NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Business Description
Align Technology, Inc. (“We”, “Our”, or “Align”) was incorporated in April 1997 in Delaware. Align is a global medical device company engaged in the design, manufacture and marketing of Invisalign® clear aligners and iTero® intraoral scanners and services for orthodontics and restorative and aesthetic dentistry. Align’s products are intended primarily for the treatment of malocclusion or the misalignment of teeth and are designed to help dental professionals achieve the clinical outcomes that they expect. We are headquartered in San Jose, California with offices worldwide. Our Americas regional headquarters is located in Raleigh, North Carolina; our European regional headquarters is located in Amsterdam, the Netherlands; and our Asia Pacific regional headquarters is located in Singapore. We have
two
operating segments: (1) Clear Aligner, known as the Invisalign System, and (2) Scanners and Services ("Scanner"), known as the iTero intraoral scanner and OrthoCAD services.
Basis of Presentation and Preparation
The consolidated financial statements include the accounts of Align and our wholly-owned subsidiaries after elimination of intercompany transactions and balances.
During fiscal year 2018, we adopted Accounting Standards Codification (“ASC”) 606, “
Revenues from Contracts with Customers,
” using the full retrospective method and Accounting Standards Update (“ASU”) 2016-18, “
Statement of Cash Flows - Restricted Cash,
” on a retrospective basis. The Consolidated Balance Sheet as of December 31, 2017, Consolidated Statements of Cash Flow for the year ended December 31, 2017 and 2016, and Consolidated Statements of Stockholders' Equity for the year ended December 31, 2017 and 2016 have been recast to comply with the adoption of these standards.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") in the U.S. requires our management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates, including those related to the fair values of financial instruments, valuation of investments in privately held companies, useful lives of intangible assets and property and equipment, revenue recognition, stock-based compensation, long-lived assets and goodwill, income taxes and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Fair Value of Financial Instruments
We measure the fair value of financial assets as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1
– Quoted (unadjusted) prices in active markets for identical assets or liabilities.
Level 2
– Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3
– Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
Cash and Cash Equivalents
We consider currency on hand, demand deposits, time deposits, and all highly liquid investments with an original or remaining maturity of
three months
or less at the date of purchase to be cash and cash equivalents. Cash and cash equivalents are held in various financial institutions in the U.S. and internationally.
Restricted Cash
The restricted cash primarily consists of funds reserved for legal requirements. Restricted cash balances are included in other current assets and other assets within our Consolidated Balance Sheet.
Marketable Securities
Marketable securities are classified as available-for-sale and are carried at fair value. Marketable securities classified as current assets have maturities of less than one year. Unrealized gains or losses on such securities are included in accumulated other comprehensive income (loss), net in stockholders’ equity. Realized gains and losses from maturities of all such securities are reported in earnings and computed using the specific identification cost method. Realized gains or losses and charges for other-than-temporary declines in value, if any, on available-for-sale securities are reported in other income (expense), net, as incurred. We periodically evaluate these investments for other-than-temporary impairment.
Variable Interest Entities
We evaluate whether an entity in which we have made an investment is considered a variable interest entity (“VIE”). If we determine we are the primary beneficiary of a VIE, we would consolidate the VIE into our financial statements. In determining if we are the primary beneficiary, we evaluate whether we have the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our evaluation includes identification of significant activities and an assessment of our ability to direct those activities based on governance provisions and arrangements to provide or receive product and process technology, product supply, operations services, equity funding, financing, and other applicable agreements and circumstances. Our assessments of whether we are the primary beneficiary of a VIE require significant assumptions and judgments. We have concluded that we are not the primary beneficiary of our VIE investments; therefore, we do not consolidate their results into our consolidated 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 ASC 323, “
Investments -Equity Method and Joint Ventures
.
”
Equity securities qualified as equity method investments are reported on our Consolidated Balance Sheet as a single amount, and we record our share of their operating results within equity in losses of investee, net of tax, in our Consolidated Statement of Operations. 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 ASC 321, “
Investments -Equity Securities
.
”
The equity securities without readily determinable fair values are recorded at cost and adjusted for impairments and observable price changes with a same or similar security from the same issuer (“Measurement Alternative
”
)
.
Equity securities under ASC 321 are reported on our Consolidated Balance Sheet as other assets, and we record a change in carrying value of our equity securities, if any, in other income (expense), net in our Consolidated Statement of Operations.
Equity securities are evaluated for impairment as events or circumstances indicate that there is an other-than-temporary loss in value. The decrease in value is recognized in the period the impairment occurs and recorded in other income (expense), net in the 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 an average exchange rate in effect during the period. The foreign currency revaluation that are derived from monetary assets and liabilities stated in a currency other than functional currency are included in other income (expense), net. For the year ended
December 31, 2018
,
2017
and
2016
, we had foreign currency net gains (losses) of
$(5.6) million
,
$9.0 million
and
$(8.0) million
, respectively.
Certain Risks and Uncertainties
Our operating results depend to a significant extent on our ability to market and develop our products. The life cycles of our products are difficult to estimate due, in part, to the effect of future product enhancements and competition. Our inability to successfully develop and market our products as a result of competition or other factors would have a material adverse effect on our business, financial condition and results of operations.
Our cash and investments are held primarily by
three
financial institutions. Financial instruments which potentially expose us to concentrations of credit risk consist primarily of cash equivalents and marketable securities. We invest excess cash primarily in money market funds, commercial paper, corporate bonds, U.S. government agency bonds, U.S. government treasury bonds and certificates of deposits. If the carrying value of our investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments, which could adversely affect our results of operations and financial condition. Moreover, the performance of certain securities in our investment portfolio correlates with the credit condition of the U.S. economy.
We provide credit to customers in the normal course of business. Collateral is not required for accounts receivable, but ongoing evaluations of customers’ credit worthiness are performed. We maintain reserves for potential credit losses and such losses have been within management’s expectations. No individual customer accounted for 10% or more of our accounts receivable at
December 31, 2018
or
2017
, or net revenues for the year ended
December 31, 2018
,
2017
or
2016
.
In the U.S., the Food and Drug Administration (“FDA”) regulates the design, manufacture, distribution, pre-clinical and clinical study, clearance and approval of medical devices. Products developed by us may require approvals or clearances from the FDA or other international regulatory agencies prior to commercialized sales. There can be no assurance that our products will receive any of the required approvals or clearances. If we were denied approval or clearance or such approval was delayed, it may have a material adverse impact on us.
We have manufacturing facilities located outside the U.S. In Juarez, Mexico and Ziyang, China, we manufacture our clear aligners, distribute and repair our scanners and perform our computer-aided design/computer-aided manufacturing ("CAD/CAM") services. In Or Yehuda, Israel, we produce our handheld intraoral scanner wand and perform the final assembly of our iTero scanner. Our digital treatment plans using a sophisticated, internally developed computer-modeling program are located in 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.
Inventories
Inventories are valued at the lower of cost or net realizable value, with cost computed using either standard cost, which approximates actual cost, or average cost on a first-in-first-out basis. Excess and obsolete inventories are determined primarily based on future demand forecasts, and write-downs of excess and obsolete inventories are recorded as a component of cost of net revenues.
Property, Plant and Equipment
Property, plant and equipment are stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Construction in progress ("CIP") is related to the construction or development of property (including land) and equipment that have not yet been placed in service for their intended use. Upon sale or retirement, the asset’s cost and related accumulated depreciation are removed from the balance sheet and any related gains or losses are reflected in 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
.
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 units is based on relative synergies generated as a result of an acquisition.
