Align Technology (ALGN) 10-K risk factor changes: FY2018 vs FY2017

We expect that net revenues from the sale of the Invisalign System, primarily [removed: Invisalign Full and Invisalign Teen,] [added: our comprehensive products,] will continue to account for the vast majority of our total net revenues for the foreseeable future.

Competition in the markets for our products is [removed: intense] [added: increasing] and we expect aggressive competition from existing competitors and other companies that may introduce new technologies in the future.

In addition, corresponding foreign patents [removed: will start] [added: started] to expire in 2018 [removed: which] [added: and] will likely result in increased competition in some of the markets outside the U.S. Large consumer product companies may also enter the orthodontic supply market.

Furthermore, we also face competition from companies that now offer clear [removed: aligner therapy] [added: aligners] directly to the consumer [removed: eliminating the need for] [added: and do not require] the consumer to [removed: visit] [added: see] a [removed: dental office.][added: doctor before or during orthodontic treatment.]

Our key production steps are performed in operations located outside of the U.S. [removed: In San Jose, Costa Rica, technicians] [added: Technicians] use a sophisticated, internally developed computer-modeling program to prepare digital treatment plans, which are then transmitted electronically to [removed: Juarez, Mexico.][added: our aligner fabrication facilities.]

These digital files form the basis of the ClinCheck treatment plan and are used to manufacture aligner [removed: molds.][added: molds and aligners.]

We will continue to establish [removed: additional order acquisition and] treatment planning [added: and aligner fabrication] facilities closer to our international customers in order to improve our operational efficiency.

| • | import and export [added: controls,] license requirements and restrictions; |

| • | political, social and economic instability, including [removed: as a result of] increased levels of violence in Juarez, Mexico or the Middle East. We cannot predict the effect on us of any future armed conflict, political instability or violence in these regions. In addition, some of our employees in Israel are obligated to perform annual reserve duty in the Israeli military and are subject to being called for additional active duty under emergency circumstances. We cannot predict the full impact of these conditions on us in the future, particularly if emergency circumstances or an escalation in the political situation occurs. If many of our employees are called for active duty, our operations in Israel and our business may not be able to function at full capacity; |

| • | general geopolitical instability and the responses to it, such as the possibility of additional sanctions against [added: China and] Russia which continue to bring uncertainty to [removed: this region;] [added: these regions;] |

| • | product or material transportation delays or disruption, including as a result of [added: customs clearance,] increased levels of violence, acts of terrorism, acts of war or health epidemics restricting travel to and from our international locations or as a result of natural disasters, such as earthquakes or volcanic eruptions; |

[removed: For sales of our products outside the U.S.,] [added: As a result,] we are subject to foreign regulatory requirements that vary widely from country to country.

The time required to obtain clearances or approvals required by other countries may be longer than that required for [removed: FDA] [added: U.S. Food and Drug Administration ("FDA")] clearance or approval, and requirements for such approvals may differ from FDA requirements.

Our future success may depend on our ability to develop, successfully introduce and achieve market acceptance of new [removed: products.][added: products or product offerings.]

Our future success may depend on our ability to develop, manufacture, market and obtain regulatory approval or clearance of new [removed: products.][added: products or product offerings.]

The extent of, and rate at which, market acceptance and penetration are achieved by [added: new or] future products [added: or offerings] is a function of many variables, which include, among other things, our ability to:

| • | anticipate and respond to our competitors’ development of new [removed: products] [added: products. product offerings] and technological innovations; |

| • | differentiate our [added: products and product] offerings from our [removed: competitors’ offerings;] [added: competitors;] |

Even if we successfully innovate and develop new products and [removed: produce] [added: product] enhancements, we may incur substantial costs in doing so and our profitability may suffer.

If we change the volume-based discount [removed: accounting that affects] [added: programs affecting] our average selling prices; if we introduce any price reductions or consumer rebate programs; if we expand our discount programs in the future or participation in these programs increases; or if our product mix shifts to lower priced products or [added: to] products that have a higher percentage of deferred revenue, our average selling prices would be adversely affected and our net revenues, gross profit, gross margin and net income may be reduced.

[removed: We have in the past and may in the future] [added: As a result, we] enter into currency [removed: hedging] [added: forward contract] transactions in an effort to cover some of our exposure to foreign currency exchange fluctuations.

As we continue to grow, we are subject to growth related risks, including risks related to excess or constrained capacity [added: and operational efficiencies] at our [removed: existing] [added: manufacturing and treat] facilities.

Our ability to plan, construct and equip additional order acquisition, treatment planning and manufacturing facilities is subject to significant risk and uncertainty, including risks inherent in the establishment of a facility, such as hiring and retaining employees and delays and cost overruns as a result of a number of factors, any of which may be out of our [removed: control.][added: control and may negatively impact our gross margin.]

[removed: In addition, if product demand decreases or we fail to forecast demand] accurately, we could be required to write off inventory or record excess capacity charges, which would lower our gross margin.

[added: Production of our intraoral scanners may also be limited by capacity] constraints due to a variety of factors, including our dependency on third party vendors for key components in addition to limited production yields.

If we do not increase [removed: profitability or] [added: profitability, Invisalign volume and] revenue growth or otherwise meet the expectations of securities analysts or investors, the market price of our common stock will likely decline.

| • | changes in the timing of receipt of Invisalign case product orders during a given quarter which, given our cycle time and the delay between case receipts and case shipments, could have an impact on which quarter [removed: revenue] [added: revenues] can be recognized; |

| • | if participation in our customer rebate or discount programs [removed: increases] [added: increases,] our average selling price will be adversely affected; |

| • | changes in the timing of when [removed: revenue is] [added: revenues are] recognized, including as a result of the introduction of new [removed: products] [added: products, product offerings] or promotions, modifications to our terms and conditions or as a result of changes to critical accounting estimates or new accounting pronouncements; |

| • | impairments in the value of our [removed: strategic] investments in SDC and other privately held companies could be material; |

Due to these and other factors, we believe that quarter-to-quarter comparisons of our [removed: operating results may not be meaningful.]

[added: If there is a major earthquake or any other natural] disaster in a region where one of these facilities is located, our ability to create ClinCheck treatment plans, respond to customer inquiries or manufacture and ship our aligners could be compromised which could result in our customers experiencing a significant delay in receiving their completed aligners and a decrease in service levels for a period of time.

[removed: The implementation of] [added: We are continuing to transform certain business processes, extend established processes to new subsidiaries and/or implement] additional functionality in [removed: the ERP] [added: our enterprise resource planning (“ERP”) software] system [added: which] entails certain risks, including difficulties with changes in business processes that could disrupt our operations, such as our ability to track orders and timely ship products, manage our supply chain and aggregate financial and operational data.

[removed: The discovery] of [removed: a defect or error or the incompatibility with the computer operating system and hardware configurations of] customers in a new upgraded version or the failure of our primary information systems may result in the following consequences, among others: loss of [removed: revenue] [added: revenues] or delay in market acceptance, damage to our reputation or increased service costs, any of which could have a material adverse effect on our business, financial condition or results of operations.

We have experienced [removed: such] breaches in the past and our security measures may be inadequate to prevent security breaches, and our business operations and profitability would be adversely affected by, among other things, loss of customers and potential criminal and civil sanctions if they are not prevented.

Despite the implementation of security measures, we have experienced [removed: such] breaches in the past and our infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors or other technical malfunctions, hacking or phishing attacks by third parties, employee error or malfeasance or similar disruptive problems.

If we fail to meet our customer and patient’s expectations regarding the security of healthcare information, we could be liable for damages and our reputation and [removed: competition] [added: competitive] position could be impaired.

As of December 31, [removed: 2017,] [added: 2018,] we had [removed: 420] [added: 449] active U.S. patents, [removed: 456] [added: 423] active foreign patents, and [removed: 416] [added: 486] pending global patent applications.

Our future success will also depend on our ability to identify, recruit, train and retain additional qualified personnel, including [removed: orthodontists.][added: orthodontists and production technicians in our treat facilities.]

Our ability to sell our products and generate revenues primarily depends upon our direct sales force within our [removed: North American] [added: Americas] and [removed: international] [added: International] markets.

Currently, our products compete directly against products manufactured and distributed by various companies, both within and outside the U.S. Although the number of competitors varies by segment, geography and customer, we encounter a wide variety of competitors, including well-established regional competitors in certain foreign markets, as well as larger companies or divisions of larger companies with substantial sales, marketing, research and financial capabilities.

Due in part to the expiration of certain key patents owned by us beginning in 2017, we are facing increased competition in the clear aligner market as a result of the entry of new, large companies into certain markets who have the ability to leverage their existing channels in the dental market to compete directly with us.

Unlike these direct to consumer competitors, we are committed to a doctor in the core of everything we do, and Invisalign Treatment requires a doctor's prescription and an in person physical examination of the patients dentition before treatment can begin.

Our digital treatment planning and aligner fabrication are performed in multiple international locations.

We also have operations in Israel where we design and assemble wands,

and our intraoral scanner is manufactured.

| • | trade restrictions and changes in tariffs, including the recent tariffs imposed by the U.S. and China and the possibility of additional tariffs or other trade restrictions related to trade between the two countries; and |

We currently sell our products outside of North America.

In addition, these new facilities are located in higher cost regions compared to Mexico and Costa Rica, which may negatively impact our gross margin.

In addition, if product demand decreases or we fail to forecast demand

We are subject to risks associated with leasing retail space subject to long-term and non-cancelable leases.

We may be unable to renew leases at the end of their terms.

If we close a leased retail space, we remain obligated under the applicable lease.

We have recently increased the number of retail locations leased by us as we continue to expand our Invisalign Experience program.

We do not own any of our retail locations.

We currently lease the majority of our Invisalign locations under long-term, non-cancelable leases, which usually have initial terms ranging from three to ten years.

We believe that the majority of the leases we enter into in the future will likely be long-term and non-cancelable.

Generally, our leases are “net” leases, which require us to pay our proportionate share of the cost of insurance, taxes, maintenance and utilities.

If we determine that it is no longer economical to operate a retail location subject to a lease and decide to, or are otherwise required to, close it for any reason, including as a result of an adverse ruling in the SDC dispute (see “Item 3 Legal Proceedings - SDC Dispute”), we may remain obligated under the applicable lease for, among other things, payment of the base rent for the balance of the lease term.

In addition, as each of our leases expire, we may be unable to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close retail spaces in desirable locations.

Our inability to secure desirable retail space or favorable lease terms could impact our ability to grow our Invisalign Experience program as desired.

Likewise, our obligation to continue making lease payments in respect of leases for closed retail spaces could have a material adverse effect on our business, financial condition and results of operations.

| • | higher manufacturing costs driven by an increase in the numbers of aligners per case; |

| • | changes in relationships with our dental support organizations, including timing of orders; |

| • | underutilization of manufacturing and treat facilities; |

| • | costs and expenditures in connection with establishment of treatment planning and Aligner fabrication in international locations; |

| • | costs and expenditures in connection with hiring and deployment of direct sales force personnel; |

operating results may not be meaningful.

In addition, we earn an increasingly larger portion of our total revenues from international sales.

International sales carry higher shipping costs which could negatively impact our gross margin and results of operations.

The discovery of a defect or error or the incompatibility with the computer operating system and hardware configurations

We have cybersecurity insurance related to a breach event covering expenses for notification, credit monitoring, investigation, crisis management, public relations and legal advice.

The policy also provides coverage for regulatory action defense including fines and penalties, potential payment card industry fines and penalties and costs related to cyber extortion; however, damage and claims arising from such incidents may not be covered or may exceed the amount of any insurance available.

In addition, we must comply with numerous data protection requirements that span from individual state and national laws in the U.S. to multinational requirements in the EU.

In the EU, Align must comply with the General Data Protection Regulation (“GDPR”), which became effective on May 25, 2018 and serves as a harmonization of European data-privacy laws.

We believe we have designed our product and service offerings to be compliant with the requirements of applicable data protection laws and regulations.

Maintaining systems that are compliant with these laws and regulations is costly and could require complex changes in the way we do business or provide services to our customers and their patients.

Additionally, our success may be dependent on the success of healthcare providers in managing data protection requirements.

We recently hired approximately 100 sales personnel in the Americas and plan on hiring 50 in the EMEA region in the first quarter of 2019.

To adequately train and successfully deploy new representatives into these regions and to establish strong customer relationships takes approximately six to twelve months.

Currently, our products compete directly against products manufactured and distributed by various companies, both within and outside the U.S. In addition, as a result of the expiration of certain key patents owned by us, which began in 2017, we expect that existing competitors such as Danaher Corporation, Dentsply Sirona Inc., Straumann AG, 3M, 3Shape and Angel Align as well as new entrants into the clear aligner market such as start-ups will begin offering an orthodontic system more similar to ours in the near future.

Several of these competitors will likely have greater resources as well as the ability to leverage their existing channels in the dental market to compete directly with us, and therefore our share of the clear aligner market could decline which would likely have a material adverse effect on our business, results of operation and financial condition.

In 2017, we opened new treatment planning facilities in Chengdu, China and Cologne, Germany to support our customers within these regions.

Our order acquisition, aligner fabrication and shipping operations are conducted in Juarez, Mexico, and we also have order acquisition for the EMEA region in Amsterdam, the Netherlands.

We also have customer-care, accounts receivable, customer event registration and accounts payable organizations located in San Jose, Costa Rica.

In addition, we have operations in Israel where the design and wand are assembled and our intraoral scanner is manufactured.

| • | trade restrictions and changes in tariffs; and |

Outside of North America, we currently sell our products in certain countries within Europe, Asia Pacific, Latin America and the Middle East and may expand into other countries from time to time.

Production of our intraoral scanners may also be limited by capacity

If there is a major earthquake or any other natural

We are in a multi-year, company-wide program to transform certain business processes or extend established processes which includes the transition to a new enterprise resource planning ("ERP") software system.

We implemented the first phase of our ERP on July 1, 2016 and, while we believe we are past any potential significant business disruption, we are still monitoring and troubleshooting potential issues.

