Align Technology 10-Q 2021-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2021

OR

For the transition period from to

Commission file number: 000-32259

ALIGN TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

410 North Scottsdale Road, Suite 1300

Tempe, Arizona 85281

(Address of principal executive offices)

(602) 742-2000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

ALIGN TECHNOLOGY, INC.

INDEX

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

PART I—FINANCIAL INFORMATION

ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

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

ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

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

ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

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Forward-Looking Statements

In addition to historical information, this quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include, among other things, our expectations and intentions regarding our strategic objectives and the means to achieve them; our beliefs regarding digital dentistry and its potential to impact our business; our intentions regarding expanding our business; our expectations regarding the utilization rates for our products, including the impact of marketing on those rates and causes for periodic fluctuations of the rates; our expectation regarding customer and consumer purchasing behavior, including expectations related to consumer demand for digital solutions; our expectations for future investments in and benefits from sales and marketing activities; our expectations regarding the near and long-term implications of the COVID-19 pandemic on the global economy, including global supply chain issues; our preparedness and our customers' preparedness to react to changing circumstances and demand, results of operations and financial condition; our expectations for our expenses and capital obligations and expenditures in particular; our intentions to control spending and for investments; our intentions regarding the investment of our international earnings from operations; our belief regarding the sufficiency of our cash balances and borrowing capacity; our judgments regarding the estimates used in our revenue recognition, and assessment of goodwill and intangible assets; our expectations regarding our tax positions and the judgments we make related to our tax obligations; our predicted level of operating expenses and gross margins and other factors beyond our control; our expectations regarding staying in compliance with laws and regulations currently applicable to, or which may become applicable to, our business both in the United States and internationally; as well as other statements regarding our future operations, financial condition and prospects and business strategies. These statements may contain words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or other words indicating future results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in particular, the risks discussed below in Part II, Item 1A “Risk Factors.” We undertake no obligation to revise or update these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the Securities and Exchange Commission (the “SEC”).

Executive Overview of Results

COVID-19 Update

The outbreak of COVID-19 virus in late 2019 and the pandemic that followed has caused significant volatility and uncertainty in the global and regional economies. This has led to changes in consumer and business behavior, fear and market fluctuations, and restrictions on business and individual activities, all of which has materially impacted supply and demand in broad sectors of the world markets. For us, sales and results of operations were initially materially impacted by the preventative measures implemented to slow the spread, including the complete closure or significantly reduced operations of dental practices. In subsequent quarters, our business rebounded sharply, although the inconsistent pace and scale of recovery generally continues to reverberate throughout global markets, evidenced by significant shortages of raw materials, energy, components, transportation and delivery services, and labor. Additionally, variants of the COVID-19 virus continue to drive unpredictability and hamper the normalization of supply and demand as businesses react to new or renewed localized preventative measures intended to slow the spread of the virus. Notwithstanding these setbacks, in general, the scale and time during which these additional measures are implemented are less impactful on our customers and their patients than the most drastic measures imposed in 2020. For instance, globally both public and private dental practices largely remain open, although many continue to operate at less than pre-pandemic capacities.

Conversely, as a result of the restrictive measures imposed to contain the spread of the virus, the demand for digital solutions has increased as society and businesses have adapted to practices such as social distancing and remote working. Our efforts to promote the digital transformation of dental practices with our clear aligners, intraoral scanners, clinical treatment planning and other offerings has allowed us to quickly respond to increased demand in the dental field. We expect the number of customers that realize the efficiencies and benefits of our digital solutions for their practices and patients to continue to grow even as the pandemic-related restrictions remain unpredictable.

To address the increasing demand for digital solutions, we intend to continue targeting our investment plans in sales, marketing and innovation as well as our capital expenditures, particularly as we expand our manufacturing operations in locations such as Europe, in order to meet the anticipated demand for our solutions.

Nevertheless, the continuing evolution of the pandemic, including the setbacks occurring as a result of new virus strains and the continuing business restrictions and lockdowns, supply chain shortages and delays, the positive impacts of vaccinations, the uncertainties regarding consumer spending as demand for entertainment, dining, and travel returns and remote working diminishes, remains highly fluid and unpredictable. Consequently, the COVID-19 pandemic has caused, and is expected to continue causing for an unknown period of time, disruptions to many of the norms we have historically experienced in the cadence of our quarterly results of operations. As such, our recent operating results and levels of growth may not be indicative of our future performance. Ultimately, however, we believe the digital transition to dentistry that began before the pandemic will continue to be positive for our business, results of operations, cash flows, and financial condition, and we intend to adjust spending to coincide with the pace of recovery and changes in demand.