We perform an initial assessment of qualitative factors to determine whether the existence of events and circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In performing the qualitative assessment, we identify and consider the significance of relevant key factors, events, and circumstances that affect the fair value of our reporting units. These factors include external factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such as our actual and planned financial performance. We also give consideration to the difference between the reporting unit fair value and carrying value as of the most recent date a fair value measurement was performed. If, after assessing the totality of relevant events and circumstances, we determine that it is more likely than not that the fair value of the reporting unit exceeds its carrying value and there is no indication of impairment, no further testing is performed; however, if we conclude otherwise, the first step of the two-step impairment test is performed by estimating the fair value of the reporting unit and comparing it with its carrying value, including goodwill.
Step one of the goodwill impairment test consists of a comparison of the fair value of a reporting unit against its carrying amount, including the goodwill allocated to each reporting unit. We determine the fair value of our reporting units based on the present value of estimated future cash flows under the income approach of the reporting units as well as various price or market multiples applied to the reporting unit's operating results along with the appropriate control premium under the marketing approach, both of which are classified as level 3 within the fair value hierarchy as described in
Note 2 "Marketable Securities and Fair Value
Measurements" of the Notes of Consolidated Financial Statements
. If the carrying amount of the reporting unit is in excess of its fair value, step two requires the comparison of the implied fair value of the reporting unit’s goodwill against the carrying amount of the reporting unit’s goodwill. Any excess of the carrying value of the reporting unit’s goodwill over the implied fair value of the reporting unit’s goodwill is recorded as an impairment loss in the Consolidated Statements of Operations.
Finite-Lived Intangible Assets and Long-Lived Assets
We evaluate long-lived assets (including finite-lived intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. An asset or asset group is considered impaired if its carrying amount exceeds the future undiscounted net cash flows that the asset or asset group is expected to generate. Factors we consider important which could trigger an impairment review include significant negative industry or economic trends, significant loss of customers and changes in the competitive environment. If an asset or asset group is considered to be impaired, the impairment to be recognized is calculated as the amount by which the carrying amount of the asset or asset group exceeds its fair market value. Our estimates of future cash flows attributable to our long-lived assets require significant judgment based on our historical and anticipated results and are subject to many assumptions. The estimation of fair value utilizing a discounted cash flow approach includes numerous uncertainties which require our significant judgment when making assumptions of expected growth rates and the selection of discount rates, as well as assumptions regarding general economic and business conditions, and the structure that would yield the highest economic value, among other factors.
Refer to Note 6 "Goodwill and Intangible Assets" of the Notes of Consolidated Financial Statements
for details on intangible long-lived assets
.
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. During the year ended December 31, 2018, we capitalized approximately
$2.7 million
of internally developed software costs. Internally developed software costs capitalized during the year ended
December 31, 2017
was not material.
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
Clear Aligner
We warrant our Invisalign products against material defects until the treatment plan is complete. We warrant clear aligners manufactured for SmileDirectClub, LLC (“SDC”) against material defects for one year. We accrue for warranty costs in cost of net revenues upon shipment of products. The estimated warranty costs liability is primarily based on historical experience as to product failures as well as current information on replacement costs. Actual warranty costs could differ materially from the estimated amounts. We regularly review our warranty liability and update these balances based on historical warranty cost trends.
Scanners and Services
We warrant our intraoral scanners for a period of
one
year, which include materials and labor. We accrue for these warranty costs based on average historical repair costs. An extended warranty may be purchased for additional fees.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for customers that are not able to make payments. We periodically review these balances, including an analysis of the customers’ payment history and information regarding the customers’ creditworthiness. Actual write-offs have not materially differed from the estimated allowances.
Revenue Recognition
Our revenues are derived primarily from the sale of aligners, scanners, and services from our Clear Aligner and Scanner 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 true: 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”) and allocation of consideration from a 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 historical sales, usage rates (the number of times a customer is expected to order additional aligners), costs, and expected margin, which may vary over time depending upon the unique facts and circumstances related to each performance obligation in making these estimates. Further, our process for estimating usages rates require significant judgment and evaluation of inputs, including historical data and forecasted usages. 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 Full, Invisalign Teen, Invisalign First, Invisalign Express 10, Invisalign Express 5, Express Package, Lite Package and Invisalign Assist products include optional additional aligners at no charge for a certain period of time ranging from one to five years after initial shipment, and Invisalign Go includes optional additional aligners at no charge for a period of up to two years after initial shipment.
We determined that our treatment plans comprise the following performance obligations that also represent distinct deliverables: initial aligners, additional aligners, case refinement, and replacement aligners. We elected to 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 and 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 considered whether a significant financing component exists; however, as the delivery of the performance obligations are at the customer’s discretion, we concluded that no significant financing component exists.
Scanner
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 SSPs of the scanner and the subscription service. We estimate the SSP of each element, taking into consideration historical prices as well as our discounting strategies. Revenues are then recognized over time as the monthly services are rendered and upon shipment for the scanner, as that is when we deem the customer to have obtained control. Most consideration is collected upfront and in cases where there are payment plans, consideration is collected by the one year mark and, therefore, there are no significant financing components.
Warranties
For both Clear Aligner and Scanner segments, we offer an assurance warranty which provides the customer assurance that the product will function as the parties intended because it complies with agreed-upon specifications, and thus is not treated as a separate performance obligation and will continue to be accrued in accordance with the Financial Accounting Standards Board ("FASB") guidance on guarantees.
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 accrue for sales return reserve based on historical sales returns as a percentage of revenue.
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 revenue, we evaluate the individual components and capitalize the eligible components, recognizing the costs over the treatment period.
Unfulfilled Performance Obligations for Clear Aligners and Scanners
Our unfilled performance obligations as of
December 31, 2018
and the estimated revenues expected to be recognized in the future related to these performance obligations are
$431.8 million
. This includes performance obligations from the Clear Aligner segment, primarily the shipment of additional aligners, which are fulfilled over
one
to
five
years, and performance obligations from the iTero scanner segment, primarily support, and contracted deliveries of additional scanners, which are fulfilled over one to five years. The estimate includes both product and service unfulfilled performance obligations and the time range reflects our best estimate of when we will transfer control to the customer and may change based on customer usage patterns, timing of shipments, readiness of customers' facilities for installation, and manufacturing availability.
Contract Balances
The timing of revenue recognition results in deferred revenues being recognized on our Consolidated Balance Sheet. For both aligners and scanners, we usually collect the total consideration owed prior to all performance obligations being performed with payment terms 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 expense is expensed as incurred and includes the costs associated with the research and development of new products and enhancements to existing products. These costs primarily include personnel-related costs, including payroll and stock-based compensation, outside consulting expenses 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, 2018
,
2017
and
2016
, we incurred advertising costs of
$88.4 million
,
$70.1 million
and
$36.0 million
, respectively.
Common Stock Repurchase
We repurchase our own common stock from time to time in the open market when our Board of Directors approve a stock repurchase program. We account for these repurchases under the accounting guidance for equity where we allocate the total repurchase value that is in excess over par value between additional paid-in capital and retained earnings. All shares repurchased are retired.
Operating Leases
We lease office spaces, vehicles and equipment under operating leases with original lease periods of up to
10
years. Certain of these leases have free or escalating rent payment provisions and lease incentives provided by the landlord. We recognize rent expense under such leases on a straight-line basis over the term of the lease.
Income Taxes
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our current tax exposure under the applicable tax laws and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities which are included in our Consolidated Balance Sheet.
We account for uncertainty in income taxes pursuant to authoritative guidance based on a two-step approach to recognize and measure uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit based on its technical merits, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit or refinement of estimates due to new information. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will impact our tax provision in our Consolidated Statement of Operation in the period in which such determination is made.
