filings.toolsItem 8. Financial Statements and Supplementary Data.
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Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Align is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed by, or under supervision of, our CEO and CFO, and effected by the board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
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pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Align;
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provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Align are being made only in accordance with authorizations of management and directors of Align; and
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provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Align’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
Based on our assessment, management has concluded that, as of December 31, 2022, 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, 2022 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
| /S/ JOSEPH M. HOGAN | ||
| Joseph M. Hogan | ||
| President and Chief Executive Officer | ||
| February 27, 2023 | ||
| /S/ JOHN F. MORICI | ||
| John F. Morici | ||
| Chief Financial Officer and Executive Vice President, Global Finance | ||
| February 27, 2023 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Align Technology, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Align Technology, Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 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, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition – Determination of Standalone Selling Price of Distinct Performance Obligations in Clear Aligner Contracts
As described in Notes 1 and 15 to the consolidated financial statements, the Company recognized net revenues of $3.1 billion from its Clear Aligner segment for the year ended December 31, 2022. The Company enters into contracts (“treatment plans”) that involve multiple future performance obligations. Management identifies a performance obligation as distinct if both of the following criteria are met: the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. Management allocates revenues for each treatment plan based on each unit’s standalone selling price. Management considers a variety of factors such as same or similar product historical sales, costs, and gross margin, which may vary over time depending upon the unique facts and circumstances related to each performance obligation in making these estimates. In addition to historical data, they take into consideration changing trends and market conditions. Management also considers usage rates, which is the number of times a customer is expected to order additional aligners. Management’s process for estimating usage rates requires significant judgment and evaluation of inputs, including historical usage data by region, country and channel.
The principal considerations for our determination that performing procedures related to revenue recognition and the determination of standalone selling price of distinct performance obligations in Clear Aligner contracts is a critical audit matter are the significant judgment by management in determining the estimate of standalone selling price, which includes significant assumptions related to usage rates for each distinct performance obligation. This in turn led to significant auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s determination of the estimates of standalone selling price and usage rates for each distinct performance obligation.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to revenue recognition, including controls over the determination of standalone selling price for each distinct performance obligation in the Company’s Clear Aligner contracts. These procedures also included, among others, (i) testing management’s process for determining the estimate of standalone selling price, which included testing the completeness and accuracy of inputs used and evaluating the reasonableness of factors considered by management related to same or similar product historical sales and usage rates, and (ii) testing management’s process for estimating usage rates, which included evaluating the reasonableness of inputs evaluated by management related to historical usage data by region, country and channel.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 27, 2023
We have served as the Company’s auditor since 1997.
ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Net revenues | $ | 3,734,635 | $ | 3,952,584 | $ | 2,471,941 | ||||||||||||||
| Cost of net revenues | 1,100,860 | 1,017,229 | 708,706 | |||||||||||||||||
| Gross profit | 2,633,775 | 2,935,355 | 1,763,235 | |||||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Selling, general and administrative | 1,674,469 | 1,708,640 | 1,200,757 | |||||||||||||||||
| Research and development | 305,258 | 250,315 | 175,307 | |||||||||||||||||
| Restructuring and other charges | 11,453 | — | — | |||||||||||||||||
| Total operating expenses | 1,991,180 | 1,958,955 | 1,376,064 | |||||||||||||||||
| Income from operations | 642,595 | 976,400 | 387,171 | |||||||||||||||||
| Interest income and other income (expense), net: | ||||||||||||||||||||
| Interest income | 5,367 | 3,103 | 3,125 | |||||||||||||||||
| Other income (expense), net | (48,905) | 32,920 | (11,347) | |||||||||||||||||
| Total interest income and other income (expense), net | (43,538) | 36,023 | (8,222) | |||||||||||||||||
| Net income before provision for (benefit from) income taxes | 599,057 | 1,012,423 | 378,949 | |||||||||||||||||
| Provision for (benefit from) income taxes | 237,484 | 240,403 | (1,396,939) | |||||||||||||||||
| Net income | $ | 361,573 | $ | 772,020 | $ | 1,775,888 | ||||||||||||||
| Net income per share: | ||||||||||||||||||||
| Basic | $ | 4.62 | $ | 9.78 | $ | 22.55 | ||||||||||||||
| Diluted | $ | 4.61 | $ | 9.69 | $ | 22.41 | ||||||||||||||
| Shares used in computing net income per share: | ||||||||||||||||||||
| Basic | 78,190 | 78,917 | 78,760 | |||||||||||||||||
| Diluted | 78,420 | 79,670 | 79,230 |
The accompanying notes are an integral part of these consolidated financial statements.
ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Net income | $ | 361,573 | $ | 772,020 | $ | 1,775,888 | ||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||
| Change in foreign currency translation adjustment, net of tax | (11,480) | (38,680) | 44,383 | |||||||||||||||||
| Change in unrealized gains (losses) on investments, net of tax | (3,130) | (495) | (194) | |||||||||||||||||
| Other comprehensive income (loss) | (14,610) | (39,175) | 44,189 | |||||||||||||||||
| Comprehensive income | $ | 346,963 | $ | 732,845 | $ | 1,820,077 |
The accompanying notes are an integral part of these consolidated financial statements.
ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | 942,050 | $ | 1,099,370 | ||||||||||
| Marketable securities, short-term | 57,534 | 71,972 | ||||||||||||
| Accounts receivable, net of allowance for doubtful accounts of $10,343 and $9,245, respectively | 859,685 | 897,198 | ||||||||||||
| Inventories | 338,752 | 230,230 | ||||||||||||
| Prepaid expenses and other current assets | 226,370 | 195,305 | ||||||||||||
| Total current assets | 2,424,391 | 2,494,075 | ||||||||||||
| Marketable securities, long-term | 41,978 | 125,320 | ||||||||||||
| Property, plant and equipment, net | 1,231,855 | 1,081,926 | ||||||||||||
| Operating lease right-of-use assets, net | 118,880 | 121,257 | ||||||||||||
| Goodwill | 407,551 | 418,547 | ||||||||||||
| Intangible assets, net | 95,720 | 109,709 | ||||||||||||
| Deferred tax assets | 1,571,746 | 1,533,767 | ||||||||||||
| Other assets | 55,826 | 57,509 | ||||||||||||
| Total assets | $ | 5,947,947 | $ | 5,942,110 | ||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | 127,870 | $ | 163,886 | ||||||||||
| Accrued liabilities | 454,374 | 607,315 | ||||||||||||
| Deferred revenues | 1,343,643 | 1,152,870 | ||||||||||||
| Total current liabilities | 1,925,887 | 1,924,071 | ||||||||||||
| Income tax payable | 124,393 | 118,072 | ||||||||||||
| Operating lease liabilities | 100,334 | 102,656 | ||||||||||||
| Other long-term liabilities | 195,975 | 174,597 | ||||||||||||
| Total liabilities | 2,346,589 | 2,319,396 | ||||||||||||
| Commitments and contingencies (Notes 7 and 8) | ||||||||||||||
| Stockholders’ equity: | ||||||||||||||
| Preferred stock, $0.0001 par value (5,000 shares authorized; none issued) | — | — | ||||||||||||
| Common stock, $0.0001 par value (200,000 shares authorized; 77,267 and 78,710 issued and outstanding, respectively) | 8 | 8 | ||||||||||||
| Additional paid-in capital | 1,044,946 | 999,006 | ||||||||||||
| Accumulated other comprehensive income (loss), net | (10,284) | 4,326 | ||||||||||||
| Retained earnings | 2,566,688 | 2,619,374 | ||||||||||||
| Total stockholders’ equity | 3,601,358 | 3,622,714 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 5,947,947 | $ | 5,942,110 |
The accompanying notes are an integral part of these consolidated financial statements.
ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss), Net | Retained Earnings | Total | ||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | 78,433 | $ | 8 | $ | 906,937 | $ | (688) | $ | 439,912 | $ | 1,346,169 | |||||||||||||||||||||||||||
| Net income | — | — | — | — | 1,775,888 | 1,775,888 | ||||||||||||||||||||||||||||||||
| Net change in unrealized gains (losses) from investments | — | — | — | (194) | — | (194) | ||||||||||||||||||||||||||||||||
| Net change in foreign currency translation adjustment | — | — | — | 44,383 | — | 44,383 | ||||||||||||||||||||||||||||||||
| Issuance of common stock relating to employee equity compensation plans | 427 | — | 20,314 | — | — | 20,314 | ||||||||||||||||||||||||||||||||
| Tax withholdings related to net share settlements of equity awards | — | — | (51,122) | — | — | (51,122) | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 98,427 | — | — | 98,427 | ||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | 78,860 | 8 | 974,556 | 43,501 | 2,215,800 | 3,233,865 | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 772,020 | 772,020 | ||||||||||||||||||||||||||||||||
| Net change in unrealized gains (losses) from investments | — | — | — | (495) | — | (495) | ||||||||||||||||||||||||||||||||
| Net change in foreign currency translation adjustment | — | — | — | (38,680) | — | (38,680) | ||||||||||||||||||||||||||||||||
| Issuance of common stock relating to employee equity compensation plans | 442 | — | 25,623 | — | — | 25,623 | ||||||||||||||||||||||||||||||||
| Tax withholdings related to net share settlements of equity awards | — | — | (108,917) | — | — | (108,917) | ||||||||||||||||||||||||||||||||
| Common stock repurchased and retired | (592) | — | (6,592) | — | (368,446) | (375,038) | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 114,336 | — | — | 114,336 | ||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | 78,710 | 8 | 999,006 | 4,326 | 2,619,374 | 3,622,714 | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 361,573 | 361,573 | ||||||||||||||||||||||||||||||||
| Net change in unrealized gains (losses) from investments | — | — | — | (3,130) | — | (3,130) | ||||||||||||||||||||||||||||||||
| Net change in foreign currency translation adjustment | — | — | — | (11,480) | — | (11,480) | ||||||||||||||||||||||||||||||||
| Issuance of common stock relating to employee equity compensation plans | 305 | — | 26,149 | — | — | 26,149 | ||||||||||||||||||||||||||||||||
| Tax withholdings related to net share settlements of equity awards | — | — | (52,799) | — | — | (52,799) | ||||||||||||||||||||||||||||||||
| Common stock repurchased and retired | (1,748) | — | (20,777) | — | (414,259) | (435,036) | ||||||||||||||||||||||||||||||||
| Equity forward contract related to accelerated stock repurchase | — | — | (40,000) | — | — | (40,000) | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 133,367 | — | — | 133,367 | ||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | 77,267 | $ | 8 | $ | 1,044,946 | $ | (10,284) | $ | 2,566,688 | $ | 3,601,358 |
The accompanying notes are an integral part of these consolidated financial statements.
ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||||||
| Net income | $ | 361,573 | $ | 772,020 | $ | 1,775,888 | ||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
| Deferred taxes | (39,495) | 15,455 | (1,491,577) | |||||||||||||||||
| Depreciation and amortization | 125,793 | 108,729 | 93,538 | |||||||||||||||||
| Stock-based compensation | 133,367 | 114,336 | 98,427 | |||||||||||||||||
| Non-cash operating lease cost | 30,520 | 26,807 | 22,467 | |||||||||||||||||
| Arbitration award gain | — | (43,403) | — | |||||||||||||||||
| Other non-cash operating activities | 41,288 | 24,363 | 33,743 | |||||||||||||||||
| Changes in assets and liabilities, net of effects of acquisitions: | ||||||||||||||||||||
| Accounts receivable | 21,549 | (262,066) | (139,777) | |||||||||||||||||
| Inventories | (130,097) | (112,450) | (29,110) | |||||||||||||||||
| Prepaid expenses and other assets | (65,514) | (124,626) | (21,130) | |||||||||||||||||
| Accounts payable | (36,523) | 19,747 | 52,206 | |||||||||||||||||
| Accrued and other long-term liabilities | (121,942) | 158,543 | 42,168 | |||||||||||||||||
| Long-term income tax payable | 6,327 | 12,449 | (2,802) | |||||||||||||||||
| Deferred revenues | 241,886 | 462,640 | 228,133 | |||||||||||||||||
| Net cash provided by operating activities | 568,732 | 1,172,544 | 662,174 | |||||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||||||
| Acquisitions, net of cash acquired | (12,304) | (8,002) | (420,788) | |||||||||||||||||
| Purchase of property, plant and equipment | (291,900) | (401,098) | (154,916) | |||||||||||||||||
| Purchase of marketable securities | (28,002) | (200,928) | (5,341) | |||||||||||||||||
| Proceeds from maturities of marketable securities | 23,785 | 498 | 42,641 | |||||||||||||||||
| Proceeds from sales of marketable securities | 97,316 | 3,114 | 278,817 | |||||||||||||||||
| Repayment on unsecured promissory note | — | 4,594 | 26,925 | |||||||||||||||||
| Proceeds from arbitration award | — | 43,403 | — | |||||||||||||||||
| Other investing activities | (2,211) | (5,011) | 1,156 | |||||||||||||||||
| Net cash used in investing activities | (213,316) | (563,430) | (231,506) | |||||||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||||||
| Proceeds from issuance of common stock | 26,149 | 25,623 | 20,314 | |||||||||||||||||
| Common stock repurchases | (435,036) | (375,038) | — | |||||||||||||||||
| Payment for equity forward contract related to accelerated stock repurchase agreement | (40,000) | — | — | |||||||||||||||||
| Payroll taxes paid upon the vesting of equity awards | (52,799) | (108,917) | (51,122) | |||||||||||||||||
| Net cash used in financing activities | (501,686) | (458,332) | (30,808) | |||||||||||||||||
| Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash | (11,514) | (12,117) | 10,480 | |||||||||||||||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash | (157,784) | 138,665 | 410,340 | |||||||||||||||||
| Cash, cash equivalents, and restricted cash at beginning of year | 1,100,139 | 961,474 | 551,134 | |||||||||||||||||
| Cash, cash equivalents, and restricted cash at end of year | $ | 942,355 | $ | 1,100,139 | $ | 961,474 |
The accompanying notes are an integral part of these consolidated financial statements.
ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Business Description
Align Technology, Inc. (“We”, “Our”, “Align”) is a global medical device company primarily engaged in the design, manufacture and marketing of Invisalign® clear aligners for the treatment of malocclusions, or the misalignment of teeth, by orthodontists and general dental practitioners (“GPs”), Vivera® retainers for retention, iTero® intraoral scanners and services for dentistry, and exocad® computer-aided design and computer-aided manufacturing (“CAD/CAM”) software for dental laboratories and dental practitioners. Our vision and strategy is to revolutionize orthodontic and restorative dentistry through digital treatment planning and implementation using our Align Digital PlatformTM, an integrated suite of proprietary technologies and services designed to deliver a seamless, end-to-end solution for patients and consumers, orthodontists and GPs and lab partners. We strive to achieve our vision and strategy through key objectives made possible with the proprietary technologies and services of the Align Digital Platform to establish: clear aligners as the principal solution for the treatment of malocclusions with the Invisalign System as the treatment solution of choice by orthodontists, GPs and patients globally, our intraoral scanners as the preferred scanning technology for digital dental scans, and our exocad CAD/CAM software as the dental restorative solution of choice for dental labs. Our corporate headquarters is located in Tempe, Arizona and we have offices worldwide. Our Americas regional headquarters is located in Raleigh, North Carolina; our European, Middle East and Africa (“EMEA”) regional headquarters is located in Rotkreuz, Switzerland; and our Asia Pacific (“APAC”) regional headquarters is located in Singapore. We have two operating segments: (1) Clear Aligner, known as the Invisalign system, and (2) Imaging Systems and CAD/CAM services (“Systems and Services”), known as the iTero intraoral scanner and CAD/CAM services.
Basis of Presentation and Preparation
The consolidated financial statements include the accounts of Align and our wholly-owned subsidiaries after elimination of intercompany transactions and balances.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America (“U.S.”) requires our management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, useful lives of intangible assets and property and equipment, long-lived assets and goodwill, income taxes, contingent liabilities, the fair values of financial instruments, stock-based compensation and the valuation of investments in privately held companies among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Fair Value of Financial Instruments
Fair value is an exit price, representing the amount that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We use the GAAP fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value:
Level 1 - Quoted (unadjusted) prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. We obtain fair values for our Level 2 investments. Our custody bank and asset managers independently use professional pricing services to gather pricing data which may include quoted market prices for identical or comparable financial instruments, or inputs other than quoted prices that are observable either directly or indirectly, and we are ultimately responsible for these underlying estimates.
Level 3 - Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.
Cash and Cash Equivalents
We consider currency on hand, demand deposits, time deposits, and all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash and cash equivalents. Cash and cash equivalents are held in various financial institutions in the U.S. and internationally.
Restricted Cash
The restricted cash primarily consists of funds reserved for legal requirements. Restricted cash balances are primarily included in other assets within our Consolidated Balance Sheets.
Marketable Securities
Our marketable securities consist of marketable debt securities which are classified as available-for-sale and are carried at fair value. Our fixed-income securities investment portfolio allows for investments with a maximum effective maturity of up to 40 months on any individual security. Marketable securities classified as current assets have maturities within one year from the balance sheet date. Unrealized gains or losses on such securities are included in accumulated other comprehensive income (loss), net (“AOCI”) in stockholders’ equity. Realized gains and losses from sales and maturities of all such securities are reported in earnings and computed using the specific identification cost method.
All of our marketable securities are subject to a periodic impairment review. We evaluate if an allowance for credit loss is necessary by considering available information relevant to the collectibility of the security and information about credit rating changes, past events, current conditions, and reasonable and supportable forecasts. Any allowance for credit loss is recorded as a charge to other income (expense), net, in our Consolidated Statement of Operations. If we have an intent to sell, or if it is more likely than not that we will be required to sell the security in an unrealized loss position before recovery of its amortized cost basis, we will write down the security to its fair value and record the corresponding charge as a component of other income (expense), net in our Consolidated Statement of Operations.
Variable Interest Entities
We evaluate whether an entity in which we have made an investment is considered a variable interest entity (“VIE”). If we determine we are the primary beneficiary of a VIE, we would consolidate the VIE into our financial statements. In determining if we are the primary beneficiary, we evaluate whether we have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our evaluation includes identification of significant activities and an assessment of our ability to direct those activities based on governance provisions and arrangements to provide or receive product and process technology, product supply, operations services, equity funding, financing, and other applicable agreements and circumstances. Our assessments of whether we are the primary beneficiary of a VIE require significant assumptions and judgments. We have concluded that we are not the primary beneficiary of our VIE investments; therefore, we do not consolidate their results into our consolidated financial statements.
Investments in Privately Held Companies
Our investments in privately held companies in which we cannot exercise significant influence and do not own a majority equity interest or otherwise control are accounted for under the measurement alternative. Under the measurement alternative, the carrying value of our equity investment is adjusted to fair value for observable transactions for identical or similar investments of the same issuer. Investments in equity securities are reported on our Consolidated Balance Sheet as other assets, and we periodically evaluate them for impairment. We record any change in carrying value of our equity securities, in other income (expense), net in our Consolidated Statement of Operations. The carrying value of our equity investments in privately held companies without readily determinable fair values were not material as of December 31, 2022 or 2021 and the associated adjustments to the carrying values of the investments were not material during the year ended December 31, 2022, 2021 and 2020.
Derivative Financial Instruments
We enter into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations associated with certain assets and liabilities. These forward contracts are not designated as hedging instruments. The gains and losses on these forward contracts are intended to offset the gains and losses in the underlying foreign currency denominated monetary assets and liabilities being economically hedged. We do not enter into foreign currency forward contracts for trading or speculative purposes. The net gain or loss from the settlement of these foreign currency forward contracts is recorded in other income (expense), net in the Consolidated Statement of Operations.
Foreign Currency
For our international subsidiaries, we analyze on an annual basis or more often if necessary, if a significant change in facts and circumstances indicate that the functional currency has changed. For international subsidiaries where the local currency is the functional currency, adjustments from translating financial statements from the local currency to the U.S. dollar reporting currency are recorded as a separate component of AOCI in the stockholders’ equity section of the Consolidated Balance Sheet. This foreign currency translation adjustment reflects the translation of the balance sheet at period end exchange rates, and the income statement at the transaction date or average exchange rate in effect during the period. The foreign currency revaluation that are derived from monetary assets and liabilities stated in a currency other than functional currency are included in other income (expense), net. For the year ended December 31, 2022, 2021 and 2020, we had foreign currency net gains (losses) of $(43.8) million, $(13.3) million and $6.8 million, respectively.
Certain Risks and Uncertainties
We are subject to risks including, but not limited to, global and regional economic market conditions, inflation, fluctuations in foreign currency exchange rates, changes in consumer confidence and demand, increased competition, dependence on key personnel, protection and litigation of proprietary technology, shifts in taxable income between tax jurisdictions and compliance with regulations of the U.S. Food and Drug Administration (“FDA”) and similar international agencies. Further, our operations globally have been impacted by the COVID-19 pandemic. Although its impact has been gradually declining, we continue to be exposed to risks and uncertainties posed by it which varies by geographic regions at different levels. The extent to which our business could be impacted in the future by the pandemic is highly uncertain and difficult to predict.
Our cash and investments are held primarily by five financial institutions. Financial instruments which potentially expose us to concentrations of credit risk consist primarily of cash equivalents and marketable securities. We invest excess cash primarily in money market funds, corporate bonds, asset-backed securities, municipal bonds and U.S. government agency bonds and treasury bonds and periodically evaluate them for credit losses. Such credit losses have not been material to our financial statements.
We purchase certain inventory from sole suppliers. Additionally, we rely on a limited number of hardware manufacturers. The inability of any supplier or manufacturer to fulfill our supply requirements could materially and adversely impact our future operating results.
Accounts Receivable, net
Trade accounts receivable are recorded at the invoiced amount. Accounts receivable, net includes allowances for doubtful accounts for any potentially uncollectible amounts. We periodically assess the adequacy of the allowance for doubtful accounts by reviewing the accounts receivable on a collective basis by considering factors such as aging of the receivables and customers’ expected ability to pay, and on an individual basis for specific customers with known disputes or collectability issues. In determining the amount of the allowance for doubtful accounts, we also evaluate the creditworthiness of customers, current market conditions and forecasts of future economic conditions to make any adjustments. Actual write-offs have not materially differed from the estimated allowances. No individual customer accounted for 10% or more of our accounts receivable at December 31, 2022 or 2021 or net revenues for the year ended December 31, 2022, 2021 or 2020.
In 2022, we entered into factoring transactions on a non-recourse basis with financial institutions to sell certain of our non-U.S. accounts receivable. We account for these transactions as sales of accounts receivables and include the cash proceeds as a part of our cash flows from operations in the Consolidated Statements of Cash Flows. Total accounts receivable sold under the factoring arrangements was $37.0 million during the year ended December 31, 2022. Factoring fees on the sales of receivables were recorded in other income (expense), net in our Consolidated Statement of Operations and were not material.
Inventories
Inventories are valued at the lower of cost or net realizable value, with cost computed using standard cost which approximates actual cost on a first-in-first-out basis. Excess and obsolete inventories are determined primarily based on future demand forecasts, and write-downs of excess and obsolete inventories are recorded as a component of cost of net revenues.
Property, Plant and Equipment, net
Property, plant and equipment, net are stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Construction in progress is related to the construction or development of property (including land) and equipment that have not yet been placed in service for their intended use. Upon sale or retirement, the asset’s cost and related accumulated depreciation are removed from the balance sheet and any related gains or losses are reflected in income from operations. Maintenance and repairs are expensed as incurred. Refer to Note 3 “Balance Sheet Components" of the Notes of Consolidated Financial Statements for details on estimated useful lives*.*
Leases - Lessee
We determine if an arrangement is a lease at inception. Leases with a term of 12 months or less are not recorded on the balance sheet. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments as the rate implicit in our leases is not readily determinable. We determine lease terms as the noncancellable period of the lease and may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We have lease agreements with lease and non-lease components which are accounted for as a single lease component. Payments under our lease arrangements are primarily fixed; however, certain lease agreements contain variable payments which are expensed as incurred and not included in the operating lease ROU assets and liabilities.
