Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
A discussion regarding our financial condition and results of operations for fiscal 2021 compared to fiscal 2020 is presented under Results of Operations of this Form 10-K. Discussions regarding our financial condition and results of operations for fiscal 2020 compared to 2019 have been omitted from this Annual Report on Form 10-K, but can be found in "Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 26, 2021, which is available without charge on the SEC's website at www.sec.gov and on our investor relations website at investor.aligntech.com.
Executive Overview of Results
Trends and Uncertainties
Our business strategic priorities remain focused on four principal pillars of growth: (i) international expansion; (ii) GP adoption; (iii) patient demand and conversion; and (iv) orthodontic utilization.
We strive to deliver on each of our strategic growth drivers through a variety of interrelated enterprise-wide efforts including:
•Our growth depends on the continued penetration and adoption of Invisalign products, intraoral scanners and CAD/CAM solutions in international markets. We continue to invest in manufacturing operations, research and development, clinical treatment planning, sales and marketing and building our quality and regulatory capabilities in existing and emerging markets globally. For instance, in 2021, we:
◦opened new offices in Israel to support the long-term growth of iTero scanner and services business for treatment planning and other operations;
◦announced plans to open an aligner fabrication facility in Wroclaw, Poland as a part of our strategy to bring operational facilities closer to customers and thereby serve them more quickly and respond to their needs more effectively as well as new treatment planning operations in targeted regional geographies; and
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◦expanded our sales and marketing efforts into new countries and regions, including establishing offices in the African countries of Ghana and Morocco.
•We continue to see growth opportunities with international orthodontists and GP customers, particularly with adopters of digital dentistry platforms as we continue to tailor our sales and marketing strategies and resources around the unique needs of each customer channel. As we continue growing, we intend to opportunistically expand our research, development, manufacturing, treatment planning, sales and marketing operations to meet local and regional demand thoughtfully and deliberately. Over the longer-term, we expect international revenues to grow faster than Americas' revenues as a result of growing international demand, our continued investment in international market expansion, the size of the market opportunities and our relatively low market penetration of these regions.
•We believe our training and education efforts are important to building the confidence within the GP and orthodontic communities needed to increase their adoption and utilization of clear aligner treatment. Accordingly, we continue to expand our Invisalign customer base by educating new doctors on the benefits of digital dentistry through the Invisalign system and demonstrating to GPs and orthodontists how the iTero portfolio of intraoral scanners and CAD/CAM restorative services and workflows can increase the profitability of their dental practices by enhancing patient experiences.
However, training and education alone are insufficient to drive adoption and utilization growth sufficiently. We need to continue to innovate, develop and bring to market products and solutions that deliver the ever-increasing clinical precision and predictability doctors expect with the speed and convenience their patients require. For this reason, we expect to continue to invest in research and development and open facilities closer to our customers and their patients to timely and conveniently support them.
•Patient demand and conversion depends on making targeted investments in advertising and public relations through social media, influencers and other forms of digital communications to encourage patients to seek treatment from Invisalign trained doctors. We believe that well-designed, targeted sales and marketing promotions that build on our strong brand awareness and allow us to differentiate our products and solutions from traditional and emerging competitors. Accordingly, we continue to increase investments intended to grow consumer demand. For instance, in 2021, we introduced the “Invis-is” consumer advertising campaign with new creative content and influencers focused on teens, moms and young adults. We expect to make further investments to create additional demand for Invisalign system treatment driving more consumers to dental professionals for those treatments.
In addition, we are pursuing new lines of Consumer Products that are complementary to our doctor-prescribed principal products currently available in certain e-commerce channels in the U.S. Similarly, in order to grow our retainer business, which is significantly underpenetrated, we have begun investing more directly in marketing strategies focused on driving adoption and increasing market share in the U.S.
•We expect global orthodontic utilization rates to continue increasing overall as doctors’ clinical confidence in the efficacy and predictability of the Invisalign system increases with advancements in products and technology and as patients and doctors demand treatments that emphasize convenience and safety through fewer in office visits and less invasive and quicker treatments rise. In addition, the teenage and younger market makes up 75% of the approximately 21 million total annual global orthodontic case starts each year. As we continue to emphasize the benefits of the Invisalign system for teenage and younger patient treatments through education, training and sales and marketing programs, we expect utilization rates to rise. However, our utilization rates will fluctuate from period to period due to a variety of factors, which may include seasonal trends in our business, office closures or slowdowns related to COVID-19-related preventative measures and adoption rates for new products and features. Refer to “COVID-19 Pandemic Update” below for further details.
•To achieve these strategic pillars, we expect to continue hiring skilled employees in our clinical engineering, technology development, manufacturing, sales and management teams. Expanding our workforce will require that we offer competitive compensation and result in increasing costs which we expect to offset with increasing revenues.
COVID-19 Pandemic Update
The COVID-19 pandemic continues to cause significant volatility and uncertainty in the global and regional economies, leading to changes in consumer and business behavior, fear and market fluctuations, materials and product shortages and restrictions on business and individual activities, all of which is materially impacting supply and demand in broad sectors of the world markets. During 2021, many businesses and countries, including the U.S., continued imposing preventative and precautionary measures to mitigate the spread of the virus and its variants. As a result of the restrictive measures imposed, the
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demand for digital solutions has increased. Society and businesses continue to adapt to practices such as social distancing and remote working that further the need for greater flexibility and convenience of digital solutions. 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 fluctuating demands in the dental field in various regions.
Consequently, despite the economic challenges caused by the pandemic, our revenue grew by 59.9% in 2021 compared to 2020. The growth was a combination of non-COVID related increases as well as lower revenues in 2020 as the initial preventative measures to combat the spread of the virus resulted in significant office closures and materially reduced operating capacities for many of our customers. Our overall business performance has been strong, and 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, although we intend to adjust spending to coincide with the fluctuating pace of recovery and changes in demand. As such, our recent operating results and levels of growth may not be indicative of our future performance.
The continuing evolution of the pandemic remains highly fluid and unpredictable, including the setbacks occurring as a result of new virus strains and new or additional operating restrictions imposed on businesses, 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. Our top priority continues to be the health and safety of our employees and their families, our customers and their staff. In addition, new variants of the virus have caused unpredictable fluctuations in the number of patients seeking treatment and the number of doctors providing the services and treatments. These fluctuations have adversely impacted our results of operations from time to time in the recent past and are expected to continue to impact our results, particularly in the near term.
We continue to follow recommended safety measures, including encouraging employees to work from home when possible, suspending non-essential work travel, and implementing various access controls at our facilities. In order to overcome the supply chain shortages and delays, we are also proactively communicating with our suppliers and distributors and modifying our purchase order commitments to mitigate the risks of supply chain interruptions and maintaining inventory levels greater than historically required.
Further discussion of the impact of the COVID-19 pandemic on our business may be found in Part I, Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.”