We assess the likelihood that we will be able to realize our deferred tax assets. Should there be a change in our ability to realize our deferred tax assets, our tax provision would increase in the period in which we determine that it is more likely than not that we cannot realize our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If it is more likely than not that we will not realize our deferred tax assets, we will increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be realizable. The available positive evidence at
December 31, 2018
included historical operating profits and a projection of future income sufficient to realize most of our remaining deferred tax assets. As of
December 31, 2018
,
it was considered more likely than not that our deferred tax assets would be realized with the exception of certain foreign loss carryovers as we are unable to forecast sufficient future profits to realize the deferred tax assets.
The U.S. Tax Cuts and Jobs Act was enacted into law on December 22, 2017 which included provisions for certain foreign-sourced earnings referred to as Global Intangible Low-Taxed Income (“GILTI”). GILTI imposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. FASB guidance issued in January 2018 allows companies to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which the tax is incurred (the “period cost method”), or (ii) account for GILTI in the measurement of deferred taxes (the “deferred method”). We have made the election to record GILTI tax using the period cost method.
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 estimate the fair value of market-performance based restricted stock units using a Monte Carlo simulation model which requires the input of assumptions, including expected term, stock price volatility and the risk-free rate of return. In addition, judgment is also required in estimating the number of stock-based awards that are expected to be forfeited. Forfeitures are estimated based on historical experience at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.
Comprehensive Income
Comprehensive income includes all changes in equity during a period from non-owner sources including unrealized gains and losses on investments and foreign currency translation adjustments, net of their related tax effect.
Recent Accounting Pronouncements
(i) New Accounting Updates Recently Adopted
In March 2016, the FASB issued Accounting Standards Update ("ASU") 2016-09, "
Improvements to Employee Share-Based Payment Accounting
"
(Topic 718)
.
We adopted the standard in the first quarter of fiscal year 2017. With this adoption, excess tax benefits related to stock-based compensation expense are reflected in our consolidated statement of operations as a component of the provision for income taxes instead of additional paid-in capital in our consolidated balance sheet. In addition, we elected to continue to estimate expected forfeitures rather than as they occur to determine the amount of compensation cost to be recognized in each period. During the fiscal year ended December 31, 2017, we recognized excess tax benefits of $30.0 million in our provision for income taxes. Excess tax benefits from share-based payment arrangements are classified as an operating activity in our consolidated statement of cash flows.
In May 2014, FASB released ASU 2014-09, “
Revenue from Contracts with Customers,
” (Topic 606) to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of the standard is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for the goods or services. We adopted the guidance in the first quarter of fiscal year 2018 by applying the full retrospective method. The impact of adoption was primarily related to the Clear Aligner segment. Our disaggregation of revenues can be found in Note 16 “Segments and Geographical Information.” We elected to take the practical expedient to exclude from the transaction price all taxes assessed by a governmental authority. Prior periods have been retrospectively adjusted, and we recognized a
$3.9 million
cumulative effect of adopting the guidance as an adjustment to our opening balance of retained earnings as of January 1, 2016 in our Consolidated Statements of Stockholders’ Equity.
The adoption of ASU 2014-09 did not have a material impact on our Consolidated Statement of Operations, Consolidated Statements of Comprehensive Income or Consolidated Statements of Cash Flows. Consolidated Balance Sheet line items, which reflect the adoption of the ASU 2014-09 are as follows (in thousands):
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
As Previously Reported
|
|
Adjustment
|
|
As Adjusted
|
Asset Accounts:
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
322,825
|
|
|
$
|
1,364
|
|
|
$
|
324,189
|
|
Deferred tax assets
|
|
50,059
|
|
|
(725
|
)
|
|
49,334
|
|
Other assets
|
|
38,379
|
|
|
5,514
|
|
|
43,893
|
|
Liability and Stockholders’ Equity Accounts:
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
194,198
|
|
|
$
|
1,364
|
|
|
$
|
195,562
|
|
Deferred revenues
|
|
266,842
|
|
|
871
|
|
|
267,713
|
|
Retained earnings
|
|
263,356
|
|
|
3,918
|
|
|
267,274
|
|
In August 2016, the FASB issued ASU 2016-15,
“Classification of Certain Cash Receipts and Cash Payments,”
which clarifies the presentation and classification of certain cash receipts and cash payments in the statements of cash flows. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2017.
We adopted the standard in the first quarter of fiscal year 2018 on a retrospective basis, and it did not have an impact on our Consolidated Statements of Cash Flows.
In November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows—Restricted Cash,”
which provides guidance to address the classification and presentation of changes in restricted cash in the statements of cash flows. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2017 on a retrospective basis. We adopted the guidance in the first quarter of fiscal year 2018 on a retrospective basis and presented the changes in the total of cash, cash equivalents, and restricted cash in the Consolidated Statements of Cash Flows. Consolidated Statement of Cash Flows line items, which reflect the adoption of the ASU 2016-18, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
As Previously Reported
|
|
Adjustment
|
|
As Adjusted
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
Other investing activities
|
|
$
|
567
|
|
|
$
|
(3,164
|
)
|
|
$
|
(2,597
|
)
|
Net cash used in investing activities
|
|
(248,313
|
)
|
|
(3,164
|
)
|
|
(251,477
|
)
|
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash
|
|
5,510
|
|
|
34
|
|
|
5,544
|
|
Net increase in cash, cash equivalents, and restricted cash
|
|
60,236
|
|
|
(3,130
|
)
|
|
57,106
|
|
Cash, cash equivalents, and restricted cash at beginning of the period
|
|
389,275
|
|
|
3,744
|
|
|
393,019
|
|
Cash, cash equivalents, and restricted cash at end of the period
|
|
$
|
449,511
|
|
|
$
|
614
|
|
|
$
|
450,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
As Previously Reported
|
|
Adjustment
|
|
As Adjusted
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
Other investing activities
|
|
$
|
(8,211
|
)
|
|
$
|
180
|
|
|
$
|
(8,031
|
)
|
Net cash provided by investing activities
|
|
72,848
|
|
|
180
|
|
|
73,028
|
|
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash
|
|
(3,417
|
)
|
|
43
|
|
|
(3,374
|
)
|
Net increase in cash, cash equivalents, and restricted cash
|
|
221,561
|
|
|
223
|
|
|
221,784
|
|
Cash, cash equivalents, and restricted cash at beginning of the period
|
|
167,714
|
|
|
3,521
|
|
|
171,235
|
|
Cash, cash equivalents, and restricted cash at end of the period
|
|
$
|
389,275
|
|
|
$
|
3,744
|
|
|
$
|
393,019
|
|
In May 2017, the FASB issued ASU 2017-09, “
Compensation
—
Stock Compensation (Topic 718): Scope of Modification Accounting,”
to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification.
The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2017 on a prospective basis. We adopted the standard in the first quarter of fiscal year 2018 on a prospective basis which did not have an impact on our consolidated financial statements and related disclosures.
(ii) Recent Accounting Updates Not Yet Effective
In February 2016, the FASB issued ASU 2016-02, “
Leases
” (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. In July 2018, the FASB issued ASU 2018-11, “
Leases- Targeted Improvements,
” which p
rovides an additional transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. We will adopt this standard in the first quarter of fiscal year 2019 by electing the transition method issued in ASU 2018-11 and the package of practical expedients available in the standard. We are finalizing our implementation efforts related to policies, processes and internal controls to comply with the guidance. Upon adoption, based on our lease portfolio as of December 31, 2018, we anticipate recognizing right-of-use assets in the range of $67 million to $74 million and related lease liabilities in the range of $77 million to $86 million on our Consolidated Balance Sheet, with no material impact to our Consolidated Statement of Operations.
