Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Quarterly Results of Operations

	Three Months Ended
	2017																2016
	December 31, 2017				September 30, 2017				June 30, 2017				March 31, 2017				December 31, 2016				September 30, 2016				June 30, 2016				March 31, 2016
	(in thousands, except per share data) (unaudited )
Net revenues	$	421,323			$	385,267			$	356,482			$	310,341			$	293,203			$	278,589			$	269,362			$	238,720
Gross profit	317,917				292,488				270,917				235,625				220,249				209,202				205,216				180,627
Income from operations	109,606				98,763				83,569				61,673				68,372				62,079				65,136				53,334
Net income	10,264				82,555				69,179				69,420				47,621				51,367				50,148				40,546
Net income per share:
Basic	$	0.13			$	1.03			$	0.86			$	0.87			$	0.60			$	0.64			$	0.63			$	0.51
Diluted	$	0.13			$	1.01			$	0.85			$	0.85			$	0.59			$	0.63			$	0.62			$	0.50
Shares used in computing net income per share:
Basic	80,080				80,163				80,188				79,904				79,667				79,977				79,951				79,831
Diluted	81,863				81,789				81,631				81,534				81,248				81,466				81,281				81,320

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Management on Internal Control over Financial Reporting	55
Report of Independent Registered Public Accounting Firm	56
Consolidated Statements of Operations for the year ended December 31, 2017, 2016 and 2015	58
Consolidated Statements of Comprehensive Income for the year ended December 31, 2017, 2016 and 2015	59
Consolidated Balance Sheets as of December 31, 2017 and 2016	60
Consolidated Statements of Stockholders’ Equity for the year ended December 31, 2017, 2016 and 2015	61
Consolidated Statements of Cash Flows for the year ended December 31, 2017, 2016 and 2015	62
Notes to Consolidated Financial Statements	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, 2017. 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, 2017, 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, 2017 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 28, 2018
/S/ JOHN F. MORICI
John F. Morici
Chief Financial Officer
February 28, 2018

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, 2017 and December 31, 2016, 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, 2017, 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, 2017, 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, 2017 and December 31, 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 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, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for certain elements of its employee share-based payments in 2017.

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 because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

San Jose, California

February 28, 2018

We have served as the Company's auditor since 1997.

ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Year Ended December 31,
	2017				2016				2015
Net revenues	$	1,473,413			$	1,079,874			$	845,486
Cost of net revenues	356,466				264,580				205,376
Gross profit	1,116,947				815,294				640,110
Operating expenses:
Selling, general and administrative	665,777				490,653				390,239
Research and development	97,559				75,720				61,237
Total operating expenses	763,336				566,373				451,476
Income from operations	353,611				248,921				188,634
Interest and other income (expense), net	11,188				(6,355		)		(2,533		)
Net income before provision for income taxes and equity in losses of investee	364,799				242,566				186,101
Provision for income taxes	130,162				51,200				42,081
Equity in losses of investee, net of tax	3,219				1,684				—
Net income	$	231,418			$	189,682			$	144,020
Net income per share:
Basic	$	2.89			$	2.38			$	1.80
Diluted	$	2.83			$	2.33			$	1.77
Shares used in computing net income per share:
Basic	80,085				79,856				79,998
Diluted	81,832				81,484				81,521

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

ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

	Year Ended December 31,
	2017				2016				2015
Net income	$	231,418			$	189,682			$	144,020
Net change in foreign currency translation adjustment	1,741				(670		)		(154		)
Change in unrealized gains (losses) on investments, net of tax	(232		)		712				(686		)
Other comprehensive income (loss)	1,509				42				(840		)
Comprehensive income	$	232,927			$	189,724			$	143,180

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

ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	December 31,
	2017				2016
ASSETS
Current assets:
Cash and cash equivalents	$	449,511			$	389,275
Marketable securities, short-term	272,031				250,981
Accounts receivable, net of allowance for doubtful accounts and returns of $7,178 and $4,310, respectively	322,825				247,415
Inventories	31,688				27,131
Prepaid expenses and other current assets	80,948				38,176
Total current assets	1,157,003				952,978
Marketable securities, long-term	39,948				59,783
Property, plant and equipment, net	348,793				175,167
Equity method investments	54,606				45,061
Goodwill and intangible assets, net	89,068				81,998
Deferred tax assets	50,059				67,844
Other assets	38,379				13,320
Total assets	$	1,777,856			$	1,396,151
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	36,776			$	28,596
Accrued liabilities	194,198				134,332
Deferred revenues	266,842				191,407
Total current liabilities	497,816				354,335
Income tax payable	114,091				45,133
Other long-term liabilities	15,579				1,294
Total liabilities	627,486				400,762
Commitments and contingencies (Notes 8 and 9)
Stockholders’ equity:
Preferred stock, $0.0001 par value (5,000 shares authorized; none issued)	—				—
Common stock, $0.0001 par value (200,000 shares authorized; 80,040 and 79,553 issued and outstanding, respectively)	8				8
Additional paid-in capital	886,435				864,871
Accumulated other comprehensive income (loss), net	571				(938		)
Retained earnings	263,356				131,448
Total stockholders’ equity	1,150,370				995,389
Total liabilities and stockholders’ equity	$	1,777,856			$	1,396,151

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

ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

	Common Stock							Additional Paid-In Capital				Accumulated Other Comprehensive Income (Loss), Net				Retained Earnings (Deficit)				Total
	Shares			Amount
Balances at December 31, 2014	80,205			$	8			$	783,410			$	(140	)		$	(30,507	)		$	752,771
Net income	—			—				—				—				144,020				144,020
Net change in unrealized gains (losses) from investments	—			—				—				(686		)		—				(686		)
Net change in foreign currency translation adjustment	—			—				(10		)		(154		)		—				(164		)
Issuance of common stock relating to employee equity compensation plans	991			—				11,325				—				—				11,325
Tax withholdings related to net share settlements of restricted stock units	—			—				(20,716		)		—				—				(20,716		)
Common stock repurchased and retired	(1,696	)		—				(15,669		)		—				(86,122		)		(101,791		)
Net tax benefits from stock-based awards	—			—				10,224				—				—				10,224
Stock-based compensation	—			—				52,943				—				—				52,943
Balances at December 31, 2015	79,500			8				821,507				(980		)		27,391				847,926
Net income	—			—				—				—				189,682				189,682
Net change in unrealized gains (losses) from investments	—			—				—				712				—				712
Net change in foreign currency translation adjustment	—			—				—				(670		)		—				(670		)
Issuance of common stock relating to employee equity compensation plans	1,163			—				13,778				—				—				13,778
Tax withholdings related to net share settlements of restricted stock units	—			—				(29,857		)		—				—				(29,857		)
Common stock repurchased and retired	(1,110	)		—				(10,593		)		—				(85,625		)		(96,218		)
Net tax benefits from stock-based awards	—			—				15,888				—				—				15,888
Stock-based compensation	—			—				54,148				—				—				54,148
Balances at December 31, 2016	79,553			8				864,871				(938		)		131,448				995,389
Cumulative effect adjustment from adoption of ASU 2016-16	—			—				—				—				(1,300		)		(1,300		)
Net income	—			—				—				—				231,418				231,418
Net change in unrealized gains (losses) from investments	—			—				—				(232		)		—				(232		)
Net change in foreign currency translation adjustment	—			—				—				1,741				—				1,741
Issuance of common stock relating to employee equity compensation plans	1,073			—				14,461				—				—				14,461
Tax withholdings related to net share settlements of restricted stock units	—			—				(46,168		)		—				—				(46,168		)
Common stock repurchased and retired	(586	)		—				(5,583		)		—				(98,210		)		(103,793		)
Stock-based compensation	—			—				58,854				—				—				58,854
Balances at December 31, 2017	80,040			$	8			$	886,435			$	571			$	263,356			$	1,150,370

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

ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2017				2016				2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	231,418			$	189,682			$	144,020
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes	17,572				(16,401		)		(11,424		)
Depreciation and amortization	37,739				24,002				18,004
Stock-based compensation	58,854				54,148				52,943
Net tax benefits from stock-based awards	—				15,888				10,224
Excess tax benefit from share-based payment arrangements	—				(16,773		)		(10,396		)
Equity in losses of investee	3,219				1,684				—
Other non-cash operating activities	13,847				12,031				13,799
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable	(90,990		)		(94,444		)		(40,775		)
Inventories	(5,481		)		(7,663		)		(3,563		)
Prepaid expenses and other assets	(8,669		)		(9,390		)		(3,726		)
Accounts payable	8,175				(3,395		)		7,575
Accrued and other long-term liabilities	24,235				30,007				12,532
Long-term income tax payable	68,958				7,622				6,930
Deferred revenues	79,662				60,656				41,854
Net cash provided by operating activities	438,539				247,654				237,997
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition, net of cash acquired	(8,953		)		—				—
Purchase of property, plant and equipment	(195,695		)		(70,576		)		(53,451		)
Purchase of marketable securities	(390,244		)		(405,612		)		(447,092		)
Proceeds from maturities of marketable securities	349,240				387,873				304,125
Purchase of equity method investments	(12,764		)		(46,745		)		—
Proceeds from sales of marketable securities	39,536				216,119				30,011
Loan advances to equity investee	(36,000		)		—				—
Loan repayment from equity investee	6,000				—				—
Other investing activities	567				(8,211		)		46
Net cash provided by (used in) investing activities	(248,313		)		72,848				(166,361		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock	14,461				13,778				11,325
Common stock repurchases	(103,793		)		(96,218		)		(101,791		)
Excess tax benefit from share-based payment arrangements	—				16,773				10,396
Employees’ taxes paid upon the vesting of restricted stock units	(46,168		)		(29,857		)		(20,716		)
Net cash used in financing activities	(135,500		)		(95,524		)		(100,786		)
Effect of foreign exchange rate changes on cash and cash equivalents	5,510				(3,417		)		(3,007		)
Net increase (decrease) in cash and cash equivalents	60,236				221,561				(32,157		)
Cash and cash equivalents, beginning of year	389,275				167,714				199,871
Cash and cash equivalents, end of year	$	449,511			$	389,275			$	167,714

The accompanying notes are an integral part of these consolidated financial state ments.