Additionally, if we are not able to accurately forecast expenses related to the project, this may have an adverse impact on our financial condition and operating results.

Our insurance may not protect us from this risk.

If our distributor relationships are not successful, our ability to market and sell our products would be harmed and our financial performance will be adversely affected.

We depend on relationships with distributors for the marketing and sales of our products in various geographic regions, and we have a limited ability to influence their efforts.

Relying on distributors for our sales and marketing could harm our business for various reasons, including:

| • | agreements with distributors may terminate prematurely due to disagreements or may result in litigation between the partners; |

| • | we may not be able to renew existing distributor agreements on acceptable terms; |

| • | our distributors may not devote sufficient resources to the sale of products; |

| • | our distributors may be unsuccessful in marketing our products; |

| • | our existing relationships with distributors may preclude us from entering into additional future arrangements with other distributors; and |

| • | we may not be able to negotiate future distributor agreements on acceptable terms. |

we intend to market in the future.

In response to perceived increases in health care costs, Congress passed health care reform legislation that was signed into law in March 2010.

This legislation contains many provisions designed to generate the revenues necessary to fund the coverage expansions.

The most relevant of these provisions are those that impose fees or taxes on certain health-related industries, including medical device manufacturers.

A product liability claim, regardless

On July 1, 2016, we changed our corporate structure; however, if we are unable to maintain this structure or if it is challenged by U.S. or foreign tax authorities, we may be unable to realize tax savings which could materially and adversely affect our operating results.

We implemented a new international corporate structure on July 1, 2016.

This corporate structure may reduce our overall effective tax rate over time through changes in the structure of our international procurement and sales operations, as well as realignment of the ownership and use of intellectual property among our wholly-owned subsidiaries.

The structure includes legal entities located in jurisdictions with income tax rates lower than the U.S. federal statutory tax rate.

Such intercompany arrangements would be designed to result in income earned by such entities in accordance with arm’s-length principles and commensurate with functions performed, risks assumed and ownership of valuable corporate assets.

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 the medium to long term.

If the structure is challenged by U.S. or foreign tax authorities, if changes in domestic and international tax laws negatively impact the structure, including the U.S. Tax Cuts and Jobs Act enacted into law on December 22, 2017, or if we do not operate our business in a manner consistent with the structure and applicable regulatory provisions, we may fail to achieve the financial and operational efficiencies that we anticipate as a result of the structure, and our business, financial condition and net income may be materially and adversely affected.

In addition, our tax rate may be impacted by tax holidays or incentives.

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 successful execution of our business strategy in [removed: 2018] [added: 2019] and beyond may be affected by a number of other factors including:

| [removed: •] [added: ◦] | [removed: New Products, Feature Enhancements and Technology Innovation. Product innovation drives greater treatment predictability and clinical applicability and ease of use for our customers which supports adoption of Invisalign treatment in their practices. Our focus is to develop solutions and features to treat a wide range of cases from simple to complex. Most recently, in] [added: In] March 2017, we announced Invisalign [removed: Teen] [added: treatment] with [removed: mandibular advancement,] [added: Mandibular Advancement,] the first clear aligner solution for Class II correction in growing tween and teen patients. This [removed: new] offering combines the benefits of [removed: the most advanced] [added: our] clear aligner system [removed: in the world] with features for moving the lower jaw forward while simultaneously aligning the teeth. Invisalign [removed: Teen] [added: treatment] with [removed: mandibular advancement] [added: Mandibular Advancement] is [removed: now] available in Canada, [removed: and] select Europe, Middle East and Africa [removed: ("EMEA"),] [added: (“EMEA”),] Asia Pacific [removed: ("APAC")] [added: (“APAC”)] and Latin America [removed: ("LATAM") countries. Invisalign Teen with mandibular advancement is pending] [added: (“LATAM”) countries and, in the U.S. starting November 2018 as we received] 510(k) clearance [removed: and is not yet available in] [added: from] the United States [removed: ("U.S."). We believe that over the long-term, clinical solutions and treatment tools will increase adoption of Invisalign and increase sales of our intraoral scanners; however, it is difficult to predict the rate of adoption which may vary by region] [added: (“U.S.”) Food] and [removed: channel.] [added: Drug Administration in October 2018.] |

| • | Invisalign Adoption. Our goal is to establish Invisalign as the treatment of choice for treating malocclusion ultimately driving increased product adoption and frequency of use by dental professionals, also known as "utilization rates." Our [removed: quarterly] [added: annual] utilization rates for the last [removed: 9 quarters] [added: three fiscal years] are as follows: |

[removed: ][added: ]

* Invisalign [removed: Utilization Rates] [added: utilization rates] = # of cases shipped divided by # of doctors cases were shipped [removed: to][added: to.]

[removed: | ▪ | North America: Utilization among our North American] orthodontist [removed: customers reached an all time high in the fourth quarter of 2017 at 14.0 cases per doctor. Compared to 11.3 cases per doctor utilized in the fourth quarter of 2016, the increase in North America orthodontist] utilization in [removed: the fourth quarter of 2017] [added: 2018] reflects improvements in product and technology which continues to strengthen our doctors’ clinical confidence such that they now utilize Invisalign more often and on more complex cases, including their teenage patients. [removed: |]

| ▪ | International: International doctor utilization [removed: of 5.2] [added: was 13.9] cases per doctor in [removed: the fourth quarter of 2017] [added: 2018] compared to [removed: 5.0] [added: 13.2 cases] in [removed: the fourth quarter of 2016.] [added: 2017.] The [added: increase in] International utilization reflects [removed: growth] [added: increased utilization and continued expansion of our customer base] in both [removed: the] EMEA and APAC regions due to increasing adoption of the product due in part to its ability to treat more complex cases. |

We expect that over the [removed: long-term] [added: long-term,] our utilization rates will gradually improve as a result of advancements in product and technology, which continue to strengthen our doctors’ clinical confidence in the use of Invisalign.

In addition, since the teenage [added: and younger] market makes up 75% of the [removed: 10] [added: approximately 12] million total orthodontic case starts each [removed: year] [added: year,] and as we continue to drive adoption of teenage [added: and younger] patients through sales and marketing programs, we expect our utilization rate to improve.

| • | International Invisalign Growth. We [removed: will] continue to focus our efforts towards increasing Invisalign [added: clear aligner] adoption by dental professionals in [removed: our direct international] [added: the EMEA and APAC] markets. On a [removed: year over year] [added: year-over-year] basis, [added: our] international Invisalign volume increased [removed: 52.3%] [added: 45.3%] driven primarily by [removed: strong performance in] [added: increased adoption as well as expansion of] our [removed: APAC and] [added: customer base in both the] EMEA [added: and APAC] regions. We [added: continue to see growth from our international orthodontists and general practitioner (“GP”) customers and are seeing more positive traction in the GP channel from segmenting our sales and marketing resources and programs specifically around each customer channel. In addition, we] believe that [removed: the introduction of] [added: continuous product introductions and feature improvements, such as] Invisalign [removed: Teen] treatment with mandibular [removed: advancement is helping to raise visibility for Invisalign treatment of teenagers and contributed to some of the growth] [added: advancement, provide our customers with continued confidence] in [removed: the APAC market.] [added: treating complex cases as well as teen-aged patients with Invisalign clear aligners.] In [removed: 2018,] [added: 2019,] we are continuing to expand in our existing markets through targeted investments in sales coverage and professional marketing and education programs, along with consumer marketing in [removed: selected] [added: select] country markets. We expect [removed: international Invisalign clear aligner] [added: International] revenues to continue to grow at a faster rate than [removed: North America] [added: the Americas] for the foreseeable future due to our continued investment in international market expansion, the size of the market [removed: opportunity,] [added: opportunities,] and our relatively low market penetration of these [removed: regions] [added: regions. Our future growth is dependent upon the continued growth of Invisalign adoption and international market penetration] (Refer to Item 1A Risk Factors [removed: \-] [added: -] “We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and results of operations.” for information on related risk factors). |

| • | [removed: Operating] Expenses. We expect [removed: operating] expenses to increase in [removed: 2018] [added: 2019] due in part to: |

| ◦ | Investments in manufacturing [added: capacity and facilities] to enhance our regional capabilities; |

| ◦ | Increases in legal [removed: expenses] [added: expenses,] primarily related to the continued protection of our intellectual property [removed: rights,] [added: rights] including our [removed: patents;] [added: patents along with the additional costs related to the planned corporate structure reorganization.] |

| ◦ | Increases in sales, marketing and customer support resources; [removed: and] |

| ◦ | Product and technology innovation to enhance product efficiency and operational [removed: productivity.] [added: productivity;] |

We believe that these investments will position us to increase our revenues and continue to grow our market [removed: share.][added: share, but will negatively impact results of operations, particularly in the near term.]

| [removed: •] [added: ◦] | [removed: Stock Repurchases: April 2016] [added: May 2018] Repurchase Program. In [removed: 2017,] [added: May 2018,] we [added: announced that our Board of Directors had authorized a plan to repurchase up to $600.0 million of our common stock. In August 2018, we] repurchased $50.0 million of our common stock [removed: through] [added: on the open market. In November 2018, we entered into] an accelerated [removed: stock] [added: share] repurchase [removed: agreement and repurchased] [added: ("2018 ASR") to repurchase] $50.0 million [removed: on the open market.] [added: of our common stock which was completed in December 2018.] As of December 31, [removed: 2017,] [added: 2018,] we [removed: had $200.0] [added: have $500.0] million remaining under the [removed: April 2016] [added: May 2018] Repurchase Program. In February [removed: 2018,] [added: 2019,] we repurchased [removed: $100.0] [added: $50.0] million of our common stock on the open market (Refer to Note 11 "Common Stock Repurchase [removed: Program"] [added: Programs"] of the Notes to Consolidated Financial Statements for details on [added: common] stock repurchase [removed: program).] [added: programs).] |

| • | SmileDirectClub. In February 2018, we received a communication on behalf of SDC Financial LLC, SmileDirectClub LLC, and the Members of SDC Financial LLC other than [removed: Align] [added: the Company] (collectively, the [removed: "SDC Entities")] [added: SDC Entities)] alleging that the launch and operation of [removed: our] [added: the] Invisalign [removed: store] [added: locations] 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 [removed: has] notified [removed: Align] [added: us] that its members (other than Align) seek to exercise a right to repurchase all of [removed: Align’s] [added: Align's] SDC Financial LLC membership interests for a purchase price equal to the current capital account [removed: balance of Align.] [added: balance.] The SDC [removed: Entities] [added: Entities’ communication] also [removed: allege] [added: alleged] that [removed: Align has] [added: we] breached confidentiality provisions applicable to the SDC Financial LLC members and [removed: demands] [added: demanded] that [removed: Align] [added: we] cease all activities related to the Invisalign [removed: store] pilot project, close existing Invisalign [removed: stores] [added: locations] and cease using SDC’s confidential information. [removed: Align disputes] [added: In April 2018,] the [removed: allegations] [added: SDC Entities served a Demand for Arbitration alleging] that [removed: it has] [added: we] breached [removed: its obligations] [added: the non-compete clause and confidentiality clause, misused the SDC Entities’ alleged trade secrets, and violated fiduciary duties] to [added: SDC Financial LLC. The SDC Entities seek through] the [added: arbitration the rights to repurchase all of Align’s] SDC [removed: Entities, including] [added: Financial LLC membership interests for a purchase price equal to] the [removed: allegation] [added: current capital account balance as defined by the Internal Revenue Service which likely is significantly below the current fair market value of such investment, an injunction requiring us to close our Invisalign locations and to cease using the SDC Entities’ confidential information, and financial damages in an unspecified amount. We filed a response in which we denied the SDC Entities’ allegations and denied] that the SDC Entities are entitled to [removed: exercise] [added: any relief. In April 2018 the SDC Entities also filed] a [removed: repurchase right. Pursuant] [added: motion for preliminary injunction in the Tennessee Court of Chancery seeking] to [added: enjoin Align from opening additional Invisalign locations until] the [removed: parties’ agreement,] [added: arbitration is completed. In June 2018,] the [removed: dispute will be arbitrated if it] [added: Tennessee court denied the SDC Entities’ motion for a preliminary injunction. In December 2018, the parties participated in binding arbitration proceedings and presented closing arguments on January 23, 2019. The arbitrator’s decision] is [added: due on or before March 4, 2019. This dispute does] not [removed: resolved] [added: impact Align’s existing supply agreement with SDC which remains in place] through [removed: negotiations.] [added: 2019.] We [added: do not intend to renew this agreement. We] are currently [removed: evaluating] [added: unable to predict] the [removed: potential impact that] [added: outcome of] this [removed: could have] [added: dispute and therefore cannot determine the likelihood of loss, if any, nor estimate a range of possible loss. (Refer to Note 8 "Legal Proceedings" of the Notes to Consolidated Financial Statements for details] on [removed: our consolidated financial statements.] [added: SDC dispute).] |

| ◦ | Comprehensive Products [removed: include our] [added: include, but not limited to,] Invisalign [removed: Full, Teen] [added: Comprehensive (formerly known as Invisalign Full] and [added: Invisalign Teen), Invisalign] Assist [removed: products.] [added: and Invisalign First.] |

| ◦ | Non-Comprehensive Products [removed: include our Invisalign Express,] [added: include, but not limited to,] Invisalign [removed: Lite,] [added: Express 10,] Invisalign [removed: i7] [added: Express 5, Express Package, Lite Package] and Invisalign Go [removed: products] in addition to revenues from the sale of aligners to SmileDirectClub (“SDC”) under our supply agreement. [removed: Revenue from SDC is recorded after eliminating outstanding intercompany transactions.] |

| ◦ | Non-Case [removed: includes our] [added: includes, but not limited to,] Vivera retainers along with our training and ancillary products for treating malocclusion. |

| • | Our Scanner segment consists of intraoral scanning [removed: systems and] [added: systems,] additional services [added: and ancillary products] available with the intraoral scanners that provide digital alternatives to the traditional cast models. This segment includes our iTero scanner and OrthoCAD services. |