Key financial and operating metrics
We measure our performance against these strategic priorities by the achievement of key financial and operating metrics. For the year ended December 31, 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 $3,952.6 million, an increase of 59.9% year-over-year;
◦Clear Aligner revenues of $3,247.1 million, an increase of 54.5% year-over-year reflecting the expanding opportunity for Invisalign system 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 $1,544.8 million, an increase of 52.9% year-over-year;
▪International Clear Aligner revenuesof $1,498.7 million, an increase of 55.2% year-over-year;
▪Clear Aligner volume increase of 54.8% year-over-year and Clear Aligner volume increase for teenage patients of 47.3% year-over-year;
◦Imaging Systems and CAD/CAM Services revenues of $705.5 million, an increase of 90.4% 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 $976.4 million and operating margin of 24.7%;
◦Effective tax rate of 23.7%;
◦Net income of $772.0 million with diluted net income per share of $9.69;
◦Cash, cash equivalents and marketable securities of $1,296.7 million as of December 31, 2021;
◦Operating cash flow of $1,172.5 million;
◦Capital expenditures of $401.1 million, predominantly related to increases in our manufacturing capacity and facilities; and
◦Number of employees was 22,540 as of December 31, 2021, an increase of 24.7% year-over-year.
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Other Statistical Data and Trends
•Our primary goal is to establish clear aligners as the principal solution for the treatment of malocclusions and our Invisalign system as the treatment solution of choice by orthodontists, GPs and patients globally, our intraoral scanning platform as the preferred scanning protocol for digital dental scans, and our exocad CAD/CAM software as the solution of choice for dental labs. As of December 31, 2021, over 12 million people worldwide have been treated with our Invisalign system, over 68,000 iTero scanners have been sold and over 47,000 exocad software licenses have been installed. Management measures these results by comparing to the estimated 500 million people who can benefit from straighter teeth, 21 million annual orthodontic case starts and 2 million dental practices that could use intraoral scanners and uses this data to target opportunities to expand the market for orthodontics by educating consumers about the benefits of straighter teeth using the Invisalign system, dental professionals and/or labs and service providers to use iTero intraoral scanners, and dental labs and practitioners to install exocad CAD/CAM software.
•For the fourth quarter of 2021, total Invisalign cases submitted with a digital scanner in the Americas increased to 89.1%, up from 84.0% in the fourth quarter of 2020 and international scans increased to 80.8%, up from 73.7% in the fourth quarter of 2020. For the fourth quarter of 2021, 96.4% of Invisalign cases submitted by North American orthodontists were submitted digitally. Our annual utilization rates for the last three fiscal years 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 EMEA, APAC. Latin America (“LATAM”) is excluded from the International region based on its immateriality to the year, however is included in the Total utilization.
•Total utilization rate in 2021 increased to 20.8 cases per doctor compared to 16.1 cases per doctor in 2020 and 15.9 cases per doctor in 2019.
•North America: Utilization rate among our North American orthodontist customers increased to 98.1 cases per doctor in 2021 compared to 67.3 cases per doctor in 2020 and 65.0 cases per doctor in 2019 and the utilization rate among our North American GP customers increased to 14.3 cases per doctor in 2021 compared to 9.6 cases per doctor in 2020 and 9.5 cases per doctor in 2019.
•International: International doctor utilization rate increased to 17.5 cases per doctor in 2021 compared to 14.5 cases per doctor in 2020 and 13.8 cases per doctor in 2019.
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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 and Invisalign Go Plus.
•Non-Case products include, but are not limited to, retention products, Invisalign training, adjusting tools used by dental professionals during the course of treatment and, more recently, Consumer Products that are complementary to our doctor-prescribed principal products such as aligner cases (clamshells), teeth whitening products, cleaning solutions (crystals, foam and other material) and other oral health products available in certain e-commerce channels in the U.S.
•Our Systems and Services segment consists of our iTero intraoral scanning systems, which includes a single hardware platform and restorative or orthodontic software options. Our services include subscription software, disposables, rentals, pay per scan services, as well as exocad’s CAD/CAM software solutions that integrate workflows to dental labs and dental practices.
Net revenues for our Clear Aligner and Systems and Services segments by region for the year ended December 31, 2021, 2020 and 2019 are as follows (in millions):
Year Ended December 31, Year Ended December 31,
Clear Aligner revenues:
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 year ended December 31, 2021, 2020 and 2019 is as follows (in thousands):
Year Ended December 31, Year Ended December 31,
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
Total net revenues increased by $1,480.6 million in 2021 as compared to 2020 primarily as a result of increases in Clear Aligner volume of 54.8% and an increase in the number of scanners recognized across most regions.
Clear Aligner - Americas
Americas net revenues increased by $534.5 million in 2021 as compared to 2020 primarily due to a 57.6% increase in volume which resulted in higher net revenues of $582.1 million, partially offset by lower ASP that decreased net revenues by
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$47.7 million. Lower ASP was mostly due to higher promotional discounts which decreased revenue by $52.1 million and net deferrals which decreased revenues by $40.3 million. The decreases in ASP were partially offset by favorable product mix shift which increased net revenues by $34.2 million and favorable exchanges rates which increased net revenues by $12.2 million.
Clear Aligner - International
International net revenues increased by $533.2 million in 2021 as compared to 2020primarily due to a 51.6% increase in volume which resulted in higher net revenues by $497.8 million. Higher ASP increased net revenues by $35.4 million mostly due to favorable exchange rates which increased net revenues by $61.8 million and favorable product mix shift which increased net revenues by $27.6 million. The increases in ASP were partially offset by higher net deferrals which decreased net revenues by $49.6 million.
Clear Aligner - Non-Case
Non-case net revenues increased by $77.8 million in 2021 compared to 2020 due to increased volume for retention products across all regions primarily driven by Vivera retainers.
Systems and Services
Systems and Services net revenues increased by $335.0 million in 2021 as compared to 2020 due to a higher number of scanners recognized which increased net revenues by $186.3 million. Net revenues also increased by $97.7 million as a result of higher iTero service revenues mostly due to a larger scanner install base and additional exocad CAD/CAM revenues. Additionally, higher scanner ASP increased net revenues by $51.0 million mostly due to favorable product mix shift towards higher priced scanners such as the iTero Element Plus Series.
Cost of net revenues and gross profit (in millions):
Year Ended December 31, Year Ended December 31,
Clear Aligner
Systems and Services
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, freight and shipping related costs, depreciation on capital equipment and facilities used in the production process, amortization of acquired intangible assets and training costs.
Clear Aligner
The gross margin percentage increased in 2021 as compared to 2020 primarily due to manufacturing efficiencies driven by higher production volumes.
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Systems and Services
The gross margin percentage increased in 2021 as compared to 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):
Year Ended December 31, Year Ended December 31,
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”).
Selling, general and administrative expense increased in 2021 compared to 2020 primarily due to higher compensation related costs of $235.0 million from higher salaries, fringe benefits, incentive bonuses and commissions due to increased headcount as we continue to invest in sales and marketing to penetrate into new markets as well as higher advertising and marketing costs of $183.4 million.
Research and development (in millions):
Year Ended December 31, Year Ended December 31,
% of net revenues 6.3 % 7.1 % 7.1 % 6.5 %
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.
Research and development expense increased in 2021 compared to 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):
Year Ended December 31, Year Ended December 31,
Clear Aligner
Systems and Services
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
1Refer to Note 18 “Segments and Geographical Information” of the Notes to Consolidated Financial Statements for details on unallocated corporate expenses and the reconciliation to Consolidated Income from Operations.
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Clear Aligner
Operating margin percentage increased in 2021 compared to 2020 due to higher gross margins and operating leverage on higher net revenues.
Systems and Services
Operating margin percentage increased in 2021 compared to 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):
Year Ended December 31, Year Ended December 31,
% of net revenues 0.1 % 0.1 % 0.1 % 0.5 %
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. In 2021, there was no change to interest income compared to 2020.
Other income (expense), net (in millions):
Year Ended December 31, Year Ended December 31,
% of net revenues 0.8 % (0.5) % (0.5) % 0.3 %
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.