Further discussion of the impact of the COVID-19 pandemic on our business may be found in Part II, Item 1A of this Quarterly Report on Form 10-Q under the heading “Risk Factors.”

Key financial and operating metrics

Our business strategic priorities remain focused on four principal pillars of growth: (i) international expansion; (ii) general practitioners (“GP”) adoption; (iii) patient demand & conversion; and (iv) orthodontic utilization. We measure our performance against these strategic priorities by the achievement of key financial and operating metrics.

For the three months ended September 30, 2021, we achieved the following, taking into consideration that percentage changes from prior year financial results include the impact of COVID-19 and do not necessarily reflect our future growth rates:

• Revenues of $1.0 billion, an increase of 38.4% year-over-year;

• Clear Aligner revenues of $837.6 million, an increase of 34.9% year-over-year reflecting the expanding opportunity for Invisalign treatment among adults globally, as well as the underlying orthodontic market as we continue to build awareness of the Invisalign brand and drive utilization among teens and younger patients through increased consumer marketing.

*◦*Americas Clear Aligner revenues of $408.4 million, an increase of 34.3% year-over-year;

◦International Clear Aligner revenues of $375.5 million, an increase of 33.5% year-over-year;

◦Clear Aligner volume increase of 32.1% year-over-year and Clear Aligner volume for teenage patients increase of 26.6% year-over-year;

• Imaging Systems and CAD/CAM Services revenues of $178.3 million, an increase of 57.3% year-over-year reflecting strong growth across all regions with continued adoption of the iTero Element 5D and 5D Plus Series of next generation scanners and imaging systems launched in February 2021, as well as increased average selling prices (“ASP”) predominately due to favorable product mix shift towards higher priced scanners;

*•*Income from operations of $261.2 million and operating margin of 25.7%;

• Effective tax rate of 30.9%;

• Net income of $181.0 million with diluted net income per share of $2.28;

• Cash and cash equivalents of $1.2 billion as of September 30, 2021;

• Operating cash flow of $355.0 million;

• Capital expenditures of $124.3 million, predominantly related to increases to our manufacturing capacity and facilities; and

• Number of employees was 21,590 as of September 30, 2021, an increase of 25.4% year-over-year.

Other Statistical Data and Trends

• Digital Scanner Case Submissions. For the third quarter of 2021, total Invisalign cases submitted with a digital scanner in the Americas increased to 87.9%, up from 83.2% in the third quarter of 2020 and international scans increased to 79.3%, up from 72.1% in the third quarter of 2020. For the third quarter of 2021, 96.1% of Invisalign cases submitted by North American orthodontists were submitted digitally. Our quarterly utilization rates for the last five quarters are as follows:

***** Invisalign utilization rates are calculated by the number of cases shipped divided by the number of doctors to whom cases were shipped. Our International region includes Europe, Middle East and Africa (“EMEA”) and Asia Pacific (“APAC”). Latin America (“LATAM”) is excluded from the International region based on its immateriality to the quarter, however is included in the Total utilization.

• Total utilization rate in the third quarter of 2021 increased to 7.7 cases per doctor compared to 7.1 cases per doctor in the third quarter of 2020.

▪North America: Utilization rate among our North American orthodontist customers increased to 29.7 cases per doctor in the third quarter of 2021 compared to 24.1 cases per doctor in the third quarter of 2020 and the utilization rate among our North American GP customers increased to 5.0 cases per doctor in the third quarter of 2021 compared to 4.2 cases per doctor in the third quarter of 2020.

▪International: International doctor utilization rate was 6.5 cases per doctor in the third quarter of 2021 compared to 6.4 cases in the third quarter of 2020.

Results of Operations

Net Revenues by Reportable Segment

We group our operations into two reportable segments: Clear Aligner segment and Systems and Services segment.

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

▪Comprehensive Products include, but are not limited to, Invisalign Comprehensive and Invisalign First.