Net revenues for our Clear Aligner [removed: segment] and Scanner [removed: segment] [added: segments] by region for the year ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015] [added: 2016] are as follows (in millions):

| Net Revenues | December 31, [removed: 2017] [added: 2018] | | | | December 31, [removed: 2016] [added: 2017] | | | | Change | | | | | | | December 31, [removed: 2016] [added: 2017] | | | | December 31, [removed: 2015] [added: 2016] | | | | Change | | | | | |

| Non-Case | [removed: 81.7] [added: 104.0] | | | | [removed: 63.0] [added: 81.7] | | | | [removed: 18.7] [added: 22.3] | | | | [removed: 29.7] [added: 27.3] | % | | [removed: 63.0] [added: 81.7] | | | | [removed: 51.4] [added: 63.0] | | | | [removed: 11.6] [added: 18.7] | | | | [removed: 22.6] [added: 29.7] | % |

| Total Clear Aligner net revenues | $ | [removed: 1,309.3] [added: 1,691.5] | | | $ | [removed: 958.3] [added: 1,309.3] | | | $ | [removed: 351.0] [added: 382.2] | | | [removed: 36.6] [added: 29.2] | % | | $ | [removed: 958.3] [added: 1,309.3] | | | $ | [removed: 800.2] [added: 958.3] | | | $ | [removed: 158.1] [added: 351.0] | | | [removed: 19.8] [added: 36.6] | % |

| Scanner net revenues | [removed: 164.1] [added: 275.0] | | | | [removed: 121.5] [added: 164.1] | | | | [removed: 42.6] [added: 110.9] | | | | [removed: 35.1] [added: 67.6] | % | | [removed: 121.5] [added: 164.1] | | | | [removed: 45.3] [added: 121.5] | | | | [removed: 76.2] [added: 42.6] | | | | [removed: 168.2] [added: 35.1] | % |

| Total net revenues | $ | [removed: 1,473.4] [added: 1,966.5] | | | $ | [removed: 1,079.8] [added: 1,473.4] | | | $ | [removed: 393.6] [added: 493.1] | | | [removed: 36.5] [added: 33.5] | % | | $ | [removed: 1,079.8] [added: 1,473.4] | | | $ | [removed: 845.5] [added: 1,079.8] | | | $ | [removed: 234.3] [added: 393.6] | | | [removed: 27.7] [added: 36.5] | % |

Case volume data which represents Clear Aligner case shipments by region, for the year ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015] [added: 2016] is as follows (in [removed: millions):][added: thousands):]

| Region | December 31, [removed: 2017] [added: 2018] | | | December 31, [removed: 2016] [added: 2017] | | | Change | | | | | | December 31, [removed: 2016] [added: 2017] | | | December 31, [removed: 2015] [added: 2016] | | | Change | | | | |

| Total case volume | [removed: 976.4] [added: 1,280.6] | | | [removed: 709.2] [added: 976.4] | | | [removed: 267.2] [added: 304.2] | | | [removed: 37.7] [added: 31.2] | % | | [removed: 709.2] [added: 976.4] | | | [removed: 583.2] [added: 709.2] | | | [removed: 126.0] [added: 267.2] | | | [removed: 21.6] [added: 37.7] | % |

Total net revenues increased by $393.6 million in 2017 as compared to 2016 primarily as a result of [added: Clear Aligner] case volume growth across all regions and products as well as increased non-case revenue.

Clear Aligner - [removed: North America][added: Americas]

[removed: North America] [added: Americas] net revenues increased by [removed: $175.9] [added: $182.5] million in 2017 compared to 2016 primarily due to case volume growth across all channels and most products which increased net revenues by [removed: $192.6] [added: $195.5] million.

This increase was offset in part by lower [removed: average selling price ("ASP")] [added: ASP] which decreased net revenues by [removed: $16.7] [added: $13.1] million.

The ASP decline [removed: is] [added: was] a result of a shift in product mix towards Non-Comprehensive Products, primarily driven by increased SDC revenues which carry a lower ASP and higher Invisalign promotional discounts, which collectively reduced revenues by $58.4 million.

These factors contributing to the decline in ASP were [added: partially] offset in part by price increases on our Comprehensive Products effective on April 1, 2017 which contributed $28.4 million to net revenues as well as an increase in additional aligner revenue which contributed $10.8 million to net revenues, among other factors.

International net revenues increased by [removed: $156.4] [added: $149.8] million in 2017 compared to 2016 primarily driven by case volume growth across all channels and products which increased net revenues by [removed: $146.7] [added: $142.9] million and, to a lesser extent, higher ASP which contributed approximately [removed: $9.7] [added: $6.8] million to the increase in net revenues.

The increase in ASP was primarily due to price increases in our Comprehensive Products effective on July 1, 2017, as well as the impact from acquiring certain distributors as we now recognize direct sales at full ASP rather than the discounted ASP, which collectively contributed [removed: $24.7] [added: $24.4] million to net revenues.

The factors contributing to an increase in ASP were [added: partially] offset in part by higher promotional discounts which decreased net revenues by [removed: $12.6] [added: $13.7] million as well as an increase in net revenue deferrals of [removed: $3.6] [added: $3.0] million, among other factors.

| • | New Invisalign Product Portfolio and Pricing. In July 2018, we launched a new expanded Invisalign product portfolio which includes new options and greater flexibility to treat a broader range of patients. The new Invisalign product portfolio offers doctors more choices by extending desirable features across the entire portfolio and creating new Invisalign treatment packages, as well as new options to treat young patients with early mixed dentition (with a mixture of primary/baby and permanent teeth). The new end-to-end Invisalign product portfolio includes clear aligner product offerings for almost every patient age group and case complexity to make it easier for our doctors to tailor treatment planning to the needs of each patient. Pricing and availability for the new Invisalign product offerings and the associated terms and conditions vary by region. |

| • | New Invisalign Products and Feature Enhancements. Product innovation drives greater treatment predictability, clinical applicability and ease of use for our customers which supports adoption of Invisalign treatment in their practices. Our focus is to develop solutions and features to treat a wide range of cases from simple to complex. |

| ◦ | Beginning July 2018, Invisalign First clear aligners, a treatment option designed with features specifically for younger patients with early mixed dentition, are available to Invisalign-trained doctors in the U.S., Canada, Australia, New Zealand, Japan, and the EMEA region. Invisalign First clear aligners are designed specifically to address a broad range of younger patients’ malocclusions, including shorter clinical crowns, management of erupting dentition and predictable dental arch expansion. Phase 1 treatment is an early interceptive orthodontic treatment for young patients, traditionally done through arch expanders, or partial metal braces, before all permanent teeth have erupted, typically at ages seven through ten years. |

| ◦ | In April 2018, we announced a new Invisalign Go product with more user-friendly iTero digital chairside experience and greater flexibility to treat a wider range of mild to moderate cases, such as crowded or gap teeth that require teeth straightening prior to restorative treatments. Invisalign Go is available to Invisalign-trained doctors in the U.S., the majority of European countries as well as in select APAC markets. Invisalign Go also incorporates new data-driven clinical protocols for predictable tooth movement and automated case assessments that leverages our Invisalign patients treated to date. These improvements make it easier for general practitioner dentists to tailor their treatment plans to the individual needs of each patient. |

| • | New iTero Products and Technology Innovation. The iTero scanner is an important component to our customer experience and is central to a digital approach as well as overall customer utilization of Invisalign. |

| ◦ | In April 2018, we expanded the iTero Element portfolio with the launch of the iTero Element 2 and the iTero Element Flex scanners, building on the existing high precision, full-color imaging and fast scan times of the |

iTero Element portfolio while streamlining orthodontic and restorative workflows.

The next-generation iTero Element 2 is designed for greater performance with 2X faster start-up and 25% faster scan processing time compared to the iTero Element.

The new iTero Element Flex wand-only configuration is a portable scanner for easy transport from office to office.

iTero Element 2 and iTero Element Flex scanners are available in the U.S., Canada, the majority of European countries as well as in select APAC markets.

The existing iTero Element scanner continues to be available in all markets.

| ◦ | In April 2018, we announced that we received market approval for the iTero Element intra-oral scanner from the China Food and Drug Administration, and we began offering this scanner in China. The iTero Element scanner launch in China not only supports growth of our base Invisalign clear aligner business but also represents a major milestone for digital dentistry in China. As we continue to expand into markets where we sell our intra-oral scanners, we expect continued growth for the foreseeable future due to the size of the market opportunities and our relatively low market penetration in these regions. |

We believe that over the long-term, clinical solutions and treatment tools will increase adoption of Invisalign and increase sales of our intraoral scanners; however, it is difficult to predict the rate of adoption which may vary by region and channel.

The use of iTero and other digital scanners for Invisalign case submission in place of PVS impressions continues to grow and remains a positive catalyst for Invisalign utilization.

For the fourth quarter of 2018, total Invisalign cases submitted with a digital scanner in the Americas increased to 72.6%, up from 71.0% in the third quarter of 2018.

International scans increased to 57.5%, up from 53.9% in the third quarter of 2018.

In China, Invisalign cases submitted using a digital scanner increased to 45.9% from close to 0% in only one year.

We believe that over the long-term, technology innovation and added features and functionality of our iTero scanners will increase adoption of Invisalign and increase sales of our intraoral scanners; however, it is difficult to predict the rate of adoption which may vary by region and channel.

Beginning in the first quarter of 2018, we report International region to include EMEA and APAC.

LATAM is excluded from above chart as it is not material.

Our historical utilization numbers have been recast to reflect this new classification.

| ◦ | Total utilization in 2018 increased to 15.7 cases per doctor compared to 14.5 cases in 2017. |

| ▪ | North America: Utilization among our North American orthodontist customers increased in 2018 to 56.7 cases per doctor compared to 46.6 cases per doctor in 2017. The increase in North American |

| • | Number of New Invisalign Doctors Trained. We continue to expand our Invisalign customer base through the training of new doctors. In 2018, we trained approximately 19,655 new Invisalign doctors of which 7,885 were trained in the Americas region and 11,770 in the International region. |

| • | Establish Regional Order Acquisition, Treatment Planning and Manufacturing Operations. We will continue to establish and expand additional order acquisition, treatment planning and manufacturing operations closer to our international customers in order to improve our operational efficiency and to provide doctors confidence in using Invisalign clear aligners to treat more patients and more often. In the fourth quarter of 2018, we began fabricating our aligners in our new manufacturing facility in Ziyang, China, our first aligner fabrication facility outside of Juarez, Mexico. We expect that it will take several quarters to ramp this facility up to full capacity and as a result manufacturing labor and overhead in this facility will be underutilized during this transition period. (Refer to Item 1A Risk Factors - “As we continue to grow, we are subject to growth related risks, including risks related to excess or constrained capacity at our existing facilities.” for information on related risk factors). |

| • | Invisalign Experience Program. In 2018, we expanded the interactive brand experience that was piloted in 2017 and finished the year with a total of twelve Invisalign locations in major U.S. cities. The program expansion is designed to address the rapidly-evolving consumer market for clear aligners and connects consumers interested in Invisalign treatment with Invisalign doctors in their communities (Refer to Item 3 "Legal Proceedings" for details on SDC dispute which may impact the Invisalign locations). |

| • | Increased Sales Force. In order to provide more comprehensive sales and service coverage, in the fourth quarter of 2018, we increased our sales force in the Americas by adding approximately 100 sales team members. In the first quarter of 2019, we plan to add 50 new sales representatives in EMEA to cover GP dentist channel. (Refer to Item 1A Risk Factors - “We primarily rely on our direct sales force to sell our products, and any failure to maintain our direct sales force could harm our business" for information on related risk factors). |

| ◦ | Investments in expansion of number of direct sales force personnel; |

Effective in the first quarter of 2018, Americas region includes North America and LATAM.

International region includes EMEA and APAC.

Historical data has been recasted to reflect the change.

Net Revenues for Reportable Segments by Region

| Americas | $ | 903.3 | | | $ | 754.1 | | | $ | 149.2 | | | 19.8 | % | | $ | 754.1 | | | $ | 571.6 | | | $ | 182.5 | | | 31.9 | % |

| International | 684.2 | | | | 473.5 | | | | 210.7 | | | | 44.5 | % | | 473.5 | | | | 323.7 | | | | 149.8 | | | | 46.3 | % |

| Americas | 780.7 | | | 631.6 | | | 149.1 | | | 23.6 | % | | 631.6 | | | 469.4 | | | 162.2 | | | 34.6 | % |

| International | 499.9 | | | 344.8 | | | 155.1 | | | 45.0 | % | | 344.8 | | | 239.8 | | | 105.0 | | | 43.8 | % |

Fiscal Year 2018 compared to Fiscal Year 2017

This increase was offset in part by lower average selling prices ("ASP"), which was mainly the result of higher promotional discounts, which reduced net revenues by $44.7 million, and increased net revenue deferrals by $3.0 million.

This decline was partially offset by higher prices from the new products introduced in July 2018, which increased net revenues by $19.2 million.