In June 2016, the FASB issued ASU 2016-13, “
Financial Instruments - Credit Losses
” (Topic 326)
.
The FASB issued this update to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this update replace the existing guidance of incurred loss impairment methodology with an approach that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In November 2018, the FASB issued ASU 2018-19, “
Codification Improvements to Topic 326,
Financial Instruments - Credit Losses
” which clarifies the scope of guidance in the ASU 2016-13
. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the update is permitted in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
We are currently evaluating the impact of this guidance on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04,
“Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,”
to simplify the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. Under the amendments, an entity will recognize an impairment charge for the amount by which the carrying value exceeds the fair value. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2019 on a prospective basis and early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements and related disclosures.
In February 2018, the FASB issued ASU 2018-02,
“Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,”
which gives entities the option to reclassify to retained earnings the tax effects resulting from the U.S. Tax Cuts and Jobs Act (the “TCJA”) related to items in
accumulated other comprehensive income. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2018 on a retrospective basis and early adoption is permitted. We do not expect that the guidance will have a material impact on our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, “
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement,”
to modify the disclosure requirements on fair value measurements in Topic 820,
Fair Value Measurement
. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2019 on a prospective basis and early adoption is permitted. We are currently evaluating the impact of this guidance on our related disclosures.
In August 2018, the FASB issued ASU 2018-15, “
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,”
to clarify the guidance on the costs of implementing a cloud computing hosting arrangement that is a service contract. Under the amendments, the entity is required to follow the guidance in Subtopic 350-40,
Internal-Use Software
, to determine which implementation costs under the service contract to be capitalized as an asset and which costs to expense. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2019 either on a retrospective or prospectively basis and early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements and related disclosures.
Note 2. Investments and Fair Value Measurements
As of
December 31, 2018
and
2017
, the estimated fair value of our short-term and long-term marketable securities, classified as available for sale, are as follows (in thousands):
Short-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Commercial paper
|
|
$
|
17,793
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,793
|
|
Corporate bonds
|
|
45,100
|
|
|
—
|
|
|
(48
|
)
|
|
45,052
|
|
U.S. government agency bonds
|
|
19,981
|
|
|
—
|
|
|
(77
|
)
|
|
19,904
|
|
U.S. government treasury bonds
|
|
15,292
|
|
|
—
|
|
|
(1
|
)
|
|
15,291
|
|
Certificates of deposit
|
|
420
|
|
|
1
|
|
|
(1
|
)
|
|
420
|
|
Total marketable securities, short-term
|
|
$
|
98,586
|
|
|
$
|
1
|
|
|
$
|
(127
|
)
|
|
$
|
98,460
|
|
Long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Corporate bonds
|
|
$
|
4,957
|
|
|
$
|
5
|
|
|
$
|
(2
|
)
|
|
$
|
4,960
|
|
U.S. government agency bonds
|
|
1,399
|
|
|
8
|
|
|
—
|
|
|
1,407
|
|
U.S. government treasury bonds
|
|
2,235
|
|
|
9
|
|
|
—
|
|
|
2,244
|
|
Certificates of deposit
|
|
500
|
|
|
1
|
|
|
—
|
|
|
501
|
|
Total marketable securities, long-term
|
|
$
|
9,091
|
|
|
$
|
23
|
|
|
$
|
(2
|
)
|
|
$
|
9,112
|
|
Short-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Commercial paper
|
|
$
|
58,503
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
58,502
|
|
Corporate bonds
|
|
145,728
|
|
|
3
|
|
|
(174
|
)
|
|
145,557
|
|
U.S. government agency bonds
|
|
3,013
|
|
|
—
|
|
|
(7
|
)
|
|
3,006
|
|
U.S. government treasury bonds
|
|
60,650
|
|
|
—
|
|
|
(70
|
)
|
|
60,580
|
|
Certificates of deposit
|
|
4,386
|
|
|
—
|
|
|
—
|
|
|
4,386
|
|
Total marketable securities, short-term
|
|
$
|
272,280
|
|
|
$
|
3
|
|
|
$
|
(252
|
)
|
|
$
|
272,031
|
|
Long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
U.S. government agency bonds
|
|
$
|
15,023
|
|
|
$
|
—
|
|
|
$
|
(68
|
)
|
|
$
|
14,955
|
|
Corporate bonds
|
|
25,067
|
|
|
2
|
|
|
(76
|
)
|
|
24,993
|
|
Total marketable securities, long-term
|
|
$
|
40,090
|
|
|
$
|
2
|
|
|
$
|
(144
|
)
|
|
$
|
39,948
|
|
Cash equivalents are not included in the tables above as the gross unrealized gains and losses are not material. We have no short-term or long-term investments that have been in a continuous material unrealized loss position for greater than twelve months as of
December 31, 2018
and
2017
. Amounts reclassified to earnings from accumulated other comprehensive income (loss), net related to unrealized gains or losses were not material in
2018
and
2017
. For the year ended
December 31, 2018
,
2017
and 2016, realized gains or losses were not material.
Our fixed-income securities investment portfolio consists of investments that have a maximum effective maturity of
40 months
on any individual security. The securities that we invest in are generally deemed to be low risk based on their credit ratings from the major rating agencies. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. As interest rates increase, those securities purchased at a lower yield show a mark-to-market unrealized loss. The unrealized losses are due primarily to changes in credit spreads and interest rates. We expect to realize the full value of all these investments upon maturity or sale. The weighted average remaining duration of these securities was approximately
four
months and
six
months as of
December 31, 2018
and
2017
, respectively.
As the carrying value approximates the fair value for our short-term and long-term marketable securities shown in the tables above, the following table summarizes the fair value of our short-term and long-term marketable securities classified by contractual maturity as of
December 31, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
One year or less
|
|
$
|
98,460
|
|
|
$
|
272,031
|
|
Due in greater than one year
|
|
9,112
|
|
|
39,948
|
|
Total marketable securities
|
|
$
|
107,572
|
|
|
$
|
311,979
|
|
Investments in Privately Held Companies
Our investments in privately held companies as of December 31, 2018 and December 31, 2017 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Equity securities under the equity method investment
1
|
$
|
45,913
|
|
|
$
|
54,606
|
|
Equity securities without readily determinable fair values
2
|
$
|
9,862
|
|
|
$
|
—
|
|
|
|
1
|
Refer to Note 4 “Equity Method Investments” of the Notes to Consolidated Financial Statements
for more information
|
|
|
2
|
In April 2018,
$4.9 million
of convertible short term notes receivable (recurring Level 3 investment) was converted into equity securities as a result of qualified financing secured by the private company in accordance with ASC 321,
“Investments—Equity Securities.”
The equity securities issued upon conversion are reported as a nonrecurring investment within other assets in our Consolidated Balance Sheet. During the year ended
December 31, 2018
, there were no fair value adjustments to equity securities without readily determinable fair values.
|
Fair Value Measurements
We measure the fair value of financial assets as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We use the GAAP fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value:
Level 1
— Quoted (unadjusted) prices in active markets for identical assets or liabilities.
Level 2
— Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. We obtain fair values for our Level 2 investments. Our custody bank and asset managers independently use professional pricing services to gather pricing data which may include quoted market prices for identical or comparable financial instruments, or inputs other than quoted prices that are observable either directly or indirectly, and we are ultimately responsible for these underlying estimates.
Level 3
— Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.