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 engaged in the design, manufacture and marketing of Invisalign® clear aligners and iTero® intraoral scanners and services for orthodontics and restorative and aesthetic dentistry. Align’s products are intended primarily for the treatment of malocclusion or the misalignment of teeth and are designed to help dental professionals achieve the clinical outcomes that they expect. We are headquartered in San Jose, California with offices worldwide. Our European headquarters is located in Amsterdam, the Netherlands and our Asia Pacific headquarters is located in Singapore. We have two operating segments: (1) Clear Aligner, known as the Invisalign System, and (2) Scanners and Services ("Scanner"), known as the iTero intraoral scanner and OrthoCAD 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.

In connection with the preparation of the consolidated financial statements, we evaluated events subsequent to the balance sheet date through the financial statement issuance date and determined that all material transactions have been recorded and disclosed properly.

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 the fair values of financial instruments, long-lived assets and goodwill, equity method investments, useful lives of intangible assets and property and equipment, revenue recognition, 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.

Fair Value of Financial Instruments

We measure our cash equivalents, marketable securities, Israeli fund and certain notes receivable at fair value. Fair value is the price 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. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

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

Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; 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.

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

Cash and Cash Equivalents

We consider currency on hand, demand deposits, time deposits, and all highly liquid investments with an original or remaining 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

Our restricted cash balance as of December 31, 2017 is not material. Our restricted cash balance as of December 31, 2016 was $3.7 million, of which $3.3 million was classified as a long-term asset and $0.4 million as a current asset. The restricted cash primarily consists of funds reserved for legal requirements.

Marketable Securities

We invest primarily in money market funds, commercial paper, corporate bonds, U.S. government agency bonds, asset-backed securities, municipal securities, U.S. government treasury bonds and certificates of deposits.

Marketable securities are classified as available-for-sale and are carried at fair value. Marketable securities classified as current assets have maturities of less than one year. Unrealized gains or losses on such securities are included in accumulated other comprehensive income (loss), net in stockholders’ equity. Realized gains and losses from maturities of all such securities are reported in earnings and computed using the specific identification cost method. Realized gains or losses and charges for other-than-temporary declines in value, if any, on available-for-sale securities are reported in interest and other income (expense), net as incurred. We periodically evaluate these investments for other-than-temporary impairment.

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 financials.

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 of accounting. Equity method investments are reported on our balance sheet as a single amount, and we record our share of their operating results within equity in losses of investee, net of tax, in our Consolidated Statement of Operations.

Equity method investments are evaluated for impairment as events or circumstances indicate that there is an other-than-temporary loss in value. The decrease in value is recognized in the period the impairment occurs and recorded in interest and other income (expense), net in the Consolidated Statement of Operations.

Derivative Financial Instruments

We may 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 interest and 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 an 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 interest and other income (expense), net. For the year ended December 31, 2017, 2016 and 2015, we had foreign currency net gains (losses) of $9.0 million, $(8.0) million and $(4.0) 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.

Our cash and investments are held primarily by three 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, corporate bonds, U.S. government agency bonds, municipal securities, U.S. government treasury bonds, certificates of deposits and asset-backed securities. If the carrying value of our investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments, which could adversely affect 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. economy.

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 reserves for potential credit losses and such losses have been within management’s expectations. No individual customer accounted for 10% or more of our accounts receivable at December 31, 2017 or 2016, or net revenues for the year ended December 31, 2017, 2016 or 2015.

In the U.S., the Food and Drug Administration (“FDA”) regulates 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.

We have manufacturing facilities located outside the U.S. In Juarez, Mexico, we manufacture our clear aligners, distribute and repair our scanners and perform our CAD/CAM services. In Or Yehuda, Israel, we produce our handheld intraoral scanner wand and perform the final assembly of our iTero scanner. Our digital treatment plans using a sophisticated, internally developed computer-modeling program are located in Costa Rica, China and Germany. 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, particularly as a result of increased levels of violence in Juarez, Mexico and Or Yehuda, Israel; 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.

Inventories

Inventories are valued at the lower of cost or market, with cost computed using either standard cost, which approximates actual cost, or average 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

Property, plant and equipment 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 ("CIP") 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 operating expenses. 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.

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. For the year ended December 31, 2017 and 2016, all goodwill is attributed to our Clear Aligner reporting unit.

Our intangible assets primarily consist of intangible assets acquired as part of our acquisition of Cadent Holdings, Inc. on April 11, 2011. 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 units 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, the first step of the two-step impairment test is performed by estimating the fair value of the reporting unit and comparing it with its carrying value, including goodwill.

Step one of the goodwill impairment test consists of a comparison of the fair value of a reporting unit against its carrying amount, including the goodwill allocated to each reporting unit. We determine the fair value of our reporting units based on the present value of estimated future cash flows under the income approach of the reporting units as well as various price or market multiples applied to the reporting unit's operating results along with the appropriate control premium under the marketing approach, both of which are classified as level 3 within the fair value hierarchy as described in Note 2 "Marketable Securities and Fair Value Measurements" of the Notes of Consolidated Financial Statements. If the carrying amount of the reporting unit is in excess of its fair value, step two requires the comparison of the implied fair value of the reporting unit’s goodwill against the carrying amount of the reporting unit’s goodwill. Any excess of the carrying value of the reporting unit’s goodwill over the implied fair value of the reporting unit’s goodwill is recorded as an impairment loss in the Consolidated Statements of Operations.

Finite-Lived Intangible Assets and 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 the Notes of Consolidated Financial Statements for details on intangible long-lived assets.

There were no triggering events in 2017 that would cause an impairment of our goodwill or long-lived assets.

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. Internally developed software costs capitalized during the year ended December 31, 2017 was not material. During the year ended December 31, 2016, we capitalized approximately $13.2 million related to our enterprise resource planning ("ERP") project which we placed into production during 2016 and amortize over its useful life of 10 years.

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 Statements of Operations.

Product Warranty

Clear Aligner

We warrant our Invisalign products against material defects until the treatment plan is complete. We warrant SmileDirectClub, LLC (“SDC”) products against material defects for one year. We accrue for warranty costs in cost of net revenues upon shipment of products. The estimated warranty costs liability is primarily based on historical experience as to product failures as well as current information on replacement costs. Actual warranty costs could differ materially from the estimated amounts. We regularly review the warranty liability and update these balances based on historical warranty cost trends.

Scanners and Services

We warrant our intraoral scanners for a period of one year, which include materials and labor. We accrue for these warranty costs based on average historical repair costs. An extended warranty may be purchased for additional fees.

Allowances for Doubtful Accounts and Sales Returns

We maintain allowances for doubtful accounts for customers that are not able to make payments and allowances for sales returns. We periodically review these allowances, including an analysis of the customers’ payment history and information regarding the customers’ creditworthiness, as well as historical sales returns as a percentage of revenue. Actual write-offs have not materially differed from the estimated allowances.

Revenue Recognition

We measure and allocate revenue according to the accounting guidance for multiple-deliverable revenue arrangements in Accounting Standards Codification (“ASC”) 605-25, "Revenue Recognition – Multiple-Element Arrangements."

Multiple-Element Arrangements (“MEAs”): Arrangements with customers may include multiple deliverables, including any combination of products/equipment and services. The deliverables included in the MEAs are separated into more than one unit of accounting when (i) the delivered product/equipment has value to the customer on a stand-alone basis, and (ii) delivery of the undelivered service element(s) is probable and substantially in our control. Arrangement consideration is then allocated to each unit, delivered or undelivered, at the inception of the arrangement based on the relative selling price of each unit of accounting based first on vendor-specific objective evidence (“VSOE”) if it exists, second on third-party evidence (“TPE”) if it exists, or on best estimated selling price (“BESP”) if neither VSOE or TPE exist.

•	VSOE - In most instances, this applies to products and services that are sold separately in stand-alone arrangements. We determine VSOE based on pricing and discounting practices for the specific product or service when sold separately, considering geographical, customer, and other economic or marketing variables, as well as renewal rates or stand-alone prices for the service element(s).

•	TPE - If we cannot establish VSOE of selling price for a specific product or service included in a multiple-element arrangement, we use third-party evidence of selling price. We determine TPE based on sales of comparable amount of similar products or service offered by multiple third parties considering the degree of customization and similarity of product or service sold.

•

BESP - The best estimated selling price represents the price at which we would sell a product or service if it were sold on a stand-alone basis. When VSOE or TPE does not exist for all elements, we determine BESP for the arrangement element based on sales, cost and margin analysis, as well as other inputs based on our pricing practices. Adjustments for other market and company specific factors are made as deemed necessary in determining BESP. We regularly review our estimates of selling price and maintain internal controls over the establishment and update of these estimates.

Revenue is recognized when persuasive evidence of the arrangement exists, the price is fixed or determinable, collectability is reasonably assured, title and risk of loss have passed to customers based on the shipping terms, and allowances for discounts, returns, and customer incentives can be reliably estimated. Provisions for discounts and rebates to customers are provided for in the same period that the related product sales are recorded.