Other income (expense), net, increased in 2021 compared to 2020primarily 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 our investments in privately held companies recognized during 2021 compared to 2020. These increases were partially offset by net foreign exchange losses in 2021 as compared to net foreign exchange gains in 2020.
Provision for (benefit from) income taxes (in millions):
Year Ended December 31, Year Ended December 31,
Changes and percentages are based on actual values. Certain tables may not sum or recalculate due to rounding.
The increase in our effective tax rate for the year ended December 31, 2021 compared to 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 year ended December 31, 2020.
During 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 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. The amortization of this deferred tax asset depends on the
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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
As of December 31, 2021 and 2020, we had the following cash and cash equivalents and short-term and long-term marketable securities (in thousands):
December 31,
Marketable securities, short-term 71,972 —
Marketable securities, long-term 125,320 —
As of December 31, 2021 and 2020, approximately $713.8 million and $412.5 million, respectively, of cash, cash equivalents and marketable securities was held by our foreign subsidiaries. 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.
Our material cash requirements as of December 31, 2021 are as below:
•Our purchase commitments for goods and services, excluding capital expenditures, totaled $1,278.0 million, of which $731.0 million will be payable within the next 12 months. These commitments primarily relate to agreements with contract manufacturers and suppliers, sales and marketing services, research and development services and technological services.
•We expect our investments in capital expenditures to exceed $350.0 million for the next 12 months. 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 an aligner fabrication facility in Wroclaw, Poland, which is expected to begin serving doctors in 2022, as a part of our strategy to bring operational facilities closer to customers. As we continue growing, we intend to expand our investments in research and development, manufacturing, treatment planning, sales and marketing operations to meet local and regional demand.
•We have future operating lease payments of $160.8 million, which includes $17.8 million for leases that have not yet commenced as of December 31, 2021. Refer to Note 4 “Leases” of the Notes to Consolidated Financial Statements for details on the lease payments.
•We have $725.0 million available for repurchase under the stock repurchase program authorized by our Board of Directors in May 2021. Our stock repurchase program is subject to periodic evaluations to determine when and if repurchases are in the best interests of our stockholders, taking into account prevailing market conditions. Refer to Note 13 “Common Stock Repurchase Programs” of the Notes to Consolidated Financial Statements for details on our stock repurchase programs. Subsequent to year end, during February 2022, we repurchased on the open market approximately 0.1 million shares of our common stock at an average price of $522.35 per share, including commissions, for an aggregate purchase price of $75.0 million.
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Sources and Use of Cash
The following table summarizes our Consolidated Statements of Cash Flows for the year ended December 31, 2021, 2020 and 2019 (inthousands):
Year Ended December 31,
Net cash provided by (used in):
Operating Activities
For the year ended December 31, 2021, cash flows from operations of $1,172.5 million resulted primarily from our net income of approximately $772.0 million as well as the following:
Significant adjustments to net income
•Stock-based compensation of $114.3 million related to equity awards granted to employees and directors;
•Depreciation and amortization of $108.7 million related to our investments in property, plant and equipment and intangible assets; and
•Gain related to our SDC arbitration award of $43.4 million.
Significant changes in working capital
•Increase of $462.6 million in deferred revenues primarily related to increased case volumes in our Clear Aligner segment, increased scanner volumes in our Systems and Services segment and timing of revenue recognition;
•Increase of $262.1 million in accounts receivable which is primarily a result of the increase in sales;
•Increase of $158.5 million in accrued and other long-term liabilities and an increase of $124.6 million in prepaid expenses and other assets due to the timing of payment and activities; and
•Increase of $112.5 million in inventories to support our demand, including safety stock, due to shipping delays during the COVID-19 pandemic as well as long lead times with our suppliers.
For the year ended December 31, 2020, cash flows from operations of $662.2 million resulted primarily from our net income of approximately $1,775.9 million as well as the following:
Significant adjustments to net income
•Deferred taxes of $1,491.6 million related to the one-time tax benefit associated with the intra-entity sale of certain intellectual property rights;
•Stock-based compensation of $98.4 million related to equity awards granted to employees and directors; and
•Depreciation and amortization of $93.5 million related to our investments in property, plant and equipment and intangible assets.
Significant changes in working capital
•Increase of $228.1 million in deferred revenues primarily related to increased case volumes in our Clear Aligner segment and timing of revenue recognition;
•Increase of $139.8 million in accounts receivable which is primarily a result of the increase and timing in our sales; and
•Increase of $52.2 million in accounts payable due to timing of certain invoice payments.
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Investing Activities
Net cash used in investing activities was $563.4 million for the year ended December 31, 2021 and primarily consisted of purchases of property, plant and equipment of $401.1 million and purchases of marketable securities of $200.9 million, which were partially offset by $43.4 million of proceeds from our SDC arbitration award.
Net cash used in investing activities was $231.5 million for the year ended December 31, 2020, which primarily consisted of cash paid for the acquisition of exocad of $420.8 million, net of cash acquired and purchases of property, plant and equipment of $154.9 million. These outflows were partially offset by maturities and sales of marketable securities of $321.5 million and $26.9 million received from payments on an unsecured promissory note issued by SDC in exchange for tendering our shares to them.
Financing Activities
Net cash used in financing activities was $458.3 million for the year ended December 31, 2021 which consisted of payments related to our accelerated stock repurchase agreements of $375.0 million and payroll taxes paid for equity awards through share withholdings of $108.9 million which were partially offset by $25.6 million of proceeds from the issuance of common stock.
Net cash used in financing activities was $30.8 million for the year ended December 31, 2020 consisted of payroll taxes paid for equity awards through share withholdings of $51.1 million which was partially offset by $20.3 million of proceeds from the issuance of common stock.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based upon our 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 and use authoritative pronouncements, historical experience and other assumptions as the basis for making the estimates. Actual results could differ from those estimates.
We believe the following critical accounting policies and estimates affect our more significant judgments used in the preparation of our consolidated financial statements. For further information on all of our significant accounting policies, see Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements under Item 8.
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.”
Determining the standalone selling price (“SSP”), allocation of consideration from the contract to the individual performance obligations and the appropriate timing of revenue recognition is the result of significant qualitative and quantitative judgments. 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.
We allocate revenues for each clear aligner treatment plan based on each unit’s SSP. 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. For treatment plans with multiple future performance obligations, we also consider usage rates, which is the number of times a customer is expected to order more aligners after the initial shipment. Our process for estimating usage rates requires significant judgment and evaluation of inputs, including historical usage data by region, country and channel.
We estimate the SSP of each element in a scanner system and services sale taking into consideration same or similar product historical prices as well as our discounting strategies.
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Unfulfilled Performance Obligations for Clear Aligners and Scanners
The estimated revenues expected to be recognized in the future related to our unfulfilled performance obligations, including deferred revenues and backlog, as of December 31, 2021 is $1,307.3 million. This 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 all of which involve significant judgement. Generally, our deferred revenue will be recognized over a period of one to five years.
Goodwill and Finite-Lived Acquired Intangible Assets
Goodwill and acquired intangible assets with finite lives are subject to impairment testing and are reviewed for impairment when events or circumstances indicate that the carrying value of an asset is not recoverable and the carrying amount exceeds its fair value. We evaluate the recoverability of the carrying value of these identifiable intangible assets based on estimated undiscounted cash flows to be generated from such assets. If the cash flow estimates or the significant operating assumptions upon which they are based change in the future, we may be required to record impairment charges.