The following tables summarize our financial assets measured at fair value on a recurring basis as of
December 31, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance as of December 31, 2018
|
|
Level 1
|
|
Level 2
|
Cash equivalents:
|
|
|
|
|
|
|
Money market funds
|
|
$
|
431,081
|
|
|
$
|
431,081
|
|
|
$
|
—
|
|
Commercial paper
|
|
4,681
|
|
|
—
|
|
|
4,681
|
|
U.S. government treasury bonds
|
|
2,195
|
|
|
2,195
|
|
|
—
|
|
Corporate bonds
|
|
3,880
|
|
|
—
|
|
|
3,880
|
|
Short-term investments:
|
|
|
|
|
|
|
Commercial paper
|
|
17,793
|
|
|
—
|
|
|
17,793
|
|
Corporate bonds
|
|
45,052
|
|
|
—
|
|
|
45,052
|
|
U.S. government agency bonds
|
|
19,904
|
|
|
—
|
|
|
19,904
|
|
U.S. government treasury bonds
|
|
15,291
|
|
|
15,291
|
|
|
—
|
|
Certificates of deposit
|
|
420
|
|
|
—
|
|
|
420
|
|
Long-term investments:
|
|
|
|
|
|
|
U.S. government agency bonds
|
|
1,407
|
|
|
—
|
|
|
1,407
|
|
Corporate bonds
|
|
4,960
|
|
|
—
|
|
|
4,960
|
|
U.S. government treasury bonds
|
|
2,244
|
|
|
2,244
|
|
|
—
|
|
Certificate of deposit
|
|
501
|
|
|
—
|
|
|
501
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
|
Israeli funds
|
|
3,047
|
|
|
—
|
|
|
3,047
|
|
|
|
$
|
552,456
|
|
|
$
|
450,811
|
|
|
$
|
101,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance as of December 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
253,155
|
|
|
$
|
253,155
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial paper
|
|
7,246
|
|
|
—
|
|
|
7,246
|
|
|
—
|
|
Corporate bonds
|
|
2,016
|
|
|
—
|
|
|
2,016
|
|
|
—
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
58,502
|
|
|
—
|
|
|
58,502
|
|
|
—
|
|
Corporate bonds
|
|
145,557
|
|
|
—
|
|
|
145,557
|
|
|
—
|
|
U.S. government agency bonds
|
|
3,006
|
|
|
—
|
|
|
3,006
|
|
|
—
|
|
U.S. government treasury bonds
|
|
60,580
|
|
|
60,580
|
|
|
—
|
|
|
—
|
|
Certificates of deposit
|
|
4,386
|
|
|
—
|
|
|
4,386
|
|
|
—
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
U.S. government agency bonds
|
|
14,955
|
|
|
—
|
|
|
14,955
|
|
|
—
|
|
Corporate bonds
|
|
24,993
|
|
|
—
|
|
|
24,993
|
|
|
—
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
|
Israeli funds
|
|
3,075
|
|
|
—
|
|
|
3,075
|
|
|
—
|
|
Short-term notes receivable
|
|
4,476
|
|
|
—
|
|
|
—
|
|
|
4,476
|
|
|
|
$
|
581,947
|
|
|
$
|
313,735
|
|
|
$
|
263,736
|
|
|
$
|
4,476
|
|
Derivative Financial Instruments
In March 2018, we began entering 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. The gain from the settlement of foreign currency forward contracts during 2018 was
$9.9 million
. As of
December 31, 2018
, the fair value of foreign exchange forward contracts outstanding was not material.
The following table presents the gross notional value of all our foreign exchange forward contracts outstanding as of
December 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Local Currency Amount
|
|
Notional Contract Amount (USD)
|
Euro
|
€62,000
|
|
$
|
71,095
|
|
Chinese Yuan
|
¥375,000
|
|
54,515
|
|
Brazilian Real
|
R$81,000
|
|
20,858
|
|
Canadian Dollar
|
C$27,000
|
|
19,808
|
|
British Pound
|
£13,000
|
|
16,635
|
|
Japanese Yen
|
¥1,700,000
|
|
15,357
|
|
Australian Dollar
|
A$3,000
|
|
2,114
|
|
|
|
|
$
|
200,382
|
|
Note 3. Balance Sheet Components
Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Raw materials
|
$
|
26,119
|
|
|
$
|
12,721
|
|
Work in process
|
13,784
|
|
|
12,157
|
|
Finished goods
|
15,738
|
|
|
6,810
|
|
Total inventories
|
$
|
55,641
|
|
|
$
|
31,688
|
|
Other Assets
Other assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Capitalized commissions
1
|
$
|
9,185
|
|
|
$
|
5,514
|
|
Equity securities
|
9,862
|
|
|
—
|
|
Security deposits
|
5,162
|
|
|
3,557
|
|
Loan receivable from equity investee
|
—
|
|
|
30,000
|
|
Other long-term assets
|
2,778
|
|
|
4,822
|
|
Total other assets
|
$
|
26,987
|
|
|
$
|
43,893
|
|
(1)
December 31, 2017 balance has been recasted to reflect the adoption of ASU 2014-09 (
Refer to Note 1“Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements
for more information).
Property, Plant and Equipment, Net
Property, plant and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Generally Used Estimated Useful Life
|
|
2018
|
|
2017
|
Clinical and manufacturing equipment
|
Up to 10 years
|
|
$
|
236,179
|
|
|
$
|
183,392
|
|
Computer hardware
|
3 years
|
|
34,297
|
|
|
24,933
|
|
Computer software
|
3 years
|
|
59,617
|
|
|
54,756
|
|
Furniture and fixtures
|
5 years
|
|
33,436
|
|
|
16,271
|
|
Leasehold improvements
|
Lease term
(1)
|
|
77,168
|
|
|
37,756
|
|
Building
|
20 years
|
|
139,315
|
|
|
63,887
|
|
Land
|
—
|
|
17,630
|
|
|
17,630
|
|
CIP
|
—
|
|
95,414
|
|
|
85,976
|
|
Total
|
|
|
693,056
|
|
|
484,601
|
|
Less: Accumulated depreciation and amortization and impairment charges
|
|
|
(171,727
|
)
|
|
(135,808
|
)
|
Total property, plant and equipment, net
|
|
|
$
|
521,329
|
|
|
$
|
348,793
|
|
(1)
Shorter of remaining lease term or estimated useful lives of asset
Depreciation and amortization was
$54.7 million
,
$37.7 million
and
$24.0 million
for the year ended
December 31, 2018
,
2017
and
2016
, respectively.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Accrued payroll and benefits
|
$
|
127,109
|
|
|
$
|
103,004
|
|
Accrued expenses
|
39,323
|
|
|
27,318
|
|
Accrued customer credits and deposits
|
12,439
|
|
|
5,373
|
|
Accrued warranty
|
8,551
|
|
|
5,929
|
|
Accrued property, plant and equipment
|
8,193
|
|
|
11,362
|
|
Accrued professional fees
|
6,752
|
|
|
6,316
|
|
Accrued sales return reserve
1
|
6,534
|
|
|
1,364
|
|
Accrued sales tax and value added tax
|
6,276
|
|
|
5,503
|
|
Accrued income taxes
|
5,752
|
|
|
12,405
|
|
Accrued sales rebate
|
5,668
|
|
|
11,209
|
|
Other accrued liabilities
|
8,082
|
|
|
5,779
|
|
Total accrued liabilities
|
$
|
234,679
|
|
|
$
|
195,562
|
|
(1)
December 31, 2017 balance has been reclassified from accounts receivable, net to reflect the adoption of ASU 2014-09 (
Refer to Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements
for more information).
Warranty
We regularly review the balance for accrued warranty and update based on historical warranty trends. Actual warranty costs incurred have not materially differed from those accrued; however, future actual warranty costs could differ from the estimated amounts.