▪Non-Comprehensive Products include, but are not limited to, Invisalign Moderate, Lite and Express packages and Invisalign Go.

▪Non-Case includes, but is not limited to, Vivera retainers along with our training and ancillary products for treating malocclusion.

• Our Systems and Services segment consists of our iTero intraoral scanning systems, which includes a single hardware platform and restorative or orthodontic software options, OrthoCAD services and ancillary products, as well as exocad’s CAD/CAM software solution that integrates workflows to dental labs and dental practices.

Net revenues for our Clear Aligner and Systems and Services segments by region for the three and nine months ended September 30, 2021 and 2020 are as follows (in millions):

Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.

Clear Aligner Case Volume

Case volume data which represents Clear Aligner case shipments for the three and nine months ended September 30, 2021 and 2020 is as follows (in thousands):

Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.

For the three and nine months ended September 30, 2021, total net revenues increased by $281.8 million and $1.3 billion, respectively, as compared to the same periods in 2020 primarily as a result of increases in Clear Aligner volume of 32.1% and 77.9%, respectively, and an increase in the number of scanners recognized across most regions.

Clear Aligner - Americas

For the three months ended September 30, 2021, Americas net revenues increased by $104.3 million as compared to the same period in 2020 primarily due to a 36.4% increase in Clear Aligner volume which resulted in higher net revenues of $110.7 million, partially offset by lower Clear Aligner ASP that decreased net revenues by $6.4 million. Lower ASP was mostly due to higher promotional discounts which decreased net revenues by $8.5 million and higher net deferrals which decreased net revenues by $4.2 million. The decreases in ASP were partially offset by favorable foreign exchange which increased net revenues by $5.0 million.

For the nine months ended September 30, 2021, Americas net revenues increased by $483.4 million, as compared to the same period in 2020, primarily due to a 81.6% increase in Clear Aligner volume which resulted in higher net revenues of $557.3 million, partially offset by lower Clear Aligner ASP that decreased net revenues by $73.9 million. Lower ASP was mostly due to higher net deferrals which decreased revenues by $55.4 million and higher promotional discounts which decreased net revenues by $42.5 million. The decreases in ASP were partially offset by favorable product mix shift which increased net revenues by $22.4 million.

Clear Aligner - International

For the three months ended September 30, 2021, International net revenues increased by $94.3 million, as compared to the same period in 2020, primarily due to a 27.0% increase in Clear Aligner volume which resulted in higher net revenues of $75.8 million. Higher Clear Aligner ASP increased net revenues by $18.5 million mostly due to lower promotional discounts and favorable exchange rates.

For the nine months ended September 30, 2021, International net revenues increased by $486.2 million, as compared to the same period in 2020, primarily due to a 73.5% increase in Clear Aligner volume which resulted in higher net revenues of $464.8 million. Higher Clear Aligner ASP increased net revenues by $21.4 million mostly due to favorable exchange rates

which increased net revenues by $65.3 million and favorable product mix shift which increased net revenues by $18.3 million. The increases in ASP were partially offset by higher net deferrals which decreased net revenues by $62.6 million.

Clear Aligner - Non-Case

For the three and nine months ended September 30, 2021, non-case net revenues increased by $18.3 million and $61.5 million, as compared to the same periods in 2020, due to increased Vivera volume across all regions.

Systems and Services

For the three months ended September 30, 2021, Systems and Services net revenues increased by $64.9 million, as compared to the same period in 2020, due to a higher number of scanners recognized which increased net revenues by $27.0 million. Higher scanner ASP increased net revenues by $16.4 million mostly due to favorable product mix shift towards higher priced scanners. Additionally, net revenues increased by $21.5 million primarily as a result of higher iTero service revenues mostly due to a larger scanner install base.

For the nine months ended September 30, 2021, Systems and Services net revenues increased by $253.0 million, as compared to the same period in 2020, due to a higher number of scanners recognized which increased net revenues by $138.3 million. Higher scanner ASP increased net revenues by $39.1 million mostly due to favorable product mix shift towards higher priced scanners. Additionally, net revenues increased by $75.5 million as a result of higher iTero service revenues mostly due to a larger scanner install base and additional exocad CAD/CAM revenues.