Assumptions and estimates about future values and remaining useful lives of our acquired intangible assets are complex and subjective. They can be affected by external factors such as industry and economic trends and internal factors such as changes in our business strategy and internal forecasts. Our ongoing consideration of all these factors could result in impairment charges in the future.
If we were to have impairments to goodwill or finite-lived acquired intangible assets, it could adversely affect our operating results. During the fiscal year 2021 and 2020, we did not have any impairment charges related to our goodwill or acquired intangible assets.
Accounting for Income Taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. The evaluation of our uncertain tax positions involves significant judgment in the interpretation and application of U.S. GAAP and complex domestic and international tax laws related to the allocation of international taxation rights between countries. We are also required to evaluate the realizability of our deferred tax assets on an ongoing basis in accordance with U.S. GAAP, which requires the assessment of both of our historical and future performance as well as other relevant factors. Realization of our deferred tax assets is dependent on our ability to generate future taxable income which is determined based on assumptions such as estimated growth rates in revenues, gross 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.
Accounting for Legal Proceedings and Litigation
Estimates of probable losses resulting from litigation are inherently difficult to make, particularly when the matters are in early procedural stages with incomplete facts and information. The final outcome of legal proceedings is dependent on many variables difficult to predict and, therefore, the ultimate cost to entirely resolve such matters may be materially different than the amount of current estimates. Consequently, new information or changes in judgments and estimates could have a material adverse effect on our business, financial condition, and results of operations or cash flows.
Recent Accounting Pronouncements
See Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Item 8 for a discussion of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of business, we are exposed to foreign currency exchange rate and interest rate risks that could impact our financial position and results of operations. In addition, we are subject to the broad market risk that is created by the global market disruptions and uncertainties resulting from the COVID-19 pandemic. Further discussion of the impact of the COVID-19 pandemic on our business may be found in Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors”.
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Interest Rate Risk
Changes in interest rates could impact our anticipated interest income on our cash equivalents and investments in marketable securities. Our investments are fixed-rate short-term and long-term securities. Fixed-rate securities may have their fair market value adversely impacted due to a rise in interest rates, and, as a result, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. As of December 31, 2021, we had approximately $197.3 million invested in available-for-sale marketable securities. An immediate 10% change in interest rates would not have a material adverse impact on our future operating results and cash flows.
We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. Based on interest bearing liabilities we have as of December 31, 2021, we are not subject to risks from immediate interest rate increases.
Currency Rate Risk
As a result of our international business activities, our financial results could be affected by factors such as changes in foreign currency exchange rates or economic conditions in foreign markets, and there is no assurance that exchange rate fluctuations will not harm our business in the future. We generally sell our products in the local currency of the respective countries. This provides some natural hedging because most of the subsidiaries’ operating expenses are generally denominated in their local currencies. Regardless of this natural hedging, our results of operations may be adversely impacted by exchange rate fluctuations.
We primarily enter into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations on cash and certain trade and intercompany receivables and payables. These forward contracts are not designated as hedging instruments and do not subject us to material balance sheet risk due to fluctuations in foreign currency exchange rates. The gains and losses on these forward contracts are intended to offset the gains and losses in the underlying foreign currency denominated monetary assets and liabilities being economically hedged. These instruments are marked to market through earnings every period and generally are one month in original maturity. We do not enter into foreign currency forward contracts for trading or speculative purposes. As our international operations grow, we will continue to reassess our approach to managing the risks relating to fluctuations in currency rates. It is difficult to predict the impact forward contracts could have on our results of operations.
Although we will continue to monitor our exposure to currency fluctuations, and, where appropriate, may use forward contracts to minimize the effect of these fluctuations, the impact of an aggregate change of 10% in foreign currency exchange rates relative to the U.S. dollar on our results of operations and financial position could be material.
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Item 8.Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Management on Internal Control over Financial Reporting 55
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) 56
Consolidated Balance Sheets as of December 31, 2021 and 2020 60
Notes to Consolidated Financial Statements 63
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REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Align is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed by, or under supervision of, our CEO and CFO, and effected by the board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Align;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Align are being made only in accordance with authorizations of management and directors of Align; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Align’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. 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, 2021, 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, 2021 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
/S/ JOHN F. MORICI
John F. Morici
Chief Financial Officer and Executive Vice President, Global Finance
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Report of Independent Registered Public Accounting Firm
To theBoard 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, 2021 and 2020, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period endedDecember 31, 2021, including the related notes and financial statement schedule listed in theindex 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 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, 2021, 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’sconsolidatedfinancial 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 consolidatedfinancial 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 consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial 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 consolidatedfinancial 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 consolidatedfinancial 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
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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 consolidatedfinancial 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 18 to the consolidated financial statements, the Company recognized net revenues of $3.2 billion from its Clear Aligner segment for the year ended December 31, 2021. 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. Determining the standalone selling price, allocation of consideration from the contract to the individual performance obligations, and the appropriate timing of revenue recognition is the result of significant qualitative and quantitative judgments. 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. 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 25, 2022
We have served as the Company’s auditor since 1997.
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ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
Operating expenses:
Impairments and other charges (gains), net — — 22,990
Litigation settlement gain — — (51,000)
Interest income and other income (expense), net:
Total interest income and other income (expense), net 36,023 (8,222) 20,158
Equity in losses of investee, net of tax — — 7,528
Net income per share:
Shares used in computing net income per share:
The accompanying notes are an integral part of these consolidated financial statements.
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ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year Ended December 31,
Other comprehensive income (loss):
Change in unrealized gains (losses) on investments, net of tax (495) (194) 299
The accompanying notes are an integral part of these consolidated financial statements.
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ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
ASSETS
Current assets:
Marketable securities, short-term 71,972 —
Prepaid expenses and other current assets 195,305 91,754
Marketable securities, long-term 125,320 —
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Commitments and contingencies (Notes 10 and 11)
Stockholders’ equity:
Preferred stock, $0.0001 par value (5,000 shares authorized; none issued) — —
Accumulated other comprehensive income (loss), net 4,326 43,501
The accompanying notes are an integral part of these consolidated financial statements.
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ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Shares Amount
Net change in unrealized gains (losses) from investments — — — 299 — 299
Net change in foreign currency translation adjustment — — — 1,787 — 1,787
Net change in unrealized gains (losses) from investments — — — (194) — (194)
Net change in foreign currency translation adjustment — — — 44,383 — 44,383
Net change in unrealized gains (losses) from investments — — — (495) — (495)
Net change in foreign currency translation adjustment — — — (38,680) — (38,680)
The accompanying notes are an integral part of these consolidated financial statements.
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ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES:
Arbitration award gain (43,403) — —
Impairments on long-lived assets — — 28,498
Equity in losses of investee — — 7,528
Gain on lease terminations — — (6,792)
Gain from sale of equity method investment — — (15,769)
Changes in assets and liabilities, net of effects of acquisition:
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition, net of cash acquired (8,002) (420,788) —
Proceeds from arbitration award 43,403 — —
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of finance lease — — (45,773)
The accompanying notes are an integral part of these consolidated financial statements.