Business Combinations
We allocate the fair value of the purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. When determining the fair value of assets acquired and liabilities assumed, management is required to make certain estimates and assumptions, especially with respect to intangible assets. The estimates and assumptions used in valuing intangible assets include, but are not limited to, the amount and timing of projected future cash flows including forecasted revenues, the discount rate used to determine the present value of these cash flows, and the determination of the assets’ life cycle. Amounts recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available.
Goodwill and Finite-Lived Acquired Intangible Assets
Goodwill represents the excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets acquired in business combinations and is allocated to the respective reporting units based on relative synergies generated.
Our intangible assets primarily consist of intangible assets acquired as part of our acquisitions. These assets are amortized using the straight-line method over their estimated useful lives ranging from two to fifteen years reflecting the period in which the economic benefits of the assets are expected to be realized.
Impairment of Goodwill and Long-Lived Assets
Goodwill
We evaluate goodwill for impairment at least annually on November 30th or more frequently if indicators are present, an event occurs or changes in circumstances suggest an impairment may exist and that it would more likely than not reduce the fair value of a reporting unit below its carrying amount. The allocation of goodwill to the respective reporting unit is based on relative synergies generated as a result of an acquisition.
We perform an initial assessment of qualitative factors to determine whether the existence of events and circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In
performing the qualitative assessment, we identify and consider the significance of relevant key factors, events, and circumstances that affect the fair value of our reporting units. These factors include external factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such as our actual and planned financial performance. We also give consideration to the difference between the reporting unit fair value and carrying value as of the most recent date a fair value measurement was performed. If, after assessing the totality of relevant events and circumstances, we determine that it is more likely than not that the fair value of the reporting unit exceeds its carrying value and there is no indication of impairment, no further testing is performed; however, if we conclude otherwise, then we will perform the quantitative impairment test which compares the estimated fair value of the reporting unit to its carrying value, including goodwill. If the carrying amount of the reporting unit is in excess of its fair value, an impairment loss would be recorded in the Consolidated Statement of Operations.
Long-Lived Assets
We evaluate long-lived assets (including finite-lived intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. An asset or asset group is considered impaired if its carrying amount exceeds the future undiscounted net cash flows that the asset or asset group is expected to generate. Factors we consider important which could trigger an impairment review include significant negative industry or economic trends, significant loss of customers and changes in the competitive environment. If an asset or asset group is considered to be impaired, the impairment to be recognized is calculated as the amount by which the carrying amount of the asset or asset group exceeds its fair market value. Our estimates of future cash flows attributable to our long-lived assets require significant judgment based on our historical and anticipated results and are subject to many assumptions. The estimation of fair value utilizing a discounted cash flow approach includes numerous uncertainties which require our significant judgment when making assumptions of expected growth rates and the selection of discount rates, as well as assumptions regarding general economic and business conditions, and the structure that would yield the highest economic value, among other factors. Refer to Note 5 “Goodwill and Intangible Assets” of Notes to Consolidated Financial Statements for details on intangible long-lived assets*.*
Development Costs for Internal Use Software
Internally developed software includes enterprise-level business software that we customize to meet our specific operational needs. Such capitalized costs include external direct costs utilized in developing or obtaining the applications and payroll and payroll-related costs for employees, who are directly associated with the development of the applications. There were no significant internally developed software costs capitalized in 2022 or 2021.
Development Costs for Software to be Marketed
The costs to develop software that is marketed externally have not been capitalized as we believe our current software development process is essentially completed concurrent with the establishment of technological feasibility. As such, all related software development costs are expensed as incurred and included in research and development expense in our Consolidated Statement of Operations.
Product Warranty
We offer assurance warranties on our products which provide the customer assurance that the product will function as the parties intended because it complies with agreed-upon specifications; therefore, warranties are not treated as a separate revenue performance obligation and are accounted for as guarantees under GAAP.
Clear Aligner
We warrant our Invisalign products against material defects until the treatment plan is complete except in the case of retainers, which are warranted up to three months from expected first use. We accrue for warranty costs, which are primarily based on historical experience as to product failures as well as current information on replacement costs.
Systems and Services
We warrant our intraoral scanners for a period of one year, which includes materials and labor. We accrue for these warranty costs based on average historical repair costs. An extended warranty may be purchased for additional fees. We warrant our CAD/CAM software for a one year period to perform in accordance with agreed product specifications. As we have not historically incurred any material warranty costs, we do not accrue for these software warranties.
Warranty costs are recorded in cost of net revenues upon shipment of products. We regularly review our warranty liability and update these balances based on historical warranty cost trends. Actual warranty costs incurred have not materially differed from those accrued; however future actual warranty costs could differ from the estimated amounts.
Revenue Recognition
Our revenues are derived primarily from the sale of aligners, scanners, and services from our Clear Aligner and Systems and Services segments. We enter into sales contracts that may consist of multiple distinct performance obligations where certain performance obligations of the sales contract are not delivered in one reporting period. We measure and allocate revenues according to ASC 606-10, “Revenues from Contracts with Customers.”
We identify a performance obligation as distinct if both of the following criteria are met: the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. Determining the standalone selling price (“SSP”) in order to allocate consideration from the contract to the individual performance obligations is the result of various factors, such as changing trends and market conditions, historical prices, costs, and gross margins. While changes in the allocation of the SSP between performance obligations will not affect the amount of total revenues recognized for a particular contract, any material changes could impact the timing of revenue recognition, which would have a material effect on our financial position and result of operations. This is because the contract consideration is allocated to each performance obligation, delivered or undelivered, at the inception of the contract based on the SSP of each distinct performance obligation.
Clear Aligner
We enter into contracts (“treatment plan(s)”) that involve multiple future performance obligations. Invisalign Comprehensive, Invisalign First, Invisalign Moderate, Invisalign Go, Invisalign Go Plus, and Lite and Express Packages include optional additional aligners at no charge for a certain period of time ranging from six months to five years after initial shipment.
Our treatment plans comprise the following performance obligations that also represent distinct deliverables: initial aligners, the option of additional aligners, case refinement, and replacement aligners. We take the practical expedient to consider shipping and handling costs as activities to fulfill the performance obligation. Where processing fees are charged, the consideration received from the fees are included in the total consideration. We allocate revenues for each treatment plan based on each unit’s standalone selling price. Management considers a variety of factors such as same or similar product historical sales, costs, and gross margin, which may vary over time depending upon the unique facts and circumstances related to each performance obligation in making these estimates. In addition to historical data, we take into consideration changing trends and market conditions. For treatment plans with multiple future options, we also consider usage rates, which is the number of times a customer is expected to order additional aligners. Our process for estimating usage rates requires significant judgment and evaluation of inputs, including historical usage data by region, country and channel. We recognize the revenues upon shipment, as the customers obtain physical possession and we have enforceable rights to payment. As we collect most consideration upfront, we consider whether a significant financing component exists; however, as the delivery of the performance obligations are at the customer’s discretion, we conclude that no significant financing component exists.
Systems and Services
We sell intraoral scanners and CAD/CAM services through both our direct sales force and distribution partners. The intraoral scanner sales price includes one year of warranty and unlimited scanning services. The customer may also select, for additional fees, extended warranty and unlimited scanning services for periods beyond the initial year. When intraoral scanners are sold with an unlimited scanning service agreement and/or extended warranty, we allocate revenues based on the respective SSP of the scanner and the subscription service. We estimate the SSP of each element, taking into account factors such as same or similar historical prices and discounting strategies. Revenues are then recognized over time as the monthly services are rendered and upon shipment of the scanner, as that is when we deem the customer to have obtained control. We also have a rental program, where scanners are leased to customers. The contracts for the program are treated as operating leases, and the revenue is recognized ratably over the lease term.
CAD/CAM services, where sold separately, include the initial software license and maintenance and support. We allocate revenues based upon the respective SSPs of the software license and the maintenance and support. We estimate the SSP of each element using data such as historical prices. Revenues related to the software license are recognized upfront and revenues related to the maintenance and support are recognized over time. For both scanner and service sales, most consideration is
collected upfront and in cases where there are payment plans, consideration is collected within one year and, therefore, there are no significant financing components.
Volume Discounts
In certain situations, we offer promotions in which the discount will increase depending upon the volume purchased over time. We concluded that in these situations, the promotions can represent either variable consideration or options, depending upon the specifics of the promotion. In the event the promotion contains an option, the option is considered a material right and, therefore, included in the accounting for the initial arrangement. We estimate the average anticipated discount over the lifetime of the promotion or contract, and apply that discount to each unit as it is sold. On a quarterly basis, we review our estimates and, if needed, updates are made and changes are applied prospectively.
Accrued Sales Return Reserve
We provide a reserve for sales returns based on historical sales returns as a percentage of revenues.
Costs to Obtain a Contract
We offer a variety of commission plans to our salesforce; each plan has multiple components. To match the costs to obtain a contract to the associated revenues, we evaluate the individual components and capitalize the eligible components, recognizing the costs over the treatment period. The costs to obtain contracts were $27.4 million and $31.1 million as of December 31, 2022 and 2021, respectively, and are included in other assets in our Consolidated Balance Sheets. We recognized amortization on our costs to obtain a contract of $20.8 million, $17.0 million, and $10.1 million during the year ended December 31, 2022, 2021, and 2020, respectively, which is included in selling, general and administrative expenses in our Consolidated Statements of Operations.
Unfulfilled Performance Obligations for Clear Aligners and Scanners
Our unfulfilled performance obligations, including deferred revenues and backlog, as of December 31, 2022 and the estimated revenues expected to be recognized in the future related to these performance obligations are $1,515.4 million. This includes performance obligations from the Clear Aligner segment, primarily the shipment of additional aligners, which are fulfilled over six months to five years. This also includes the performance obligations from the Systems and Services segment, primarily services and support, which are fulfilled over one to five years, and contracted deliveries of additional scanners. The estimate includes both product and service unfulfilled performance obligations and the time range reflects our best estimate of when we will transfer control to the customer and may change based on customer usage patterns, timing of shipments, readiness of customers' facilities for installation, and manufacturing availability.
Contract Balances
The timing of revenue recognition results in deferred revenues being recognized on our Consolidated Balance Sheet. For both aligners and scanners, we usually collect the total consideration owed prior to all performance obligations being performed with payment terms generally varying from net 30 to net 180 days. Contract liabilities are recorded as deferred revenue balances, which are generated based upon timing of invoices and recognition patterns, not payments. If the revenue recognition exceeds the billing, the exceeded amount is considered unbilled receivable and a contract asset. Conversely, if the billing occurs prior to the revenue recognition, the amount is considered deferred revenue and a contract liability.
Shipping and Handling Costs
Shipping and handling charges to customers as well as processing fees are included in net revenues, and the associated costs incurred are recorded in cost of net revenues.
Legal Proceedings and Litigations
We are involved in legal proceedings on an ongoing basis. If we believe that a loss arising from such matters is probable and can be reasonably estimated, we accrue the estimated loss in our consolidated financial statements. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range.
Research and Development
Research and development costs are expensed as incurred and includes the costs associated with the research and development of new products and enhancements to existing products. These costs primarily include personnel-related costs, including payroll and stock-based compensation, equipment, material and maintenance costs, outside consulting expenses, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and information technology (“IT”).
Advertising Costs
The cost of advertising and media is expensed as incurred. For the year ended December 31, 2022, 2021 and 2020, we incurred advertising costs of $222.0 million, $325.6 million and $161.0 million, respectively.
Stock-Based Compensation
We recognize stock-based compensation cost for shares expected to vest on a straight-line basis over the requisite service period of the award, net of estimated forfeitures. We use the Black-Scholes option pricing model to determine the fair value of employee stock purchase plan shares. We use a Monte Carlo simulation model to estimate the fair value of market-performance based restricted stock units which requires the input of assumptions, including expected term, stock price volatility and the risk-free rate of return. For restricted stock units which vest based on performance conditions, we use the stock price on the grant date to estimate the fair value and stock-based compensation cost is recorded based on expected attainment of performance targets. Forfeitures are estimated based on historical experience at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Income Taxes
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenues and expenses for tax and financial statement purposes.
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our current tax exposure under the applicable tax laws and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities which are included in our Consolidated Balance Sheets.