The ASP decline was mainly the result of increased net revenue deferrals mostly for additional aligners, which reduced net revenues by $20.1 million, and higher promotions discounts, which reduced net revenues by $17.4 million.

| ◦ | Total utilization in the fourth quarter of 2017 increased to 5.7 cases per doctor compared to 5.2 in the fourth quarter of 2016. |

In 2017, 25.5% of our volume was from teenagers starting treatment with Invisalign, an increase of 40.4% from 2016.

| • | Number of New Invisalign Doctors Trained. We continue to expand our Invisalign customer base through the training of new doctors. In 2017, Invisalign growth was driven primarily by increased utilization across all regions as well as by the continued expansion of our customer base as we trained a total of 16,500 new Invisalign doctors, of which 67% were trained internationally. |

| • | Establish Regional Order Acquisition, Treatment Planning and Manufacturing Operations. We will continue to establish and expand additional order acquisition, treatment planning and manufacturing operations closer to our international customers in order to improve our operational efficiency and to provide doctors confidence in using Invisalign clear aligners to treat more patients and more often: |

| ◦ | In June 2017, we opened a new treatment planning facility in Chengdu, China which services and supports our customers within China. It also serves as a clinical education and training center for all of our customers across Asia Pacific. |

| ◦ | In August 2017, we opened a treatment planning facility in Cologne, Germany to support our customers located in Europe. |

| ◦ | In 2017, we purchased two buildings in Costa Rica for a total purchase price of approximately $51.7 million in order to support our expanding treatment planning and customer service needs. |

| ◦ | In November 2017, we entered into an Investment Agreement with the People’s Republic of China in which we have committed to invest a minimum of $46.0 million in Ziyang, China over five years to establish manufacturing operations. |

Refer to Item 1A Risk Factors - “As we continue to grow, we are subject to growth related risks, including risks related to excess or constrained capacity at our existing facilities” for information on related risk factors and Refer to Note 9 "Commitments and Contingencies" of the Notes of Consolidated Financial Statements for more information on the Costa Rica purchase agreements and the China investment agreement.

| • | U.S. Tax Cuts and Jobs Act. 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 a provisional amount of $84.3 million additional income tax expense in the fourth quarter of 2017. 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 earnings 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 tax expense in 2018 when the analysis is complete. |

Net Revenues by Reportable Segment Comparison for Year Ended December 31, 2017, 2016 and 2015:

| North America | $ | 744.6 | | | $ | 568.7 | | | $ | 175.9 | | | 30.9 | % | | $ | 568.7 | | | $ | 498.7 | | | $ | 70.0 | | | 14.0 | % |

| International | 483.0 | | | | 326.6 | | | | 156.4 | | | | 47.9 | % | | 326.6 | | | | 250.1 | | | | 76.5 | | | | 30.6 | % |

| North America | 621.9 | | | 464.5 | | | 157.4 | | | 33.9 | % | | 464.5 | | | 398.4 | | | 66.1 | | | 16.6 | % |

| International | 354.5 | | | 244.7 | | | 109.8 | | | 44.9 | % | | 244.7 | | | 184.8 | | | 59.9 | | | 32.4 | % |

ASP declined in 2016 compared to 2015 as a result of higher promotional discounts of $21.9 million as well as an increase in net deferrals of $7.7 million primarily related to the full year effect of our new additional aligners product policy launched in July 2015.

These declines were partially offset by price increases on our Comprehensive Products effective April 1, 2016 which contributed $17.7 million to net revenues.

This increase was offset in part by lower ASP which decreased net revenues by $4.4 million.

ASP declined in 2016 compared to 2015 as a result of higher promotional discounts of $6.9 million as well as the unfavorable impact of changes in foreign exchange rates of $6.8 million.

These declines were partially offset by the price increases on our Comprehensive products effective April 1, 2016 which contributed $5.7 million to net revenues, as well as an increase in additional aligner revenue of $3.5 million.

Scanner net revenues increased by $76.2 million in 2016 compared to 2015 primarily as a result of an increase in the number of scanners recognized as we began shipping our next generation iTero Element scanner in September 2015, which contributed $43.3 million in net revenues and, to a lesser extent, an increase in ASP.

which contributed $23.7 million to net revenues.

The gross margin percentage declined in 2016 compared to 2015 primarily driven by a higher number of aligners per case and lower ASP which was partially offset by higher absorption as a result of increased production volumes.

The gross margin percentage increased in 2016 compared to 2015 due to a product mix shift to our iTero Element scanner which has a higher ASP along with lower costs per unit.

We also incurred higher expenses from advertising and marketing of $16.5 million, outside services costs of $12.2 million, equipment and material costs of $6.8 million, travel and related costs of $6.0 million and credit card processing fees of $4.2 million.

In addition, during the first quarter of 2015, there was a refund of MDET taxes paid in 2014 of $6.8 million as our aligners are no longer subject to the excise tax.

Research and development expense increased in 2016 compared to 2015 due to higher compensation costs as a result of increased headcount resulting in higher salaries expense, incentive bonuses and fringe benefits.

Operating margin percentage declined in 2016 compared to 2015 primarily due to higher compensation costs as a result of increased headcount, higher number of aligners manufactured per case and lower ASP.

Operating margin percentage increased in 2016 compared to 2015 due to a product mix shift to our iTero Element scanner resulting in a higher ASP and lower costs per unit.

We also incurred lower operating expenses as a percentage of revenues as we leveraged our operating expenses on higher revenues.

| Interest and other income (expense), net | $ | 11.2 | | | $ | (6.4 | ) | | $ | 17.6 | | | $ | (6.4 | ) | | $ | (2.5 | ) | | $ | (3.9 | ) |

Interest and other income (expense), net, decreased in 2016 compared to 2015 mainly due to higher foreign exchange losses as a result of the Euro weakening to the U.S. dollar.

| | | | | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

We acquired a 17% equity interest in SDC in July 2016 and an additional 2% in July 2017 for combined equity interest of 19% on a fully diluted basis.

We account for this investment based on the equity method of accounting.

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 a provisional amount of $84.3 million of additional income tax expense in the fourth quarter of 2017.

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 earnings in the amount of $73.9 million.

Our [removed: cash equivalents and] investments [removed: are] [added: include] fixed-rate short-term and long-term securities.

Fixed-rate securities may have their fair market value adversely impacted due to a rise in interest rates, [removed: and] [added: and,] as a result, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates.

As of December 31, [removed: 2017,] [added: 2018,] we had approximately [removed: $312.0] [added: $107.6] million invested in available-for-sale marketable securities.

We do not have [added: material] interest bearing liabilities as of December 31, [removed: 2017,] [added: 2018,] and, therefore, we are not subject to risks from immediate interest rate increases.

As a result of our international business activities, [removed: including the impact of the change in] our [removed: new international corporate structure in 2016, our] financial results could be affected by factors such as changes in foreign currency exchange rates or economic conditions in foreign markets, and there is no assurance that exchange rate fluctuations will [removed: not harm our business in the future.]

This provides some natural hedging because most of the subsidiaries’ operating expenses are generally denominated in their local [removed: currencies as discussed further below.][added: currencies.]

[removed: We may enter] [added: In March 2018, we started entering] into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations on cash and certain trade and intercompany receivables and payables.

It is difficult to predict the impact [removed: hedging activities] [added: forward contracts] could have on our results of operations.

Although we will continue to monitor our exposure to currency fluctuations, and, where appropriate, may use [removed: financial hedging techniques in the future] [added: forward contracts] to minimize the effect of these fluctuations, the impact of an aggregate change of 10% in foreign currency exchange rates relative to the U.S. dollar on our results of operations and financial position could be material.

We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.

not harm our business in the future.

The fair value of foreign exchange forward contracts outstanding as of December 31, 2018 was not material.

For the year ended December 31, 2017 and 2016, we had foreign currency net gains (losses) of $9.0 million and $(8.0) million, respectively.

As of December 31, 2017, we did not have any outstanding foreign exchange forward contracts.

Align Technology, Inc (“We”, “Our”, “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, [added: and] restorative and aesthetic dentistry.

Our [added: corporate] headquarters is located at 2820 Orchard Parkway, San Jose, [removed: California] [added: California, U.S.A.,] 95134, and our telephone number is 408-470-1000.

Our [added: Americas regional headquarters is located in Raleigh, North Carolina; our] European [added: regional] headquarters is located in Amsterdam, the [removed: Netherlands] [added: Netherlands;] and our Asia Pacific [added: regional] headquarters is located in Singapore.

For the year ended December 31, [removed: 2017,] [added: 2018,] Clear Aligner net revenues represent approximately [removed: 89%] [added: 86%] of worldwide net revenues, while Scanner [added: net revenues] represent the remaining [removed: 11%] [added: 14%] of worldwide net revenues.

To date, over [removed: 5.2] [added: 6.1] million people worldwide have been treated with our Invisalign System.

Scanners and [removed: CAD/CAM Services] [added: computer-aided design/computer-aided manufacturing ("CAD/CAM") services] are primarily sold through our direct sales force and a few distributors in North America, Europe and certain Asia Pacific countries, and through distribution partners in [removed: Thailand, Scandinavia and Russia.][added: smaller non-core international country markets.]

[removed: Our Products and] [added: CAD/CAM] Services [added: and Ancillary Products]

Annually, approximately [removed: 10] [added: 12] million people in major developed countries elect treatment by orthodontists worldwide.

Of the [removed: 10] [added: 12] million annual orthodontic cases started, approximately [removed: 60%] [added: 75%] or [removed: 6] [added: 8.4] million are applicable to Invisalign treatment [removed: -] our served market.

In addition, approximately 300 million people with malocclusion could benefit from straightening their [removed: teeth,] [added: teeth] but are unlikely to seek treatment through a doctor’s office.

The Invisalign System is a proprietary method for treating malocclusion based on a [added: proprietary computer-simulated virtual treatment plan and a] series of doctor-prescribed, custom manufactured, clear plastic, removable aligners.

The Invisalign-trained dental professional prepares and sends us a patient’s treatment data package which consists of a prescription form, a [added: digital scan or a] polyvinyl-siloxane (or "PVS") impression of the relevant dental arches, photographs of the patient and, at the dental professional’s election, x-rays of the patient’s dentition.

See "Third Party Scanners and Digital scans for Invisalign treatment submission." More than [removed: 50%] [added: 63%] of Invisalign case submissions are submitted via digital scan instead of a physical PVS impression.

Attachments are tooth-colored “buttons” that are sometimes used to increase the biomechanical force on a specific tooth or teeth in order to effect the desired [removed: movement.][added: movement(s).]

Review and approval of the treatment plan by an [removed: Invisalign provider.][added: Invisalign-trained doctor.]

From these molds, aligners are fabricated by pressure-forming polymeric sheets over each [added: mold.]

At the treating doctor’s discretion, [removed: we recommend changing from two-week aligner wear to one-week] [added: weekly] aligner [removed: wear] [added: changes are recommended] for [added: all] Invisalign treatments [removed: with Invisalign Full,] [added: for] Invisalign [removed: Teen,] [added: Comprehensive,] Invisalign [removed: Assist,] [added: First Comprehensive,] Invisalign Lite, [added: Invisalign Assist] and Invisalign Go [removed: products,] [added: packages,] thereby reducing treatment time by up to [removed: 50%.][added: 50% compared to two week aligner wear.]

Should the dental professional determine that the treatment is not tracking for various reasons, such as patient compliance, certain teeth movement not tracking to plan, or they need to extend the treatment a few stages further to [removed: achieve their treatment goals, the dental professional can request additional aligners at no charge at any point during the treatment, subject to certain requirements.]

Used for a wide range of malocclusion, the Invisalign [removed: Full and Invisalign Teen] [added: Comprehensive] treatment plans each consist of the number of aligners necessary to achieve the [removed: doctor’s] [added: doctor's] treatment goals.

The Invisalign [removed: Teen] [added: Comprehensive] treatment includes all the features of Invisalign [removed: Full] treatment, plus additional features that address the orthodontic needs of teenage patients such as compliance indicators, compensation for tooth [removed: eruption and six free single arch replacement aligners.][added: eruption.]

Aligners for Invisalign [removed: Full and Invisalign Teen] [added: Comprehensive] treatments [removed: (other than the replacement aligners)] are manufactured and then delivered to the dental professionals in a single shipment.

[removed: Both treatment options are] [added: Invisalign Comprehensive Package is] sold in the U.S., Canada and [removed: our] [added: select] international countries.

Invisalign Express 10, Invisalign Express 5, [removed: Invisalign i7] [added: Express Package] and [removed: Invisalign Lite.][added: Lite Package.]

Invisalign Express 10, Invisalign Express 5 and [removed: Invisalign i7] [added: Express Package] use up to 10 sets, 5 sets and 7 sets of aligners, respectively.

[removed: Non-Comprehensive Products -] Non-Invisalign Aligners Supplied to SmileDirectClub, LLC:

Align manufactures the aligners per SDC’s specifications for minor tooth movement using EX-30, [removed: our proprietary] [added: a non-proprietary] aligner material used prior to the introduction of [removed: SmartTrack.][added: SmartTrack aligner material.]

[added: Align does] not market or sell SDC products and ships supply of aligners directly to SDC when requested.

[removed: The second is offered as a set of] [added: We offer up to] four [added: sets of] custom clear aligners called Vivera Retainers made with proprietary material strong enough to maintain tooth position and correct minor relapse if necessary.

[removed: A shipment of four sets] [added: Vivera Retainers] are available to both Invisalign and non-Invisalign patients.

Invisalign [removed: Teen] [added: Comprehensive] with [removed: mandibular advancement] [added: Mandibular Advancement] (launched in March 2017) is the first clear aligner solution for Class II correction in growing tween and teen patients.

This new offering combines the benefits of our clear aligner system with [removed: features for moving the lower jaw forward while simultaneously aligning the teeth.]

By enabling the dental practitioner to create a 3D image of the patient's teeth (digital scan) using a handheld intraoral scanner inside the mouth, digital scanning is more efficient and precise and more comfortable for patients, compared to the [removed: mess,] discomfort and subjective nature of taking physical impressions.

Prior to the launch of iTero [removed: Element,] [added: Element 2 and iTero Element Flex,] we sold [added: and continue to sell iTero Element and, prior to that, we sold] the iTero 2.9 scanner.

We have qualified third party scanners for digital scan submission including 3M™ True Definition [removed: scanner,] [added: scanner and] the Sirona CEREC Omnicam [removed: scanner and certain 3Shape TRIOS scanners.][added: scanner.]

Our iTero [added: Element, iTero] Element [removed: scanner includes] [added: 2 and iTero Element Flex scanners include] the Invisalign Outcome Simulator, Invisalign 3D Assessment tool and Timelapse as well as the orthodontic software and/or restorative software.

Other proprietary software mentioned in this Annual Report on Form 10-K such as ClinCheck and ClinCheck Pro software, the Invisalign Doctor Site, and [removed: enhanced] feature [removed: solutions such as Invisalign G7] [added: enhancements] are included as part of the Invisalign System and are not sold separately nor do they contribute as individual items to revenue.