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ALIGN TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Business Description
Align Technology, Inc. (“We”, “Our”, or “Align”) was incorporated in April 1997 in Delaware. Align is a global medical device company primarily engaged in the design, manufacture and marketing of Invisalign® clear aligners, iTero® intraoral scanners, services for orthodontics, restorative and aesthetic dentistry and exocad® computer-aided design and computer-aided manufacturing (“CAD/CAM”) software for dental laboratories and dental practitioners. We also market and sell consumer products that are complementary to our doctor-prescribed principal products under the Invisalign brand, including retainers, aligner cases (clamshells), teeth whitening products and cleaning solutions (crystals, foam and other material) (collectively “Consumer Products”). Our primary goal is to establish clear aligners as the principal solution for the treatment of malocclusions and our Invisalign system as the treatment solution of choice by orthodontists, general dental practitioners and patients globally, our intraoral scanning platform as the preferred scanning protocol for digital dental scans, and our exocad CAD/CAM software as the solution of choice for dental labs. Our corporate headquarters is located in Tempe, Arizona, which moved from San Jose, California effective January 1, 2021, 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.
Out-of-Period Adjustments
For the year ended December 31, 2021 and 2020, we recorded out-of-period corrections that resulted in tax benefits of $16.0 million and $12.7 million, respectively, in our Consolidated Statement of Operations. We do not believe these out-of-period adjustments are material to the interim or annual consolidated financial statements for the respective reporting period or to any of the related prior periods.
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 and contingent liabilities, the fair values of financial instruments, stock-based compensation and 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
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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 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
Investments in privately held companies in which we can exercise significant influence but do not own a majority equity interest or otherwise control are accounted for under the equity method. We record our share of their operating results within equity in losses of investee, net of tax, in our Consolidated Statement of Operations.
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,
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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.
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 and do not subject us to material balance sheet risk due to fluctuations in foreign currency exchange rates. The gains and losses on these forward contracts are intended to offset the gains and losses in the underlying foreign currency denominated monetary assets and liabilities being economically hedged. We do not enter into foreign currency forward contracts for trading or speculative purposes. The net gain or loss from the settlement of these foreign currency forward contracts is recorded in other income (expense), net in the Consolidated Statement of Operations.
Foreign Currency
For our international subsidiaries, we analyze on an annual basis or more often if necessary, if a significant change in facts and circumstances indicate that the functional currency has changed. For international subsidiaries where the local currency is the functional currency, adjustments from translating financial statements from the local currency to the U.S. dollar reporting currency are recorded as a separate component of accumulated other comprehensive income (loss), net in the stockholders’ equity section of the Consolidated Balance Sheet. This foreign currency translation adjustment reflects the translation of the balance sheet at period end exchange rates, and the income statement at 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, 2021, 2020 and 2019, we had foreign currency net gains (losses) of $(13.3) million, $6.8 million and $(2.0) million, respectively.
Certain Risks and Uncertainties
Our operating results depend to a significant extent on our ability to market and develop our products. The life cycles of our products are difficult to estimate due, in part, to the effect of future product enhancements and competition. Our inability to successfully develop and market our products as a result of competition or other factors would have a material adverse effect on our business, financial condition and results of operations.
The U.S. Food and Drug Administration (“FDA”) and similar international agencies regulate the design, manufacture, distribution, pre-clinical and clinical study, clearance and approval of medical devices. Products developed by us may require approvals or clearances from the FDA or other international regulatory agencies prior to commercialized sales. There can be no assurance that our products will receive any of the required approvals or clearances. If we were denied approval or clearance or such approval was delayed, it may have a material adverse impact on us.
Our cash and investments are held primarily by four financial institutions. Financial instruments which potentially expose us to concentrations of credit risk consist primarily of cash equivalents and marketable securities. We invest excess cash primarily in money market funds, commercial paper, certificates of deposits, 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 provide credit to customers in the normal course of business. Collateral is not required for accounts receivable but ongoing evaluations of customers’ credit worthiness are performed. We maintain an allowance for potential credit losses for uncollectible accounts and such losses have been within management’s expectations. No individual customer accounted for 10% or more of our accounts receivable at December 31, 2021 or 2020 or net revenues for the year ended December 31, 2021, 2020 or 2019.
We have manufacturing facilities located in Juarez, Mexico where we conduct our aligner fabrication, distribution and perform certain services and in Ziyang, China where we fabricate aligners primarily for China and other APAC markets. In addition, we produce our handheld intraoral scanner wand, perform final scanner assembly and repair our scanners at our facilities in Ziyang, China and Or Yehuda, Israel and service and repair certain scanners in Juarez, Mexico. In the second quarter of 2021, we announced the start of a multi-million dollar project to bring operational facilities closer to our customers through the expansion of our manufacturing operations in Wroclaw, Poland. Expected to begin serving doctors during the first half of 2022, the new aligner fabrication facility will be our third and allow us to more quickly and effectively serve tens of thousands of customers throughout EMEA. Additionally, in the third quarter of 2021, we opened our multi-story iTero scanner and services facilities in Petach Tikva, Israel to further the design and development of our portfolio of iTero intraoral scanners, imaging systems and services. Our digital treatment plans using a sophisticated, internally developed computer-modeling
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program are located in multiple international locations to support our customers within the regions. Our reliance on international operations exposes us to related risks and uncertainties, including difficulties in staffing and managing international operations such as hiring and retaining qualified personnel; controlling production volume and quality of manufacture; political, social and economic instability; interruptions and limitations in telecommunication services; product and material transportation delays or disruption; trade restrictions and changes in tariffs; import and export license requirements and restrictions; fluctuations in foreign currency exchange rates; and potential adverse tax consequences. If any of these risks materialize, our international manufacturing operations, as well as our operating results, may be harmed.
We purchase certain inventory from sole suppliers. Additionally, we rely on a limited number of hardware manufacturers. The inability of any supplier or manufacturer to fulfill our supply requirements could materially and adversely impact our future operating results.
Due to the COVID-19 pandemic, we are subject to a greater degree of uncertainty than normal in making the judgments and estimates needed to apply our significant accounting policies. The full extent to which the pandemic, including as a result of any new variants, business restrictions or lockdowns, and the impact of vaccinations, will directly or indirectly impact our business, results of operations, cash flows, and financial condition will depend on future developments that are highly uncertain and cannot be accurately determined. Further, we could also be materially adversely affected by supply chain disruptions, including shortages and inflationary pressures, uncertain or reduced demand, labor shortages, delays in collection of outstanding receivables and the impact of any initiatives or programs that we may undertake to address financial and operational challenges faced by our customers.
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.
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
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.
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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 one to fifteen years reflecting the period in which the economic benefits of the assets are expected to be realized.
Impairment of Goodwill and Long-Lived Assets
Goodwill
We evaluate goodwill for impairment at least annually on November 30th or more frequently if indicators are present, an event occurs or changes in circumstances suggest an impairment may exist and that it would more likely than not reduce the fair value of a reporting unit below its carrying amount. The allocation of goodwill to the respective reporting 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 6 “Goodwill and Intangible Assets” of Notes to Consolidated Financial Statements for details on intangible long-lived assets.
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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 2021 or 2020.
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”), allocation of consideration from the contract to the individual performance obligations and the appropriate timing of revenue recognition is the result of significant qualitative and quantitative judgments. 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, 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, and Invisalign Go and Invisalign Go Plus includes optional additional aligners at no charge for a period of up to two years after initial shipment.