We account for uncertainty in income taxes pursuant to authoritative guidance based on a two-step approach to recognize and measure uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit based on its technical merits, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit or refinement of estimates due to new information. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will impact our tax provision in our Consolidated Statement of Operations in the period in which such determination is made.
We assess the likelihood that we will be able to realize our deferred tax assets. Should there be a change in our ability to realize our deferred tax assets, our tax provision would increase in the period in which we determine that it is more likely than not that we cannot realize our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If it is more likely than not that we will not realize our deferred tax assets, we will increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be realizable.
During fiscal 2020, we completed an intra-entity transfer of certain intellectual property rights and fixed assets to our Swiss subsidiary, which resulted in the recognition of deferred tax assets and related tax benefits. Refer to Note 12 “Income Taxes” of Notes to Consolidated Financial Statements for more information. The establishment of deferred tax assets from the intra-entity transfer of intangible assets required us to make significant estimates and assumptions to determine the fair value of intellectual property rights transferred which include, but are not limited to, our expectations of growth rates in revenue, margins, future cash flows, and discount rates. The accuracy of these estimates could be affected by unforeseen events or actual
results, and the sustainability of our future tax benefits is dependent upon the acceptance of these valuation estimates and assumptions by the taxing authorities.
The U.S. Tax Cuts and Jobs Act includes provisions for certain foreign-sourced earnings referred to as Global Intangible Low-Taxed Income (“GILTI”) which imposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. We have made the election to record GILTI tax using the period cost method.
Common Stock Repurchase
We repurchase our own common stock from time to time under stock repurchase programs approved by our Board of Directors. We account for these repurchases under the accounting guidance for equity where we allocate the total repurchase value that is in excess over par value between additional paid-in capital and retained earnings. All shares repurchased are retired.
Recent Accounting Pronouncements
(i) New Accounting Updates Recently Adopted
In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2021-08, “Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured in accordance with ASC 606, Revenue from Contracts with Customers as if the acquirer had originated the contracts. The updated guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2022 on a prospective basis and early adoption is permitted. We early adopted this standard during 2022 which did not have a material impact on our consolidated financial statements and related disclosures.
(ii) Recent Accounting Pronouncements Not Yet Effective
We continue to monitor new accounting pronouncements issued by the FASB and do not believe any of the recently issued accounting pronouncements will have a material impact on our consolidated financial statements or related disclosures.
Note 2. Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The following tables summarize our cash and cash equivalents, and marketable securities on our Consolidated Balance Sheet as of December 31, 2022 and 2021 (in thousands):
| Reported as: | ||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Cash and Cash Equivalents | Marketable securities, short-term | Marketable securities, long-term | |||||||||||||||||||||||||||||||||||||
| Cash | $ | 712,921 | $ | — | $ | — | $ | 712,921 | $ | 712,921 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| Money market funds | 229,129 | — | — | 229,129 | 229,129 | — | — | |||||||||||||||||||||||||||||||||||||
| Corporate bonds | 69,390 | — | (2,915) | 66,475 | — | 36,510 | 29,965 | |||||||||||||||||||||||||||||||||||||
| U.S. government treasury bonds | 20,559 | — | (549) | 20,010 | — | 15,404 | 4,606 | |||||||||||||||||||||||||||||||||||||
| Asset-backed securities | 4,514 | 1 | (37) | 4,478 | — | 2,909 | 1,569 | |||||||||||||||||||||||||||||||||||||
| Municipal bonds | 3,447 | — | (61) | 3,386 | — | 2,711 | 675 | |||||||||||||||||||||||||||||||||||||
| U.S. government agency bonds | 5,231 | 1 | (69) | 5,163 | — | — | 5,163 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 1,045,191 | $ | 2 | $ | (3,631) | $ | 1,041,562 | $ | 942,050 | $ | 57,534 | $ | 41,978 |
| Reported as: | ||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2021 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Cash and Cash Equivalents | Marketable securities, short-term | Marketable securities, long-term | |||||||||||||||||||||||||||||||||||||
| Cash | $ | 754,802 | $ | — | $ | — | $ | 754,802 | $ | 754,802 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| Money market funds | 343,012 | — | (2) | 343,010 | 343,010 | — | — | |||||||||||||||||||||||||||||||||||||
| Corporate bonds | 115,507 | 9 | (398) | 115,118 | 1,042 | 35,065 | 79,011 | |||||||||||||||||||||||||||||||||||||
| U.S. government treasury bonds | 42,976 | — | (48) | 42,928 | — | 22,251 | 20,677 | |||||||||||||||||||||||||||||||||||||
| Asset-backed securities | 32,031 | — | (40) | 31,991 | — | 10,999 | 20,992 | |||||||||||||||||||||||||||||||||||||
| Municipal bonds | 7,628 | — | (15) | 7,613 | 516 | 3,657 | 3,440 | |||||||||||||||||||||||||||||||||||||
| U.S. government agency bonds | 1,201 | — | (1) | 1,200 | — | — | 1,200 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 1,297,157 | $ | 9 | $ | (504) | $ | 1,296,662 | $ | 1,099,370 | $ | 71,972 | $ | 125,320 |
The following table summarizes the fair value of our available-for-sale marketable securities classified by contractual maturity as of December 31, 2022 and 2021 (in thousands):
| December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Due in 1 year or less | $ | 51,037 | $ | 59,737 | ||||||||||
| Due in 1 year through 5 years | 48,475 | 139,113 | ||||||||||||
| Total | $ | 99,512 | $ | 198,850 |
The securities that we invest in are generally deemed to be low risk based on their credit ratings from the major rating agencies. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. As interest rates increase, those securities purchased at a lower yield show a mark-to-market unrealized loss. Our unrealized losses as of December 31, 2022 and 2021 are primarily due to changes in interest rates and credit spreads.
The following table summarizes the gross unrealized losses as of December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous loss position (in thousands):
| As of December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Less than 12 months | 12 Months of Greater | Total | |||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 10,639 | $ | (440) | $ | 54,634 | $ | (2,475) | $ | 65,273 | $ | (2,915) | |||||||||||||||||||||||||||||
| U.S. government treasury bonds | 5,262 | (177) | 14,748 | (372) | 20,010 | (549) | |||||||||||||||||||||||||||||||||||
| Asset-backed securities | 2,636 | (17) | 1,275 | (20) | 3,911 | (37) | |||||||||||||||||||||||||||||||||||
| Municipal bonds | — | — | 2,412 | (61) | 2,412 | (61) | |||||||||||||||||||||||||||||||||||
| U.S. government agency bonds | 3,017 | (5) | 1,136 | (64) | 4,153 | (69) | |||||||||||||||||||||||||||||||||||
| Total | $ | 21,554 | $ | (639) | $ | 74,205 | $ | (2,992) | $ | 95,759 | $ | (3,631) |
As of December 31, 2021, all gross unrealized losses had been in an unrealized loss position for less than 12 months.
Investment in SmileDirectClub, LLC (“SDC”)
After tendering of our SDC equity interest in 2019, on July 3, 2019, we filed a demand for arbitration regarding SDC’s calculation of the “capital account” balance. On March 12, 2021, the arbitrator ruled in our favor and against SDC and issued an award of $43.4 million along with interest. The gain of $43.4 million was recognized as a part of our other income (expense), net in our Consolidated Statement of Operation during the year ended December 31, 2021.
Fair Value Measurements
The following tables summarize our financial assets measured at fair value as of December 31, 2022 and 2021 (in thousands):
| Description | Balance as of December 31, 2022 | Level 1 | Level 2 | |||||||||||||||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||||||||||||||
| Money market funds | $ | 229,129 | $ | 229,129 | $ | — | ||||||||||||||||||||||||||
| Short-term investments: | ||||||||||||||||||||||||||||||||
| U.S. government treasury bonds | 15,404 | 15,404 | — | |||||||||||||||||||||||||||||
| Corporate bonds | 36,510 | — | 36,510 | |||||||||||||||||||||||||||||
| Municipal bonds | 2,711 | — | 2,711 | |||||||||||||||||||||||||||||
| Asset-backed securities | 2,909 | — | 2,909 | |||||||||||||||||||||||||||||
| Long-term investments: | ||||||||||||||||||||||||||||||||
| U.S. government treasury bonds | 4,606 | 4,606 | — | |||||||||||||||||||||||||||||
| Corporate bonds | 29,965 | — | 29,965 | |||||||||||||||||||||||||||||
| Municipal bonds | 675 | — | 675 | |||||||||||||||||||||||||||||
| U.S. government agency bonds | 5,163 | — | 5,163 | |||||||||||||||||||||||||||||
| Asset-backed securities | 1,569 | — | 1,569 | |||||||||||||||||||||||||||||
| $ | 328,641 | $ | 249,139 | $ | 79,502 |
| Description | Balance as of December 31, 2021 | Level 1 | Level 2 | |||||||||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||||||||
| Money market funds | $ | 343,010 | $ | 343,010 | $ | — | ||||||||||||||||||||
| Corporate bonds | 1,042 | — | 1,042 | |||||||||||||||||||||||
| Municipal bonds | 516 | — | 516 | |||||||||||||||||||||||
| Short-term investments: | ||||||||||||||||||||||||||
| U.S. government treasury bonds | 22,251 | 22,251 | — | |||||||||||||||||||||||
| Corporate bonds | 35,065 | — | 35,065 | |||||||||||||||||||||||
| Municipal bonds | 3,657 | — | 3,657 | |||||||||||||||||||||||
| Asset-backed securities | 10,999 | — | 10,999 | |||||||||||||||||||||||
| Long-term investments: | ||||||||||||||||||||||||||
| U.S. government treasury bonds | 20,677 | 20,677 | — | |||||||||||||||||||||||
| Corporate bonds | 79,011 | — | 79,011 | |||||||||||||||||||||||
| Municipal bonds | 3,440 | — | 3,440 | |||||||||||||||||||||||
| U.S. government agency bonds | 1,200 | — | 1,200 | |||||||||||||||||||||||
| Asset-backed securities | 20,992 | — | 20,992 | |||||||||||||||||||||||
| Prepaid expenses and other current assets: | ||||||||||||||||||||||||||
| Israeli funds | 3,841 | — | 3,841 | |||||||||||||||||||||||
| $ | 545,701 | $ | 385,938 | $ | 159,763 |
Derivatives Not Designated as Hedging Instruments
Recurring foreign currency forward contracts
We enter into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations on certain trade and intercompany receivables and payables. These forward contracts are classified within Level 2 of the fair value hierarchy. As a result of the settlement of foreign currency forward contracts, the net gain recognized during the year ended December 31, 2022 was not material and we recognized a net gain of $18.8 million and a net loss of $22.1 million, during the year ended December 31, 2021 and 2020, respectively. As of December 31, 2022 and 2021, the fair value of foreign exchange forward contracts outstanding was not material.
The following tables presents the gross notional value of all our foreign exchange forward contracts outstanding as of December 31, 2022 and 2021 (in thousands):
| December 31, 2022 | ||||||||||||||
| Local Currency Amount | Notional Contract Amount (USD) | |||||||||||||
| Euro | €186,900 | $ | 200,010 | |||||||||||
| Polish Zloty | PLN365,988 | 83,307 | ||||||||||||
| Canadian Dollar | C$109,000 | 80,514 | ||||||||||||
| Chinese Yuan | ¥471,000 | 68,223 | ||||||||||||
| British Pound | £41,200 | 49,677 | ||||||||||||
| Japanese Yen | ¥6,200,000 | 47,196 | ||||||||||||
| Israeli Shekel | ILS110,030 | 31,383 | ||||||||||||
| Swiss Franc | CHF25,000 | 27,165 | ||||||||||||
| Brazilian Real | R$141,200 | 26,839 | ||||||||||||
| Mexican Peso | M$230,000 | 11,746 | ||||||||||||
| New Zealand Dollar | NZ$6,000 | 3,806 | ||||||||||||
| Australian Dollar | A$4,000 | 2,721 | ||||||||||||
| Czech Koruna | Kč56,000 | 2,469 | ||||||||||||
| New Taiwan Dollar | NT$60,000 | 1,959 | ||||||||||||
| $ | 637,015 |
| December 31, 2021 | ||||||||||||||
| Local Currency Amount | Notional Contract Amount (USD) | |||||||||||||
| Euro | €165,110 | $ | 186,358 | |||||||||||
| Canadian Dollar | C$99,800 | 78,018 | ||||||||||||
| Chinese Yuan | ¥494,500 | 77,358 | ||||||||||||
| Polish Zloty | PLN219,800 | 54,014 | ||||||||||||
| Brazilian Real | R$286,500 | 50,894 | ||||||||||||
| Japanese Yen | ¥5,548,700 | 48,206 | ||||||||||||
| British Pound | £34,740 | 46,881 | ||||||||||||
| Israeli Shekel | ILS54,110 | 17,416 | ||||||||||||
| Mexican Peso | M$311,500 | 15,133 | ||||||||||||
| Swiss Franc | CHF9,950 | 10,883 | ||||||||||||
| Australian Dollar | A$6,900 | 5,009 | ||||||||||||
| $ | 590,170 |
Other foreign currency forward contract
Prior to the closing of the exocad acquisition on April 1, 2020, we entered into a Euro foreign currency forward contract with a notional contract amount of €376.0 million. Relating to this forward contract, in 2020, we recognized a loss of $10.2 million within other income (expense), net in our Consolidated Statement of Operations.