Cost of net revenues and gross profit (in millions):

Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.

Cost of net revenues includes personnel-related costs including payroll and stock-based compensation for staff involved in the production process, the cost of materials, packaging, shipping costs, depreciation on capital equipment and facilities used in the production process, amortization of acquired intangible assets and training costs.

Clear Aligner

For the three and nine months ended September 30, 2021, our gross margin percentage increased, as compared to the same periods in 2020, primarily due to manufacturing efficiencies driven by higher production volumes.

Systems and Services

For the three and nine months ended September 30, 2021, our gross margin percentage increased, as compared to the same period in 2020, as a result of higher ASP from a product mix shift and an increase in service revenues which was partially offset by higher freight costs.

Selling, general and administrative (in millions):

Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.

Selling, general and administrative expense generally includes personnel-related costs including payroll, stock-based compensation and commissions for our sales force, marketing and advertising expenses including media, public relations, marketing materials, clinical education, trade shows and industry events, legal and outside service costs, equipment, software and maintenance costs, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and Information Technology (“IT”).

For the three months ended September 30, 2021, selling, general and administrative expense increased, compared to the same period in 2020, primarily due to higher compensation related costs of $41.5 million from higher salaries, fringe benefits, commissions, incentive bonuses and stock-based compensation mainly due to increased headcount. Additionally, we also incurred higher advertising and marketing costs of $53.4 million during the three months ended September 30, 2021.

For the nine months ended September 30, 2021, selling, general and administrative expense increased, compared to the same period in 2020, primarily due to higher compensation related costs of $191.5 million from higher salaries, fringe benefits, commissions, incentive bonuses and stock-based compensation due to increased headcount as we continue to invest in sales and marketing to penetrate into new markets. We also incurred higher advertising and marketing costs of $147.2 million during the nine months ended September 30, 2021.

Research and development (in millions):

Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.

Research and development expense generally includes personnel-related costs, including payroll and stock-based compensation, outside service costs associated with the research and development of new products and enhancements to existing products, software, equipment, material and maintenance costs, depreciation and amortization expense and allocations of corporate overhead expenses including facilities and IT.

For the three and nine months ended September 30, 2021, research and development expense increased, compared to the same periods in 2020, primarily due to higher compensation costs including higher salaries, fringe benefits, and incentive bonuses mainly from increased headcount as we continue to focus our investments in innovation and research.

Income from operations (in millions):

Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.

1 Refer to Note 13 “Segments and Geographical Information” of the Notes to Condensed Consolidated Financial Statements for details on unallocated corporate expenses and the reconciliation to Condensed Consolidated Income from Operations.

Clear Aligner

For the three months ended September 30, 2021, our operating margin decreased slightly, compared to the same period in 2020, due to higher operating expenses which were partially offset by higher gross margins.

For the nine months ended September 30, 2021, our operating margin increased, compared to the same period in 2020, due to higher gross margins and operating leverage on higher net revenues.

Systems and Services

For the three and nine months ended September 30, 2021, our operating margin percentage increased, compared to the same periods in 2020, due to operating leverage on higher net revenues and higher gross margins due to a favorable mix shift towards higher priced scanners.

Interest income (in millions):

Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.

Interest income generally includes interest earned on cash, cash equivalents and investment balances.

For the three months ended September 30, 2021, there was no significant change to interest income compared to the same period in 2020.

For the nine months ended September 30, 2021, interest income decreased slightly, compared to the same period in 2020, mainly due to the divestiture of our marketable securities portfolio during the first quarter of 2020 offset by interest income recognized during the nine months ended September 30, 2021 from the SDC arbitration award regarding the value of Align’s capital account balance.

Other income (expense), net (in millions):

Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.

Other income (expense), net, generally includes foreign exchange gains and losses, gains and losses on foreign currency forward contracts, interest expense, gains and losses on equity investments and other miscellaneous charges.

For the three months ended September 30, 2021, other income (expense), net decreased, compared to the same period in 2020, primarily due to net foreign exchange losses in the three months ended September 30, 2021 as compared to net foreign exchange gains in the same period in 2020. This was partially offset by an unrealized gain on investment held in a private company recognized in the three months ended September 30, 2021.