Warranty as of
December 31, 2018
and
2017
consists of the following activity (in thousands):
|
|
|
|
|
Accrued warranty as of December 31, 2016
|
$
|
3,841
|
|
Charged to cost of net revenues
|
7,195
|
|
Actual warranty expenditures
|
(5,107
|
)
|
Accrued warranty as of December 31, 2017
|
5,929
|
|
Charged to cost of net revenues
|
15,059
|
|
Actual warranty expenditures
|
(12,437
|
)
|
Accrued warranty as of December 31, 2018
|
$
|
8,551
|
|
Deferred Revenues
Deferred revenues consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Deferred revenues - current
|
$
|
393,138
|
|
|
$
|
267,713
|
|
Deferred revenues - long-term
1
|
17,051
|
|
|
4,588
|
|
1
Included in other long-term liabilities within our Consolidated Balance Sheet
During the year ended
December 31, 2018
and
2017
, we recognized
$2.0 billion
and
$1.5 billion
of revenue, respectively, of which
$180.6 million
and
$119.0 million
was included in the deferred revenues balance at
December 31, 2017
and
December 31, 2016
, respectively.
Note 4. Equity Method Investments
On July 25, 2016, we acquired a
17%
equity interest
1
, on a fully diluted basis, in SDC for
$46.7 million
. The investment is accounted for under an equity method investment, and the investee, SDC, is considered a related party. The investment is reported in our Consolidated Balance Sheet under equity method investments, and we record our proportional share of SDC's losses within equity in losses of investee, net of tax, in our Consolidated Statement of Operations. On July 24, 2017, we purchased an additional
2%
equity interest in SDC for
$12.8 million
. As of
December 31, 2018
and
2017
, the balance of our equity method investments was
$45.9 million
and
$54.6 million
, respectively.
Concurrently with the investment on July 25, 2016, we also entered into a supply agreement with SDC to manufacture clear aligners for SDC's doctor-led, at-home program for simple teeth straightening. The term of the supply agreement expires on December 31, 2019. We commenced supplying aligners to SDC in October 2016. The sale of aligners to SDC and the income from the supply agreement are reported in our Clear Aligner business segment. We eliminate unrealized profit on outstanding intercompany transactions. As of
December 31, 2018
and
2017
, the balance of accounts receivable due from SDC was
$16.3 million
and
$14.3 million
, respectively. For the year ended
December 31, 2018
and
2017
, net revenues recognized from SDC were
$27.9 million
and
$24.1 million
, respectively.
On July 25, 2016, we entered into a Loan and Security Agreement (the "Loan Agreement") with SDC and amended on July 24, 2017 where we agreed to provide SDC a loan of up to
$30.0 million
in one or more advances. On February 7, 2018,
$30.0 million
of outstanding advances and related accrued interest were repaid in full, and the Loan Agreement was terminated (
Refer to Note 9 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements
for information on the Loan and Security Agreement with SDC).
1
Our ownership percentage may change depending on SDC's equity share activities
Note 5. Business Combinations
During the first quarter of 2017, we completed the acquisitions of certain of our distributors for the total estimated cash consideration of approximately
$9.5 million
including cash acquired. We recorded
$1.9 million
of net tangible liabilities,
$8.2 million
of identifiable intangible assets and
$3.2 million
of goodwill. The goodwill is primarily related to the benefit we expect
to obtain from direct sales as we believe that the transition from our distributor arrangements to a direct sales model will increase our net revenues in the region as we will experience higher average sales prices (“ASP”) compared to our discounted ASP under the distribution agreements. The goodwill is not deductible for tax purposes.
Pro forma results of operations for these acquisitions have not been presented as they were not material to our results of operations, either individually or in aggregate, for the year ended December 31, 2017.
Note 6. Goodwill and Intangible Assets
Goodwill
The change in the carrying value of goodwill for the year ended
December 31, 2018
, all attributable to our Clear Aligner reporting unit, is as follows (in thousands):
|
|
|
|
|
|
Total
|
Balance as of December 31, 2016
|
$
|
61,044
|
|
Goodwill from distributor acquisitions
|
3,247
|
|
Adjustments
(1)
|
323
|
|
Balance as of December 31, 2017
|
64,614
|
|
Adjustments
(1)
|
(585
|
)
|
Balance as of December 31, 2018
|
$
|
64,029
|
|
(1)
The adjustments to goodwill during the period were related to foreign currency translation and/or purchase accounting adjustments within the measurement period.
Based on the qualitative assessments performed, there were
no
impairments to goodwill in 2018 and 2017.
Intangible Long-Lived Assets
We amortize our intangible assets over their estimated useful lives. We evaluate long-lived assets, which includes property, plant and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The carrying value is not recoverable if it exceeds the undiscounted cash flows resulting from the use of the asset and its eventual disposition. Our estimates of future cash flows attributable to our long-lived assets require significant judgment based on our historical and anticipated results and are subject to many factors. Factors we consider important which could trigger an impairment review include significant negative industry or economic trends, significant loss of customers and changes in the competitive environment of our intraoral scanning business.
There were no triggering events in
2018
and 2017 that would cause impairments of our long-lived assets.
Acquired intangible long-lived assets are being amortized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Amortization Period (in years)
|
|
Gross Carrying Amount as of
December 31, 2018
|
|
Accumulated
Amortization
|
|
Accumulated Impairment Loss
|
|
Net Carrying
Value as of
December 31, 2018
|
Trademarks
|
15
|
|
$
|
7,100
|
|
|
$
|
(1,907
|
)
|
|
$
|
(4,179
|
)
|
|
$
|
1,014
|
|
Existing technology
|
13
|
|
12,600
|
|
|
(5,268
|
)
|
|
(4,328
|
)
|
|
3,004
|
|
Customer relationships
|
11
|
|
33,500
|
|
|
(16,542
|
)
|
|
(10,751
|
)
|
|
6,207
|
|
Reacquired rights
|
3
|
|
7,500
|
|
|
(4,341
|
)
|
|
—
|
|
|
3,159
|
|
Patents
|
8
|
|
6,796
|
|
|
(2,334
|
)
|
|
—
|
|
|
4,462
|
|
Other
|
2
|
|
618
|
|
|
(544
|
)
|
|
—
|
|
|
74
|
|
Total intangible assets
|
|
|
$
|
68,114
|
|
|
$
|
(30,936
|
)
|
|
$
|
(19,258
|
)
|
|
$
|
17,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Amortization Period (in years)
|
|
Gross Carrying
Amount as of
December 31, 2017
|
|
Accumulated
Amortization
|
|
Accumulated Impairment Loss
|
|
Net Carrying
Value as of
December 31, 2017
|
Trademarks
|
15
|
|
$
|
7,100
|
|
|
$
|
(1,769
|
)
|
|
$
|
(4,179
|
)
|
|
$
|
1,152
|
|
Existing technology
|
13
|
|
12,600
|
|
|
(4,704
|
)
|
|
(4,328
|
)
|
|
3,568
|
|
Customer relationships
|
11
|
|
33,500
|
|
|
(14,681
|
)
|
|
(10,751
|
)
|
|
8,068
|
|
Reacquired rights
|
3
|
|
7,500
|
|
|
(1,356
|
)
|
|
—
|
|
|
6,144
|
|
Patents
|
8
|
|
6,798
|
|
|
(1,504
|
)
|
|
—
|
|
|
5,294
|
|
Other
|
2
|
|
618
|
|
|
(390
|
)
|
|
—
|
|
|
228
|
|
Total intangible assets
|
|
|
$
|
68,116
|
|
|
$
|
(24,404
|
)
|
|
$
|
(19,258
|
)
|
|
$
|
24,454
|
|
The total estimated annual future amortization expense for these acquired intangible assets as of
December 31, 2018
is as follows (in thousands):
|
|
|
|
|
|
Fiscal Year
|
|
Amortization
|
2019
|
|
$
|
6,134
|
|
2020
|
|
3,847
|
|
2021
|
|
3,389
|
|
2022
|
|
2,116
|
|
2023
|
|
1,495
|
|
Thereafter
|
|
939
|
|
Total
|
|
$
|
17,920
|
|
Amortization expense was
$6.0 million
,
$6.2 million
and
$3.2 million
for the year ended December 31, 2018, 2017 and 2016, respectively.