Note 3. Balance Sheet Components
Inventories consist of the following (in thousands):
| December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Raw materials | $ | 172,758 | $ | 123,234 | ||||||||||
| Work in progress | 96,558 | 51,706 | ||||||||||||
| Finished goods | 69,436 | 55,290 | ||||||||||||
| Total inventories | $ | 338,752 | $ | 230,230 |
Prepaid expenses and other current assets consist of the following (in thousands):
| December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Value added tax receivables | $ | 140,484 | $ | 93,610 | ||||||||||
| Prepaid expenses | 69,124 | 70,218 | ||||||||||||
| Other current assets | 16,762 | 31,477 | ||||||||||||
| Total prepaid expenses and other current assets | $ | 226,370 | $ | 195,305 |
Property, plant and equipment consist of the following (in thousands):
| December 31, | ||||||||||||||||||||
| Generally Used Estimated Useful Life | 2022 | 2021 | ||||||||||||||||||
| Clinical and manufacturing equipment | Up to 10 years | $ | 583,776 | $ | 452,876 | |||||||||||||||
| Building | 20 years | 466,003 | 310,344 | |||||||||||||||||
| Leasehold improvements | Lease term 1 | 64,238 | 61,289 | |||||||||||||||||
| Computer software and hardware | 3 years | 120,544 | 117,986 | |||||||||||||||||
| Land | — | 58,885 | 58,869 | |||||||||||||||||
| Furniture, fixtures and other | 2-5 years | 102,933 | 71,977 | |||||||||||||||||
| Construction in progress | — | 285,202 | 367,686 | |||||||||||||||||
| Total | 1,681,581 | 1,441,027 | ||||||||||||||||||
| Less: Accumulated depreciation and impairment charges | (449,726) | (359,101) | ||||||||||||||||||
| Total property, plant and equipment, net | $ | 1,231,855 | $ | 1,081,926 |
1 Shorter of the remaining lease term or the estimated useful lives of the assets
Depreciation was $109.8 million, $92.1 million and $80.1 million for the year ended December 31, 2022, 2021 and 2020, respectively.
Accrued liabilities consist of the following (in thousands):
| December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Accrued payroll and benefits | $ | 149,508 | $ | 288,355 | ||||||||||
| Accrued income taxes | 74,323 | 33,838 | ||||||||||||
| Accrued expenses | 64,341 | 67,169 | ||||||||||||
| Accrued sales and marketing expenses | 36,407 | 41,387 | ||||||||||||
| Current operating lease liabilities | 26,574 | 22,719 | ||||||||||||
| Accrued property, plant and equipment | 19,922 | 46,561 | ||||||||||||
| Other accrued liabilities | 83,299 | 107,286 | ||||||||||||
| Total accrued liabilities | $ | 454,374 | $ | 607,315 |
Accrued warranty as of December 31, 2022 and 2021, which is included in the “Other accrued liabilities” category of the accrued liabilities table above, consists of the following activity (in thousands):
| Accrued warranty as of December 31, 2020 | $ | 12,615 | ||||||
| Charged to cost of net revenues | 18,213 | |||||||
| Actual warranty expenditures | (14,659) | |||||||
| Accrued warranty as of December 31, 2021 | 16,169 | |||||||
| Charged to cost of net revenues | 16,429 | |||||||
| Actual warranty expenditures | (14,725) | |||||||
| Accrued warranty as of December 31, 2022 | $ | 17,873 |
Deferred revenues consist of the following (in thousands):
| December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Deferred revenues - current | $ | 1,343,643 | $ | 1,152,870 | ||||||||||
| Deferred revenues - long-term 1 | 160,662 | 136,684 |
1 Included in Other long-term liabilities within our Consolidated Balance Sheet
During the year ended December 31, 2022 and 2021, we recognized $3,734.6 million and $3,952.6 million of net revenues, respectively, of which $635.3 million and $481.1 million was included in the deferred revenues balance at December 31, 2021 and December 31, 2020, respectively.
Note 4. Leases
Lessee Information
We have operating leases for our digital treatment planning and office facilities, retail spaces, vehicles and office equipment. The components of lease expenses consist of following (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| Lease Cost | 2022 | 2021 | 2020 | |||||||||||||||||
| Operating lease cost 1 | $ | 37,919 | $ | 33,241 | $ | 27,825 | ||||||||||||||
| Variable lease cost 2 | 22,084 | 11,134 | 1,429 | |||||||||||||||||
| Total lease cost | $ | 60,003 | $ | 44,375 | $ | 29,254 |
1 Includes expense associated with short term leases of less than 12 months which is not material
2 Includes payments related to agreements with embedded leases that are not otherwise reflected on the balance sheet. These costs are primarily associated with our manufacturing supply arrangements and fluctuate based on factory output and material price changes.
The following table provides a summary of our operating lease terms and discount rates:
| December 31, | ||||||||||||||||||||
| Remaining Lease Term and Discount Rate | 2022 | 2021 | ||||||||||||||||||
| Weighted average remaining lease term (in years) | 7.2 | 7.8 | ||||||||||||||||||
| Weighted average discount rate | 3.5 | % | 3.2 | % |
As of December 31, 2022, the future payments related to our operating lease liabilities are as follows (in thousands):
| Fiscal Year Ending December 31, | Operating Leases | |||||||||||||
| 2023 | $ | 30,596 | ||||||||||||
| 2024 | 24,606 | |||||||||||||
| 2025 | 19,480 | |||||||||||||
| 2026 | 16,511 | |||||||||||||
| 2027 | 13,363 | |||||||||||||
| Thereafter | 39,449 | |||||||||||||
| Total lease payments | 144,005 | |||||||||||||
| Less: Imputed interest | (17,097) | |||||||||||||
| Total lease liabilities | $ | 126,908 |
As of December 31, 2022, we had additional leases that have not yet commenced with future lease payments of $14.3 million. These leases will commence during 2023 with non-cancelable lease terms of three to six years.
Lessor Information
We lease iTero intraoral scanners to customers which are classified as operating leases. Our portfolio of leased iTero scanners included in Property, plant and equipment, net are as follows:
| December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Scanners under operating leases, gross | $ | 22,914 | $ | 10,927 | ||||||||||
| Less: accumulated depreciation | (3,919) | (785) | ||||||||||||
| Scanners under operating leases, net | $ | 18,995 | $ | 10,142 |
As of December 31, 2022, the future lease payments due to us are as follows (in thousands):
| Fiscal Year Ending December 31, | Operating Leases | |||||||||||||
| 2023 | $ | 15,714 | ||||||||||||
| 2024 | 13,967 | |||||||||||||
| 2025 | 6,202 | |||||||||||||
| Total lease payments | $ | 35,883 |
For the year ended December 31, 2022, operating lease income was $12.3 million and for the years ended December 31, 2021 and 2020, operating lease income was not material.
Note 5. Goodwill and Intangible Assets
During the year ended December 31, 2022, we completed an immaterial business combination which increased goodwill and existing technology intangible assets.
Goodwill
The change in the carrying value of goodwill for the year ended December 31, 2022 and 2021, categorized by reportable segments, is as follows (in thousands):
| Clear Aligner | Systems and Services | Total | ||||||||||||||||||
| Balance as of December 31, 2020 | $ | 112,691 | $ | 332,126 | $ | 444,817 | ||||||||||||||
| Additions from acquisition | 3,646 | — | 3,646 | |||||||||||||||||
| Foreign currency translation adjustments | (4,129) | (25,787) | (29,916) | |||||||||||||||||
| Balance as of December 31, 2021 | 112,208 | 306,339 | 418,547 | |||||||||||||||||
| Additions from acquisition | — | 8,729 | 8,729 | |||||||||||||||||
| Foreign currency translation adjustments | (2,728) | (16,997) | (19,725) | |||||||||||||||||
| Balance as of December 31, 2022 | $ | 109,480 | $ | 298,071 | $ | 407,551 |
We completed our annual goodwill impairment assessments in 2022 and 2021 and determined there were no impairments.
Intangible Long-Lived Assets
Acquired intangible long-lived assets were as follows, excluding intangibles that were fully amortized (in thousands):
| Weighted Average Amortization Period (in years) | Gross Carrying Amount as of December 31, 2022 | Accumulated Amortization | Accumulated Impairment Loss | Net Carrying Value as of December 31, 2022 | ||||||||||||||||||||||||||||
| Existing technology | 10 | $ | 112,051 | $ | (33,537) | $ | (4,328) | $ | 74,186 | |||||||||||||||||||||||
| Customer relationships | 10 | 21,500 | (5,913) | — | 15,587 | |||||||||||||||||||||||||||
| Trademarks and tradenames | 10 | 17,200 | (6,442) | (4,122) | 6,636 | |||||||||||||||||||||||||||
| Patents | 8 | 6,511 | (5,288) | — | 1,223 | |||||||||||||||||||||||||||
| $ | 157,262 | $ | (51,180) | $ | (8,450) | 97,632 | ||||||||||||||||||||||||||
| Foreign currency translation adjustments | (1,912) | |||||||||||||||||||||||||||||||
| Total intangible assets, net 1 | $ | 95,720 |
1 Also includes $33.5 million of fully amortized intangible assets related to customer relationships.
| Weighted Average Amortization Period (in years) | Gross Carrying Amount as of December 31, 2021 | Accumulated Amortization | Accumulated Impairment Loss | Net Carrying Value as of December 31, 2021 | ||||||||||||||||||||||||||||
| Existing technology | 10 | $ | 104,531 | $ | (22,495) | $ | (4,328) | $ | 77,708 | |||||||||||||||||||||||
| Customer relationships | 11 | 55,000 | (25,891) | (10,751) | 18,358 | |||||||||||||||||||||||||||
| Trademarks and tradenames | 10 | 17,200 | (4,547) | (4,179) | 8,474 | |||||||||||||||||||||||||||
| Patents | 8 | 6,511 | (4,495) | — | 2,016 | |||||||||||||||||||||||||||
| $ | 183,242 | $ | (57,428) | $ | (19,258) | 106,556 | ||||||||||||||||||||||||||
| Foreign currency translation adjustments | 3,153 | |||||||||||||||||||||||||||||||
| Total intangible assets, net | $ | 109,709 |
There were no triggering events in 2022 or 2021 that would cause impairments of our intangible long-lived assets.
The total estimated annual future amortization expense for these acquired intangible assets as of December 31, 2022 is as follows (in thousands):
| Fiscal Year | Amortization | |||||||
| 2023 | $ | 16,501 | ||||||
| 2024 | 15,335 | |||||||
| 2025 | 14,959 | |||||||
| 2026 | 14,353 | |||||||
| 2027 | 11,992 | |||||||
| Thereafter | 24,492 | |||||||
| Total | $ | 97,632 |
Amortization expense was $16.0 million, $16.6 million and $13.4 million for the year ended December 31, 2022, 2021 and 2020, respectively.