Our [removed: smile-changing] technology and innovations are designed to meet the demands of today’s patients with treatment options that are convenient, comfortable, affordable, while helping to improve overall oral health.

| 1. | International Expansion. In order to provide the millions of consumers access to a better smile, we continue increasing our presence globally by making our products available in more countries. We expect to continue to grow and expand our business by investing in resources, infrastructure, and initiatives that will drive Invisalign treatment growth in our current and new international markets. As our core countries within the EMEA and APAC regions continue to grow in both number of new Invisalign [removed: providers] [added: trained doctors] and customer utilization, we strive to make sure we can support that growth through investments such as headcount, clinical support, education and advertising. We have transitioned most of our [removed: indirect] smaller country markets [added: from an indirect] to a direct sales model, and, while we do not expect a material impact from these countries for some time, in the near [removed: term,] [added: term] we will leverage our existing infrastructure in adjacent country markets as we build local sales organizations to drive long-term market penetration. In addition, we are scaling and expanding our operations and facilities to better support our customers across the globe. In [removed: 2017,] [added: 2018,] we opened new treatment planning facilities in [removed: Chengdu, China and Cologne, Germany] [added: Madrid, Spain] to support our customers within [removed: these regions.] [added: this region and we expanded our facilities in Costa Rica to support our growth.] |

| 2. | Orthodontist Utilization. We continue to innovate and increase the product applicability and predictability to address a wide range of cases, from simple to complex, thereby enabling [removed: providers] [added: doctors] to confidently treat teenagers and adults with the Invisalign System. Over the last several years, we launched clinical innovations such as Invisalign G6 and Invisalign G7. In March 2017, we launched Invisalign [added: Comprehensive] with [removed: mandibular advancement,] [added: Mandibular Advancement,] the first clear aligner solution for Class II correction in growing tween and teen [removed: patients.] [added: patients in Canada and certain country markets in EMEA and APAC.] This [removed: new] offering combines the benefits of [removed: the most advanced] [added: our] clear aligner system [removed: in the world] with features for moving the lower jaw forward while simultaneously aligning the teeth. Approximately 30% to 45% of teen cases need Class II correction. [removed: Invisalign with mandibular advancement was launched in Canada, EMEA and APAC. It is pending] [added: In October 2018 we received] 510(k) approval [added: for Invisalign with Mandibular Advancement] in the U.S. and [removed: therefore not currently available] [added: began its commercial launch] in [removed: the U.S.] [added: November 2018.] We also continue to make improvements to our Invisalign treatment software, ClinCheck Pro, designed to deliver an exceptional user experience and increase treatment control to help our doctors achieve their treatment goals. |

| 3. | GP Dentist Treat & Refer. We want to enable GPs, who have access to a large patient base, to more easily identify Invisalign cases they can treat, monitor patient progress or, if needed, help refer cases to an orthodontist while providing high-quality restorative, orthodontic, and dental hygiene care. [added: In 2018, we continued to commercialize Invisalign Go, a simplified and streamlined solution designed for GPs and trained over 3,000 new iGo doctors primarily in EMEA. In the EMEA region, we segmented sales and marketing for certain country markets into two separate organizations to serve each customer segment, orthodontists and GP dentists separately, thereby increasing our focus and effectiveness on GP dentists. In the first quarter of 2019, we plan to add 50 new sales representatives in EMEA to cover the GP dentist channel.] The iTero scanner is an important component to that customer experience and is central to a digital approach as well as overall customer utilization of Invisalign treatment. The iTero scanner is optimized for Invisalign treatment with the Invisalign Outcome Simulator and Progress Assessment tool. In June 2017, we launched TimeLapse technology that allows doctors or practitioners to compare a patient’s 3D historic scans to the present-day scan, enabling clinicians to identify and measure orthodontic movement, tooth wear, and gingival recession. This highlights areas of diagnostic interest to dental professionals and helps foster a proactive conversation with the patient regarding potential restorative or orthodontic solutions. [removed: We also signed a distribution agreement with Patterson Dental for the iTero Element intraoral scanning system in the U.S. and Canada effective September 2017. Lastly, as part of expanding restorative workflows for iTero, in Q4 2017,] [added: In 2018,] we [removed: signed a distribution agreement] [added: announced multi-year agreements] with [removed: Glidewell] [added: Heartland] Dental [removed: for the] [added: and Aspen Dental, two large dental support organizations, to extend] iTero Element [removed: scanner in North America with glidewell.ioTM In-Office Solution, a chairside restorative ecosystem designed] [added: intraoral scanners] to [removed: simplify the process of prescribing] [added: their supported dentists] and [removed: delivering laboratory-quality dental restorations.] [added: teams nationwide.] |

In addition, we sell directly to Dental Support Organizations (DSOs) who contract with dental practices to provide critical business management and support including non-clinical operations, and we sell directly to dental laboratories who manufacture or customize a variety of products to assist in the provision of oral health care by a licensed dentist.

Intraoral digital scans may be submitted through either Align's iTero scanner or a few qualified third-party scanners.

achieve their treatment goals, the dental professional can request additional aligners at any point during the treatment, subject to certain requirements in our terms and conditions.

Invisalign Comprehensive.

Invisalign Comprehensive Package replaces both Invisalign Full and Invisalign Teen treatments and includes the Mandibular Advancement feature launched in March 2017.

Invisalign First Phase 1 and Invisalign First Comprehensive Phase 2 Package.

Designed with features specifically for younger patients with early mixed dentition with a mixture of primary/baby and permanent teeth.

Phase 1 treatment is early interceptive orthodontic treatment for young patients, traditionally done through arch expanders, or partial metal braces, before all permanent teeth have erupted - typically at ages 7 through 10 years.

Invisalign First clear aligners are designed specifically to address a broad range of younger patients' malocclusions, including shorter clinical crowns, management of erupting dentition, and predictable dental arch expansion.

Invisalign First clear aligners became commercially available to Invisalign-trained doctors in the U.S., Canada, Australia, New Zealand, Japan, and certain countries in the EMEA region as of July 1, 2018, and became available in Brazil in January 2019.

Invisalign Go is available in select country markets.

In select markets, we also offer single arch retainers.

features for moving the lower jaw forward while simultaneously aligning the teeth without the need for elastics typically used to treat teen Class II patients.

In 2017, it was available in Canada, core country markets in EMEA and certain country markets in APAC and Latin America.

In October 2018, Invisalign Treatment with mandibular advancement was approved by the FDA and became commercially available in the U.S. in November 2018.

In November 2018, we introduced enhancements designed to improve clinical outcomes and user experience including: wing overlap and engagement in deep bite cases with anterior intrusion, new options to set up mandibular advancement cases beyond edge-to-edge, an option to prescribe symmetrical advancement of the left and right side, new default protocol of 2 mm incremental advancement, and improvements to support leveling the curve of Spee in deep bite cases.

The supply agreement terminates by its terms December 31, 2019 and we do not intend on renewing it (Refer to Note 8 "Legal Proceedings" of the Notes to Consolidated Financial Statements for details on SDC dispute).

The expanded portfolio (launched in May 2018) includes the iTero Element 2 and the iTero element Flex scanners.

These additions build on the existing high precision, full-color imaging and fast scan times of the iTero Element portfolio.

The next-generation iTero Element 2 is designed for greater performance with 2X faster start-up and 25% faster scan processing time compared to the iTero Element.

The iTero Element Flex is a wand-only device that transforms compatible laptop computers into a highly portable scanner that works anywhere - it's ideal for practices with multiple locations who need a scanner that is convenient and easy to transport.

iTero Element 2 and iTero Element Flex scanners are available in the U.S., Canada, the majority of European countries, including France, Germany, Italy, Spain, and the United Kingdom as well as select Asia Pacific markets.

On February 18, 2019, we launched the iTero Element 5D Imaging system which provides a new comprehensive approach to clinical applications, workflows and user experience that expands the suite of existing high-precision, full-color imagining and fast scan times of the iTero Element portfolio.

In addition to offering all of the features and functionality that doctors have come to expect and rely on with the iTero Element 2 scanner, the iTero

Element 5D scanner is the first integrated dental imaging system that simultaneously records 3D, intra-oral color and near-infrared ("NIRI") imaging and enables comparison over time using iTero TimeLapse.

NIRI technology of the iTero Element 5D Imaging System aids in detection and monitoring of interproximal caries lesions above the gingiva without using harmful radiation.

The iTero Element 5D Imaging System is commercially available now in Canada, European Union countries accepting CE-Marking (excluding Greece), Switzerland, Norway, Australia, New Zealand, Hong Kong and Thailand.

It is not available in the U.S. or Latin America.

Ancillary Products.

We also sell other ancillary products for the iTero scanner, such as disposable sleeves for the wand.

Our goal is to establish the Invisalign System as the standard method for treating malocclusion and our intraoral scanning platform as the preferred scanning protocol for digital scans.

materials used in our manufacturing process for clear aligners, from a single source.

As of December 31, 2018, we had approximately 69,940 active Invisalign trained doctors, which is defined as having submitted at least one case in the prior 12 month period.

Similarly, other international holidays like Chinese New Year can also negatively impact our sales.

Currently, our products compete directly against products manufactured and distributed by various companies, both within and outside the U.S. Although the number of competitors varies by segment, geography and customer, we encounter a wide variety of competitors, including well-established regional competitors in certain foreign markets, as well as larger companies or divisions of larger companies with substantial sales, marketing, research and financial capabilities.

Due in part to the expiration of certain key patents owned by us beginning in 2017, we are facing increased competition in the clear aligner market markets as a result of the entry of new, large companies into certain markets who have the ability to leverage their existing channels in the dental market to compete directly with us.

In addition, corresponding foreign patents started to expire in 2018 and will likely result in increased competition in some of the markets outside the U.S. Furthermore, we also face competition from companies that now offer clear aligners directly to the consumer and do not require the consumer to see a doctor before or during orthodontic treatment.

Unlike these direct to consumer competitors, we are committed to a doctor in the core of everything we do, and Invisalign Treatment requires a doctor's prescription and an in person physical examination of the patients dentition before treatment can begin.

Align is also preparing for compliance with the recently passed California Consumer Privacy Act (“CCPA”), scheduled to take effect in January 2020.

Further expansion into Latin American markets require Align to prepare for Brazil's Lei Geral de Proteção de Dados ("LGPD"), scheduled to take effect in August 2020.

Refer to "Supply Agreement with SmileDirectClub, LLC" section.

Our net revenues are generated from the sale of the following product offerings:

| | | | | | | |

| --- | --- | --- | --- | --- | --- | --- |

| | Fiscal Year | | | | | |

| Percentage of Net Revenues by Product | 2017 | | 2016 | | 2015 | |

| Clear Aligner Segment | | | | | | |

| Comprehensive Products | 69 | % | 72 | % | 78 | % |

| Non-Comprehensive Products | 14 | | 11 | | 11 | |

| Non-Case Products | 6 | | 6 | | 6 | |

| Total Clear Aligner Segment | 89 | | 89 | | 95 | |

| Scanners Segment | 11 | | 11 | | 5 | |

| Total Net Revenues | 100 | % | 100 | % | 100 | % |

The Invisalign-trained dental professional can also submit an intraoral digital scan instead of a physical PVS impression through either Align's iTero scanner or several third-party scanners.

mold.

Align’s recommendation is based on clinical analysis of more than 200 in-progress Invisalign cases (data on file) and the experiences of numerous Invisalign providers.

Invisalign Full and Invisalign Teen.

Invisalign Go is available in core European markets and in certain markets in North America and Asia Pacific.

Align does

We offer two products for post treatment retention.

The first is a single set of custom clear aligner retainers.

Feature enhancements are marketed primarily under an Invisalign “G” series and have included Invisalign G3 (launched in October 2010), Invisalign G4 (launched in November 2011), Invisalign G5 (launched in February 2014), Invisalign G6 (launched in March 2015), and Invisalign G7 (launched in October 2016).

Invisalign with mandibular advancement offers a simpler, more efficient and patient-friendly treatment option than functional appliances and without the need for elastics typically used to treat teen Class II patients.

Invisalign Teen with mandibular advancement is available is most country markets; however, it is pending 510(k) clearance in the U.S. and is not yet available for use.

CAD/CAM Services

Our goal is to give patients of all ages access to the smiles they want and deserve.

Supply Agreement with SmileDirectClub, LLC

On July 28, 2016, we announced a supply agreement with SmileDirectClub, LLC to manufacture non-Invisalign clear aligners for SDC’s doctor-led, at-home program for affordable, cosmetic teeth straightening.

The agreement brings our manufacturing and production expertise to a new and growing segment of the adult treatment market, one that provides new treatment choices to consumers and new business opportunities to Invisalign providers.

Beginning October 2016, we became SDC’s exclusive third-party supplier for its minor tooth movement aligner program.

Specifically, we provide a case setup through SDC’s SmileCheck viewer portal and upon review and approval by a participating licensed orthodontist or general dentist in SDC’s network, we manufacture clear aligners and ship them directly to SDC.

SDC aligners include up to 20 stages without attachments or IPR.

We manufacture the aligners per SDC’s specifications for minor tooth movement using EX-30.

Align does not market or sell SDC products.

In addition, under the agreement, Align and SDC created a new Invisalign doctor referral program similar to the Invisalign Doctor Locator, that systematically refers a portion of case assessments that are too complex for their minor tooth movement product, to Invisalign providers in the patient’s local area.

The goal of the agreement is to help expand the market and opportunity for our Invisalign doctors, while supporting SDC’s efforts to provide consumers with access to more choices in treating simple cases from the convenience of their own home.

The Invisalign brand and system of clear aligners continue to be available exclusively for in office treatment with Invisalign-trained orthodontists and general dentists.

As of December 31, 2017, we had approximately 64,400 active Invisalign providers.

Our research and development expenses were $97.6 million, $75.7 million and $61.2 million for the year ended December 31, 2017, 2016 and 2015, respectively.

We continue to pursue further intellectual property protection through U.S. and foreign patent applications and non-disclosure agreements.

