the nine months ended September 30, 2021 and 2020. The Condensed Consolidated Balance Sheet as of December 31, 2020 was derived from the December 31, 2020 audited financial statements. It does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.”).

The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 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 the Consolidated Financial Statements and notes thereto included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2020.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the U.S. requires our management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, useful lives of intangible assets and property and equipment, long-lived assets and goodwill, income taxes and contingent liabilities, the fair values of financial instruments and stock-based compensation among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Certain Risks and Uncertainties

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 strains, 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.

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

9

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.

Note 2. Fair Value Measurements

Fair value is an exit price, representing the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We use the GAAP fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value:

Level 1 — Quoted (unadjusted) prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. We obtain fair values for our Level 2 investments. Our custody bank and asset managers independently use professional pricing services to gather pricing data which may include quoted market prices for identical or comparable financial instruments, or inputs other than quoted prices that are observable either directly or indirectly, and we are ultimately responsible for these underlying estimates.

Level 3 — Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.

The following tables summarize our financial assets measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020 (in thousands):

Description	Balance as of September 30, 2021		Level 1		Level 2
Cash equivalents:
Money market funds	$	582,227	$	582,227	$	—
Prepaid expenses and other current assets:
Israeli funds	4,170		—		4,170
	$	586,397	$	582,227	$	4,170

Description	Balance as of December 31, 2020		Level 1		Level 2		Level 3
Cash equivalents:
Money market funds	$	519,228	$	519,228	$	—	$	—
Prepaid expenses and other current assets:
Israeli funds	3,500		—		3,500		—
Current unsecured promissory note 1	5,408		—		—		5,408
	$	528,136	$	519,228	$	3,500	$	5,408

1 The unsecured promissory note was paid in full by SmileDirectClub, LLC (“SDC”) during the nine months ended September 30, 2021. Besides the repayment on the note, on March 12, 2021, the Arbitrator ruled in favor of us on the SDC dispute and issued an award of $43.4 million along with interest. The gain of $43.4 million is recognized as a part of our other income (expense), net in our Condensed Consolidated Statement of Operation during the nine months ended September 30, 2021. Refer to Note 6 “Legal Proceedings” of the Notes to Condensed Consolidated Financial Statements included for more information on the arbitration.

Investments in Privately Held Companies

10

Investments in equity securities of privately held companies without readily determinable fair values was $8.6 million as of September 30, 2021 and not material as of December 31, 2020 and are reported as nonrecurring investments within other assets in our Condensed Consolidated Balance Sheet. Our investments in equity securities are considered Level 3 in the fair value hierarchy since the investments are in private companies without quoted market prices and we adjust the carrying value based on observable price changes. The adjustments to the carrying value of these investments was not material during the nine months ended September 30, 2021 and 2020.

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 three months ended September 30, 2021 and 2020, we recognized net gains of $14.7 million and net losses of $12.1 million, respectively, and during the nine months ended September 30, 2021 and 2020, we recognized net gains of $14.1 million and $0.6 million, respectively. As of September 30, 2021 and December 31, 2020, the fair value of foreign exchange forward contracts outstanding was not material.

The following table presents the gross notional value of all our foreign exchange forward contracts outstanding as of September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021
	Local Currency Amount	Notional Contract Amount (USD)
Euro	€192,600	$	222,456
Chinese Yuan	¥1,021,000	157,701
Canadian Dollar	C$100,000	78,563
Japanese Yen	¥6,097,800	54,496
British Pound	£40,250	54,296
Brazilian Real	R$285,000	52,073
Polish Zloty	PLN142,000	35,710
Mexican Peso	M$310,000	15,065
Israel Shekel	ILS38,400	11,914
Swiss Franc	CHF10,600	11,356
Australian Dollar	A$5,900	4,252
		$	697,882

	December 31, 2020
	Local Currency Amount	Notional Contract Amount (USD)
Euro	€126,300	$	155,125
Chinese Yuan	¥936,000	143,393
Canadian Dollar	C$65,000	50,791
British Pound	£32,300	43,879
Japanese Yen	¥4,249,000	41,222
Brazilian Real	R$142,000	27,264
Israeli Shekel	ILS74,000	23,094
Mexican Peso	M$140,000	7,002
Australian Dollar	A$5,800	4,447
Swiss Franc	CHF3,700	4,191
		$	500,408

11

Other foreign currency forward contract

Prior to the closing of the exocad Global Holdings GmbH (“exocad”) acquisition on April 1, 2020, we entered into a Euro foreign currency forward contract with a notional contract amount of €376.0 million. During the nine months ended September 30, 2020, we recognized a loss of $10.2 million within other income (expense), net in our Condensed Consolidated Statement of Operations.