Note 6. Credit Facility
We have a credit facility that provides for a $300.0 million unsecured revolving line of credit, along with a $50.0 million letter of credit. On December 23, 2022, we amended certain provisions in our credit facility which included extending the maturity date on the facility to December 23, 2027 and replacing the interest rate from the existing LIBOR with SOFR (“2022 Credit Facility”). The 2022 Credit Facility requires us to comply with specific financial conditions and performance requirements. Loans under the 2022 Credit Facility bear interest, at our option, at either a rate based on the SOFR for the applicable interest period or a base rate, in each case plus a margin. As of December 31, 2022, we had no outstanding borrowings under the 2022 Credit Facility and were in compliance with the conditions and performance requirements in all material respects.
Note 7. Legal Proceedings
2019 Shareholder Derivative Lawsuit
In January 2019, three derivative lawsuits were filed in the U.S. District Court for the Northern District of California which were later consolidated, purportedly on our behalf, naming as defendants the then current members of our Board of Directors along with certain of our executive officers. The complaints assert various state law causes of action, including for breaches of fiduciary duty, insider trading, and unjust enrichment. The complaints seek unspecified monetary damages on our behalf, which is named solely as a nominal defendant against whom no recovery is sought, as well as disgorgement and the costs and expenses associated with the litigation, including attorneys’ fees. The consolidated action is currently stayed. Defendants have not yet responded to the complaints.
On April 12, 2019, a derivative lawsuit was also filed in California Superior Court for Santa Clara County, purportedly on our behalf, naming as defendants the members of our Board of Directors along with certain of our executive officers. The allegations in the complaint are similar to those in the derivative suits described above. The matter is currently stayed. Defendants have not yet responded to the complaint.
We believe these claims are without merit. We are currently unable to predict the outcome of these lawsuits and therefore cannot determine the likelihood of loss nor estimate a range of possible loss*.*
2020 Securities Class Action Lawsuit
On March 2, 2020, a class action lawsuit against us and two of our executive officers was filed in the U.S. District Court for the Southern District of New York (later transferred to the U.S. District Court for the Northern District of California) on behalf of a purported class of purchasers of our common stock. The complaint alleged claims under the federal securities laws and sought monetary damages in an unspecified amount and costs and expenses incurred in the litigation. The lead plaintiff filed an amended complaint on August 4, 2020 against us and three of our executive officers alleging similar claims as in the initial complaint on behalf of a purported class of purchasers of our common stock from April 25, 2019 to July 24, 2019. On March 29, 2021, defendants’ motion to dismiss the amended complaint was granted with leave for the lead plaintiff to file a further amended complaint. On April 22, 2021, lead plaintiff filed a notice stating it would not file a further amended complaint. On April 23, 2021, the Court dismissed the action with prejudice and judgment was entered. Lead plaintiff filed a notice of appeal on April 28, 2021 and filed its opening appeal brief with the United States Court of Appeals for the Ninth
Circuit on September 1, 2021. The defendants-appellees filed their answering brief on November 22, 2021. The lead plaintiff-appellant’s reply brief was filed on January 12, 2022. Oral argument was held on March 10, 2022. On July 8, 2022, a panel of the Ninth Circuit affirmed the district court order dismissing the complaint. On July 21, 2022, plaintiff-appellant filed a petition for rehearing or hearing en banc, which the court denied on August 15, 2022. On November 14, 2022, the deadline for plaintiff-appellant to file a petition for writ of certiorari to the United States Supreme Court passed without plaintiff-appellant filing a petition, finally resolving this matter in our favor.
Antitrust Class Actions
On June 5, 2020, a dental practice named Simon and Simon, PC doing business as City Smiles brought an antitrust action in the U.S. District Court for the Northern District of California on behalf of itself and a putative class of similarly situated practices seeking monetary damages and injunctive relief relating to our alleged market activities in alleged clear aligner and intraoral scanner markets. Plaintiff filed an amended complaint and added VIP Dental Spas as a plaintiff on August 14, 2020. A jury trial is scheduled to begin in this matter on June 29, 2024. We believe the plaintiffs’ claims are without merit and we intend to vigorously defend ourselves.
On May 3, 2021, an individual named Misty Snow brought an antitrust action in the U.S. District Court for the Northern District of California on behalf of herself and a putative class of similarly situated individuals seeking monetary damages and injunctive relief relating to our alleged market activities in alleged clear aligner and intraoral scanner markets. Plaintiff filed an amended complaint on July 30, 2021 adding new plaintiffs and various state law claims. Plaintiffs filed a second amended complaint on October 21, 2021. On March 2, 2022, Plaintiffs filed a third amended complaint. On October 3, 2022, Plaintiffs filed a fourth amended complaint. A jury trial is scheduled to begin in this matter on June 29, 2024 for issues related to Section 2 allegations. A jury trial is scheduled to begin in this matter on September 30, 2024 for issues related to Section 1 allegations. We believe the plaintiffs’ claims are without merit and we intend to vigorously defend ourselves.
We are currently unable to predict the outcome of these lawsuits and therefore we cannot determine the likelihood of loss, if any, nor estimate a range of possible loss.
SDC Dispute
On August 27, 2020, we initiated a confidential arbitration proceeding against SmileDirectClub LLC (“SDC”) before the American Arbitration Association in San Jose, California. This arbitration relates to the Strategic Supply Agreement (“Supply Agreement”) entered into between the parties in 2016. The complaint alleges that SDC breached the Supply Agreement’s terms, causing damages to us in an amount to be determined. On January 19, 2021, SDC filed a counterclaim alleging that we breached the Supply Agreement. On May 3, 2022, SDC filed an additional counterclaim alleging that we breached the Supply Agreement. We deny SDC's allegations in the counterclaims and we intend to vigorously defend ourselves against them. The arbitration hearing on our claims and SDC’s first counterclaim was held on July 18-27, 2022 in Chicago, Illinois.
On October 27, 2022, the arbitrator issued an interim award on our claims and SDC’s first counterclaim finding that SDC breached the Supply Agreement, we did not breach the Supply Agreement, and SDC caused harm to us. Based on these findings, the arbitrator awarded us an interim award that, when confirmed, may be material to our results in the quarter reported.
On December 2, 2022, SDC filed a motion to re-open the arbitrator’s interim award in Align’s favor. We anticipate recognizing the amount ultimately realizable following confirmation of the final award.
The arbitration hearing on SDC’s second counterclaim was held on February 21-23, 2023 in Chicago, Illinois. We are currently unable to predict the outcome of SDC’s second counterclaim and therefore cannot determine the likelihood of loss or success nor estimate a range of possible loss or success, if any.
In addition to the above, in the ordinary course of our operations, we are involved in a variety of claims, suits, investigations, and proceedings, including actions with respect to intellectual property claims, patent infringement claims, government investigations, labor and employment claims, breach of contract claims, tax, and other matters. Regardless of the outcome, these proceedings can have an adverse impact on us because of defense costs, diversion of management resources, and other factors. Although the results of complex legal proceedings are difficult to predict and our view of these matters may change in the future as litigation and events related thereto unfold; we currently do not believe that these matters, individually or in the aggregate, will materially affect our financial position, results of operations or cash flows.
Note 8. Commitments and Contingencies
Unconditional Purchase Obligations
On October 30, 2020, we entered into a subscription agreement with a software company to renew our license for a total consideration of $95.2 million. As of December 31, 2022, we had a remaining commitment of $23.8 million which is expected to be paid through 2024.
On December 6, 2020, we entered into a supply agreement for certain components used for our manufacturing operations. As of December 31, 2022, we had purchase commitments of $85.8 million which is expected to be paid through 2025.
On June 24, 2021, we entered into an amended purchase agreement with an existing single source supplier which requires us to purchase aligner material for a minimum amount of approximately $348.0 million from 2023 through 2026.
On March 11, 2022, we entered into an amended promotional rights agreement with a third-party which includes advertising and media coverage. As of December 31, 2022, we had a remaining commitment of $60.0 million which is expected to be paid through 2026.
On December 9, 2022, we entered into a cloud services agreement to support our production operations and research and development efforts for clinical applications which requires us to make minimum purchases totaling $145.0 million from 2023 through 2027.
Off-Balance Sheet Arrangements
As of December 31, 2022, we had no material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources other than certain items disclosed in the Unconditional Purchase Obligations section above.
Indemnification Provisions
In the normal course of business to facilitate transactions in our services and products, we indemnify certain parties: customers, vendors, lessors, and other parties with respect to certain matters, including, but not limited to, services to be provided by us and intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and our executive officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. Several of these agreements limit the time within which an indemnification claim can be made and the amount of the claim.
It is not possible to make a reasonable estimate of the maximum potential amount under these indemnification agreements due to the unique facts and circumstances involved in each particular agreement. Additionally, we have a limited history of prior indemnification claims and the payments we have made under such agreements have not had a material adverse effect on our results of operations, cash flows or financial position. However, to the extent that valid indemnification claims arise in the future, future payments by us could be significant and could have a material adverse effect on our results of operations or cash flows in a particular period. As of December 31, 2022, we did not have any material indemnification claims that were probable or reasonably possible.
Note 9. Stockholders’ Equity
Common Stock
The holders of common stock are entitled to receive dividends whenever funds are legally available and when and if declared by the Board of Directors. We have never declared or paid dividends on our common stock.
Stock-Based Compensation Plans
Our 2005 Incentive Plan, as amended, provides for the granting of incentive stock options, non-statutory stock options, restricted stock, stock appreciation rights, performance units and performance shares to employees, non-employee directors and consultants. Shares granted on or after May 16, 2013 as an award of restricted stock, restricted stock units, performance shares or performance units (“full value awards”) are counted against the authorized share reserve as one and nine-tenths (1 9/10) shares for every one (1) share subject to the award, and any shares canceled that were counted as one and nine-tenths against the plan reserve will be returned at the same ratio.
As of December 31, 2022, the 2005 Incentive Plan, as amended, has a total reserve of 27,783,379 shares for issuance of which 3,760,672 shares are available for issuance. We issue new shares from our pool of authorized but unissued shares to satisfy the exercise and vesting obligations of our stock-based compensation plans.
Summary of Stock-Based Compensation Expense
The stock-based compensation related to our stock-based awards and employee stock purchase plan for the year ended December 31, 2022, 2021 and 2020 is as follows (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Cost of net revenues | $ | 6,438 | $ | 5,633 | $ | 4,719 | ||||||||||||||
| Selling, general and administrative | 103,134 | 90,659 | 78,500 | |||||||||||||||||
| Research and development | 23,795 | 18,044 | 15,208 | |||||||||||||||||
| Total stock-based compensation | $ | 133,367 | $ | 114,336 | $ | 98,427 |
The income tax benefit related to stock-based compensation was $14.9 million, $13.8 million and $11.9 million for the year ended December 31, 2022, 2021 and 2020, respectively.
Restricted Stock Units (“RSUs”)
The fair value of RSUs is based on our closing stock price on the date of grant. RSUs granted generally vest over a period of four years. A summary for the year ended December 31, 2022 is as follows:
| Number of Shares Underlying RSUs (in thousands) | Weighted Average Grant Date Fair Value | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||||||||||||
| Unvested as of December 31, 2021 | 492 | $ | 369.17 | |||||||||||||||||||||||
| Granted | 248 | 469.12 | ||||||||||||||||||||||||
| Vested and released | (200) | 333.76 | ||||||||||||||||||||||||
| Forfeited | (51) | 437.05 | ||||||||||||||||||||||||
| Unvested as of December 31, 2022 | 489 | $ | 427.23 | 1.2 | $ | 103,138 |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (calculated by multiplying our closing stock price on the last trading day of 2022 by the number of unvested RSUs) that would have been received by the unit holders had all RSUs been vested and released as of the last trading day of 2022. This amount will fluctuate based on the fair market value of our stock. During 2022, of the 199,832 shares vested and released, 59,115 shares were withheld for employee statutory tax obligations, resulting in a net issuance of 140,717 shares.
The total fair value of RSUs vested as of their respective vesting dates during 2022, 2021 and 2020 was $93.7 million, $158.8 million and $89.6 million, respectively. The weighted average grant date fair value of RSUs granted during 2022, 2021 and 2020 was $469.12, $600.10 and $267.24, respectively. As of December 31, 2022, we expect to recognize $133.4 million of total unamortized compensation costs, net of estimated forfeitures, related to RSUs over a weighted average period of 2.2 years.