On November 14, 2017, Align filed six patent infringement lawsuits asserting 26 patents against [removed: 3Shape A/S,] [added: 3Shape,] a Danish corporation, and a related U.S. corporate entity, asserting that [removed: 3Shape's] [added: 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 [removed: (ITC)] [added: (“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.

[removed: Align's] [added: Align’s] ITC complaints seek cease and desist orders and exclusion orders prohibiting the importation of [removed: 3Shape's] [added: 3Shape’s] Trios scanning system and Dental System software products into the U.S. Align also filed four separate complaints in the [removed: United States] [added: U.S.] District Court for the District of Delaware alleging patent infringement by [removed: 3Shape's] [added: 3Shape’s] Trios intraoral scanning system and Dental System software.

[removed: All] [added: Except for 3Shape’s antitrust complaint, each] of [removed: these district court] [added: the District Court] complaints seek monetary damages and injunctive relief against further infringement.

In [added: addition, in] the course of [removed: Align's] [added: 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 [added: 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 [removed: Align's] [added: 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 [removed: Align's] [added: Align’s] financial position, results of operations or cash flows (Refer to Note 8 [removed: "Legal Proceedings"] [added: “Legal Proceedings”] of the Notes to [added: the] Consolidated Financial Statements for details on legal proceedings).

Securities Class Action Lawsuit

On November 5, 2018, a class action lawsuit against Align, and three of our executive officers, was filed in the U.S. District Court for the Northern District of California on behalf of a purported class of purchasers of our common stock between July 25, 2018 and October 24, 2018.

The complaint generally alleges claims under the federal securities laws and seeks monetary damages in an unspecified amount and costs and expenses incurred in the litigation.

On December 12, 2018, a similar lawsuit was filed in the same court on behalf of a purported class of purchasers of our common stock between April 25, 2018 and October 24, 2018 (together with the first lawsuit, the “Securities Actions”).

Motions for appointment as lead plaintiff were filed on January 4, 2019.

Align believes the plaintiffs’ claims are without merit and intends to vigorously defend itself.

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

Shareholder Derivative Lawsuit

In January 2019, three derivative lawsuits were also filed in the U.S. District Court for the Northern District of California, purportedly on behalf of Align, naming as defendants the members of our Board of Directors along with certain of our executive officers.

The allegations in the complaints are similar to those presented in the Securities Action, but the complaints assert various state law causes of action, including for breaches of fiduciary duty, insider trading, and unjust enrichment, among others.

The complaints seek unspecified monetary damages on behalf of Align, which is named solely as a nominal defendant against whom no recovery is sought, as well as disgorgement and the costs and expenses associated with the litigation, including attorneys’ fees.

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

Patent Infringement and Related Lawsuits

On May 9, 2018, 3Shape filed a complaint in the U.S. District Court for the District of Delaware alleging patent infringement by Align’s iTero Element scanner of a single 3Shape patent.

On June 14, 2018, 3Shape filed another complaint in the U.S. District Court for the District of Delaware alleging patent infringement by Align’s iTero Element scanner of a single 3Shape patent.

On August 28, 2018, 3Shape filed a complaint against Align in the U.S. District Court for the District of Delaware alleging antitrust violations and seeking monetary damages and injunctive relief relating to Align’s market activities, including Align’s assertion of its patent portfolio, in the clear aligner and intraoral scanning markets.

On December 10, 2018, Align filed three additional patent infringement lawsuits asserting 10 additional patents against 3Shape.

Align filed one Section 337 complaint with the ITC alleging that 3Shape violates U.S. trade laws through unfair competition by selling for importation and importing the infringing TRIOS intraoral scanning system, Trios Lab Scanners and TRIOS software, TRIOS Module software, Dental System software, and Ortho System Software.

On December 11, 2018, Align filed two separate complaints in the U.S. District Court for the District of Delaware alleging patent infringement by 3Shape's Trios intraoral scanning system, Lab Scanners and Dental and Ortho System Software.

We are currently unable to predict the outcome of this dispute and therefore cannot determine the likelihood of loss, if any, nor estimate a range of possible loss.

SDC Dispute

In February 2018, we received a communication on behalf of SDC Financial LLC, SmileDirectClub LLC, and the Members of SDC Financial LLC other than the Company (collectively, the SDC Entities) alleging that the launch and operation of the

Invisalign locations 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 notified us 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.

The SDC Entities’ communication also alleged that we breached confidentiality provisions applicable to the SDC Financial LLC members and demanded that we cease all activities related to the Invisalign pilot project, close existing Invisalign locations and cease using SDC’s confidential information.

In April 2018, the SDC Entities served a Demand for Arbitration alleging that we breached the non-compete clause and confidentiality clause, misused the SDC Entities’ alleged trade secrets, and violated fiduciary duties to SDC Financial LLC.

The SDC Entities seek through the arbitration the rights to repurchase all of Align’s SDC Financial LLC membership interests for a purchase price equal to the current capital account balance as defined by the Internal Revenue Service which likely is significantly below the current fair market value of such investment, an injunction requiring us to close our Invisalign locations and to cease using the SDC Entities’ confidential information, and financial damages in an unspecified amount.

We filed a response in which we denied the SDC Entities’ allegations and denied that the SDC Entities are entitled to any relief.

In April 2018 the SDC Entities also filed a motion for preliminary injunction in the Tennessee Court of Chancery seeking to enjoin Align from opening additional Invisalign locations until the arbitration is completed.

In June 2018, the Tennessee court denied the SDC Entities’ motion for a preliminary injunction.

In December 2018, the parties participated in binding arbitration proceedings and presented closing arguments on January 23, 2019.

The arbitrator’s decision is due on or before March 4, 2019.

This dispute does not impact Align’s existing supply agreement with SDC which remains in place through 2019.

We do not intend to renew this agreement.

We are currently unable to predict the outcome of this dispute and therefore cannot determine the likelihood of loss, if any, nor estimate a range of possible loss.

Patent Infringement Lawsuit

on us because of defense costs, diversion of management resources, and other factors.

For the fiscal year ended December 31, [removed: 2017][added: 2018]

Indicate by check mark whether the registrant has submitted electronically [removed: and posted on its corporate website, if any,] every Interactive Data File required to be submitted [removed: and posted] pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit [removed: and post] such files).

| Non-accelerated filer o | [removed: (Do not check if a smaller reporting company)] | Smaller reporting company o |

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was [removed: $9,773,962,344] [added: $22,262,043,858] as of June [removed: 30, 2017] [added: 29, 2018] based on the closing sale price of the registrant’s common stock on the NASDAQ Global Market on such date.

On February [removed: 23, 2018, 80,135,229] [added: 22, 2019, 79,989,347] shares of the registrant’s common stock were outstanding.

Portions of the registrant’s definitive Proxy Statement relating to its [removed: 2018] [added: 2019] Annual Stockholders’ Meeting to be filed pursuant to Regulation 14A within 120 days after the registrant’s fiscal year end of December 31, [removed: 2017] [added: 2018] are incorporated by reference into Part III of this Annual Report on Form 10-K.

For the Year Ended December 31, [removed: 2017][added: 2018]

| Item 1. | Business | [removed: [3](#s7DEFB8BEEA575257993681753D1E9CCB)] [added: [3](#s4B36E70590B85430B96FA4ED342EF06B)] |

| | Executive Officers of the Registrant | [removed: [13](#s8EC6680E6E1E53C7843281A931E0948D)] [added: [13](#sCB595ADAFC2E5905BB8A56B56019696F)] |

| Item 1A. | Risk Factors | [removed: [15](#s5F8C8545B3AA56A28255921442B522A8)] [added: [15](#s6E374A174D285E05A53C6F51AB68C001)] |

| Item 1B. | Unresolved Staff Comments | [removed: [29](#s3C796F35C61959FF9D43655ADA5A901D)] [added: [28](#s071528BC51DA577DAACA6C292C6F78D5)] |

| Item 2. | Properties | [removed: [29](#s050CCB38937A50A9BCC5712645DC1D77)] [added: [28](#sB4400A26B502573DA99F9C046BF24201)] |

| Item 3. | Legal Proceedings | [removed: [29](#sF0A716C9C57350EFA9D69076338F510F)] [added: [29](#sBE3766AEC9AF5105AE9D3942966CCC87)] |

| Item 4. | Mine Safety Disclosures | [removed: [30](#s40B4B949DF545D54B9D69193FB1A6B67)] [added: [30](#s18C784CE75155E468758A7148C905AFE)] |

| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | [removed: [31](#sD2B7A179F122524994F8202F4612B75D)] [added: [31](#s18988EB352B758D8A92895C17E2B06FB)] |

| Item 6. | Selected Consolidated Financial Data | [removed: [33](#s1EC71440025A5E1699FE651F763C99F1)] [added: [33](#s36F07F88E71C579A89FB3AC34DCD9AAB)] |

| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | [removed: [35](#s70BCE7F2B1725FAFBBE1F8308651BB52)] [added: [34](#s56FFAC1D817F54E3BDF462E6F149CA5C)] |

| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | [removed: [52](#s54466512DEDA5BA2BB89DA8D0DB200F5)] [added: [51](#sB2070993004F5F76BD0CDB37CA0D9821)] |

| Item 8. | Consolidated Financial Statements and Supplementary Data | [removed: [53](#s1E6B1FAED1ED5CF8AFDD15761D9DE90E)] [added: [52](#sB68E372DF43E56CE96DCEE48F747EAC8)] |

| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | [removed: [94](#s130B8D725C455D3EA687CC8072ABD385)] [added: [94](#s6ED51E5B99725FA0A96E000A8D3F5ACC)] |

| Item 9A. | Controls and Procedures | [removed: [94](#s34E4124172F15FB7A1C0A78411105B28)] [added: [95](#s5285A72C107458DB90BAC300C0EC9B67)] |

| Item 9B. | Other Information | [removed: [94](#sED3C20E9AEA35C978BE5F5D7A12B1ECE)] [added: [95](#s98C3EF54DA495788A1D040EB182068C7)] |

| [PART [removed: III](#s1CA2C7A1CE785321B69A3016BCF25967)] [added: III](#sC719F8E5B2E152DD83D83A818ACDE826)] | | [removed: [95](#s1CA2C7A1CE785321B69A3016BCF25967)] [added: [95](#sC719F8E5B2E152DD83D83A818ACDE826)] |

| Item 10. | Directors, Executive Officers and Corporate Governance | [removed: [95](#s143CB7942ED05C8A8CFF19C7968CA122)] [added: [95](#s2B06842AA0265A7F9A6574997C66D158)] |

| Item 11. | Executive Compensation | [removed: [95](#s287A139AB0E65FC890D2F39D1AB605E0)] [added: [95](#s80A6951158995A0382BC659D56C957C2)] |

| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | [removed: [96](#sC7A20D3DF0BB521F8CECBF3CA8BA06B2)] [added: [96](#s3E9780E166265E18964680A9FACDEAA9)] |

| Item 13. | Certain Relationships and Related Transactions and Director Independence | [removed: [96](#s1403558C40D159C88E43CFD20E297ED3)] [added: [96](#s02D36780AAC450068056F35C6D591BF4)] |

| Item 14. | Principal Accounting Fees and Services | [removed: [96](#sFF327D48FDF9580E8D4153DB0263C4E4)] [added: [96](#sB9B49E5ACB2059DB8CFDA334A6FBC2C9)] |

| Item 15. | Exhibits, Financial Statement Schedules | [removed: [97](#sDD542E86A2595E86B5531480A1B7CA5C)] [added: [97](#s4766BF7D233B5F3E864673664B167D3C)] |

| Item 16. | Form 10-K Summary | [removed: [101](#sde8fdfec7b374886a5871f5e64f3db50)] [added: [99](#sD409DECA84955A329981D77C0AD45BC8)] |

Invisalign, Align, the Invisalign logo, ClinCheck, Made to Move, Invisalign Assist, Invisalign Teen, Invisalign Go, Vivera, SmartForce, SmartTrack, SmartStage, [removed: Power Ridge,] iTero, iTero Element, Orthocad, iCast and iRecord, among others, are trademarks and/or service marks of Align Technology, Inc. or one of its subsidiaries or affiliated companies and may be registered in the United States and/or other countries.

These statements include, among other things, our expectations regarding the anticipated impact of our new products and product enhancements will have on doctor utilization and our market share, our expectations regarding product mix and product adoption, our expectations regarding the existence and impact of seasonality, our expectations regarding the [added: sales growth of our intra-oral scanner sales in international markets, our expectations regarding the] financial and strategic benefits of establishing regional order acquisition, treatment planning and manufacturing facilities, [removed: as well as the anticipated timing of such facilities being operational,] our [added: intention to hire more sales representatives in 2019 and their expected impact on our sales, our] expectations regarding the continued expansion of our international markets, [added: the anticipated] impact of the [removed: U.S. Tax Cuts and Jobs Act,] [added: Invisalign Experience program on demand creation, our expectation to incur additional costs related to] the [added: planned corporate structure reorganization, the] level of our operating expenses and gross margins and other factors beyond our control, as well as other statements regarding our future operations, financial condition and prospects and business strategies.

10-K 1 algn-20181231x10k.htm 10-K

| [PART I](#s05866C7C9FDF58D4A8B347740830126B) | | [3](#s05866C7C9FDF58D4A8B347740830126B) |

| [PART II](#s9677B3A3144D5C37BBC87BBCF916E678) | | [31](#s9677B3A3144D5C37BBC87BBCF916E678) |

| [PART IV](#s8FB323719DE6548FB41A9E253EA2100F) | | [97](#s8FB323719DE6548FB41A9E253EA2100F) |

| Signatures | | [100](#sBF64ECB5EB005C9689F3E092CD18E69B) |

10-K 1 algn-20171231x10k.htm 10-K

| [PART I](#sFC0C745AA4065D448668FC8E0D833A16) | | [3](#sFC0C745AA4065D448668FC8E0D833A16) |

| [PART II](#s58030327FF6E5BB299FC05B9AAC55D1E) | | [31](#s58030327FF6E5BB299FC05B9AAC55D1E) |

| [PART IV](#sF2E1A678EDDE5EF6AB11DFA04B9F565D) | | [97](#sF2E1A678EDDE5EF6AB11DFA04B9F565D) |

| Signatures | | [102](#s9767FF544F405FE49176A53B5962F3E6) |

At December 31, [removed: 2017,] [added: 2018,] the significant facilities [removed: were] occupied [added: were] as follows:

| San Jose, Costa Rica | [removed: Lease] [added: Own] | Office for administrative personnel, treatment personnel, and customer care | [removed: June 2023] [added: N/A] |

| Amsterdam, The Netherlands | Lease | Office for [removed: international] [added: European] headquarters, sales and marketing and administrative personnel | March 2020 |

| Moscow, Russia | Lease | Office for research & development | [removed: July 2023] [added: March 2024] |

| Raleigh, North Carolina | Lease | Office for research & development and administrative personnel | [removed: November 2024] [added: March 2026] |

We occupy several leased and owned facilities.