For the nine months ended September 30, 2021, other income (expense), net increased, compared to the same period in 2020, primarily due to a $43.4 million gain related to the SDC arbitration award recognized in the first quarter of 2021, a $10.2 million loss on a foreign currency forward contract related to the exocad acquisition recognized in 2020 and an increase due to fair value changes relating to an investment held in a private company recognized in the nine months ended September 30, 2021 compared to 2020. These increases were partially offset by net foreign exchange losses in the nine months ended September 30, 2021 as compared to net foreign exchange gains in the same period in 2020.

Provision for (benefit from) income taxes (in millions):

Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.

Our effective tax rate differs from the statutory federal income tax rate of 21% for the three and nine months ended September 30, 2021 primarily due to foreign income taxed at different rates, state income taxes, and non-deductible expenses in the U.S., partially offset by the recognition of excess tax benefits related to stock-based compensation. Our effective tax rate differs from the statutory federal income tax rate of 21% for the three months ended September 30, 2020 primarily due to state income taxes and non-deductible expenses in the U.S., partially offset by tax benefit resulting from settlement of an income tax audit. Our effective tax rate differs from the statutory federal income tax rate of 21% for the nine months ended September 30, 2020 mainly as a result of the recognition of tax benefits associated with the intra-entity transfer of certain intellectual property rights and fixed assets completed last year.

The increase in our effective tax rate for the three months ended September 30, 2021, compared to the same period in 2020, is primarily attributable to foreign income taxed at different rates and a tax benefit recognized last year resulting from settlement of an income tax audit. The increase in our effective tax rate for the nine months ended September 30, 2021, compared to the same period in 2020, is primarily attributable to the recognition of tax benefits associated with the intra-entity transfer of certain intellectual property rights and fixed assets during the nine months ended September 30, 2020.

During the nine months ended September 30, 2020, we completed an intra-entity transfer of certain intellectual property rights and fixed assets to our Swiss entity. 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 nine months ended September 30, 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. The amortization of this deferred tax asset depends on the profitability of our Swiss headquarters and the recognition of this tax benefit is allowed for a maximum recovery period of 15 years.

Liquidity and Capital Resources

Liquidity and Trends

We fund our operations from product sales. As of September 30, 2021 and December 31, 2020, we had cash and cash equivalents, which are comprised of money market funds, of $1.2 billion and $960.8 million, respectively.

As of September 30, 2021 and December 31, 2020, approximately $630.3 million and $412.5 million of cash and cash equivalents was held by our foreign subsidiaries, respectively. Our intent is to permanently reinvest our earnings from our international operations going forward, and our current plans do not require us to repatriate them to fund our U.S. operations as we generate sufficient domestic operating cash flow and have access to external funding under our $300.0 million revolving line of credit. We believe that our current cash balances and the borrowing capacity under our credit facility, if necessary, will be sufficient to fund our business for at least the next 12 months.

For 2021, we expect our investments in capital expenditures to exceed $400.0 million. Capital expenditures primarily relate to building construction and improvements as well as additional manufacturing capacity to support our international expansion. This includes our planned investment in a new manufacturing facility in Wroclaw, Poland, our first one in the EMEA region. As we expand our manufacturing operations and penetrate into newer markets, we also expect to invest significantly in sales, marketing and innovation to meet the growing demand for our solutions.

As of September 30, 2021, we have $825.0 million available for repurchase under the stock repurchase program authorized by our Board of Directors in May 2021. Subsequent to the third quarter, on October 29, 2021, we entered into an accelerated stock repurchase agreement to repurchase $100.0 million under the program.

Additional information regarding the impact of COVID-19 on our liquidity and capital resources may be found in Part II, Item 1A of this Quarterly Report on Form 10-Q under the heading “Risk Factors”.

Sources and Uses of Cash

The following table summarizes our condensed consolidated cash flows for the nine months ended September 30, 2021 and 2020 (in thousands):

Operating Activities

For the nine months ended September 30, 2021, cash flows from operations of $899.7 million resulted primarily from our net income of approximately $581.1 million as well as the following:

Adjustments to net income

• Stock-based compensation of $84.5 million related to equity awards granted to employees and directors;

• Depreciation and amortization of $79.1 million related to our investments in property, plant and equipment and intangible assets;

• Gain related to our SDC arbitration award of $43.4 million; and

• Changes in deferred taxes of $48.1 million primarily related to current year amortization and adjustments to our deferred tax assets of our Swiss entity.