Note 7. Credit Facility
On February 27, 2018, we enter into a credit facility that provides for a
$200.0 million
revolving line of credit, with a
$50.0 million
letter of credit sublimit, and a maturity date of February 27, 2021, replacing the previous credit facility which provided for a
$50.0 million
revolving line of credit with a
$10.0 million
letter of credit. The credit facility requires us to comply with specific financial conditions and performance requirements. The loans bear interest, at our option, at either a rate based on the reserve adjusted LIBOR for the applicable interest period or a base rate, in each case plus a margin. The base rate is the highest of the credit facility’s publicly announced prime rate, the federal funds rate plus
0.50%
and one month LIBOR plus
1.0%
. The margin ranges from
1.25%
to
1.75%
for LIBOR loans and
0.25%
to
0.75%
for base rate loans. Interest on the loans is payable quarterly in arrears with respect to base rate loans and at the end of an interest period (and at three month intervals if the interest period exceeds three months) in the case of LIBOR loans. Principal, together with accrued and unpaid interest, is due on the maturity date. As of
December 31, 2018
, we had no outstanding borrowings under this credit facility and were in compliance with the conditions and performance requirements.
Note 8. Legal Proceedings
Securities Class Action Lawsuit
On November 5, 2018, a class action lawsuit against Align, and
three
of our executive officers, was filed in the U.S. District Court for the Northern District of California on behalf of a purported class of purchasers of our common stock between July 25, 2018 and October 24, 2018. The complaint generally alleges claims under the federal securities laws and seeks monetary damages in an unspecified amount and costs and expenses incurred in the litigation. On December 12, 2018, a similar lawsuit was filed in the same court on behalf of a purported class of purchasers of our common stock between April 25, 2018 and October 24, 2018 (together with the first lawsuit, the “Securities Actions”). Motions for appointment as lead plaintiff were filed on January 4, 2019. Align believes the plaintiffs’ claims are without merit and intends to vigorously defend itself. Align is currently unable to predict the outcome of these lawsuits and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.
Shareholder Derivative Lawsuit
In January 2019,
three
derivative lawsuits were also filed in the U.S. District Court for the Northern District of California, purportedly on behalf of Align, naming as defendants the members of our Board of Directors along with certain of our executive officers. The allegations in the complaints are similar to those presented in the Securities Action, but the complaints assert various state law causes of action, including for breaches of fiduciary duty, insider trading, and unjust enrichment, among others. The complaints seek unspecified monetary damages on behalf of Align, which is named solely as a nominal defendant against whom no recovery is sought, as well as disgorgement and the costs and expenses associated with the litigation, including attorneys’ fees. Align is currently unable to predict the outcome of these lawsuits and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.
Patent Infringement and Related Lawsuits
On November 14, 2017, Align filed
six
patent infringement lawsuits asserting
26
patents against 3Shape, a Danish corporation, and a related U.S. corporate entity, asserting that 3Shape’s Trios intraoral scanning system and Dental System software infringe Align patents. Align filed
two
Section 337 complaints with the U.S. International Trade Commission (“ITC”) alleging that 3Shape violates U.S. trade laws by selling for importation and importing its infringing Trios intraoral scanning system and Dental System software. Align’s ITC complaints seek cease and desist orders and exclusion orders prohibiting the importation of 3Shape’s Trios scanning system and Dental System software products into the U.S. Align also filed
four
separate complaints in the U.S. District Court for the District of Delaware alleging patent infringement by 3Shape’s Trios intraoral scanning system and Dental System software.
On May 9, 2018, 3Shape filed a complaint in the U.S. District Court for the District of Delaware alleging patent infringement by Align’s iTero Element scanner of a single 3Shape patent. On June 14, 2018, 3Shape filed another complaint in the U.S. District Court for the District of Delaware alleging patent infringement by Align’s iTero Element scanner of a single 3Shape patent.
On August 28, 2018, 3Shape filed a complaint against Align in the U.S. District Court for the District of Delaware alleging antitrust violations and seeking monetary damages and injunctive relief relating to Align’s market activities, including Align’s assertion of its patent portfolio, in the clear aligner and intraoral scanning markets.
On December 10, 2018, Align filed
three
additional patent infringement lawsuits asserting
10
additional patents against 3Shape. Align filed
one
Section 337 complaint with the ITC alleging that 3Shape violates U.S. trade laws through unfair competition by selling for importation and importing the infringing TRIOS intraoral scanning system, Trios Lab Scanners and TRIOS software, TRIOS Module software, Dental System software, and Ortho System Software. On December 11, 2018, Align filed
two
separate complaints in the U.S. District Court for the District of Delaware alleging patent infringement by 3Shape's Trios intraoral scanning system, Lab Scanners and Dental and Ortho System Software.
Except for 3Shape’s antitrust complaint, each of the District Court complaints seek monetary damages and injunctive relief against further infringement. We are currently unable to predict the outcome of this dispute and therefore cannot determine the likelihood of loss, if any, nor estimate a range of possible loss.
SDC Dispute
In February 2018, we received a communication on behalf of SDC Financial LLC, SmileDirectClub LLC, and the Members of SDC Financial LLC other than the Company (collectively, the SDC Entities) alleging that the launch and operation of the Invisalign locations pilot program constitutes a breach of non-compete provisions applicable to the members of SDC Financial LLC, including Align. As a result of this alleged breach, SDC Financial LLC notified us that its members (other than Align) seek to exercise a right to repurchase all of Align's SDC Financial LLC membership interests for a purchase price equal to the current capital account balance. The SDC Entities’ communication also alleged that we breached confidentiality provisions applicable to the SDC Financial LLC members and demanded that we cease all activities related to the Invisalign locations pilot project, close existing Invisalign locations and cease using SDC’s confidential information. In April 2018, the SDC Entities served a Demand for Arbitration alleging that we breached the non-compete clause and confidentiality clause, misused the SDC Entities’ alleged trade secrets, and violated fiduciary duties to SDC Financial LLC. The SDC Entities seek through the arbitration the rights to repurchase all of Align’s SDC Financial LLC membership interests for a purchase price equal to the current capital account balance as defined by the Internal Revenue Service which likely is significantly below the current fair market value of such investment, an injunction requiring us to close our Invisalign locations and to cease using the SDC Entities’ confidential information, and
financial damages in an unspecified amount. We filed a response in which we denied the SDC Entities’ allegations and denied that the SDC Entities are entitled to any relief. In April 2018 the SDC Entities also filed a motion for preliminary injunction in the Tennessee Court of Chancery seeking to enjoin Align from opening additional Invisalign locations until the arbitration is completed. In June 2018, the Tennessee court denied the SDC Entities’ motion for a preliminary injunction. In December 2018, the parties participated in binding arbitration proceedings and presented closing arguments on January 23, 2019. The arbitrator’s decision is due on or before March 4, 2019. This dispute does not impact Align’s existing supply agreement with SDC which remains in place through 2019. We do not intend to renew this agreement. We are currently unable to predict the outcome of this dispute and therefore cannot determine the likelihood of loss, if any, nor estimate a range of possible loss.