Market-Performance Based Restricted Stock Units (“MSUs”)
We grant MSUs to members of senior management. Each MSU represents the right to one share of our common stock. The actual number of MSUs which will be eligible to vest will be based on the performance of our stock price relative to the performance of a stock market index over the vesting period. MSUs vest over a period of three years and the maximum number eligible to vest in the future is 250% of the MSUs initially granted.
The following table summarizes the MSU performance activity for the year ended December 31, 2022:
| Number of Shares Underlying MSUs (in thousands) | Weighted Average Grant Date Fair Value | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||||||||||||
| Unvested as of December 31, 2021 | 174 | $ | 551.57 | |||||||||||||||||||||||
| Granted 1 | 101 | 607.96 | ||||||||||||||||||||||||
| Vested and released | (128) | 396.10 | ||||||||||||||||||||||||
| Forfeited | (3) | 744.39 | ||||||||||||||||||||||||
| Unvested as of December 31, 2022 | 144 | $ | 725.73 | 1.0 | $ | 30,384 |
1 Includes MSUs vested during the period above 100% of the grant as actual shares released is based on our stock performance over the vesting period
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (calculated by multiplying our closing stock price on the last trading day of 2022 by the number of unvested MSUs) that would have been received by the unit holders had all MSUs been vested and released as of the last trading day of 2022. This amount will fluctuate based on the fair market value of our stock. During 2022, of the 128,259 shares vested and released, 49,524 shares were withheld for employee statutory tax obligations, resulting in a net issuance of 78,735 shares.
The total fair value of MSUs vested as of their respective vesting dates during 2022, 2021 and 2020 was $64.0 million, $135.6 million and $47.1 million, respectively. As of December 31, 2022, we expect to recognize $40.1 million of total unamortized compensation costs, net of estimated forfeitures, related to MSUs over a weighted average period of 1.0 year.
The fair value of MSUs is estimated at the grant date using a Monte Carlo simulation that includes factors for market conditions. The weighted average assumptions used in the Monte Carlo simulation were as follows:
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Expected term (in years) | 3.0 | 3.0 | 3.0 | |||||||||||||||||
| Expected volatility | 53.8 | % | 56.3 | % | 44.4 | % | ||||||||||||||
| Risk-free interest rate | 1.7 | % | 0.2 | % | 1.4 | % | ||||||||||||||
| Expected dividends | — | — | — | |||||||||||||||||
| Weighted average fair value per share at grant date | $ | 915.22 | $ | 1,102.09 | $ | 392.67 |
Restricted Stock Units with Performance Conditions (“PSUs”)
In the fourth quarter of 2022, we granted PSUs to certain employees which are eligible to vest based on the achievement of project-based milestones over a term of 2.2 years. Total PSUs granted were 4,728 and the weighted average grant date fair value for the PSUs was $201.63.
Employee Stock Purchase Plan (“ESPP”)
In May 2010, our stockholders approved the 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”) which consists of consecutive overlapping twenty-four month offering periods with four six-month purchase periods in each offering period. Employees purchase shares at 85% of the lower of the fair market value of the common stock at either the beginning of the offering period or the end of the purchase period. The 2010 Purchase Plan will continue until terminated by either the Board of Directors or its administrator. The 2010 Purchase Plan also allows for purchase rights to employees outside the U.S. and Canada with six-month offering periods and purchase periods. In May 2021, the 2010 Purchase Plan was amended and restated to increase the maximum number of shares available for purchase to 4,400,000 shares.
The following table summarizes the ESPP shares issued:
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Number of shares issued (in thousands) | 86 | 131 | 116 | |||||||||||||||||
| Weighted average price | $ | 305.24 | $ | 195.44 | $ | 175.69 |
As of December 31, 2022, 2,108,898 shares remain available for future issuance.
The fair value of the option component of the 2010 Purchase Plan shares was estimated at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions:
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Expected term (in years) | 1.5 | 1.1 | 1.0 | |||||||||||||||||
| Expected volatility | 50.2 | % | 52.7 | % | 55.0 | % | ||||||||||||||
| Risk-free interest rate | 1.8 | % | 0.1 | % | 0.9 | % | ||||||||||||||
| Expected dividends | — | — | — | |||||||||||||||||
| Weighted average fair value at grant date | $ | 159.44 | $ | 246.84 | $ | 96.94 |
We recognized stock-based compensation related to our employee stock purchase plan of $23.5 million, $12.2 million and $10.5 million for the year ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, we expect to recognize $14.8 million of total unamortized compensation costs related to future employee stock purchases over a weighted average period of 0.9 year.
Note 10. Common Stock Repurchase Programs
In May 2018, our Board of Directors authorized a plan to repurchase up to $600.0 million of our common stock (“May 2018 Repurchase Program”). As of December 31, 2021, the authorization under the May 2018 Repurchase Program was completed. In May 2021, our Board of Directors authorized a plan to repurchase up to $1.0 billion of our common stock (“May 2021 Repurchase Program”). As of December 31, 2022, we have $249.9 million available for repurchases under the May 2021 Repurchase Program.
Subsequent to the fourth quarter, in January 2023, our Board of Directors authorized a plan to repurchase up to $1.0 billion of our common stock.
Accelerated Share Repurchase Agreements (“ASRs”)
We entered into ASRs providing for the repurchase of our common stock based on the volume-weighted average price during the term of the agreement, less an agreed upon discount. Under the terms of the ASRs, the financial institution may be required to deliver additional shares of common stock at final settlement or, under certain circumstances, we may be required at our election, to either deliver shares or make a cash payment to the financial institution. The ASRs limit the number of shares we would be required to deliver.
The following table summarizes the information regarding repurchases of our common stock under ASRs:
| Agreement Date | Repurchase Program | Amount Paid (in millions) | Completion Date | Total Shares Received | Average Price per Share | |||||||||||||||||||||||||||||||||||||||||||||
| Q2 2021 | May 2018 | $ | 100.0 | Q3 2021 | 171,322 | $ | 583.70 | |||||||||||||||||||||||||||||||||||||||||||
| Q2 2021 | May 2021 | $ | 100.0 | Q3 2021 | 161,707 | $ | 618.40 | |||||||||||||||||||||||||||||||||||||||||||
| Q3 2021 | May 2021 | $ | 75.0 | Q3 2021 | 109,239 | $ | 686.91 | |||||||||||||||||||||||||||||||||||||||||||
| Q4 2021 | May 2021 | $ | 100.0 | Q4 2021 | 150,031 | $ | 666.53 | |||||||||||||||||||||||||||||||||||||||||||
| Q2 2022 | May 2021 | $ | 200.0 | Q2 2022 | 756,502 | $ | 264.37 | |||||||||||||||||||||||||||||||||||||||||||
| Q4 2022 | May 2021 | $ | 200.0 | N/A1 | 848,266 | $ | 188.62 |
1 As of December 31, 2022, the contract was open and we recorded the remaining equity forward contract at a fair value of $40.0 million which was included within “Additional paid-in capital” in stockholders' equity in our Consolidated Balance Sheet. Subsequent to the fourth quarter, the ASR was completed and 0.1 million additional shares were received at an average price per share of $293.15.
Subsequent to the fourth quarter, on February 3, 2023, we entered into an ASR to repurchase $250.0 million of our common stock, completing our 2021 Repurchase Program. We paid $250.0 million and received an initial delivery of approximately 0.6 million shares based on current market prices. The final number of shares to be repurchased will be based on our volume-weighted average stock price under the terms of the ASR, less an agreed upon discount.
Open Market Common Stock Repurchases
During the year ended December 31, 2022, we repurchased on the open market approximately 0.1 million shares of our common stock at an average price of $522.61 per share, including commissions and fees, for an aggregate purchase price of $75.0 million.
Note 11. Employee Benefit Plans
We have defined contribution retirement plan under Section 401(k) of the Internal Revenue Code for our U.S. employees which covers substantially all U.S. employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. We match 50% of our employee’s salary deferral contributions up to 6% of the employee’s eligible compensation. We contributed approximately $10.0 million, $8.5 million and $6.9 million to the 401(k) plan during the year ended December 31, 2022, 2021 and 2020, respectively. We also have defined contribution retirement plans outside of the U.S. to which we contributed $54.5 million, $42.3 million and $28.9 million during the year ended December 31, 2022, 2021 and 2020, respectively.
Note 12. Income Taxes
Net income before provision for (benefit from) income taxes consists of the following (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Domestic | $ | 268,097 | $ | 378,478 | $ | 173,099 | ||||||||||||||
| Foreign | 330,960 | 633,945 | 205,850 | |||||||||||||||||
| Net income before provision for (benefit from) income taxes | $ | 599,057 | $ | 1,012,423 | $ | 378,949 |
The provision for (benefit from) income taxes consists of the following (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Federal | ||||||||||||||||||||
| Current | $ | 188,050 | $ | 157,383 | $ | 55,291 | ||||||||||||||
| Deferred | (55,579) | (25,598) | (11,749) | |||||||||||||||||
| 132,471 | 131,785 | 43,542 | ||||||||||||||||||
| State | ||||||||||||||||||||
| Current | 34,621 | 28,365 | 8,862 | |||||||||||||||||
| Deferred | (12,265) | (5,860) | (2,121) | |||||||||||||||||
| 22,356 | 22,505 | 6,741 | ||||||||||||||||||
| Foreign | ||||||||||||||||||||
| Current | 56,537 | 42,681 | 29,399 | |||||||||||||||||
| Deferred | 26,120 | 43,432 | (1,476,621) | |||||||||||||||||
| 82,657 | 86,113 | (1,447,222) | ||||||||||||||||||
| Provision for (benefit from) income taxes | $ | 237,484 | $ | 240,403 | $ | (1,396,939) |
The differences between income taxes using the federal statutory income tax rate for 2022, 2021 and 2020 and our effective tax rates are as follows:
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| U.S. federal statutory income tax rate | 21.0 | % | 21.0 | % | 21.0 | % | ||||||||||||||
| State income taxes, net of federal tax benefit | 3.7 | 2.2 | 1.5 | |||||||||||||||||
| U.S. tax on foreign earnings | 5.6 | 2.5 | (1.2) | |||||||||||||||||
| Impact of differences in foreign tax rates | 3.3 | (2.0) | 5.6 | |||||||||||||||||
| Stock-based compensation | 2.1 | (0.3) | 1.1 | |||||||||||||||||
| Impact of intra-entity intellectual property rights transfer | — | — | (395.6) | |||||||||||||||||
| Settlement on audits | 1.9 | — | (1.4) | |||||||||||||||||
| Change in valuation allowance | 1.7 | 1.1 | 0.1 | |||||||||||||||||
| Other items not individually material | 0.3 | (0.8) | 0.3 | |||||||||||||||||
| Effective tax rate | 39.6 | % | 23.7 | % | (368.6) | % |
We intend to continue reinvesting our foreign subsidiary earnings indefinitely and do not expect any additional costs that we may incur upon repatriation of these foreign earnings to be significant.
During the year ended December 31, 2020, we completed an intra-entity transfer of certain intellectual property rights and fixed assets to our new Swiss subsidiary, where our EMEA regional headquarters is located beginning January 1, 2020. The transfer of intellectual property rights did not result in a taxable gain; however, it did result in a step-up of the Swiss tax deductible basis in the transferred assets, and accordingly, created a temporary difference between the book basis and the tax basis of such intellectual property rights. Consequently, this transaction resulted in the recognition of a deferred tax asset and related one-time tax benefit of approximately $1,493.5 million during the year ended December 31, 2020, which is the net impact of the deferred tax asset recognized as a result of the additional Swiss tax deductible basis in the transferred assets and certain costs related to the transfer of fixed assets and inventory.