We occupy several leased and owned facilities with total office and manufacturing area of over 786,714 square feet.

As of February [removed: 23, 2018,] [added: 22, 2019,] there were approximately [removed: 86] [added: 73] holders of record of our common stock.

The graph tracks the performance of a $100 investment in our common stock, in the peer group, and the index (with the reinvestment of all dividends) from December 31, [removed: 2012] [added: 2013] to December 31, [removed: 2017.][added: 2018.]

[removed: ][added: ]

Following is a summary of stock repurchases for the three months ended December 31, [removed: 2017:][added: 2018:]

| October 1, [removed: 2017] [added: 2018] through October 31, [removed: 2017] [added: 2018] | | — | | | $ | — | | | — | | | $ | [removed: 250,000,000] [added: 550,000,000] | |

(1) Stock Repurchase [removed: Programs][added: Program]

Market Information

Our common stock trades on the NASDAQ Global Market under the symbol "ALGN".

| November 1, 2018 through November 30, 2018 | | 142,677 | | | $ | 245.31 | | | 142,677 | | | $ | 500,000,000 | |

| December 1, 2018 through December 31, 2018 | | 91,865 | | | $ | 163.28 | | | 91,865 | | | $ | 500,000,000 | |

| ◦ | May 2018 Repurchase Program. In May 2018, we announced that our Board of Directors had authorized a plan to repurchase up to $600.0 million of our common stock. In August 2018, we repurchased $50.0 million of our common stock on the open market. In November 2018, we entered into an accelerated share repurchase ("2018 ASR") to repurchase $50.0 million of our common stock which was completed in December 2018. As of December 31, 2018, we have $500.0 million remaining under the May 2018 Repurchase Program (Refer to Note 11 "Common Stock Repurchase Programs" of the Notes to Consolidated Financial Statements for details on common stock repurchase programs). |

Price Range of Common Stock

Our common stock is quoted on the NASDAQ Global Select Market under the symbol “ALGN.” The following table sets forth the range of high and low per share sales prices as reported for each period indicated:

| | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- |

| | High | | | | Low | | |

| Year Ended December 31, 2017: | | | | | | | |

| Fourth quarter | $ | 266.41 | | | $ | 184.67 | |

| Third quarter | $ | 190.04 | | | $ | 148.95 | |

| Second quarter | $ | 154.85 | | | $ | 113.40 | |

| First quarter | $ | 115.20 | | | $ | 88.56 | |

| Year Ended December 31, 2016: | | | | | | | |

| Fourth quarter | $ | 102.10 | | | $ | 83.27 | |

| Third quarter | $ | 96.90 | | | $ | 80.30 | |

| Second quarter | $ | 81.98 | | | $ | 70.03 | |

| First quarter | $ | 73.55 | | | $ | 57.31 | |

On February 23, 2018, the closing price of our common stock on the NASDAQ Global Market was $265.07 per share.

We have never declared or paid any cash dividends on our common stock.

We currently intend to retain any future earnings to fund the development and growth of our business and do not anticipate paying any cash dividends in the foreseeable future.

| November 1, 2017 through November 30, 2017 | | 205,000 | | | $ | 243.40 | | | 205,000 | | | $ | 200,000,000 | |

| December 1, 2017 through December 31, 2017 | | — | | | $ | — | | | — | | | $ | 200,000,000 | |

| | |

| --- | --- |

| ◦ | April 2014 Repurchase Program. In 2017, we repurchased shares of our common stock on the open market for an aggregate purchase price of approximately $3.8 million, completing the April 2014 Repurchase Program. |

| ◦ | April 2016 Repurchase Program. In 2017, we repurchased, $50.0 million of our common stock through an accelerated stock repurchase agreement and $50.0 million on the open market. |

| ◦ | Remaining Available Repurchases. As of December 31, 2017, we have $200.0 million remaining under the April 2016 Repurchase Program. In February 2018, we repurchased approximately 0.4 million shares on the open market for an aggregate purchase price of $100 million, at an average share price of $252.24. (Refer to Note 10 "Common Stock Repurchase Program" of the Notes to Consolidated Financial Statements for details on stock repurchase program). |

The following tables set forth the selected consolidated financial data for each of the years in the five-year period ended December 31, [removed: 2017.][added: 2018.]

| | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | |

| Net revenues | $ | [removed: 1,473,413] [added: 1,966,492] | | | $ | [removed: 1,079,874] [added: 1,473,413] | | | $ | [removed: 845,486] [added: 1,079,874] | | | $ | [removed: 761,653] [added: 845,486] | | | $ | [removed: 660,206] [added: 761,653] | |

| Gross profit [removed: (1)] | $ | [removed: 1,116,947] [added: 1,447,867] | | | $ | [removed: 815,294] [added: 1,116,947] | | | $ | [removed: 640,110] [added: 815,294] | | | $ | [removed: 578,443] [added: 640,110] | | | $ | [removed: 498,106] [added: 578,443] | |

| Income from operations [removed: (2)] | [removed: 353,611] [added: 466,564] | | | | [removed: 248,921] [added: 353,611] | | | | [removed: 188,634] [added: 248,921] | | | | [removed: 193,576] [added: 188,634] | | | | [removed: 94,212] [added: 193,576] | | |

| Net income before provision for income taxes and equity in losses of investee [removed: (3)] | [removed: 364,799] [added: 466,651] | | | | [removed: 242,566] [added: 364,799] | | | | [removed: 186,101] [added: 242,566] | | | | [removed: 190,369] [added: 186,101] | | | | [removed: 93,139] [added: 190,369] | | |

| Provision for income taxes [removed: (4)] | [removed: 130,162] [added: 57,723] | | | | [removed: 51,200] [added: 130,162] | | | | [removed: 42,081] [added: 51,200] | | | | [removed: 44,537] [added: 42,081] | | | | [removed: 28,844] [added: 44,537] | | |

| Equity in losses of investee, net of tax | [removed: 3,219] [added: 8,693] | | | | [removed: 1,684] [added: 3,219] | | | | [removed: —] [added: 1,684] | | | | — | | | | — | | |

| Net income | $ | [removed: 231,418] [added: 400,235] | | | $ | [removed: 189,682] [added: 231,418] | | | $ | [removed: 144,020] [added: 189,682] | | | $ | [removed: 145,832] [added: 144,020] | | | $ | [removed: 64,295] [added: 145,832] | |

| Basic | $ | [removed: 2.89] [added: 5.00] | | | $ | [removed: 2.38] [added: 2.89] | | | $ | [removed: 1.80] [added: 2.38] | | | $ | [removed: 1.81] [added: 1.80] | | | $ | [removed: 0.80] [added: 1.81] | |

| Diluted | $ | [removed: 2.83] [added: 4.92] | | | $ | [removed: 2.33] [added: 2.83] | | | $ | [removed: 1.77] [added: 2.33] | | | $ | 1.77 | | | $ | [removed: 0.78] [added: 1.77] | |

| Basic | [removed: 80,085] [added: 80,064] | | | | [removed: 79,856] [added: 80,085] | | | | [removed: 79,998] [added: 79,856] | | | | [removed: 80,754] [added: 79,998] | | | | [removed: 80,551] [added: 80,754] | | |

| Diluted | [removed: 81,832] [added: 81,357] | | | | [removed: 81,484] [added: 81,832] | | | | [removed: 81,521] [added: 81,484] | | | | [removed: 82,283] [added: 81,521] | | | | [removed: 82,589] [added: 82,283] | | |

| Total long-term liabilities | [removed: 129,670] [added: 107,494] | | | | [removed: 46,427] [added: 129,670] | | | | [removed: 39,035] [added: 46,427] | | | | [removed: 33,415] [added: 39,035] | | | | [removed: 22,839] [added: 33,415] | | |

| [removed: (5)] [added: (1)] | Working capital is calculated as the difference between total current assets and total current [removed: liabilities] [added: liabilities.] |

| Interest income | 8,576 | | | | 6,948 | | | | 4,213 | | | | 2,938 | | | | 1,818 | | |

| Other income (expense), net | (8,489 | | ) | | 4,240 | | | | (10,568 | | ) | | (5,471 | | ) | | (5,025 | | ) |

| | 2018 | | | | 2017 (2) | | | | 2016 (2) | | | | 2015 | | | | 2014 | | |

| Working capital (1) | $ | 610,406 | | | $ | 658,316 | | | $ | 597,772 | | | $ | 460,338 | | | $ | 455,349 | |

| Total assets | 2,052,458 | | | | 1,784,009 | | | | 1,402,305 | | | | 1,158,633 | | | | 987,997 | | |

| Stockholders’ equity | $ | 1,252,891 | | | $ | 1,154,288 | | | $ | 999,307 | | | $ | 847,926 | | | $ | 752,771 | |

| (2) | Balances have been recast to reflect the adoption of new revenue accounting standard (Refer to Note 1 "Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements for details). |

We have derived the statements of operations data for the year ended December 31, 2017, 2016 and 2015 and the balance sheet data as of December 31, 2017 and 2016 from the consolidated audited financial statements included elsewhere in this Annual Report on Form 10-K.

The statements of operations data for the year ended December 31, 2014 and 2013 and the balance sheet data as of December 31, 2015, 2014 and 2013 were derived from the consolidated audited financial statements that are not included in this Annual Report on Form 10-K.

| Interest and other income (expense), net | 11,188 | | | | (6,355 | | ) | | (2,533 | | ) | | (3,207 | | ) | | (1,073 | | ) |

| Working capital (5) | $ | 659,187 | | | $ | 598,643 | | | $ | 460,338 | | | $ | 455,349 | | | $ | 369,338 | |

| Total assets | 1,777,856 | | | | 1,396,151 | | | | 1,158,633 | | | | 987,997 | | | | 832,147 | | |

| Stockholders’ equity | $ | 1,150,370 | | | $ | 995,389 | | | $ | 847,926 | | | $ | 752,771 | | | $ | 633,970 | |

| | |

| --- | --- |

| (1) | Gross profit includes: |

| • | $1.7 million out of period adjustment in 2013 |

(2) Income from operations includes:

| • | $40.7 million and $26.3 million of goodwill and long-lived asset impairment, respectively, in 2013 |

| • | $1.9 million, net of tax, out of period adjustment in 2013 |

(3) Net income before provision for income taxes and equity in losses of investee includes:

| (4) | Provision for income taxes includes: |

| • | $1.8 million out of period income tax adjustment in 2014 |

| | [removed: 2017 | | | | | | | |] [added: 2018] | | | | [added: 2017] | | | | 2016 | | | [removed: | | | | | | | | | | | |]

| | December 31, [removed: 2017] [added: 2018] | | | | September 30, [removed: 2017] [added: 2018] | | | | June 30, [removed: 2017] [added: 2018] | | | | March 31, [removed: 2017] [added: 2018] | | | | December 31, [removed: 2016] [added: 2017] | | | | September 30, [removed: 2016] [added: 2017] | | | | June 30, [removed: 2016] [added: 2017] | | | | March 31, [removed: 2016] [added: 2017] | | |

| Income from operations | [removed: 109,606] [added: 120,473] | | | | [removed: 98,763] [added: 125,208] | | | | [removed: 83,569] [added: 122,691] | | | | [removed: 61,673] [added: 98,192] | | | | [removed: 68,372] [added: 109,606] | | | | [removed: 62,079] [added: 98,763] | | | | [removed: 65,136] [added: 83,569] | | | | [removed: 53,334] [added: 61,673] | | |

| Report of Management on Internal Control over Financial Reporting | [removed: [55](#sCD5859AE6F515E54952C7115612FE0DD)] [added: [54](#s0088DD25709155B48F1F812AE6CC5529)] |

| Report of Independent Registered Public Accounting Firm | [removed: [56](#sE917FAC971D657B7B1567780EE49EEBA)] [added: [55](#s470B593D46AF5323A305AB4C2D429EF6)] |

| Consolidated Statements of Operations for the year ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015] [added: 2016] | [removed: [58](#sABA721BDFFF555AFAE6D498D2B18119A)] [added: [57](#sD26BA1804B73528DB422EEE74B9ED3FF)] |

| Consolidated Statements of Comprehensive Income for the year ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015] [added: 2016] | [removed: [59](#s5C7E6294340D502EAC1FEC9B1FB0E026)] [added: [58](#s5A9014C579FA58E38D7349B3805569B7)] |

| Consolidated Balance Sheets as of December 31, [removed: 2017] [added: 2018] and [removed: 2016] [added: 2017] | [removed: [60](#sC77C2B845DD05E17B2AE66FE028A7942)] [added: [59](#s905CDA10DFD15CF38C217E8A6AB7A9C7)] |

| Consolidated Statements of Stockholders’ Equity for the year ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015] [added: 2016] | [removed: [61](#sC0BADEA77E935501A4C9E4C773A4125C)] [added: [60](#s58B32FFE8F77520294BF6FAD56ABAB60)] |

| Consolidated Statements of Cash Flows for the year ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015] [added: 2016] | [removed: [62](#sD1DCF33E663B5A708B6DB623CA864E5B)] [added: [61](#s3820ED1E9F6559F9A05E342479422E16)] |

| Notes to Consolidated Financial Statements | [removed: [63](#s3862CBF9D46458F2A1C760BE4790981F)] [added: [62](#sFF0F20B7AA565E9D8953CCA59DED0FCE)] |

Management assessed the effectiveness of our internal control over financial reporting as of December 31, [removed: 2017.][added: 2018.]