Note 3. Balance Sheet Components

Inventories consist of the following (in thousands):

	September 30, 2021		December 31, 2020
Raw materials	$	104,017	$	76,404
Work in process	51,527		31,393
Finished goods	51,572		31,440
Total inventories	$	207,116	$	139,237

Accrued liabilities consist of the following (in thousands): 

	September 30, 2021		December 31, 2020
Accrued payroll and benefits	$	229,743	$	170,106
Accrued expenses	62,828		42,536
Accrued sales and marketing expenses	55,310		34,488
Accrued property, plant and equipment	41,389		27,692
Accrued income taxes	35,152		30,130
Accrued professional fees	29,488		20,617
Current operating lease liabilities	22,170		21,735
Other accrued liabilities	69,206		58,278
Total accrued liabilities	$	545,286	$	405,582

Accrued warranty, which is included in the "Other accrued liabilities" category of the accrued liabilities table above, consists of the following activity (in thousands):

	Nine Months Ended September 30,
	2021		2020
Balance at beginning of period	$	12,615	$	11,205
Charged to cost of net revenues	13,400		8,047
Actual warranty expenditures	(11,040)		(8,229)
Balance at end of period	$	14,975	$	11,023

Deferred revenues consist of the following (in thousands):

	September 30, 2021		December 31, 2020
Deferred revenues - current	$	1,070,113	$	777,887
Deferred revenues - long-term 1	$	108,387	$	62,551

1 Included in Other long-term liabilities within our Condensed Consolidated Balance Sheet

During the three months ended September 30, 2021 and 2020, we recognized $1.0 billion and $734.1 million of net revenues, respectively, of which $112.6 million and $99.6 million was included in the deferred revenues balance at December 31, 2020 and 2019, respectively.

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During the nine months ended September 30, 2021 and 2020, we recognized $2.9 billion and $1.6 billion of net revenues, respectively, of which $349.7 million and $263.3 million was included in the deferred revenues balance at December 31, 2020 and 2019, respectively.

Our unfulfilled performance obligations, including deferred revenues and backlog, as of September 30, 2021 were $1.2 billion. These performance obligations are expected to be recognized over the next one to five years.

Note 4. Goodwill and Intangible Assets

During the three months ended September 30, 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 nine months ended September 30, 2021, categorized by reportable segments, is as follows (in thousands):

	Clear Aligner		Systems and Services		Total
Balance as of December 31, 2020	$	112,691	$	332,126	$	444,817
Additions from acquisition	3,646		—		3,646
Foreign currency translation adjustments	(3,062)		(18,807)		(21,869)
Balance as of September 30, 2021	$	113,275	$	313,319	$	426,594

Intangible Long-Lived Assets

Acquired intangible long-lived assets were as follows, excluding intangibles that were fully amortized (in thousands): 

	Weighted Average Amortization Period (in years)	Gross Carrying Amount as of September 30, 2021		Accumulated Amortization		Accumulated Impairment Loss		Net Carrying Value as of September 30, 2021
Existing technology	10	$	104,531	$	(19,923)	$	(4,328)	$	80,280
Customer relationships	11	55,000		(24,888)		(10,751)		19,361
Trademarks and tradenames	10	16,600		(4,087)		(4,179)		8,334
Patents and other	8	6,511		(4,296)		—		2,215
		$	182,642	$	(53,194)	$	(19,258)	110,190
Foreign currency translation								5,604
Total intangible assets								$	115,794

	Weighted Average Amortization Period (in years)	Gross Carrying Amount as of December 31, 2020		Accumulated Amortization		Accumulated Impairment Loss		Net Carrying Value as of December 31, 2020
Existing technology	10	$	99,400	$	(12,719)	$	(4,328)	$	82,353
Customer relationships	11	55,000		(21,879)		(10,751)		22,370
Trademarks and tradenames	10	16,600		(2,934)		(4,179)		9,487
Patents and other	8	6,610		(3,785)		—		2,825
		177,610		(41,317)		(19,258)		117,035
Foreign currency translation								13,037
Total intangible assets								$	130,072