Clear Aligner

We enter into arrangements (“treatment plan(s)”) that involve multiple future product deliverables. Invisalign Full, Invisalign Teen, and Invisalign Assist products include optional additional aligners at no charge for a period of up to five years after initial shipment and Invisalign Go includes optional additional aligners at no charge for a period of up to two years after initial shipment. Invisalign Teen also includes up to six optional replacement aligners in the price of the product and may be ordered by the dental professional any time throughout treatment. Invisalign Lite includes one optional case refinement in the price of the product. Case refinement is a finishing tool used to adjust a patient's teeth to the desired final position and may be elected by the dental professional at any time during treatment; however, it is generally ordered in the last stages of the treatment.

We determined that our treatment plans, except Invisalign Assist with progress tracking, comprise the following deliverables which also represent separate units of accounting: initial aligners, additional aligners, case refinement, and replacement aligners. We allocate revenue for each treatment plan based on each unit's relative selling price based on BESP and recognize the revenue upon shipment of each unit in the treatment plan.

For Invisalign Assist with the progress tracking feature, aligners and services are provided to the dental professional every nine stages (a "batch”). We are able to reliably estimate the number of batches which are expected to be shipped for each case based upon our historical experience. The amounts allocated to this deliverable are recognized on a prorated basis as each batch is shipped.

Scanners and Services

We recognize revenues from the sales of iTero intraoral scanners and CAD/CAM services. CAD/CAM services include scanning services, extended warranty for the intraoral scanners, a range of iTero restorative services, and OrthoCAD services such as OrthoCAD iRecord. We sell intraoral scanners and services through both our direct sales force and distribution partners. The intraoral scanner sales price includes one year of warranty, and, for additional fees, the customer may select an unlimited scanning service agreement over a fixed period of time or extended warranty periods. When intraoral scanners are sold with either an unlimited scanning service agreement and/or extended warranty, we allocate revenue based on each element's relative selling price. We estimate the selling price of each element, as if it is sold on a stand-alone basis, taking into consideration historical prices as well as our discounting strategies.

Scanner revenue, net of related discounts and allowances, is recognized when products have been shipped and no significant obligations for installation or training remain. For certain distributors who provide installation and training to the customer, we recognize scanner revenue when the intraoral scanner is shipped to the distributor assuming all of the other revenue recognition criteria have been met. Discounts are deducted from revenue at the time of sale. Returns of products, excluding warranty related returns, are infrequent and insignificant.

Service revenue, including iTero restorative and all OrthoCAD services are recognized upon delivery or ratably over the contract term as the specified services are performed. If a customer selects a pay per use basis for scanning service fees, the revenue is recognized as the service is provided.

We offer customers an option to purchase extended warranties on certain products. We recognize revenue on these extended warranty contracts ratably over the life of the contract. The costs associated with these extended warranty contracts are recognized when incurred.

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 expense is 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 stock-based compensation, outside consulting expenses and allocations of corporate overhead expenses including facilities and IT.

Advertising Costs

The cost of advertising and media is expensed as incurred. For the year ended December 31, 2017, 2016 and 2015, we incurred advertising costs of $70.0 million, $36.0 million and $23.4 million, respectively.

Common Stock Repurchase

We repurchase our own common stock from time to time in the open market when our Board of Directors approve a stock repurchase program. 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.

Operating Leases

We lease office spaces, vehicles and equipment under operating leases with original lease periods of up to 9 years. Certain of these leases have free or escalating rent payment provisions and lease incentives provided by the landlord. We recognize rent expense under such leases on a straight-line basis over the term of the lease.

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 revenue and expense 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 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 Sheet.

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. The available positive evidence at December 31, 2017 included historical operating profits and a projection of future income sufficient to realize most of our remaining deferred tax assets. As of December 31, 2017, it was considered more likely than not that our deferred tax assets would be realized with the exception of certain foreign loss carryovers as we are unable to forecast sufficient future profits to realize the deferred tax assets.

The U.S. Tax Cuts and Jobs Act (the “TCJA”) was enacted into law on December 22, 2017 and impacted our effective tax rate for the year ended December 31, 2017. The TCJA made significant changes to the Internal Revenue Code, including, but not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. We recorded an additional income tax expense of $84.3 million in the fourth quarter of 2017, which represents the provisional amount of the impact of the TCJA. This provisional amount includes income tax expenses related to the remeasurement of certain deferred tax assets and liabilities of $10.4 million, and the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earning in the amount of $73.9 million. Additional work is necessary for a more detailed analysis of our deferred tax assets and liabilities and our historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to the

provision for income taxes in 2018 when the analysis is complete. Refer to Note 13 "Income Taxes" of the Notes of Consolidated Financial Statements for details on provision impact of the TCJA.

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 employee stock purchase plan shares. We estimate the fair value of market-performance based restricted stock units using a Monte Carlo simulation model which requires the input of assumptions, including expected term, stock 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.

Comprehensive Income

Comprehensive income includes all changes in equity during a period from non-owner sources. Comprehensive income, including unrealized gains and losses on investments and foreign currency translation adjustments, are reported net of their related tax effect.

Recent Accounting Pronouncements

(i) New Accounting Updates Recently Adopted

In January 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” to clarify the definition of a business when evaluating whether transactions should be accounted for as acquisitions of assets or businesses. We early adopted the standard in the fourth quarter of fiscal year 2017 on a prospective basis and our adoption did not have a material impact on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued Accounting Standards Update ("ASU") 2016-09, "Improvements to Employee Share-Based Payment Accounting" (Topic 718). We adopted the standard in the first quarter of fiscal year 2017. With this adoption, excess tax benefits related to stock-based compensation expense are reflected in our consolidated statement of operations as a component of the provision for income taxes instead of additional paid-in capital in our consolidated balance sheet. In addition, we elected to continue to estimate expected forfeitures rather than as they occur to determine the amount of compensation cost to be recognized in each period. During the fiscal year ended December 31, 2017, we recognized excess tax benefits of $30.0 million in our provision for income taxes. Excess tax benefits from share-based payment arrangements are classified as an operating activity in our consolidated statement of cash flows.

In October 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory," (Topic 740) which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. We early adopted the standard in the first quarter of fiscal year 2017 by applying the modified retrospective approach and recognized a $1.3 million decrease to retained earnings as a cumulative-effect adjustment.

(ii) Recent Accounting Updates Not Yet Effective

In May 2014, the FASB released ASU 2014-9, "Revenue from Contracts with Customers," (Topic 606) to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of the standard is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for the goods or services. The new standard defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In addition, the new standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We plan to adopt

the standard in the first quarter of fiscal year 2018 by applying the full retrospective method. Prior periods will be retrospectively adjusted and we will recognize the cumulative effect of adopting this guidance as an adjustment to our opening balance of retained earnings as of January 1, 2016. We have assessed the financial statement impact of adoption including, but not limited to, volume-based discount programs, sales commissions and the identification of performance obligations, and are continuing to evaluate the transition and disclosure requirements of the standard. We anticipate the adoption of Topic 606 will not have a material impact to our consolidated financial statements.

In April 2016, the FASB released ASU 2016-10, "Revenue from Contracts with Customers," to clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the principles for those areas of the ASU 2014-9 issued in May 2014. The effective date and the transition requirement of the amendments in this update are the same as the effective date and transition requirements of Topic 606.

In May 2016, the FASB released ASU 2016-12, "Revenue from Contracts with Customers," to address certain issues in the Topic 606 guidance on assessing the collectability, presentation of sales taxes, non-cash consideration, and completed contracts and contract modifications at transition. The ASU provides narrow-scope improvements and practical expedients to the ASU 2014-9 issued in May 2014. The effective date and the transition requirement of the amendments in this update are the same as the effective date and transition requirements of Topic 606.

In December 2016, the FASB released ASU 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers," to clarify certain aspects of guidance in the Topic 606 including its scope, disclosure requirements and contract cost accounting, while retaining the principles for those areas of the ASU 2014-9 issued in May 2014. The effective date and the transition requirement of the amendments in this update are the same as the effective date and transition requirements of Topic 606.

In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the standard is permitted. We plan to adopt the standard in the first quarter of fiscal year 2019 by electing practical expedients available in the standard. While we are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements, we expect the adoption will have a material increase to the assets and liabilities of our consolidated balance sheet.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses” (Topic 326). The FASB issued this update to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this update replace the existing guidance of incurred loss impairment methodology with an approach that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the update is permitted in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the impact of this guidance on our consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments" (Topic 230). This FASB clarifies the presentation and classification of certain cash receipts and cash payments in the statements of cash flows. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2017. We plan to adopt the guidance in the first quarter of fiscal year 2018 and we do not expect that the guidance will have a material impact on our consolidated statements of cash flows.

In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows - Restricted Cash," which provides guidance to address the classification and presentation of changes in restricted cash in the statements of cash flows. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2017 on a retrospective basis. We plan to adopt the guidance in the first quarter of fiscal year 2018 and we do not expect that the guidance will have a material impact on our consolidated statements of cash flows.

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," to simplify the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. Under the amendments, an entity will recognize an impairment charge for the amount by which the carrying value exceeds the fair value. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2019 on a prospective basis, and early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements and related disclosures.

In May 2017, the FASB issued ASU 2017-09, "Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting," to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2017 on a prospective basis. We are plan to adopt the guidance in the first quarter of fiscal year 2018 and we do not expect that the guidance will have a material impact on our consolidated financial statements and related disclosures.