Based on our assessment, management has concluded that, as of December 31, [removed: 2017,] [added: 2018,] 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, [removed: 2017] [added: 2018] has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

We have audited the accompanying consolidated balance sheets of Align Technology, Inc. and its subsidiaries (the “Company”) as of December 31, [removed: 2017] [added: 2018] and [removed: December 31, 2016,] [added: 2017,] 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, [removed: 2017,] [added: 2018,] 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, [removed: 2017,] [added: 2018,] 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, [removed: 2017] [added: 2018] and [removed: December 31, 2016,] [added: 2017,] and the results of [removed: their] [added: its] operations and [removed: their] [added: its] cash flows for each of the three years in the period ended December 31, [removed: 2017] [added: 2018] 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, [removed: 2017,] [added: 2018,] based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) [removed: ("PCAOB")] [added: (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.

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 [removed: company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide]

[added: 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.

| | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | |

| Net revenues | $ | [removed: 1,473,413] [added: 1,966,492] | | | $ | [removed: 1,079,874] [added: 1,473,413] | | | $ | [removed: 845,486] [added: 1,079,874] | |

| Cost of net revenues | [removed: 356,466] [added: 518,625] | | | | [removed: 264,580] [added: 356,466] | | | | [removed: 205,376] [added: 264,580] | | |

| Gross profit | [removed: 1,116,947] [added: 1,447,867] | | | | [removed: 815,294] [added: 1,116,947] | | | | [removed: 640,110] [added: 815,294] | | |

| Selling, general and administrative | [removed: 665,777] [added: 852,404] | | | | [removed: 490,653] [added: 665,777] | | | | [removed: 390,239] [added: 490,653] | | |

| Research and development | [removed: 97,559] [added: 128,899] | | | | [removed: 75,720] [added: 97,559] | | | | [removed: 61,237] [added: 75,720] | | |

| Total operating expenses | [removed: 763,336] [added: 981,303] | | | | [removed: 566,373] [added: 763,336] | | | | [removed: 451,476] [added: 566,373] | | |

| Income from operations | [removed: 353,611] [added: 466,564] | | | | [removed: 248,921] [added: 353,611] | | | | [removed: 188,634] [added: 248,921] | | |

| Net income before provision for income taxes and equity in losses of investee | [removed: 364,799] [added: 466,651] | | | | [removed: 242,566] [added: 364,799] | | | | [removed: 186,101] [added: 242,566] | | |

| Provision for income taxes | [removed: 130,162] [added: 57,723] | | | | [removed: 51,200] [added: 130,162] | | | | [removed: 42,081] [added: 51,200] | | |

| Equity in losses of investee, net of tax | [removed: 3,219] [added: 8,693] | | | | [removed: 1,684] [added: 3,219] | | | | [removed: —] [added: 1,684] | | |

| Net income | $ | [removed: 231,418] [added: 400,235] | | | $ | [removed: 189,682] [added: 231,418] | | | $ | [removed: 144,020] [added: 189,682] | |

| Basic | $ | [removed: 2.89] [added: 5.00] | | | $ | [removed: 2.38] [added: 2.89] | | | $ | [removed: 1.80] [added: 2.38] | |

| Diluted | $ | [removed: 2.83] [added: 4.92] | | | $ | [removed: 2.33] [added: 2.83] | | | $ | [removed: 1.77] [added: 2.33] | |

| Basic | [removed: 80,085] [added: 80,064] | | | | [removed: 79,856] [added: 80,085] | | | | [removed: 79,998] [added: 79,856] | | |

| Diluted | [removed: 81,832] [added: 81,357] | | | | [removed: 81,484] [added: 81,832] | | | | [removed: 81,521] [added: 81,484] | | |

| Net change in foreign currency translation adjustment | [removed: 1,741] [added: (3,631] | | [added: )] | | [removed: (670] [added: 1,741] | | [removed: )] | | [removed: (154] [added: (670] | | ) |

| Change in unrealized gains (losses) on investments, net of tax | [removed: (232] [added: 286] | | [removed: )] | | [removed: 712] [added: (232] | | [added: )] | | [removed: (686] [added: 712] | | [removed: )] |

| Other comprehensive income (loss) | [removed: 1,509] [added: (3,345] | | [added: )] | | [removed: 42] [added: 1,509] | | | | [removed: (840] [added: 42] | | [removed: )] |

| | 2018 | | | | | | | | | | | | | | | | 2017 | | | | | | | | | | | | | | |

| Net revenues | $ | 534,020 | | | $ | 505,289 | | | $ | 490,259 | | | $ | 436,924 | | | $ | 421,323 | | | $ | 385,267 | | | $ | 356,482 | | | $ | 310,341 | |

| Gross profit | 383,096 | | | | 371,781 | | | | 365,582 | | | | 327,408 | | | | 317,917 | | | | 292,488 | | | | 270,917 | | | | 235,625 | | |

| Net income | 97,392 | | | | 100,872 | | | | 106,105 | | | | 95,866 | | | | 10,264 | | | | 82,555 | | | | 69,179 | | | | 69,420 | | |

| Basic | $ | 1.22 | | | $ | 1.26 | | | $ | 1.32 | | | $ | 1.20 | | | $ | 0.13 | | | $ | 1.03 | | | $ | 0.86 | | | $ | 0.87 | |

| Diluted | $ | 1.20 | | | $ | 1.24 | | | $ | 1.30 | | | $ | 1.17 | | | $ | 0.13 | | | $ | 1.01 | | | $ | 0.85 | | | $ | 0.85 | |

| Basic | 79,891 | | | | 80,111 | | | | 80,216 | | | | 80,036 | | | | 80,080 | | | | 80,163 | | | | 80,188 | | | | 79,904 | | |

| Diluted | 80,943 | | | | 81,359 | | | | 81,471 | | | | 81,628 | | | | 81,863 | | | | 81,789 | | | | 81,631 | | | | 81,534 | | |

| February 28, 2019 |

| Chief Financial Officer and Senior Vice President, Global Finance |

| February 28, 2019 |

February 28, 2019

| Interest income | 8,576 | | | | 6,948 | | | | 4,213 | | |

| Other income (expense), net | (8,489 | | ) | | 4,240 | | | | (10,568 | | ) |

| Net income | $ | 400,235 | | | $ | 231,418 | | | $ | 189,682 | |

| | 2018 | | | | 2017 | | |

| Accounts receivable, net of allowance for doubtful accounts of $2,378 and $5,814, respectively | 439,009 | | | | 324,189 | | |

| Total current assets | 1,302,479 | | | | 1,158,367 | | |

| Other assets | 26,987 | | | | 43,893 | | |

| Total assets | $ | 2,052,458 | | | $ | 1,784,009 | |

| Accrued liabilities | 234,679 | | | | 195,562 | | |

| Deferred revenues | 393,138 | | | | 267,713 | | |

| Total current liabilities | 692,073 | | | | 500,051 | | |

| Total liabilities | 799,567 | | | | 629,721 | | |

| Retained earnings | 378,143 | | | | 267,274 | | |

| Total stockholders’ equity | 1,252,891 | | | | 1,154,288 | | |

| Total liabilities and stockholders’ equity | $ | 2,052,458 | | | $ | 1,784,009 | |

| Cumulative effect adjustment from adoption of ASU 2014-09 | — | | | — | | | | — | | | | — | | | | 3,918 | | | | 3,918 | | |

| Net income | — | | | — | | | | — | | | | — | | | | 400,235 | | | | 400,235 | | |

| Common stock repurchased and retired | (1,057 | ) | | — | | | | (10,252 | | ) | | — | | | | (289,750 | | ) | | (300,002 | | ) |

| Other | — | | | — | | | | — | | | | — | | | | 384 | | | | 384 | | |

| Balances at December 31, 2018 | 79,778 | | | $ | 8 | | | $ | 877,514 | | | $ | (2,774 | ) | | $ | 378,143 | | | $ | 1,252,891 | |

| Net income | $ | 400,235 | | | $ | 231,418 | | | $ | 189,682 | |

| Accounts receivable | (109,224 | | ) | | (90,990 | | ) | | (95,808 | | ) |

| Purchases of investments in privately held companies | (5,000 | | ) | | (12,764 | | ) | | (46,745 | | ) |

| Other investing activities | 765 | | | | (2,597 | | ) | | (8,031 | | ) |

| Net cash provided by (used in) investing activities | 6,927 | | | | (251,477 | | ) | | 73,028 | | |

| Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash | (4,733 | | ) | | 5,544 | | | | (3,374 | | ) |

| Net increase in cash, cash equivalents, and restricted cash | 187,441 | | | | 57,106 | | | | 221,784 | | |

| Cash, cash equivalents, and restricted cash at beginning of year | 450,125 | | | | 393,019 | | | | 171,235 | | |

| 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 | | |

| Net income | 10,264 | | | | 82,555 | | | | 69,179 | | | | 69,420 | | | | 47,621 | | | | 51,367 | | | | 50,148 | | | | 40,546 | | |

| 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 | |

| 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 | | |

| | |

| --- | --- |

| February 28, 2018 |

| Chief Financial Officer |

February 28, 2018

| Interest and other income (expense), net | 11,188 | | | | (6,355 | | ) | | (2,533 | | ) |

| Accounts receivable, net of allowance for doubtful accounts and returns of $7,178 and $4,310, respectively | 322,825 | | | | 247,415 | | |

| Total current assets | 1,157,003 | | | | 952,978 | | |

| Total assets | $ | 1,777,856 | | | $ | 1,396,151 | |

| Total current liabilities | 497,816 | | | | 354,335 | | |

| Total liabilities | 627,486 | | | | 400,762 | | |

| Total stockholders’ equity | 1,150,370 | | | | 995,389 | | |

| Total liabilities and stockholders’ equity | $ | 1,777,856 | | | $ | 1,396,151 | |

| Balances at December 31, 2014 | 80,205 | | | $ | 8 | | | $ | 783,410 | | | $ | (140 | ) | | $ | (30,507 | ) | | $ | 752,771 | |

| Net income | — | | | — | | | | — | | | | — | | | | 144,020 | | | | 144,020 | | |

| Common stock repurchased and retired | (1,696 | ) | | — | | | | (15,669 | | ) | | — | | | | (86,122 | | ) | | (101,791 | | ) |

| Net tax benefits from stock-based awards | — | | | | 15,888 | | | | 10,224 | | |

| Accounts receivable | (90,990 | | ) | | (94,444 | | ) | | (40,775 | | ) |

| Purchase of equity method investments | (12,764 | | ) | | (46,745 | | ) | | — | | |

| 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 | |

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.

We measure our cash equivalents, marketable securities, Israeli fund and certain notes receivable at fair value.

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.

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.

The allocation of goodwill to the respective reporting units is based on relative synergies generated as a result of an acquisition.

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.

Scanners and Services

Allowances for Doubtful Accounts and Sales Returns

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.

Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of December 31, [removed: 2017] [added: 2018] to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

There have been no changes in our internal control over financial reporting during the quarter ended December 31, [removed: 2017] [added: 2018] that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The following table provides information as of December 31, [removed: 2017] [added: 2018] about our common stock that may be issued upon the exercise of options and awards granted to employees, consultants or members of our Board of Directors under all existing equity compensation plans, including the 2005 Incentive Plan and the Employee Stock Purchase Plan ("ESPP"), each as amended, and certain individual arrangements (Refer to Note 10“Stockholders’ Equity” of the Notes to Consolidated Financial Statements for a description of our equity compensation plans).

| Plan Category | [added: |] Number of securities to be issued upon exercise of outstanding options and restricted stock units(a) | | | Weighted average exercise price of outstanding options(b) | | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)) | | |

| Equity compensation plans [added: not] approved by security holders | [removed: 1,843,573] | [added: —] | [removed: 1] | [removed: $] | [removed: 11.36] [added: —] | | | [removed: 7,620,549] | [added: —] | [removed: 2, 3] | [added: |]

| Equity compensation plans [removed: not] approved by security holders | [removed: —] | [added: 1,263,246] | | [removed: —] [added: 1] | [added: $] | [added: 8.07] | | [removed: —] | [added: 6,632,043] | | [added: 2, 3 |]

| 1 | Includes [removed: 1,340,759] [added: 930,859] restricted stock units and [removed: 428,100] [added: 324,200] market-performance based restricted stock units at target, which have an exercise price of zero. |

| 2 | Includes [removed: 735,301] [added: 571,778] shares available for issuance under our ESPP. We are unable to ascertain with specificity the number of securities to be issued upon exercise of outstanding rights or the weighted average exercise price of outstanding rights under the ESPP. |

| 3 | [removed: Excludes 507,775] [added: Includes 648,185] of potentially issuable MSUs if performance targets are achieved at maximum payout. |

| | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | |

| Total | | 1,263,246 | | | $ | 8.07 | | | 6,632,043 | | |

| | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Total | 1,843,573 | | | $ | 11.36 | | | 7,620,549 | | |

| Report of Independent Registered Public Accounting Firm | [removed: [56](#sE917FAC971D657B7B1567780EE49EEBA)] [added: [55](#s470B593D46AF5323A305AB4C2D429EF6)] |

| Consolidated Statements of Operations for the year ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015] [added: 2016] | [removed: [58](#sABA721BDFFF555AFAE6D498D2B18119A)] [added: [57](#sD26BA1804B73528DB422EEE74B9ED3FF)] |

| Consolidated Statements of Comprehensive Income for the year ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015] [added: 2016] | [removed: [59](#s5C7E6294340D502EAC1FEC9B1FB0E026)] [added: [58](#s5A9014C579FA58E38D7349B3805569B7)] |

| Consolidated Balance Sheets as of December 31, [removed: 2017] [added: 2018] and [removed: 2016] [added: 2017] | [removed: [60](#sC77C2B845DD05E17B2AE66FE028A7942)] [added: [59](#s905CDA10DFD15CF38C217E8A6AB7A9C7)] |