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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. We allocate revenues for each treatment plan based on each unit’s SSP. 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. 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 consideration same or similar historical prices as well as our 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. 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 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 $31.1 million and $22.8 million as of December 31, 2021 and 2020, respectively, and are included in other assets in our Consolidated Balance Sheets. We recognized amortization on our costs to obtain a contract of $17.0 million, $10.1 million, and $7.2 million during the year ended December 31, 2021, 2020, and 2019, 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, 2021 and the estimated revenues expected to be recognized in the future related to these performance obligations are $1,307.3 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
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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 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, 2021, 2020 and 2019, we incurred advertising costs of $325.6 million, $161.0 million and $119.1 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 stock awards and employee stock purchase plan shares. We use a Monte Carlo simulation model to estimate the fair value of market-performance based restricted stock units (“MSUs”) which requires the input of assumptions, including expected term, stock price volatility and the risk-free rate of return. In addition, judgment is also required in estimating the number of stock-based awards that are expected to be forfeited. Forfeitures are estimated based on historical experience at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.
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
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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 Operation in the period in which such determination is made.
We assess the likelihood that we will be able to realize our deferred tax assets. Should there be a change in our ability to realize our deferred tax assets, our tax provision would increase in the period in which we determine that it is more likely than not that we cannot realize our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If it is more likely than not that we will not realize our deferred tax assets, we will increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be realizable.
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 15 “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 December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes,”to enhance and simplify various aspects of the income tax accounting guidance. The amendment removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The amendments are effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020. Adoption of this standard in the first quarter of fiscal year 2021 did not have a material impact on our consolidated financial statements or related disclosures.
(ii) Recent Accounting Updates Not Yet Effective
We continue to monitor new accounting pronouncements issued by the FASB and do not believe any of the recently issued accounting pronouncements will have an impact on our consolidated financial statements or related disclosures.
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Note 2. Financial Instruments
Cash, Cash Equivalents and Marketable Securities
The following table summarizes our cash and cash equivalents, and marketable securities on our Consolidated Balance Sheet as of December 31, 2021 (in thousands):
Reported as:
As of December 31, 2020, we held $441.6 million of cash and $519.2 million of money market funds which were reported as cash and cash equivalents on our Consolidated Balance Sheet. We had no short-term or long-term marketable securities as of December 31, 2020. Net realized and unrealized gains and losses were not material for the year ended December 31, 2021, 2020 and 2019.
The following table summarizes the fair value of our available-for-sale marketable securities classified by contractual maturity as of December 31, 2021 (in thousands):
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, 2021 are primarily due to changes in interest rates and credit spreads. We had no marketable securities that have been in a continuous material unrealized loss position for greater than twelve months as of December 31, 2021.
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Fair Value Measurements
The following tables summarize our financial assets measured at fair value as of December 31, 2021 and 2020 (in thousands):
Description Balance as of December 31, 2021 Level 1 Level 2 Level 3
Cash equivalents:
Short-term investments:
Long-term investments:
U.S. government agency bonds 1,200 — 1,200 —
Prepaid expenses and other current assets:
Other assets:
Investments in privately held companies 1 8,621 — — 8,621
1 The adjustment to the carrying value of our equity investments in privately held companies without readily determinable fair value are not material during the year ended December 31, 2021, 2020 and 2019.
Description Balance as of December 31, 2020 Level 1 Level 2 Level 3
Cash equivalents:
Prepaid expenses and other current assets:
Current unsecured promissory note 5,408 — — 5,408
Derivatives Not Designated as Hedging Instruments
Recurring foreign currency forward contracts
We enter into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations on certain trade and intercompany receivables and payables. These forward contracts are classified within Level 2 of the fair value hierarchy. As a result of the settlement of foreign currency forward contracts, during the year ended December 31, 2021, 2020 and 2019, we recognized a net gain of $18.8 million, a net loss of $22.1 million and a net gain of $3.2 million, respectively. As of December 31, 2021 and 2020, the fair value of foreign exchange forward contracts outstanding were not material.
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The following table presents the gross notional value of all our foreign exchange forward contracts outstanding as of December 31, 2021 and 2020 (in thousands):
Local Currency Amount Notional Contract Amount (USD)
Local Currency Amount Notional Contract Amount (USD)
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,
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Prepaid expenses and other current assets consist of the following (in thousands):
December 31,
Total prepaid expenses and other current assets $ 195,305 $ 91,754
Property, plant and equipment consist of the following (in thousands):
December 31,
Generally Used Estimated Useful Life 2021 2020
Clinical and manufacturing equipment Up to 10 years $ 452,876 $ 372,077
Less: Accumulated depreciation and impairment charges (359,101) (301,252)
1Shorter of the remaining lease term or the estimated useful lives of the assets
Depreciation was $92.1 million, $80.1 million and $73.1 million for the year ended December 31, 2021, 2020 and 2019, respectively.
Accrued liabilities consist of the following (in thousands):
December 31,
Accrued property, plant and equipment 46,561 27,692
Accrued warranty as of December 31, 2021 and 2020, which is included in the “Other accrued liabilities” category of the accrued liabilities table above, consists of the following activity (in thousands):
Charged to cost of net revenues 12,581
Actual warranty expenditures (11,171)
Charged to cost of net revenues 18,213
Actual warranty expenditures (14,659)
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Deferred revenues consist of the following (in thousands):
December 31,
1Included in Other long-term liabilities within our Consolidated Balance Sheet
During the year ended December 31, 2021 and 2020, we recognized $3,952.6 million and $2,471.9 million of net revenues, respectively, of which $481.1 million and $341.9 million was included in the deferred revenues balance at December 31, 2020 and December 31, 2019, respectively.
Note 4. Leases
We have operating leases for manufacturing facilities, office and retail spaces, vehicles and office equipment. The components of lease expenses consist of following (in thousands):
Year Ended December 31,
1Includes expense associated with short term leases of less than 12 months which is not material
2Includes payments related to agreements with embedded leases that are not otherwise reflected on the balance sheet. These costs are 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 2021 2020
Weighted average remaining lease term (in years) 7.8 7.4
Weighted average discount rate 3.2 % 4.2 %
As of December 31, 2021, the future payments related to our operating lease liabilities are as follows (in thousands):
Fiscal Year Ending December 31, Operating Leases
Less: Imputed interest (17,655)
Total lease liabilities $ 125,375
As of December 31, 2021, we had additional leases that have not yet commenced with future lease payments of $17.8 million. These leases will commence during 2022 with non-cancelable lease terms of two to seven years.
Note 5. Business Combination
On April 1, 2020, we completed the acquisition of privately-held exocad for a total purchase consideration of $430.0 million and exocad became a wholly-owned subsidiary. exocad is a German dental CAD/CAM software company that offers fully integrated workflows to dental labs and dental practices.
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The allocation of purchase price to assets acquired and liabilities assumed based on estimated fair values is as follows (in thousands):
Identified intangible assets 118,700
Cash and cash equivalents 9,190
Deferred tax liabilities (35,419)
Other assets (liabilities), net (2,674)
1 None of this goodwill is deductible for tax purposes.
The following table presents details of the identified intangible assets acquired (in thousands, except years):
Weighted Average Amortization Period (in years) Fair Value
Intangible assets subject to amortization:
Intangible assets not subject to amortization:
In-process Research and Development (“IPR&D”) N/A 400
Total intangible assets $ 118,700
We believe the amount of purchased intangible assets recorded above represent the fair values and approximate the amount a market participant would pay for these intangible assets as of the acquisition date.
Existing technology represents the estimated fair value of exocad’s core technology that has reached technological feasibility. We valued the existing technology using the multi-period excess earnings method under the income approach. The economic useful life of existing technology was determined by considering the life cycle of the technology and related cash flows.