Significant changes in working capital

• Increase of $348.4 million in deferred revenues primarily related to increased sales volume in both our Clear Aligner and Systems and Services segments and timing of revenue recognition;

• Increase of $216.1 million in accounts receivable which is primarily a result of the increase in sales; and

• Increase of $74.7 million in prepaid expenses and other assets and an increase of $107.2 million in accrued and other long-term liabilities due to the timing of payment and activities.

Investing Activities

Net cash used in investing activities was $255.7 million for the nine months ended September 30, 2021 which primarily consisted of purchases of property and plant and equipment of $292.0 million, which was partially offset by $43.4 million of proceeds from our SDC arbitration award in addition to $4.6 million received on an unsecured promissory note.

Financing Activities

Net cash used in financing activities was $356.8 million for the nine months ended September 30, 2021 which consisted of payments related to our accelerated stock repurchase agreements of $275.0 million and payroll taxes paid for equity awards through share withholdings of $107.3 million which were partially offset by $25.6 million of proceeds from the issuance of common stock.

Contractual Obligations

Our contractual obligations have not significantly changed since December 31, 2020 as disclosed in our Annual Report on Form 10-K, other than obligations described in the Form 10-Q herein, including items disclosed in Note 7 “Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements. We believe that our current cash balances and the borrowing capacity under our credit facility, if necessary, will be sufficient to fund our business for at least the next 12 months. If we are unable to generate adequate operating cash flows and need more funds beyond our available liquid investments and those available under our credit facility, we may need to suspend our stock repurchase programs or seek additional sources of capital through equity or debt financing, collaborative or other arrangements with other companies, bank financing and other sources in order to realize our objectives and to continue our operations. There can be no assurance that we will be able to obtain additional debt or equity financing on terms acceptable to us, or at all. If adequate funds are not available, we may need to make business decisions that could adversely affect our operating results such as modifications to our pricing policy, business structure or operations. Accordingly, the failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our business, results of operations and financial condition.

Off-Balance Sheet Arrangements

As of September 30, 2021, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources other than certain items disclosed in Note 11 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures at the date of the financial statements. We evaluate our estimates on an on-going basis, including those related to revenue recognition, goodwill and finite-lived assets, business combination, income taxes and legal proceedings and litigations. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates.

There have been no material changes to our critical accounting policies and estimates from the information provided in the “Critical Accounting Policies and Estimates” section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2020.

Recent Accounting Pronouncements

See Note 1 “Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements.

There have been no material changes in our market risk during the nine months ended September 30, 2021, compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2020.

Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of September 30, 2021, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

Changes in internal control over financial reporting.

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For a discussion of legal proceedings, refer to Note 6 “Legal Proceedings” of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

The following discussion is divided into two sections. The first, entitled “Risks Relating to our Business Operations and Strategy,” discusses some of the risks that may affect our business, results of operations and financial condition. The second, captioned “General Risk Factors,” discusses some of the risks that apply generally to companies and to owning our common stock, in particular. You should carefully review both sections, as well as our condensed consolidated financial statements and notes thereto and other information appearing in this Quarterly Report on Form 10-Q, for important information regarding these and other risks that may affect us. The order we have chosen to list the risks below or the sections in which we have identified them should not be interpreted to mean we deem any risks to be more or less important or likely to occur or, if any do occur, that their impact may be any less significant than others. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this report because they could cause our actual results and conditions to differ materially from those statements. Before you invest in Align, you should know that investing involves risks, including those described below. The risks below are not the only ones we face. If any of the risks actually occur, our business, financial condition and results of operations could be negatively affected, the trading price of our common stock could decline, and you may lose all or part of your investment.

Summary of Risk Factors

The following is a summary of the risks that are more fully described below in this “Risk Factors” section:

Risks Relating to our Business Operations and Strategy

• Our results of operations have been materially adversely affected by global and regional efforts to mitigate the spread of COVID-19 and we expect this will continue in as yet unknown ways and to varying degrees in the future.

• Our net revenues are dependent primarily on our Invisalign System and iTero Scanners and any decline in sales or average selling price of these products for any reason, may adversely affect net revenues, gross margin and net income.