The total estimated annual future amortization expense for these acquired intangible assets as of September 30, 2021 is as follows (in thousands):

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Fiscal Year Ending December 31,	Amortization
Remainder of 2021	$	4,158
2022	15,392
2023	14,772
2024	13,831
2025	13,455
Thereafter	48,582
Total	$	110,190

Amortization expense for the three months ended September 30, 2021 and 2020 was $4.4 million and $4.1 million, respectively, and amortization expense for the nine months ended September 30, 2021 and 2020 was $12.2 million and $9.5 million, respectively.

Note 5. Credit Facility

On July 21, 2020 we entered into a credit facility for a $300.0 million unsecured revolving line of credit, with a $50.0 million letter of credit sublimit, and a maturity date of July 21, 2023 (“2020 Credit Facility”), replacing our previous credit facility which provided for a $200.0 million revolving line of credit with a $50.0 million letter of credit. The 2020 Credit Facility requires us to comply with specific financial conditions and performance requirements. Loans under the 2020 Credit Facility bear interest, at our option, at either a rate based on the reserve adjusted LIBOR for the applicable interest period or a base rate, in each case plus a margin. The base rate is the highest of the credit facility's publicly announced prime rate, the federal funds rate plus 0.50% and one-month LIBOR plus 1.0%. The margin ranges from 1.50% to 2.25% for LIBOR loans and 0.50% to 1.25% for base rate loans. The 2020 Credit Facility allows for an alternative rate to be identified if LIBOR is no longer available. Interest on the loans is payable quarterly in arrears with respect to base rate loans and at the end of an interest period (and at three month intervals if the interest period exceeds three months) in the case of LIBOR loans. The outstanding principal, together with accrued and unpaid interest, is due on the maturity date. As of September 30, 2021, we had no outstanding borrowings under the 2020 Credit Facility and were in compliance with the conditions and performance requirements.

Note 6. 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 condensed consolidated financial statements. Lead Plaintiff filed a motion seeking preliminary approval of the settlement on July 15, 2021. A hearing on that motion was held on October 21, 2021. At the hearing, the Court directed Lead Plaintiff to file an amended motion seeking preliminary approval of the settlement by November 1, 2021 and the Court indicated it will thereafter grant preliminary approval of the settlement. 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

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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 is currently unable to predict the outcome of these lawsuits and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.

2020 Securities Class Action Lawsuit

On March 2, 2020, a class action lawsuit against Align and two of our executive officers was filed in the U.S. District Court for the Southern District of New York (later transferred to the U.S. District Court for the Northern District of California) on behalf of a purported class of purchasers of our common stock. The complaint alleged claims under the federal securities laws and sought monetary damages in an unspecified amount and costs and expenses incurred in the litigation. The lead plaintiff filed an amended complaint on August 4, 2020 against Align and three of our executive officers alleging similar claims as in the initial complaint on behalf of a purported class of purchasers of our common stock from April 25, 2019 to July 24, 2019. On March 29, 2021, defendants’ motion to dismiss the amended complaint was granted with leave for the lead plaintiff to file a further amended complaint. On April 22, 2021, lead plaintiff filed a notice stating it would not file a further amended complaint. On April 23, 2021, the Court dismissed the action with prejudice and judgment was entered. Lead plaintiff filed a notice of appeal on April 28, 2021 and filed its opening appeal brief with the United States Court of Appeals for the Ninth Circuit on September 1, 2021. Respondents’ brief in opposition is due November 22, 2021. 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 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 November 14, 2017, Align filed several patent infringement lawsuits asserting patents against 3Shape, a Danish corporation, and a related U.S. corporate entity, asserting that 3Shape’s Trios intraoral scanning system and Dental System software infringe Align patents.

These lawsuits were filed in the U.S. District Court for the District of Delaware alleging patent infringement by 3Shape’s Trios intraoral scanning system and Dental System software. Three of the cases are active and 3Shape filed counterclaims for breach of contract and business torts. Align’s motion to dismiss these 3Shape counterclaims was granted.