Customer relationships represent the fair value of future projected revenue that will be derived from sales of products to existing customers. Customer relationships were valued using the with-and-without method under the income approach. The economic useful life for customer relationships was based on historical customer attrition rates.
Tradenames relates to the exocad tradenames that are recognized within the industry. The fair value was determined using the relief-from-royalty method under the income approach. The economic useful life of tradenames was determined by benchmarking against similar transactions entered into by peer companies.
IPR&D refers to the fair value of projects that are not yet completed but have potential value to the company.
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Note 6. Goodwill and Intangible Assets
During the year ended December 31, 2021, we completed an immaterial business combination which increased goodwill and existing technology intangible assets.
Goodwill
The change in the carrying value of goodwill for the year ended December 31, 2021 and 2020, categorized by reportable segments, is as follows (in thousands):
Clear Aligner Systems and Services Total
We completed our annual goodwill impairment assessments in 2021 and 2020 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):
Foreign currency translation 3,153
Total intangible assets $ 109,709
Foreign currency translation 13,037
Total intangible assets $ 130,072
There were no triggering events in 2021 or 2020 that would cause impairments of our intangible long-lived assets.
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The total estimated annual future amortization expense for these acquired intangible assets as of December 31, 2021 is as follows (in thousands):
Fiscal Year Amortization
Amortization expense was $16.6 million, $13.4 million and $5.9 million for the year ended December 31, 2021, 2020 and 2019, respectively.
Note 7. Equity Method Investments
On July 25, 2016, we acquired a 17% equity interest, on a fully diluted basis, in SmileDirectClub, LLC (“SDC”) for $46.7 million. Concurrently with the investment, we also entered into a supply agreement to manufacture clear aligners for SDC, which expired on December 31, 2019. The sale of aligners to SDC and the income from the supply agreement were reported in our Clear Aligner business segment. On July 24, 2017, we purchased an additional 2% equity interest in SDC for $12.8 million. The investment was accounted for as an equity method investment and recorded in our Consolidated Balance Sheet. We recorded our proportional share of SDC’s losses within equity in losses of investee, net of tax, in our Consolidated Statement of Operations within our Clear Aligner reportable segment.
As a result of the arbitrator’s decision regarding SDC announced on March 5, 2019, we were ordered to tender our SDC equity interest by April 3, 2019 for a purchase price equal to the “capital account” balance as of October 31, 2017 under the terms of the investment. In April 2019, based on the “capital account” value provided by SDC, we entered into an unsecured promissory note with SDC to receive $54.2 million through February 1, 2021 in exchange for the tender of our membership interests. As a result, we derecognized the equity method investment balance of $38.4 million in exchange for an unsecured promissory note of $54.2 million and we recorded the difference of $15.8 million as a gain in 2019 in other income in our Consolidated Statement of Operations. The unsecured promissory note was paid in full by SDC during the year ended December 31, 2021.
Although we tendered our membership interests pursuant to the arbitrator’s decision, the parties did not agree on the amount of the “capital account” balance as of October 31, 2017 or the appropriate repurchase price for the membership units. 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 favor of Align 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. Refer to Note 10 “Legal Proceedings” of the Notesto Consolidated Financial Statements included for more information on the arbitration.
Note 8. Credit Facility
On July 21, 2020 we entered into a credit facility for a $300.0 million unsecured revolving line of credit, with a $50.0 million letter of credit sublimit, and a maturity date of July 21, 2023 (“2020 Credit Facility”). The 2020 Credit Facility requires us to comply with specific financial conditions and performance requirements. Loans under the 2020 Credit Facility bear interest, at our option, at either a rate based on the reserve adjusted LIBOR for the applicable interest period or a base rate, in each case plus a margin. The base rate is the highest of the credit facility’s publicly announced prime rate, the federal funds rate plus 0.50% and one-month LIBOR plus 1.0%. The margin ranges from 1.50% to 2.25% for LIBOR loans and 0.50% to 1.25% for base rate loans. The 2020 Credit Facility allows for an alternative rate to be identified if LIBOR is no longer available. Interest on the loans is payable quarterly in arrears with respect to base rate loans and at the end of an interest period (and at three month intervals if the interest period exceeds three months) in the case of LIBOR loans. The outstanding principal, together with accrued and unpaid interest, is due on the maturity date. As of December 31, 2021, we had no outstanding borrowings under the 2020 Credit Facility and were in compliance with the conditions and performance requirements.
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Note 9. Impairments and Other Charges (Gains), net
On March 5, 2019, we announced the outcome of the arbitration regarding SDC (Refer to Note 10 “Legal Proceedings” of the Notes to Consolidated Financial Statements for SDC legal proceedings discussion) which required Align to close its Invisalign stores and tender Align’s equity interest in SDC by April 3, 2019. Accordingly, Align evaluated the ongoing value of the Invisalign stores’ operating lease right-of-use assets and related leasehold improvements and other fixed assets and determined that the carrying value of these assets were not recoverable. Align evaluated the fair value of these assetsand we considered the market participant’s ability to generate economic benefits by using these assets in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.As a result, in 2019, we recorded impairment losses of $14.2 million for operating lease right-of-use assets and $14.3 million of leasehold improvements and other fixed assets. In addition, we also recorded $1.3 million of employee severance costs and other charges. During 2019, we also negotiated early termination of our Invisalign store leases and recorded lease termination gains of $6.8 million.
Note 10. Legal Proceedings
2018 Securities Class Action Lawsuit
On November 5, 2018, a class action lawsuit against Align and three of our executive officers was filed in the U.S. District Court for the Northern District of California on behalf of a purported class of purchasers of our common stock. The complaint generally alleged claims under the federal securities laws and sought monetary damages in an unspecified amount and costs and expenses incurred in the litigation. On December 12, 2018, a similar lawsuit was filed in the same court on behalf of a purported class of purchasers of our common stock. On November 29, 2019, the lead plaintiff filed an amended consolidated complaint against Align and two of our executive officers alleging similar claims as the initial complaints on behalf of a purported class of purchasers of our common stock from May 23, 2018 and October 24, 2018. On September 9, 2020, Defendants’motion to dismiss the amended consolidated complaint was granted in part and denied in part. On June 30, 2021, counsel for the parties signed a Stipulation and Agreement of Settlement to resolve all claims for $16 million. The settlement amount will be funded by insurance proceeds and consequently, we recorded a short term liability and a receivable for this amount in our consolidated financial statements. The Court granted preliminary approval of the settlement on November 2, 2021. A final settlement approval hearing is currently set for April 28, 2022. The settlement is subject to notice to class members and final approval by the Court.
2019 Shareholder Derivative Lawsuit
In January 2019, three derivative lawsuits were filed in the U.S. District Court for the Northern District of California which were later consolidated, purportedly on behalf of Align, naming as defendants the then current members of our Board of Directors along with certain of our executive officers. The allegations in the complaints are similar to those asserted in the 2018 Securities Class Action Lawsuit, but the complaints assert various state law causes of action, including for breaches of fiduciary duty, insider trading, and unjust enrichment. The complaints seek unspecified monetary damages on behalf of Align, which is named solely as a nominal defendant against whom no recovery is sought, as well as disgorgement and the costs and expenses associated with the litigation, including attorneys’ fees. The consolidated action has been stayed pending final disposition of the 2018 Securities Class Action Lawsuit.