• Competition in the markets for our products is increasing and we expect aggressive competition from existing competitors, other companies that may introduce new technologies in the future and customers who alone or with others create aligners or retainers or other products or services that compete with us.

• An increasingly larger portion of our total revenues are derived from international sales and we are dependent on our international operations, which exposes us to foreign operational, political and other risks that may harm our business.

• Demand for our products may not increase as rapidly as we anticipate or may decrease due to a variety of factors, including a weakness in general economic conditions and resistance to non-traditional treatment methods.

• Our success depends on our ability to develop, successfully introduce and achieve market acceptance of new products and services.

• We may not achieve the anticipated benefits from our acquisition of exocad in the timeframe expected, or at all, which may have an adverse effect on our business and our financial results.

• As we continue to grow, we are subject to growth related risks, including risks related to excess or constrained capacity and operational inefficiencies at our manufacturing and treat facilities.

• Our products and information technology systems are critical to our business. Issues with product development or enhancements, IT system integration, implementation, updates and upgrades along with security and data protection risks have previously and could again in the future disrupt our operations, which could have a material adverse impact on our business and operating results.

• If we are unable to protect our customer or patient information or if we are unable to comply with applicable privacy, security and data protection laws, our operations may be severely adversely impacted, patient care could suffer, we could be liable for related damages, and our business, operations and reputation could be harmed.

• If we fail to sustain or increase revenue growth while controlling expenses, our profitability may decline.

• Our operating results have and will fluctuate in the future, which makes predicting the timing and amount of our revenues, costs and expenditures difficult.

• A disruption in the operations of a primary freight carrier, higher shipping costs or shipping delays could cause a decline in our net revenues or a reduction in our earnings.

• If we fail to accurately predict our volume growth and hire too many or too few technicians, the delivery time of our products could be delayed or our costs may exceed our revenues, each of which could adversely affect our results of operations.

• We are dependent on our marketing activities to deepen our market penetration and raise awareness of our brand and products, which may not prove successful or may become less effective or more costly to maintain in the long term.

• Our success depends in part on our proprietary technology, and if we fail to successfully obtain or enforce our intellectual property rights, our competitive position may be harmed. Litigating claims of this type is costly and could distract our management and cause a decline in our results of operations and stock price.

• Obtaining approvals and complying with governmental regulations, particularly those related to personal healthcare information, financial information and data privacy, is expensive and time-consuming, and any failure to obtain or maintain approvals or comply with regulations regarding our products or services or the products and services of our suppliers or customers could materially harm our sales, result in substantial penalties and cause harm to our reputation.

• If we or any vendors on whose products or services we rely for our products and services infringe the patents or IP rights of other parties or are subject to a patent infringement claim, our ability to grow our business may be severely limited.

• We are highly dependent on third party suppliers, some of whom are sole source suppliers for certain key machines, components and materials, and our business and operating results could be harmed if supply is restricted or ends or the price of raw materials used in our manufacturing process increases.

• We primarily rely on our direct sales force to sell our products, and any failure to train and maintain our key sales force personnel could harm our business.

• We use distributors for a portion of the importation, marketing and sales efforts related to our products and services, which exposes us to risks that may be harmful to our sales and operations.

• Our business exposes us to potential liability for the quality and safety of our products and services, how we advertise and market those products and services and how and to whom we sell them, and we may incur substantial expenses or be found liable for substantial damages or penalties if we are subject to claims or litigation.

• We are subject to risks associated with our strategic investments. Impairments in the value of our investments could negatively impact our financial results.

• The requirements to comply with current or future environmental, health and safety and workforce laws may materially increase our costs, expose us to potential liability and otherwise materially impact our business.

General Risk Factors

• We rely on highly skilled personnel and, if we fail to attract, motivate or retain personnel, or if our growth harms our corporate culture, it may be more difficult to grow effectively and pursue our strategic priorities.

• Business disruptions could seriously harm our financial condition.

• Changes in, or interpretations of, accounting rules and regulations, could res

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None

(a) Exhibits:

† The certifications attached as Exhibit 32.1 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the SEC and are not to be incorporated by reference into any filing of the Registrant under the Securities Act or the Exchange Act, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.