Note 2. Marketable Securities and Fair Value Measurements

As of December 31, 2017 and 2016, the estimated fair value of our short-term and long-term marketable securities, classified as available for sale, is as follows (in thousands):

Short-term

December 31, 2017		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Commercial paper		$	58,503			$	—			$	(1	)		$	58,502
Corporate bonds		145,728				3				(174		)		145,557
U.S. government agency bonds		3,013				—				(7		)		3,006
U.S. government treasury bonds		60,650				—				(70		)		60,580
Certificates of deposit		4,386				—				—				4,386
Total marketable securities, short-term		$	272,280			$	3			$	(252	)		$	272,031

Long-term

December 31, 2017		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
U.S. government agency bonds		$	15,023			$	—			$	(68	)		$	14,955
Corporate bonds		25,067				2				(76		)		24,993
Total marketable securities, long-term		$	40,090			$	2			$	(144	)		$	39,948

Short-term

December 31, 2016		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Commercial paper		$	42,397			$	—			$	(6	)		$	42,391
Corporate bonds		122,788				22				(121		)		122,689
Municipal securities		5,852				—				(5		)		5,847
U.S. government agency bonds		28,903				9				(4		)		28,908
U.S. government treasury bonds		45,146				7				(7		)		45,146
Certificates of deposit		6,000				—				—				6,000
Total marketable securities, short-term		$	251,086			$	38			$	(143	)		$	250,981

Long-term

December 31, 2016		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
U.S. government agency bonds		$	6,805			$	—			$	(16	)		$	6,789
Corporate bonds		40,889				8				(85		)		40,812
U.S. government treasury bonds		12,016				5				(16		)		12,005
Asset-backed securities		177				—				—				177
Total marketable securities, long-term		$	59,887			$	13			$	(117	)		$	59,783

Cash equivalents are not included in the tables above as the gross unrealized gains and losses are not material. We have no short-term or long-term investments that have been in a continuous material unrealized loss position for greater than twelve months as of December 31, 2017 and 2016. Amounts reclassified to earnings from accumulated other comprehensive income (loss), net related to unrealized gains or losses were not material in 2017 and 2016. For the year ended December 31, 2017 and 2016, realized gains or losses were not material.

Our fixed-income securities investment portfolio consists of commercial paper, corporate bonds, municipal securities, U.S. government agency bonds, U.S. government treasury bonds, certificates of deposit and asset-backed securities that have a maximum effective maturity of 40 months on any individual security. 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. The unrealized losses are due primarily to changes in credit spreads and interest rates. We expect to realize the full value of all these investments upon maturity or sale. The weighted average remaining duration of these securities was approximately 6 months and 7 months as of December 31, 2017 and 2016, respectively.

As the carrying value approximates the fair value for our short-term and long-term marketable securities shown in the tables above, the following table summarizes the fair value of our short-term and long-term marketable securities classified by maturity as of December 31, 2017 and 2016 (in thousands):

		December 31,
		2017				2016
One year or less		$	272,031			$	250,981
Due in greater than one year		39,948				59,783
Total marketable securities		$	311,979			$	310,764

Fair Value Measurements

We measure the fair value of financial assets as the price 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.

Our Level 1 assets consist of money market funds and U.S. government treasury bonds. We did not hold any Level 1 liabilities as of December 31, 2017 and 2016.

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.

Our Level 2 assets consist of commercial paper, corporate bonds, municipal securities, U.S. government agency and treasury bonds, certificates of deposit, asset-backed securities and our Israeli funds that are mainly invested in insurance policies. 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. We did not hold any Level 2 liabilities as of December 31, 2017 and 2016.

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. Certain investments in private companies contain embedded derivatives, which do not require bifurcation as we elected to measure these investments at fair value. Our Level 3 assets consist of notes receivable due on December 31, 2018. We did not hold any Level 3 liabilities as of December 31, 2017 and 2016.

The following table summarizes the reconciliation of assets measured and recorded at fair value on a recurring basis using significant unobservable inputs Level 3 (in thousands):

	Notes Receivable
Balance as of December 31, 2016 (1)	$	2,047
Additional notes receivable issued	2,000
Accrued interest receivable	79
Change in fair value recognized in earnings	350
Balance as of December 31, 2017 (1)	$	4,476

(1) Balance was reclassified from Long-term notes receivable to Short-term notes receivable as of December 31, 2017

Refer to Note 9 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements for more information on our investment with a privately held company.

The following tables summarize our financial assets measured at fair value on a recurring basis as of December 31, 2017 and 2016 (in thousands):

Description		Balance as of December 31, 2017				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Observable Inputs (Level 3)
Cash equivalents:
Money market funds		$	253,155			$	253,155			$	—			$	—
Commercial paper		7,246				—				7,246				—
Corporate bonds		2,016				—				2,016				—
Short-term investments:
Commercial paper		58,502				—				58,502				—
Corporate bonds		145,557				—				145,557				—
U.S. government agency bonds		3,006				—				3,006				—
U.S. government treasury bonds		60,580				60,580				—				—
Certificates of deposit		4,386				—				4,386				—
Long-term investments:
U.S. government agency bonds		14,955				—				14,955				—
Corporate bonds		24,993				—				24,993				—
Prepaid expenses and other current assets:
Israeli funds		3,075				—				3,075				—
Short-term notes receivable		4,476				—				—				4,476
		$	581,947			$	313,735			$	263,736			$	4,476

Description		Balance as of December 31, 2016				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Observable Inputs (Level 3)
Cash equivalents:
Money market funds		$	87,179			$	87,179			$	—			$	—
Commercial paper		2,499				—				2,499				—
Corporate bonds		750				—				750				—
Short-term investments:
Commercial paper		42,391				—				42,391				—
Corporate bonds		122,689				—				122,689				—
Municipal securities		5,847				—				5,847				—
U.S. government agency bonds		28,908				—				28,908				—
U.S. government treasury bonds		45,146				45,146				—				—
Certificates of deposit		6,000				—				6,000				—
Long-term investments:
U.S. government agency bonds		6,789				—				6,789				—
Corporate bonds		40,812				—				40,812				—
U.S. government treasury bonds		12,005				12,005				—
Asset-backed securities		177				—				177				—
Prepaid expenses and other assets:
Israeli funds		2,956				—				2,956				—
Other assets:
Long-term notes receivable		2,047				—				—				2,047
		$	406,195			$	144,330			$	259,818			$	2,047

Derivative Financial Instruments

We have in the past and may in the future enter into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations associated with certain assets and liabilities. During 2017, we did not enter into foreign currency forward contracts. We had no foreign currency forward contracts outstanding as of December 31, 2016 and the net gain or loss on forward contracts was not material during the year ended December 31, 2016.

Note 3. Balance Sheet Components

Inventories

Inventories consist of the following (in thousands):

	December 31,
	2017				2016
Raw materials	$	12,721			$	9,793
Work in process	12,157				10,773
Finished goods	6,810				6,565
Total inventories	$	31,688			$	27,131

Property, Plant and Equipment, Net

Property, plant and equipment consist of the following (in thousands):

			December 31,
	Generally Used Estimated Useful Life		2017				2016
Clinical and manufacturing equipment	Up to 10 years		$	183,392			$	153,938
Computer hardware	3 years		24,933				27,978
Computer software	3 years		54,756				59,997
Furniture and fixtures	5 years		16,271				10,306
Leasehold improvements	Lease term (1)		37,756				22,370
Building	20 years		63,887				7,272
Land	—		17,630				3,072
CIP	—		85,976				25,948
Total			484,601				310,881
Less: Accumulated depreciation and amortization and impairment charges			(135,808		)		(135,714		)
Total property, plant and equipment, net			$	348,793			$	175,167

(1) Shorter of remaining lease term or estimated useful lives of asset

Depreciation and amortization was $37.7 million, $24.0 million and $18.0 million, for the year ended December 31, 2017, 2016 and 2015, respectively.

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	December 31,
	2017				2016
Accrued payroll and benefits	$	103,004			$	79,214
Accrued expenses	27,318				21,811
Accrued income taxes	12,405				4,210
Accrued sales rebate	11,209				10,342
Accrued professional fees	6,316				3,604
Accrued warranty	5,929				3,841
Accrued sales tax and value added tax	5,503				5,032
Other accrued liabilities	22,514				6,278
Total accrued liabilities	$	194,198			$	134,332

Warranty

We regularly review the balance for accrued warranty and update based on historical warranty trends. Actual warranty costs incurred have not materially differed from those accrued; however, future actual warranty costs could differ from the estimated amounts.

Accrued warranty as of December 31, 2017 and 2016 consists of the following activity (in thousands):

Accrued warranty as of December 31, 2015	$	2,638
Charged to cost of net revenues	4,894
Actual warranty expenditures	(3,691		)
Accrued warranty as of December 31, 2016	3,841
Charged to cost of net revenues	7,195
Actual warranty expenditures	(5,107		)
Accrued warranty as of December 31, 2017	$	5,929

Note 4. 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. The investment is accounted for under an equity method investment, and the investee, SDC, is considered a related party. The investment is reported in our Consolidated Balance Sheet under equity method investments, and we record our proportional share of SDC's income (losses) within equity in losses of investee, net of tax, in our Consolidated Statement of Operations. On July 24, 2017, we purchased an additional 2% equity interest in SDC for $12.8 million. As a result of this purchase, we hold a 19% equity interest in SDC on a fully diluted basis. As of December 31, 2017 and 2016, the balance of our equity method investments was $54.6 million and $45.1 million, respectively.

Concurrently with the investment on July 25, 2016, we also entered into a supply agreement with SDC to manufacture clear aligners for SDC's doctor-led, at-home program for simple teeth straightening. The term of the supply agreement expires on December 31, 2019. We commenced supplying aligners to SDC in October 2016. The sale of aligners to SDC and the income from the supply agreement are reported in our Clear Aligner business segment after eliminating outstanding intercompany transactions. As of December 31, 2017 and 2016, the balance of accounts receivable due from SDC was $14.3 million and $0.1 million, respectively. For the year ended December 31, 2017 and 2016, net revenues recognized from SDC were $24.1 million and $0.2 million, respectively.

On July 25, 2016, we entered into a Loan and Security Agreement (the "Loan Agreement") with SDC and amended on July 24, 2017 where we agreed to provide SDC a loan of up to $30.0 million in one or more advances. As of December 31, 2017, $30.0 million of advances under the Loan Agreement were outstanding and no outstanding advances as of December 31, 2016. On February 7, 2018, $30.0 million of outstanding advances and related accrued interest were repaid in full, and the Loan Agreement was terminated (Refer to Note 9 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements for information on the Loan and Security Agreement with SDC).