On April 12, 2019, a derivative lawsuit was also filed in California Superior Court for Santa Clara County, purportedly on behalf of Align, naming as defendants the members of our Board of Directors along with certain of our executive officers. The allegations in the complaint are similar to those in the derivative suits described above. The matter has been similarly stayed pending final disposition of the 2018 Securities Class Action Lawsuit.
Align believes these claims are without merit. Align is currently unable to predict the outcome of these lawsuits and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.
2020 Securities Class Action Lawsuit
On March 2, 2020, a class action lawsuit against Align and two of our executive officers was filed in the U.S. District Court for the Southern District of New York (later transferred to the U.S. District Court for the Northern District of California) on behalf of a purported class of purchasers of our common stock. The complaint alleged claims under the federal securities laws and sought monetary damages in an unspecified amount and costs and expenses incurred in the litigation. The lead plaintiff filed an amended complaint on August 4, 2020 against Align and three of our executive officers alleging similar claims as in the initial complaint on behalf of a purported class of purchasers of our common stock from April 25, 2019 to July 24, 2019. On March 29, 2021, defendants’ motion to dismiss the amended complaint was granted with leave for the lead plaintiff to file a further amended complaint. On April 22, 2021, lead plaintiff filed a notice stating it would not file a further amended
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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, and oral argument is set for March 10, 2022. Align believes these claims are without merit and intends to vigorously defend itself. Align is currently unable to predict the outcome of this lawsuit and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.
2020 Shareholder Derivative Lawsuit
On May 4, 2020, a derivative lawsuit was filed in the U.S. District Court for the Northern District of California, purportedly on behalf of Align, naming as defendants the members of our Board of Directors along with certain of our executive officers. The allegations in the complaint are similar to those presented in the 2020 Securities Class Action Lawsuit, but this complaint asserts state law claims for breach of fiduciary duty and insider trading. The complaint seeks unspecified monetary damages on behalf of Align, which is named solely as a nominal defendant against whom no recovery is sought, as well as disgorgement and the costs and expenses associated with the litigation, including attorneys’ fees. This action is stayed pending resolution of the appeal in the 2020 Securities Class Action Lawsuit. Align believes these claims are without merit. Align is currently unable to predict the outcome of this lawsuit and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.
3Shape Litigation
On February 7, 2022, Align and 3Shape, a Danish corporation, settled their outstanding patent infringement and antitrust litigation, which began in November 2017. The terms of the settlement are confidential, and the settlement is not expected to have a material effect on Align’s ongoing operations and financial results. The parties have filed stipulations to stay all proceedings pending completion of the settlement.
Antitrust Class Actions
On June 5, 2020, a dental practice named Simon and Simon, PC doing business as City Smiles brought an antitrust action in the U.S. District Court for the Northern District of California on behalf of itself and a putative class of similarly situated practices seeking monetary damages and injunctive relief relating to Align’s alleged market activities in alleged clear aligner and intraoral scanner markets. Plaintiff filed an amended complaint and added VIP Dental Spas as a plaintiff on August 14, 2020. A jury trial is scheduled to begin in this matter on November 20, 2023. Align believes the plaintiffs’ claims are without merit and intends to vigorously defend itself.
On May 3, 2021, an individual named Misty Snow brought an antitrust action in the U.S. District Court for the Northern District of California on behalf of herself and a putative class of similarly situated individuals seeking monetary damages and injunctive relief relating to Align’s alleged market activities in alleged clear aligner and intraoral scanner markets. Plaintiff filed an amended complaint on July 30, 2021 adding new plaintiffs and various state law claims. Align moved to dismiss the first amended complaint. On September 30, 2021, the Court dismissed the complaint and granted Plaintiffs leave to amend. Plaintiffs filed a second amended complaint on October 21, 2021. Align filed a motion to dismiss the second amended complaint, which the Court granted in part and denied in part. Align believes the plaintiffs’ claims are without merit and intends to vigorously defend itself.
Align is currently unable to predict the outcome of these lawsuits and therefore cannot determine the likelihood of loss, if any, nor estimate a range of possible loss.
SDC Dispute
In April 2018, SDC Financial LLC, SmileDirectClub LLC, and the Members of SDC Financial LLC other than the Company (collectively, the “SDC Entities”) initiated confidential arbitration proceedings against Align. In an award dated March 4, 2019, (“Award”) an arbitrator found that Align breached a restrictive covenant and that Align misused the SDC Entities’ confidential information and violated fiduciary duties to SDC Financial LLC. As part of the Award, Align was enjoined from opening new Invisalign stores or providing certain services in physical retail establishments in connection with the marketing and sale of clear aligners in the U.S., and enjoined from using the SDC Entities’ confidential information. The arbitrator extended the expiration date of specified aspects of the restrictive covenant to August 18, 2022. The arbitrator also ordered Align to tender its SDC Financial LLC membership interests to the SDC Entities for a purchase price equal to the “capital account” balance as of October 31, 2017, to be determined in accordance with the applicable provisions of the SDC Operating Agreements. No financial damages were awarded to the SDC Entities. The Circuit Court for Cook County, Illinois confirmed the Award on April 29, 2019.
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As required by the Award, Align tendered its membership interests for a purchase price that SDC claimed to be Align’s “capital account” balance. Align disputed that the SDC Entities properly determined the value of Align’s “capital account” balance as of October 31, 2017. Consequently, on July 3, 2019, Align filed a confidential demand for arbitration challenging the propriety of the SDC Entities’ determination. On March 12, 2021 the Arbitrator issued a final award in favor of Align and against SDC finding that the SDC entities owed Align an additional $43.4 million plus interest. SDC paid the amount due to Align on March 17, 2021.
On August 27, 2020, Align initiated a confidential arbitration proceeding against the SDC entities before the American Arbitration Association in San Jose, California. This arbitration relates to the Strategic Supply Agreement (“Supply Agreement”) entered into between the parties in 2016. The complaint alleges that the SDC Entities breached the Supply Agreement’s terms, causing damages to Align in an amount to be determined. On January 19, 2021, SDC filed a counterclaim alleging that Align breached the Supply Agreement. Align denies the SDC Entities’ allegations in the counterclaim and will vigorously defend itself against them. This arbitration hearing is set for July 18-29, 2022.
Align is currently unable to predict the outcome of these disputes and therefore cannot determine the likelihood of loss or success nor estimate a range of possible loss or success, if any.
In addition to the above, in the ordinary course of Align’s operations, Align is involved in a variety of claims, suits, investigations, and proceedings, including actions with respect to intellectual property claims, patent infringement claims, government investigations, labor and employment claims, breach of contract claims, tax, and other matters. Regardless of the outcome, these proceedings can have an adverse impact on us because of defense costs, diversion of management resources, and other factors. Although the results of complex legal proceedings are difficult to predict and Align’s view of these matters may change in the future as litigation and events related thereto unfold; Align currently does not believe that these matters, individually or in the aggregate, will materially affect Align’s financial position, results of operations or cash flows.
Note 11. Commitments and Contingencies
Unconditional Purchase Obligations
On May 29, 2018, we entered into a purchase agreement, as amended, with an existing single source supplier which requires us to purchase aligner material for a minimum amount of approximately $425.9 million over five years through 2022. On June 24, 2021, we amended the agreement which requires an additional minimum align material purchase of approximately $348.0 million from 2023 through 2026. As of December 31, 2021, our remaining commitment under this agreement totaled $419.6 million.
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, 2021, we had a remaining commitment of $47.6 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, 2021, we had purchase commitments of $140.5 million which is expected to be paid through 2025.