As of December 31, 2022 and 2021, the significant components of our deferred tax assets and liabilities are (in thousands):
| December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Deferred tax assets: | ||||||||||||||
| Net operating loss and capital loss carryforwards | $ | 15,380 | $ | 11,069 | ||||||||||
| Reserves and accruals | 32,759 | 47,641 | ||||||||||||
| Stock-based compensation | 19,469 | 13,576 | ||||||||||||
| Deferred revenue | 117,039 | 83,514 | ||||||||||||
| Capitalized research & development | 54,293 | 413 | ||||||||||||
| Amortizable tax basis in intangibles | 1,350,434 | 1,392,471 | ||||||||||||
| Other | 16,645 | 15,645 | ||||||||||||
| Deferred tax assets before valuation allowance | 1,606,019 | 1,564,329 | ||||||||||||
| Valuation allowance | (23,286) | (12,938) | ||||||||||||
| Total deferred tax assets | 1,582,733 | 1,551,391 | ||||||||||||
| Deferred tax liabilities: | ||||||||||||||
| Depreciation and amortization | 11,407 | 12,328 | ||||||||||||
| Acquisition-related intangibles | 26,008 | 28,989 | ||||||||||||
| Other | 3,438 | 6,931 | ||||||||||||
| Total deferred tax liabilities | 40,853 | 48,248 | ||||||||||||
| Net deferred tax assets | 1,541,880 | 1,503,143 |
The available positive evidence at December 31, 2022 included historical operating profits and a projection of future income sufficient to realize most of our remaining deferred tax assets. As of December 31, 2022, it was considered more likely
than not that our deferred tax assets would be realized with the exception of certain net operating loss, capital loss carryovers and unrealized translation losses as we are unable to forecast sufficient future profits to realize the deferred tax assets. The total valuation allowance as of December 31, 2022 was $23.3 million. During the year ended December 31, 2022, the valuation allowance increased by $10.3 million primarily due to deferred tax assets related to unrealized translation losses and net operating loss from one of our German subsidiaries and the deferred tax assets from our Russian commercial entity are not more likely than not to be realized.
As of December 31, 2022, we have foreign net operating loss carryforwards of approximately $48.2 million, attributed mainly to losses in China, Italy and Germany. The losses in Italy and Germany can be carried forward indefinitely. The operating loss carryforwards in China, if not utilized, will expire beginning 2026.
The changes in the balance of gross unrecognized tax benefits, which exclude interest and penalties, for the year ended December 31, 2022, 2021 and 2020, are as follows (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Gross unrecognized tax benefits at January 1, | $ | 63,295 | $ | 46,320 | $ | 46,650 | ||||||||||||||
| Increases related to tax positions taken during the current year | 84,249 | 27,710 | 20,592 | |||||||||||||||||
| Increases related to tax positions taken during a prior year | 15,411 | 5,471 | 10,201 | |||||||||||||||||
| Decreases related to tax positions taken during a prior year | (2,647) | (5,804) | (29,977) | |||||||||||||||||
| Decreases related to expiration of statute of limitations | (4,582) | (8,986) | — | |||||||||||||||||
| Decreases related to settlement with tax authorities | (14,166) | (1,416) | (1,146) | |||||||||||||||||
| Gross unrecognized tax benefits at December 31, | $ | 141,560 | $ | 63,295 | $ | 46,320 | ||||||||||||||
The total amount of gross unrecognized tax benefits as of December 31, 2022 was $141.6 million, of which $134.3 million would impact our effective tax rate if recognized.
We file U.S. federal, U.S. state, and non-U.S. income tax returns. Our major tax jurisdictions include U.S. federal, the State of California and Switzerland. For U.S. federal and state tax returns, we are no longer subject to tax examinations for years before 2017 and 2015, respectively. Our Israeli subsidiary was under tax audit for years 2016 through 2019. During the fourth quarter of 2022, we settled the audit with the Israel Tax Authority in connection with a 2016 transaction to which our Israeli subsidiary was a party. As a result, we are no longer subject to tax examinations for years through 2021 in Israel. With few exceptions, we are no longer subject to examination by other foreign tax authorities for years before 2015.
We have elected to recognize interest and penalties related to unrecognized tax benefits as a component of income taxes. Interest and penalties included in tax expense for the year ended December 31, 2022, 2021 and 2020 as well as accrued as of December 31, 2022 and 2021 were not material. While we defend income tax audits in various jurisdictions and the results of such audits may differ materially from the amounts accrued for each year, we cannot currently ascertain the bases on which any given audit will be ultimately resolved. Accordingly, we are unable to estimate the range of possible adjustments to our balance of gross unrecognized tax benefits in the next 12 months.
Note 13. Net Income per Share
Basic net income per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed using the weighted average number of shares of common stock, adjusted for any dilutive effect of potential common stock. Potential common stock, computed using the treasury stock method, includes RSUs, MSUs, PSUs and our ESPP.
The following table sets forth the computation of basic and diluted net income per share attributable to common stock (in thousands, except per share amounts):
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Numerator: | ||||||||||||||||||||
| Net income | $ | 361,573 | $ | 772,020 | $ | 1,775,888 | ||||||||||||||
| Denominator: | ||||||||||||||||||||
| Weighted average common shares outstanding, basic | 78,190 | 78,917 | 78,760 | |||||||||||||||||
| Dilutive effect of potential common stock | 230 | 753 | 470 | |||||||||||||||||
| Total shares, diluted | 78,420 | 79,670 | 79,230 | |||||||||||||||||
| Net income per share, basic | $ | 4.62 | $ | 9.78 | $ | 22.55 | ||||||||||||||
| Net income per share, diluted | $ | 4.61 | $ | 9.69 | $ | 22.41 | ||||||||||||||
| Anti-dilutive potential common shares 1 | 320 | 1 | 280 |
1 Represents stock-based awards not included in the calculation of diluted net income per share as the effect would have been anti-dilutive.
Note 14. Supplemental Cash Flow Information
The supplemental cash flow information consists of the following (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Taxes paid | $ | 231,884 | $ | 203,309 | $ | 76,332 | ||||||||||||||
| Non-cash investing and financing activities: | ||||||||||||||||||||
| Acquisition of property, plant and equipment in accounts payable and accrued liabilities | $ | 35,767 | $ | 64,135 | $ | 37,267 | ||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||||||
| Operating cash flows from operating leases | $ | 31,015 | $ | 29,769 | $ | 26,022 | ||||||||||||||
| Right-of-use assets obtained in exchange for lease obligations: | ||||||||||||||||||||
| Operating leases | $ | 34,144 | $ | 68,463 | $ | 47,981 |
Note 15. Segments and Geographical Information
Segment Information
We report segment information based on the management approach. The management approach designates the internal reporting used by our Chief Operating Decision Maker for decision making and performance assessment as the basis for determining our reportable segments. The performance measures of our reportable segments include net revenues, gross profit and income from operations. Income from operations for each segment includes all geographic revenues, related cost of net revenues and operating expenses directly attributable to the segment. Certain operating expenses are attributable to operating segments and each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Costs not specifically allocated to segment income from operations generally include various corporate expenses such as stock-based compensation and costs related to IT, facilities, human resources, accounting and finance, legal and regulatory, other separately managed general and administrative costs outside the operating segments and restructuring costs. We group our operations into two reportable segments: Clear Aligner segment and Imaging Systems and CAD/CAM services (“Systems and Services”) segment.
Summarized financial information by segment is as follows (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Net revenues | ||||||||||||||||||||
| Clear Aligner | $ | 3,072,585 | $ | 3,247,080 | $ | 2,101,459 | ||||||||||||||
| Systems and Services | 662,050 | 705,504 | 370,482 | |||||||||||||||||
| Total net revenues | $ | 3,734,635 | $ | 3,952,584 | $ | 2,471,941 | ||||||||||||||
| Gross profit | ||||||||||||||||||||
| Clear Aligner | $ | 2,228,170 | $ | 2,474,373 | $ | 1,532,130 | ||||||||||||||
| Systems and Services | 405,605 | 460,982 | 231,105 | |||||||||||||||||
| Total gross profit | $ | 2,633,775 | $ | 2,935,355 | $ | 1,763,235 | ||||||||||||||
| Income from operations | ||||||||||||||||||||
| Clear Aligner | $ | 1,134,420 | $ | 1,325,866 | $ | 768,045 | ||||||||||||||
| Systems and Services | 179,765 | 259,127 | 96,052 | |||||||||||||||||
| Unallocated corporate expenses | (671,590) | (608,593) | (476,926) | |||||||||||||||||
| Total income from operations | $ | 642,595 | $ | 976,400 | $ | 387,171 | ||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Clear Aligner | $ | 14,816 | $ | 10,648 | $ | 8,975 | ||||||||||||||
| Systems and Services | 994 | 705 | 734 | |||||||||||||||||
| Unallocated corporate expenses | 117,557 | 102,983 | 88,718 | |||||||||||||||||
| Total stock-based compensation | $ | 133,367 | $ | 114,336 | $ | 98,427 | ||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||
| Clear Aligner | $ | 57,888 | $ | 50,723 | $ | 41,371 | ||||||||||||||
| Systems and Services | 28,300 | 21,581 | 16,798 | |||||||||||||||||
| Unallocated corporate expenses | 39,605 | 36,425 | 35,369 | |||||||||||||||||
| Total depreciation and amortization | $ | 125,793 | $ | 108,729 | $ | 93,538 |
The following table reconciles total segment income from operations in the table above to net income before provision for (benefit from) income taxes (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Total segment income from operations | $ | 1,314,185 | $ | 1,584,993 | $ | 864,097 | ||||||||||||||
| Unallocated corporate expenses | (671,590) | (608,593) | (476,926) | |||||||||||||||||
| Total income from operations | 642,595 | 976,400 | 387,171 | |||||||||||||||||
| Interest income | 5,367 | 3,103 | 3,125 | |||||||||||||||||
| Other income (expense), net | (48,905) | 32,920 | (11,347) | |||||||||||||||||
| Net income before provision for (benefit from) income taxes | $ | 599,057 | $ | 1,012,423 | $ | 378,949 |
Geographical Information
Net revenues are presented below by geographic area (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Net revenues 1: | ||||||||||||||||||||
| U.S. | $ | 1,660,045 | $ | 1,724,296 | $ | 1,099,564 | ||||||||||||||
| Switzerland | 1,216,094 | 1,353,229 | 809,080 | |||||||||||||||||
| Other International | 858,496 | 875,059 | 563,297 | |||||||||||||||||
| Total net revenues | $ | 3,734,635 | $ | 3,952,584 | $ | 2,471,941 |
1 Net revenues are attributed to countries based on the location of where revenues are recognized by our legal entities.
Tangible long-lived assets, which includes Property, plant and equipment, net, and Operating lease right-of-use assets, net, are presented below by geographic area (in thousands):
| December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Long-lived assets 1: | ||||||||||||||
| Switzerland | $ | 532,921 | $ | 444,205 | ||||||||||
| U.S. | 214,804 | 210,582 | ||||||||||||
| China | 118,669 | 125,346 | ||||||||||||
| Other International | 484,341 | 423,050 | ||||||||||||
| Total long-lived assets | $ | 1,350,735 | $ | 1,203,183 |
1 Long-lived assets are attributed to countries based on the location of our entity that owns or leases the assets.
Note 16. Restructuring and Other Charges
Restructuring Activities
During the fourth quarter of 2022, we initiated a restructuring plan to increase efficiencies across the organization which is expected to be completed in the first half of 2023. We incurred approximately $10.2 million in restructuring expenses, of which $2.9 million was recorded in Cost of net revenues and $7.3 million was recorded in Restructuring and other charges.
Activity related to the restructuring liabilities associated with our restructuring initiatives consist of the following (in thousands):
| Severance and related costs | Impairment Charges | Total | ||||||||||||||||||
| Restructuring charges | $ | 8,723 | $ | 1,453 | $ | 10,176 | ||||||||||||||
| Cash payments | (4,807) | — | (4,807) | |||||||||||||||||
| Non-cash charges | — | (1,453) | (1,453) | |||||||||||||||||
| Balance as of December 31, 2022 1 | $ | 3,916 | $ | — | $ | 3,916 |
1 Included in “Accrued liabilities” within our Consolidated Balance Sheet.
Other Charges
In addition to the restructuring charges, during the fourth quarter of 2022, we also incurred certain lease termination costs of $2.3 million and asset impairments of $1.8 million which were also recorded in Restructuring and other charges.
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