In February 2018, we received a communication on behalf of SDC Financial LLC, SmileDirectClub LLC, and the Members of SDC Financial LLC other than Align (collectively, the "SDC Entities") alleging that the launch and operation of our Invisalign store pilot program constitutes a breach of non-compete provisions applicable to the members of SDC Financial LLC, including Align. As a result of this alleged breach, SDC Financial LLC has notified Align that its members (other than Align) seek to exercise a right to repurchase all of Align’s SDC Financial LLC membership interests for a purchase price equal to the current capital account balance of Align. The SDC Entities also allege that Align has breached confidentiality provisions applicable to the SDC Financial LLC members and demands that Align cease all activities related to the Invisalign store pilot project, close existing Invisalign stores and cease using SDC’s confidential information. Align disputes the allegations that it has breached its obligations to the SDC Entities, including the allegation that the SDC Entities are entitled to exercise a repurchase right. Pursuant to the parties’ agreement, the dispute will be arbitrated if it is not resolved through negotiations. We are currently evaluating the potential impact that this could have on our consolidated financial statements.

Note 5. Business Combinations

During the first quarter of 2017, we completed the acquisitions of certain distributors for the total estimated cash consideration of approximately $9.5 million including cash acquired. We preliminarily recorded $1.9 million of net tangible liabilities, $8.2 million of identifiable intangible assets and $3.2 million of goodwill. The preliminary fair values of net tangible liabilities and identifiable intangible assets acquired are based on preliminary valuations, and our estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date).

The goodwill is primarily related to the benefit we expect to obtain from direct sales as we believe that the transition from our distributor arrangements to a direct sales model will increase our net revenues in the region as we will experience higher average sales prices (“ASP”) compared to our discounted ASP under the distribution agreements. The goodwill is not deductible for tax purposes.

Pro forma results of operations for these acquisitions have not been presented as they are not material to our results of operations, either individually or in aggregate, for the period ended December 31, 2017.

Note 6. Goodwill and Intangible Assets

Goodwill

The change in the carrying value of goodwill for the year ended December 31, 2017, all attributable to our Clear Aligner reporting unit, is as follows (in thousands):

	Total
Balance as of December 31, 2015	$	61,074
Adjustments (1)	(30		)
Balance as of December 31, 2016	61,044
Goodwill from distributor acquisitions	3,247
Adjustments (1)	323
Balance as of December 31, 2017	$	64,614

(1) The adjustments to goodwill during the period were related to foreign currency translation and/or purchase accounting adjustments within the measurement period.

Impairment of Goodwill

We evaluate goodwill for impairment at least annually on November 30th or more frequently if indicators are present, an event occurs or circumstances changes that suggest an impairment may exist and that it would more likely than not reduce the fair value of a reporting unit below its carrying amount. The allocation of goodwill to the respective reporting units is based on relative synergies generated as a result of an acquisition.

Annual Impairment Test

During the fourth quarter of fiscal 2017, we performed the annual goodwill impairment testing and found no impairment as the fair value of our Clear Aligner reporting unit was significantly in excess of its carrying value.

Intangible Long-Lived Assets

We amortize our intangible assets over their estimated useful lives. We evaluate long-lived assets, which includes property, plant and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The carrying value is not recoverable if it exceeds the undiscounted cash flows resulting from the use of the asset and its eventual disposition. 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 factors. 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 of our intraoral scanning business.

There were no triggering events in 2017 that would cause impairments of our long-lived assets.

Acquired intangible long-lived assets are being amortized as follows (in thousands):

	Weighted Average Amortization Period (in years)		Gross Carrying Amount as of December 31, 2017				Accumulated Amortization				Accumulated Impairment Loss				Net Carrying Value as of December 31, 2017
Trademarks	15		$	7,100			$	(1,769	)		$	(4,179	)		$	1,152
Existing technology	13		12,600				(4,704		)		(4,328		)		3,568
Customer relationships	11		33,500				(14,681		)		(10,751		)		8,068
Reacquired rights1	3		7,500				(1,356		)		—				6,144
Patents	8		6,798				(1,504		)		—				5,294
Other	2		618				(390		)		—				228
Total intangible assets			$	68,116			$	(24,404	)		$	(19,258	)		$	24,454

	Weighted Average Amortization Period (in years)		Gross Carrying Amount as of December 31, 2016				Accumulated Amortization				Accumulated Impairment Loss				Net Carrying Value as of December 31, 2016
Trademarks	15		$	7,100			$	(1,631	)		$	(4,179	)		$	1,290
Existing technology	13		12,600				(4,141		)		(4,328		)		4,131
Customer relationships	11		33,500				(12,819		)		(10,751		)		9,930
Patents	8		6,316				(713		)		—				5,603
Total intangible assets			$	59,516			$	(19,304	)		$	(19,258	)		$	20,954

1 The fair value of reacquired rights obtained from distributor acquisitions during the first quarter of fiscal year 2017 is valued using the income approach. In addition, we effectively settled the pre-existing relationship with the distributors by assessing whether the distributor agreements include favorable or unfavorable terms compared to current market rates. Based on the assessment, we determined that the distributor agreements had terms that are consistent with market rates and, therefore, no settlement gains or losses are recorded associated with the acquisition.

The total estimated future amortization expense for these acquired intangible assets as of December 31, 2017 is as follows (in thousands):

Fiscal Year
2018	$	6,379
2019	6,265
2020	3,869
2021	3,389
2022	2,116
Thereafter	2,436
Total	$	24,454

Note 7. Credit Facility

We have a credit facility that provides for a $50.0 million revolving line of credit, with a $10.0 million letter of credit. The credit facility requires us to comply with specific financial conditions and performance requirements. On February 10, 2017, we amended the credit facility and extended the maturity date to March 22, 2018. The loans bear interest, at our option, at a fluctuating rate per annum equal to the daily one-month adjusted LIBOR rate plus a spread of 1.75% or an adjusted LIBOR rate (based on one, three, six or twelve-month interest periods) plus a spread of 1.75%. On July 24, 2017, we amended the credit facility's negative covenants to allow for a Costa Rica building purchase, an additional equity interest in SDC and an increase in SDC's loan limit. As of December 31, 2017, we had no outstanding borrowings under this credit facility and were in compliance with the conditions and performance requirements (Refer to Note 4 "Equity Method Investments" of the Notes to Consolidated Financial Statements for information on the additional equity interest in SDC and Refer to Note 9 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements for information on the Costa Rica building purchase and SDC loan agreement).

On February 27, 2018, we entered into a new credit facility for a $200.0 million revolving line of credit, with a $50.0 million

letter of credit, and a maturity date of February 27, 2021, replacing the existing credit facility. The credit facility requires us to comply with specific financial conditions and performance requirements. The loans 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 1.25% to 1.75% for LIBOR loans and 0.25% to 0.75% for base rate loans. 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. Principal, together with accrued and unpaid interest, is due on the maturity date.

Note 8. Legal Proceedings

Securities Class Action Lawsuit

On November 28, 2012, plaintiff City of Dearborn Heights Act 345 Police & Fire Retirement System filed a lawsuit against Align, Thomas M. Prescott (“Mr. Prescott”), Align’s former President and Chief Executive Officer, and Kenneth B. Arola (“Mr. Arola”), Align’s former Vice President, Finance and Chief Financial Officer, in the United States District Court for the Northern District of California on behalf of a purported class of purchasers of our common stock (the “Securities Action”). On July 11, 2013, an amended complaint was filed, which named the same defendants, on behalf of a purported class of purchasers of our common stock between January 31, 2012 and October 17, 2012. The amended complaint alleged that Align, Mr. Prescott and Mr. Arola violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and that Mr. Prescott and Mr. Arola violated Section 20(a) of the Securities Exchange Act of 1934. Specifically, the amended complaint alleged that during the purported class period defendants failed to take an appropriate goodwill impairment charge related to the April 29, 2011 acquisition of Cadent Holdings, Inc. in the fourth quarter of 2011, the first quarter of 2012 and the second quarter of 2012, which rendered our financial statements and projections of future earnings materially false and misleading and in violation of U.S. GAAP. The amended complaint sought monetary damages in an unspecified amount, costs and attorneys’ fees. On December 9, 2013, the court granted defendants’ motion to dismiss with leave for plaintiff to file a second amended complaint. Plaintiff filed a second amended complaint on January 8, 2014 on behalf of the same purported class. The second amended complaint states the same claims as the amended complaint. On August 22, 2014, the court granted our motion to dismiss without leave to amend. On September 22, 2014, Plaintiff filed a notice of appeal to the Ninth Circuit Court of Appeals. Briefing for the appeal was completed in May 2015 and the Ninth Circuit held oral arguments in October 2016. On May 5, 2017, the Ninth Circuit affirmed the district court's dismissal of the complaint. Plaintiff filed a request for rehearing that was denied by the Ninth Circuit on June 14, 2017. Plaintiff had 90 days following the June 14 Order to file a petition for a writ of certiorari with the United States Supreme Court which has passed and this case has been dismissed without leave to amend.