In 2018, 3Shape filed two separate complaints in the U.S. District Court for the District of Delaware alleging patent infringement by Align’s iTero Element scanner of 3Shape patents. On August 19, 2019, the Court consolidated the two actions, and on August 30, 2019, 3Shape filed an amended complaint.

On December 11, 2018, Align filed an additional complaint in the U.S. District Court for the District of Delaware alleging patent infringement by 3Shape’s Trios intraoral scanning system, Lab Scanners and Dental and Ortho System Software. 3Shape filed business tort counterclaims. The Court granted Align’s motion to dismiss 3Shape’s business tort counterclaims. The case is currently stayed.

On October 19, 2020, Align filed a complaint in the U.S. District Court for the Western District of Texas alleging patent infringement by 3Shape’s intraoral scanners and associated software products. In response, 3Shape filed business tort and patent infringement counterclaims. Align moved to dismiss the business tort counterclaims. The Court granted Align’s motion

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to dismiss all of the business tort counterclaims except for a counterclaim of fraudulent inducement. Align filed a separate motion to dismiss on that counterclaim which is pending.

3Shape and Align’s District Court patent infringement complaints and 3Shape’s counterclaims seek monetary damages and/or injunctive relief. One of Align’s Delaware District Court cases against 3Shape is scheduled for a jury trial beginning on May 31, 2022. The case pending in the Western District of Texas has been given a jury trial date of October 3, 2022. No trial dates have been set in the remaining cases.

On August 28, 2018, 3Shape filed a complaint against Align in the U.S. District Court for the District of Delaware alleging antitrust violations and seeking monetary damages and injunctive relief relating to Align’s alleged market activities, including Align’s assertion of its patent portfolio, in alleged clear aligner and intraoral scanner markets. No trial date has been set.

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.

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 has not yet responded to the second amended complaint. 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.

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

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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 is set for hearing in the first quarter of 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 7. Commitments and Contingencies

Other Commitments

In 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 a five year period through 2022. On June 24, 2021, we amended the agreement which requires an additional minimum aligner material purchase of approximately $348.0 million from 2023 through 2026.

Off-Balance Sheet Arrangements

As of September 30, 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 Note 11 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K.

Indemnification Provisions

In the normal course of business to facilitate transactions in our services and products, we indemnify certain parties: customers, vendors, lessors, and other parties with respect to certain matters, including, but not limited to, services to be provided by us and intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and our executive officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. Several of these agreements limit the time within which an indemnification claim can be made and the amount of the claim.

It is not possible to make a reasonable estimate of the maximum potential amount under these indemnification agreements due to the unique facts and circumstances involved in each particular agreement. Additionally, we have a limited history of prior indemnification claims and the payments we have made under such agreements have not had a material adverse effect on our results of operations, cash flows or financial position. However, to the extent that valid indemnification claims arise in the future, future payments by us could be significant and could have a material adverse effect on our results of operations or cash flows in a particular period. As of September 30, 2021, we did not have any material indemnification claims that were probable or reasonably possible.

Note 8. Stockholders’ Equity

As of September 30, 2021, the 2005 Incentive Plan (as amended) has a total reserve of 27,783,379 shares of which 4,236,601 shares are available for issuance.

Summary of Stock-Based Compensation Expense

Stock-based compensation is based on the estimated fair value of awards, net of estimated forfeitures, and recognized over the requisite service period. Estimated forfeitures are based on historical experience at the time of grant and may be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The stock-based compensation related to our stock-based awards and employee stock purchase plans for the three and nine months ended September 30, 2021 and 2020 is as follows (in thousands):

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Cost of net revenues	$	1,451	$	1,247	$	4,175	$	3,485
Selling, general and administrative	22,229		19,951		67,131		58,284
Research and development	4,722		4,031		13,192		11,394
Total stock-based compensation	$	28,402	$	25,229	$	84,498	$	73,163

Restricted Stock Units (“RSUs”)

The fair value of RSUs is based on our closing stock price on the date of grant. RSUs granted generally vest over a period of four years.

A summary for the nine months ended September 30, 2021 is as follows:

	Number of Shares Underlying RSUs (in thousands)	Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Unvested as of December 31, 2020	632	$	243.55
Granted	162	599.47
Vested and released	(254)	215.09
Forfeited	(33)	343.14
Unvested as of September 30, 2021	507	$	365.16