Shareholder Derivative Lawsuit

On February 1, 2013, plaintiff Gary Udis filed a shareholder derivative lawsuit against several of Align’s current and former officers and directors in the Superior Court of California, County of Santa Clara. The complaint alleges that our reported income and earnings were materially overstated because of a failure to timely write down goodwill related to the April 29, 2011 acquisition of Cadent Holdings, Inc., and that defendants made allegedly false statements concerning our forecasts. The complaint asserts various state law causes of action, including claims of breach of fiduciary duty, unjust enrichment, and insider trading, among others. The complaint seeks unspecified damages on behalf of Align, which is named solely as nominal defendant against whom no recovery is sought. The complaint also seeks an order directing Align to reform and improve its corporate governance and internal procedures, and seeks restitution in an unspecified amount, costs, and attorneys’ fees. On July 8, 2013, an Order was entered staying this derivative lawsuit until an initial ruling on our first motion to dismiss the Securities Action. On January 15, 2014, an Order was entered staying this derivative lawsuit until an initial ruling on our second motion to dismiss the Securities Action. On October 14, 2014, an Order was entered staying this derivative lawsuit until a ruling by the Ninth Circuit in the Securities Action discussed above. On June 28, 2017, the Court entered an Order dismissing this action with prejudice pursuant to a joint stipulation between the parties.

Patent Infringement Lawsuit

On November 14, 2017, Align filed six patent infringement lawsuits asserting 26 patents against 3Shape A/S, 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. Align filed two Section 337 complaints with the U.S. International Trade Commission (ITC) alleging that 3Shape violates U.S. trade laws by selling for importation and importing its infringing Trios intraoral scanning system and Dental

System software. Align's ITC complaints seek cease and desist orders and exclusion orders prohibiting the importation of 3Shape's Trios scanning system and Dental System software products into the U.S. Align also filed four separate complaints in the United States District Court for the District of Delaware alleging patent infringement by 3Shape's Trios intraoral scanning system and Dental System software. All of these district court complaints seek monetary damages and injunctive relief against further infringement.

In addition, in the course of Align's operations, Align is involved in a variety of claims, suits, investigations, and proceedings, including actions with respect 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 9. Commitments and Contingencies

Operating Leases

We lease our facilities and certain equipment and automobiles under non-cancelable operating lease arrangements that expire at various dates through 2027 and provide for pre-negotiated fixed rental rates during the terms of the lease. The terms of some of our leases provide for rental payments on a graduated scale. We recognize rent expense on a straight-line basis over the lease period. Total rent expense was $13.8 million, $9.9 million and $8.2 million, for the year ended December 31, 2017, 2016 and 2015, respectively. Sublease income is not material and excluded from the table below.

Minimum future lease payments for non-cancelable leases as of December 31, 2017, are as follows (in thousands):

Fiscal Year	Operating Leases
2018	$	14,799
2019	13,260
2020	9,759
2021	8,137
2022	6,027
Thereafter	9,573
Total minimum lease payments	$	61,555

Other Commitments

On July 25, 2016, we entered into a Loan and Security Agreement (the "Loan Agreement") with SmileDirectClub, LLC ("SDC") where we agreed to provide a loan of up to $15.0 million in one or more advances to SDC (the "Loan Facility"). On July 24, 2017, we amended the Loan Agreement with SDC to increase the line of credit up to $30.0 million. Available advances under the Loan Facility are subject to a borrowing base of 80% of SDC's eligible accounts receivable, determined in accordance with the terms of the Loan Agreement, and the satisfaction of other customary conditions. The advances bear interest, paid quarterly, at the rate of 7% per annum. Advances that are repaid or prepaid may be reborrowed. All outstanding principal and accrued and unpaid interest on the advances are due and payable on July 25, 2021. SDC's obligations in respect of the Loan Agreement are collateralized by a security interest in substantially all of SDC's assets. As of December 31, 2017, $30.0 million of advances under the Loan Facility were outstanding. On February 7, 2018, $30.0 million of outstanding advances and related accrued interest were repaid in full and the Loan Agreement was terminated (Refer to Note 4 "Equity Method Investments" of the Notes of Consolidated Financial Statements for more information on our investments in SDC).

We have entered into certain investments with a privately held company where we have committed to purchase up to $5.0 million in convertible promissory notes. The first convertible promissory note was issued on July 14, 2016 for $2.0 million and a second convertible promissory note was issued on June 5, 2017 for $2.0 million. Both notes were outstanding as of December 31, 2017. The remaining $1.0 million available is conditioned upon achievement of certain business milestones. The notes all mature on December 30, 2018 and accrue interest annually at 2.5%.

On June 30, 2017, we entered into a non-cancelable Addendum to the Master Subscription Agreement with a software company to renew our software license subscription for the total price of $50.0 million over the next three years starting on January 1, 2018.

On July 24, 2017, we entered into a Purchase and Sale Agreement to purchase a new Costa Rica treatment planning facility located in the Republic of Costa Rica for a purchase price of $26.1 million. As of December 31, 2017, we made payments of $20.9 million. On January 8, 2018, we paid the final payment of $5.2 million and closed the Purchase and Sale Agreement.

On November 9, 2017, we entered into an Investment Agreement with the People’s Republic of China (“China Government”) where we have committed to invest a minimum of $46.0 million in Ziyang, China over five years to establish manufacturing operations.

On November 15, 2017, we entered into another Purchase and Sale Agreement to purchase a building located in the Republic of Costa Rica for a purchase price of $25.6 million. The building will be used to support treatment planning and corporate administrative activities. As of December 31, 2017, we made payments of $6.8 million and the remaining payments are due in 2018.

On November 27, 2017, we entered into a purchase agreement with one of our existing single source suppliers. Under the terms of the agreement, we are required to purchase a minimum approximately $305.2 million of aligner materials over the next 4 years.

Off-Balance Sheet Arrangements

As of December 31, 2017, 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 Other Commitments 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 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, 2017, we did not have any material indemnification claims that were probable or reasonably possible.

Note 10. 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, market stock units, 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 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. Full value awards granted prior to May 16, 2013 were counted against the authorized share reserve as one and one half (1 1/2) share for every one (1) share subject to the award, and any shares canceled that were counted as one and one half against the plan reserve will be returned at this same ratio.

As of December 31, 2017, the 2005 Incentive Plan (as amended) has a total reserve of 27,783,379 shares for issuance of which 6,885,248 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.

Stock-Based Compensation

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 all of our stock-based awards and employee stock purchases for the year ended December 31, 2017, 2016 and 2015 is as follows (in thousands):

	For the Year Ended December 31,
	2017				2016				2015
Cost of net revenues	$	3,330			$	3,966			$	3,938
Selling, general and administrative	46,550				42,612				40,813
Research and development	8,974				7,570				8,192
Total stock-based compensation	$	58,854			$	54,148			$	52,943

Stock Options

We have not granted options since 2011 and all outstanding options were fully vested and associated stock-based compensation was recognized as of December 31, 2015. Activity for the year ended December 31, 2017, under the stock option plans is set forth below:

	Stock Options
	Number of Shares Underlying Stock Options (in thousands)			Weighted Average Exercise Price per Share				Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2016	222			$	14.90
Granted	—			—
Exercised	(143	)		16.66
Cancelled or expired	(4	)		18.16
Outstanding as of December 31, 2017	75			$	11.36			0.93		$	15,752
Vested and expected to vest at December 31, 2017	75			$	11.36			0.93		$	15,752
Exercisable at December 31, 2017	75			$	11.36			0.93		$	15,752

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price on the last trading day in 2017 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last trading day of 2017. This amount will fluctuate based on the fair market value of our stock. The total intrinsic value of stock options exercised for the year ended December 31, 2017, 2016 and 2015 was $18.1 million, $18.2 million and $7.4 million, respectively. The total fair value of the options vested during the year ended December 31, 2015 was not material.

Restricted Stock Units

The fair value of restricted stock units (“RSUs”) is based on our closing stock price on the date of grant. A summary for the year ended December 31, 2017, is as follows:

	Shares Underlying RSUs (in thousands)			Weighted Average Grant Date Fair Value				Weighted Remaining Vesting Period (in years)		Aggregate Intrinsic Value (in thousands)
Nonvested as of December 31, 2016	1,789			$	58.39
Granted	487			118.77
Vested and released	(852	)		54.24
Forfeited	(83	)		69.06
Nonvested as of December 31, 2017	1,341			$	82.30			1.18		$	297,973

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 2017 by the number of nonvested RSUs) that would have been received by the unit holders had all RSUs been vested and released as of the last trading day of 2017. This amount will fluctuate based on the fair market value of our stock. During 2017, of the 851,693 shares vested and released, 287,790 shares vested were withheld for employee minimum statutory tax obligations, resulting in a net issuance of 563,903 shares.

The total intrinsic value of RSUs vested and released during 2017, 2016 and 2015 was $99.5 million, $59.8 million and $45.9 million, respectively. The total fair value of RSUs vested during the year ended December 31, 2017, 2016 and 2015 was $46.2 million, $39.1 million and $30.0 million, respectively. The weighted average grant date fair value of RSUs granted during 2017, 2016 and 2015 was $118.77, $67.82 and $57.78, respectively. As of December 31, 2017, there was $72.9 million of total unamortized compensation costs, net of estimated forfeitures, related to RSUs and these costs are expected to be recognized over a weighted average period of 2.1 years.

Market-Performance Based Restricted Stock Units

On an annual basis, we grant market-performance based restricted stock units (“MSUs”) to our executive officers. Each MSU represents the right to one share of Align’s common stock and will be issued through our amended 2005 Incentive Plan. The actual number of MSUs which will be eligible to vest will be based on the performance of Align’s stock price relative to the performance of the NASDAQ Composite Index over the vesting period, generally two to three years, up to 200% of the MSUs initially granted.

The following table summarizes the MSU performance as of December 31, 2017:

	Number of Shares Underlying MSUs (in thousands)			Weighted Average Grant Date Fair Value				Weighted Average Remaining Vesting Period (in years)		Aggregate Intrinsic Value (in thousands)
Nonvested as of December 31, 2016	520			$	60.49
Granted	201			88.80
Vested and released	(283	)		53.11
Forfeited	(10	)		64.50
Nonvested as of December 31, 2017	428			$	78.53			0.97		$	95,120

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 2017 by the number of nonvested MSUs) that would have been received by the unit holders had all MSUs been vested and released as of the last trading day of 2017. This amount will fluctuate based on the fair market value of our stock. During 2017, of the 282,548 shares vested and released 118,562 shares were withheld for tax payments, resulting in a net issuance of 163,986 shares.

The total intrinsic value of MSUs vested and released during 2017, 2016 and 2015 was $28.8 million, $17.4 million and $9.2 million, respectively. The total fair value of MSUs vested during the year ended December 31, 2017, 2016 and 2015 was $15.0 million, $9.9 million and $4.9 million, respectively. As of December 31, 2017, we expect to recognize $12.2 million of total unamortized compensation cost, net of estimated forfeitures, related to MSUs over a weighted average period of 1.0 years.

The fair value of MSUs is estimated at the grant date using a Monte Carlo simulation that includes factors for market conditions. The following weighted-average assumptions used in the Monte Carlo simulation were as follows:

	Year Ended December 31,
	2017				2016				2015
Expected term (in years)	3.0				3.0				3.0
Expected volatility	28.9		%		34.0		%		36.9		%
Risk-free interest rate	1.5		%		0.9		%		1.0		%
Expected dividends	—				—				—
Weighted average fair value per share at grant date	$	120.39			$	68.88			$	61.73

Total payments to tax authorities for payroll taxes related to RSUs, including MSUs, that vested during the period were $46.2 million, $29.9 million and $20.7 million during the year ended December 31, 2017, 2016 and 2015, respectively, and are reflected as a financing activity in the Consolidated Statement of Cash Flows.

Employee Stock Purchase Plan

In May 2010, our shareholders 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. The maximum number of shares available for issuance under the 2010 Purchase Plan is 2,400,000 shares.

The following table summarizes the ESPP shares issued:

	Year Ended December 31,
	2017				2016				2015
Number of shares issued (in thousands)	202				197				230
Weighted average price	$	59.93			$	48.65			$	36.66

As of December 31, 2017, 735,301 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:

	Year Ended December 31,
	2017				2016				2015
Expected term (in years)	1.2				1.2				1.2
Expected volatility	26.8		%		30.5		%		31.1		%
Risk-free interest rate	1.0		%		0.7		%		0.3		%
Expected dividends	—				—				—
Weighted average fair value at grant date	$	31.36			$	22.23			$	16.19

We recognized stock-based compensation expense related to our employee stock purchase plan of $5.4 million, $2.7 million and $4.1 million for the year ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, there was $2.7 million of total unamortized compensation costs related to future employee stock purchases which we expect to be recognized over a weighted average period of 0.6 years.

Note 11. Common Stock Repurchase Program

April 2014 Repurchase Program

On April 23, 2014, we announced that our Board of Directors had authorized a stock repurchase program ("April 2014 Repurchase Program") pursuant to which we may purchase up to $300.0 million of our common stock over a three year period.

In 2015, we entered into an accelerated share purchase agreement ("2015 ASR") to repurchase $70.0 million of our common stock. The 2015 ASR was completed in July 2015. We received a total of approximately 1.2 million shares for an average share price of $60.52. During 2015, we repurchased on the open market approximately 0.5 million shares of our common stock at an average price of $58.89 per share, including commissions, for an aggregate purchase price of approximately $31.8 million.

In 2016, we entered into an accelerated share repurchase agreement ("2016 ASR") to repurchase $50.0 million of our common stock. The 2016 ASR was completed in September 2016. We received a total of approximately 0.6 million shares for an average share price of $81.89. During 2016, we repurchased on the open market approximately 0.5 million shares of our common stock at an average price of $92.58 per share, including commissions, for an aggregate purchase price of approximately $46.2 million.

In 2017, we repurchased on the open market approximately 0.04 million shares of our common stock at an average price of $96.37 per share, including commission for an aggregate purchase price of approximately $3.8 million, completing the April 2014 Repurchase Program.

April 2016 Repurchase Program

On April 28, 2016, we announced that our Board of Directors had authorized a plan to repurchase up to $300.0 million of the Company's stock ("April 2016 Repurchase Plan"). In 2016, we had no repurchases under this plan. In 2017, we entered into an accelerated share repurchase agreement ("2017 ASR") to repurchase $50.0 million of our common stock. The 2017 ASR was completed in August 2017. We received a total of approximately 0.4 million shares for an average share price of $146.48. During 2017, we repurchased on the open market approximately 0.2 million shares of our common stock at an average price of $243.40 per share, including commissions, for an aggregate purchase price of approximately $50.0 million. As of December 31, 2017, we have $200.0 million remaining under the April 2016 Repurchase Program.

In February 2018, we repurchased on the open market approximately 0.4 million shares of our common stock at an average price of $252.24 per share, including commission for an aggregate purchase price of approximately $100.0 million.

Note 12. Employee Benefit Plans

401(k) Plan

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 a 6% of the employee’s eligible compensation effective 2010. We contributed approximately $4.3 million, $3.4 million and $2.7 million to the 401(k) plan during the year ended December 31, 2017, 2016 and 2015, respectively.

Israeli Funds

Under the Israeli severance fund law, we are required to make payments to dismissed employees and employees leaving employment in certain circumstances. The funding requirement is calculated based on the salary of the employee multiplied by the number of years of employment as of the applicable balance sheet date. Our Israeli employees are entitled to one month’s salary for each year of employment, or a pro-rata portion thereof. We fund the liability through monthly deposits into funds, and the values of these contributions are recorded in other current assets in the Consolidated Balance Sheet.

As of December 31, 2017 and 2016, the balance of the fund liability was approximately $3.2 million and $3.1 million, respectively.

Note 13. Income Taxes

The U.S. Tax Cuts and Jobs Act (the “TCJA”) was enacted into law on December 22, 2017, and impacted our effective tax rate for the year ended December 31, 2017. The TCJA made significant changes to the Internal Revenue Code, including, but not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.

We have estimated the impact of the TCJA and recorded $84.3 million of additional income tax expense in the fourth quarter of 2017, the period in which the legislation was enacted. The components of this expense are as follows:

•

We recorded a provisional tax amount of $73.9 million for the transition tax liability. We have not yet completed the calculation of the total post-1986 foreign Earnings and Profits ("E&P") and the income tax pools for all foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and the amounts held in cash or other specified assets. In addition, further interpretations from U.S. federal and state governments and regulatory organizations may change the provisional liability or the accounting treatment of the provisional liability.

•

We recorded a provisional tax amount of $10.4 million to remeasure certain deferred tax assets and liabilities as a result of the enactment of the Act. We are still analyzing certain aspects of the TCJA and refining the estimate of the expected reversal of the deferred tax balances. The TCJA can potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.

The TCJA also includes provisions for certain foreign-sourced earnings referred to as Global Intangible Low-Taxed Income (“GILTI”), which impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. FASB guidance issued in January 2018 allows companies to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which the tax is incurred (the “period cost method”), or (ii) account for GILTI in the measurement of deferred taxes (the “deferred method”). Because of the complexity of the new provisions, we are continuing to evaluate the accounting impact under GAAP, and will make an election once this analysis has been completed.

Net income before provision for income taxes and equity in losses of investee consists of the following (in thousands):

	Year ended December 31,
	2017				2016				2015
Domestic	$	123,696			$	118,871			$	87,803
Foreign	241,103				123,695				98,298
Net income before provision for income taxes and equity in losses of investee	$	364,799			$	242,566			$	186,101

The provision for income taxes consists of the following (in thousands):

	Year Ended December 31,
	2017				2016				2015
Federal
Current	$	91,214			$	40,235			$	28,596
Deferred	15,724				24,794				6,679
	106,938				65,029				35,275
State
Current	2,580				2,603				3,271
Deferred	2,677				2,636				(703		)
	5,257				5,239				2,568
Foreign
Current	15,285				8,964				4,305
Deferred	2,682				(28,032		)		(67		)
	17,967				(19,068		)		4,238
Provision for income taxes	$	130,162			$	51,200			$	42,081

The differences between income taxes using the federal statutory income tax rate of 35% and our effective tax rate are as follows:

	Year Ended December 31,
	2017			2016			2015
U.S. federal statutory income tax rate	35.0	%		35.0	%		35.0	%
State income taxes, net of federal tax benefit	1.4			2.1			1.5
Impact of U.S. Tax Cuts and Jobs Act	23.1			—			—
Impact of differences in foreign tax rates	(18.0	)		(6.3	)		(16.2	)
Valuation allowance release for Israel	—			(12.9	)		—
Stock-based compensation	(6.3	)		1.2			1.6
Other items not individually material	0.5			2.0			0.7
	35.7	%		21.1	%		22.6	%

As of December 31, 2017, undistributed earnings of the company totaled $606.5 million. We reassessed our capital needs and investment strategy with regard to the indefinite reinvestment of the undistributed earnings from certain of our foreign subsidiaries as a result of the one-time transition tax on cumulative foreign earnings under the TCJA. During the fourth quarter of 2017, we determined that approximately $591.9 million of the total undistributed foreign earnings are no longer be considered to be indefinitely reinvested outside the U.S. As a result, we have recorded a deferred tax liability of approximately $3.3 million, which represents the provisional amount of U.S. state income taxes that would be due in the event these foreign earnings are distributed. The remaining amount of undistributed foreign earnings of approximately $14.7 million continues to be indefinitely reinvested in our international operations. Since U.S. federal income tax has already been provided under the provisions of the TCJA, the additional tax impact of the distribution of such foreign earnings to the United States parent would be limited to U.S. state income and withholding taxes and is not significant.

On July 1, 2016, we implemented a new international corporate structure. This changed the structure of our international procurement and sales operations, as well as realigned the ownership and use of intellectual property among our wholly-owned subsidiaries. We continue to anticipate that an increasing percentage of our consolidated pre-tax income will be derived from, and reinvested in our foreign operations. We believe that income taxed in certain foreign jurisdictions at a lower rate relative to the U.S. federal statutory rate will have a beneficial impact on our worldwide effective tax rate over time. Although the license of intellectual property rights between consolidated entities did not result in any gain in the consolidated financial statements, the Company generated taxable income in certain jurisdictions in 2016 resulting in a tax expense of $34.3 million. Additionally, as a result of the restructuring, we reassessed the need for a valuation allowance against our deferred tax assets considering all available evidence. Given the current earnings and anticipated future earnings of our subsidiary in Israel, we concluded that we have sufficient

positive evidence to release the valuation allowance against our Israel operating loss carryforwards of $31.4 million, which resulted in an income tax benefit in this period of the same amount.

In June 2017, the Costa Rica Ministry of Foreign Trade, an agency of the Government of Costa Rica, granted an extension of certain income tax incentives for an additional twelve year period. Under these incentives, all of the income in Costa Rica is subject to a reduced tax rate. In order to receive the benefit of these incentives, we must hire a specified number of employees and maintain certain minimum levels of fixed asset investment in Costa Rica. If we do not fulfill these conditions for any reason, our incentive could lapse, and our income in Costa Rica would be subject to taxation at higher rates, which could have a negative impact on our operating results. The Costa Rica corporate income tax rate that would apply, absent the incentives, is 30% for 2017, 2016 and 2015. As a result of these incentives, our income taxes were reduced by $1.8 million, $19.1 million and $32.7 million in the year ended December 31, 2017, 2016 and 2015, respectively, representing a benefit to diluted net income per share of $0.02, $0.23 and $0.40 in the year ended December 31, 2017, 2016 and 2015, respectively.

As of December 31, 2017 and 2016, the significant components of our deferred tax assets and liabilities are (in thousands):

	Year Ended December 31,
	2017				2016
Deferred tax assets:
Net operating loss and capital loss carryforwards	$	24,971			$	25,445
Reserves and accruals	12,547				22,954
Stock-based compensation	10,074				16,399
Deferred revenue	10,811				13,975
Net translation losses	1,928				1,634
Credit carryforwards	792				679
	61,123				81,086
Deferred tax liabilities:
Depreciation and amortization	7,522				12,034
Unremitted foreign earnings	3,305				—
Prepaid expenses	751				969
	11,578				13,003
Net deferred tax assets before valuation allowance	49,545				68,083
Valuation allowance	(278		)		(256		)
Net deferred tax assets	$	49,267			$	67,827

The total valuation allowance as of December 31, 2017 was not material. During the year ended December 31, 2017, the valuation allowance increased by a nominal amount which was mainly related to foreign currency translation adjustments.

As of December 31, 2017, we have fully utilized California net operating loss carryforwards. As of December 31, 2017, we have California research credit carryforwards of approximately $4.1 million which can be carried forward indefinitely. In addition, we have foreign net operating loss carryforwards of approximately $104.7 million, the majority of which can be carried forward indefinitely, and a minor portion of which, if not utilized, will expire beginning in 2027.

In the event of a change in ownership, as defined under federal and state tax laws, our tax credit carryforwards may be subject to annual limitations. The annual limitations may result in the expiration of the tax credit carryforwards before utilization.

The changes in the balance of gross unrecognized tax benefits, which exclude interest and penalties, for the year ended December 31, 2017, 2016 and 2015, are as follows (in thousands):

Unrecognized tax benefit as of December 31, 2014	$	33,067
Tax positions related to current year:
Additions for uncertain tax positions	6,346
Unrecognized tax benefit as of December 31, 2015	39,413
Tax positions related to current year:
Additions for uncertain tax positions	6,971
Unrecognized tax benefit as of December 31, 2016	46,384
Tax positions related to current year:
Additions for uncertain tax positions	1,819
Tax positions related to prior year:
Additions for uncertain tax positions	1,809
Decreases for uncertain tax positions	(826		)
Settlements with tax authorities	(1,527		)
Reductions due to lapse of applicable statute of limitations	(3		)
Unrecognized tax benefit as of December 31, 2017	$	47,656

As of December 31, 2017, $39.8 million of our unrecognized tax benefits would impact our effective tax rate if recognized.

We have elected to recognize interest and penalties related to unrecognized tax benefits as a component of income taxes. For the year ended December 31, 2017 and 2016, interest and penalties included in tax expense was $0.8 million and $1.4 million, respectively. Our total interest and penalties accrued as of December 31, 2017 and 2016 was $2.9 million and $2.1 million, respectively. We do not expect any significant changes to the amount of unrecognized tax benefit within the next twelve months.

We file U.S. federal, U.S. state, and non-U.S. income tax returns. Our major tax jurisdictions are U.S. federal and the state of California. For U.S. federal and state tax returns, we are no longer subject to tax examinations for years before 2000. With few exceptions, we are no longer subject to examination by foreign tax authorities for years before 2010.

Note 14. 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, stock options and our ESPP.

The following table sets forth the computation of basic and diluted net income per share attributable to common stock (in thousands, except per share amounts):

	Year Ended December 31,
	2017				2016				2015
Numerator:
Net income	$	231,418			$	189,682			$	144,020
Denominator:
Weighted-average common shares outstanding, basic	80,085				79,856				79,998
Dilutive effect of potential common stock	1,747				1,628				1,523
Total shares, diluted	81,832				81,484				81,521
Net income per share, basic	$	2.89			$	2.38			$	1.80
Net income per share, diluted	$	2.83			$	2.33			$	1.77

For the year ended December 31, 2017, 2016 and 2015, potentially anti-dilutive shares excluded from diluted net income per share related to RSUs, MSUs, stock options and ESPP were not material.

Note 15. Supplemental Cash Flow Information

The supplemental cash flow information consists of the following (in thousands):

	Year Ended December 31,
	2017				2016				2015
Taxes paid	$	51,231			$	47,289			$	40,621
Non-cash investing activities:
Fixed assets acquired with accounts payable or accrued liabilities	$	15,105			$	4,434			$	14,636
Fair value of option to purchase property	$	3,936			$	—			$	—

Note 16. Segments and Geographical Information

Segment Information

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is our Chief Executive Officer. We report segment information based on the management approach. The management approach designates the internal reporting used by CODM 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 Scanner segment.

•	Our Clear Aligner segment consists of Comprehensive Products, Non-Comprehensive Products and Non-Case revenues as defined below:

•	Comprehensive Products include our Invisalign Full, Teen and Assist products.

•	Non-Comprehensive Products include our Invisalign Express, Invisalign Lite, Invisalign i7 and Invisalign Go products in addition to revenues from the sale of aligners to SmileDirectClub (“SDC”) under our supply agreement. Revenue from SDC is recorded after eliminating outstanding intercompany transactions.

•	Non-Case includes our Vivera retainers along with our training and ancillary products for treating malocclusion.

•	Our Scanner segment consists of intraoral scanning systems and additional services available with the intraoral scanners that provide digital alternatives to the traditional cast models. This segment includes our iTero scanner and OrthoCAD services.

These reportable operating segments are based on how our CODM views and evaluates our operations as well as allocation of resources. The following information relates to these segments (in thousands):

	For the Year Ended December 31,
Net revenues	2017				2016				2015
Clear Aligner	$	1,309,262			$	958,327			$	800,186
Scanner	164,151				121,547				45,300
Total net revenues	$	1,473,413			$	1,079,874			$	845,486
Gross profit
Clear Aligner	$	1,019,563			$	747,494			$	628,187
Scanner	97,384				67,800				11,923
Total gross profit	$	1,116,947			$	815,294			$	640,110
Income from operations
Clear Aligner	$	564,648			$	411,817			$	371,113
Scanner	49,613				37,498				(12,337		)
Unallocated corporate expenses	(260,650		)		(200,394		)		(170,142		)
Total income from operations	$	353,611			$	248,921			$	188,634
Depreciation and amortization
Clear Aligner	$	21,581			$	13,742			$	9,842
Scanner	4,385				3,871				3,839
Unallocated corporate expenses	11,773				6,389				4,323
Total depreciation and amortization	$	37,739			$	24,002			$	18,004

The following table reconciles total segment income from operations in the table above to net income before provision for income taxes and equity losses of investee (in thousands):

	For the Year Ended December 31,
	2017				2016				2015
Total segment income from operations	$	614,261			$	449,315			$	358,776
Unallocated corporate expenses	(260,650		)		(200,394		)		(170,142		)
Total income from operations	353,611				248,921				188,634
Interest and other income (expense), net	11,188				(6,355		)		(2,533		)
Net income before provision for income taxes and equity losses of investee	$	364,799			$	242,566			$	186,101

Geographical Information

Net revenues are presented below by geographic area (in thousands):

	For the Year Ended December 31,
	2017				2016				2015
Net revenues (1):
United States (2)	$	836,200			$	692,254			$	585,874
The Netherlands (2)	456,108				286,911				167,128
Other International	181,105				100,709				92,484
Total net revenues	$	1,473,413			$	1,079,874			$	845,486

(1)	Net revenues are attributed to countries based on location of where revenue is recognized.

(2) Effective July 2016, we implemented a new international corporate structure. This changed the structure of our international procurement and sales operations.

Tangible long-lived assets are presented below by geographic area (in thousands):

	As of December 31,
	2017				2016
Long-lived assets (1):
The Netherlands	$	143,673			$	104,039
United States	128,171				43,278
Costa Rica	30,738				2,657
Mexico	25,090				17,918
China	5,480				461
Other International	15,641				6,814
Total long-lived assets	$	348,793			$	175,167

(1) Long-lived assets are attributed to countries based on entity that owns the assets.