In addition, in the course of Align’s operations, Align is involved in a variety of claims, suits, investigations, and proceedings, including actions with respect to intellectual property claims, patent infringement claims, government investigations, labor and employment claims, breach of contract claims, tax, and other matters. Regardless of the outcome, these proceedings can have an adverse impact on us because of defense costs, diversion of management resources, and other factors. Although the results of complex legal proceedings are difficult to predict and Align’s view of these matters may change in the future as litigation and events related thereto unfold; Align currently does not believe that these matters, individually or in the aggregate, will materially affect Align’s financial position, results of operations or cash flows.
Note 9. Commitments and Contingencies
Operating Leases
We lease our facilities and certain equipment and automobiles under non-cancelable operating lease arrangements that expire at various dates through 2029 and provide for pre-negotiated fixed rental rates during the terms of the lease. The terms of some of our leases provide for rental payments on a graduated scale. We recognize rent expense on a straight-line basis over the lease period. Total rent expense was
$16.5 million
,
$13.8 million
and
$9.9 million
for the year ended
December 31, 2018
,
2017
and
2016
, respectively. Sublease income is not material and excluded from the table below.
Minimum future lease payments for non-cancelable leases as of
December 31, 2018
, are as follows (in thousands):
|
|
|
|
|
Fiscal Year
|
Operating Leases
|
2019
|
$
|
21,429
|
|
2020
|
20,483
|
|
2021
|
18,897
|
|
2022
|
15,096
|
|
2023
|
12,400
|
|
Thereafter
|
18,371
|
|
Total minimum lease payments
|
$
|
106,676
|
|
Other Commitments
On July 25, 2016, we entered into a Loan and Security Agreement (the “Loan Agreement”) with SDC and subsequently amended on July 24, 2017 to provide a loan of up to
$30.0 million
in one or more advances to SDC (the “Loan Facility”). On February 7, 2018,
$30.0 million
of outstanding advances and related accrued interest were repaid in full, and the Loan Agreement was terminated (
Refer to Note 4 “Equity Method Investments” of the Notes to Consolidated Financial Statements
for more information on our investments in SDC).
On November 9, 2017, we entered into an Investment Agreement with the People’s Republic of China (“China Government”) where we have committed to invest a minimum of $46.0 million in Ziyang, China over five years to establish manufacturing operations.
On November 27, 2017, we entered into a Purchase Agreement with one of our existing single source suppliers. Under the terms of the original agreement, we are required to purchase a minimum of approximately
$305.2 million
of aligner materials over the next
four
years. On May 29, 2018, we entered into an amendment to the Purchase Agreement with the existing single source
supplier to increase the original term of the agreement to
five
years and total minimum purchase amount to approximately of
$425.9 million
.
On January 15, 2019, we entered into a Purchase Agreement to purchase five floors of a building under construction in Petach Tivka, Israel (the "Property") for a purchase price of approximately
$27.0 million
with an option to purchase additional
three
floors. The purchase price will be paid in
six
installments according to construction milestones and the delivery of the Property throughout 2019 and 2020.
On January 29, 2019, we entered into a Purchase and Sale Agreement to purchase our currently leased building located in Morrisville, North Carolina for a purchase price of
$58.1 million
. On January 30, 2019, we paid a
$2.0 million
deposit related to the Purchase and Sale Agreement and an additional
$56.1 million
will be paid on or before the closing date which is expected to occur on April 8, 2019.
Off-Balance Sheet Arrangements
As of
December 31, 2018
, we had no material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources other than certain items disclosed in Other Commitments section above.
Indemnification Provisions
In the normal course of business to facilitate transactions in our services and products, we indemnify certain parties: customers, vendors, lessors, and other parties with respect to certain matters, including, but not limited to, services to be provided by us and intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and our executive officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. Several of these agreements limit the time within which an indemnification claim can be made and the amount of the claim.
It is not possible to make a reasonable estimate of the maximum potential amount under these indemnification agreements due to the unique facts and circumstances involved in each particular agreement. Additionally, we have a limited history of prior indemnification claims and the payments we have made under such agreements have not had a material adverse effect on our results of operations, cash flows or financial position. However, to the extent that valid indemnification claims arise in the future, future payments by us could be significant and could have a material adverse effect on our results of operations or cash flows in a particular period. As of December 31, 2018, we did not have any material indemnification claims that were probable or reasonably possible.
Note 10. Stockholders’ Equity
Common Stock
The holders of common stock are entitled to receive dividends whenever funds are legally available and when and if declared by the Board of Directors. We have never declared or paid dividends on our common stock.
Stock-Based Compensation Plans
Our 2005 Incentive Plan, as amended, provides for the granting of incentive stock options, non-statutory stock options, restricted stock units, market stock units, stock appreciation rights, performance units and performance shares to employees, non-employee directors and consultants. Shares granted on or after May 16, 2013 as an award of restricted stock, restricted stock unit, market stock units, performance share or performance unit ("full value awards") are counted against the authorized share reserve as
one and nine-tenths
(1
9/10
) shares for every one (1) share subject to the award, and any shares canceled that were counted as
one and nine-tenths
against the plan reserve will be returned at the same ratio.
As of
December 31, 2018
, the 2005 Incentive Plan (as amended) has a total reserve of
27,783,379
shares for issuance of which
6,060,265
shares are available for issuance. We issue new shares from our pool of authorized but unissued shares to satisfy the exercise and vesting obligations of our stock-based compensation plans.
Stock-Based Compensation
Stock-based compensation is based on the estimated fair value of awards, net of estimated forfeitures, and recognized over the requisite service period. Estimated forfeitures are based on historical experience at the time of grant and may be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The stock-based compensation related to all of our stock-based awards and employee stock purchases for the year ended
December 31, 2018
,
2017
and
2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Cost of net revenues
|
$
|
3,695
|
|
|
$
|
3,330
|
|
|
$
|
3,966
|
|
Selling, general and administrative
|
56,422
|
|
|
46,550
|
|
|
42,612
|
|
Research and development
|
10,646
|
|
|
8,974
|
|
|
7,570
|
|
Total stock-based compensation
|
$
|
70,763
|
|
|
$
|
58,854
|
|
|
$
|
54,148
|
|
Stock Options
We have not granted options since 2011 and all outstanding options were fully vested and associated stock-based compensation expense was recognized as of December 31, 2015. Activity for the year ended
December 31, 2018
, under the stock option plans is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
Underlying
Stock Options
(in thousands)
|
|
Weighted
Average
Exercise
Price per Share
|
|
Weighted Average
Remaining
Contractual Term
(in years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
Outstanding as of December 31, 2017
|
75
|
|
|
$
|
11.36
|
|
|
|
|
|
Exercised
|
(67
|
)
|
|
11.76
|
|
|
|
|
|
Cancelled or expired
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
8
|
|
|
$
|
8.07
|
|
|
0.16
|
|
$
|
1,649
|
|
Vested at December 31, 2018
|
8
|
|
|
$
|
8.07
|
|
|
0.16
|
|
$
|
1,649
|
|
Exercisable at December 31, 2018
|
8
|
|
|
$
|
8.07
|
|
|
0.16
|
|
$
|
1,649
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price on the last trading day in
2018
and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last trading day of
2018
. This amount will fluctuate based on the fair market value of our stock. The total intrinsic value of stock options exercised for the year ended
December 31, 2018
,
2017
and
2016
was $
17.6 million
,
$18.1 million
and
$18.2 million
, respectively.
Restricted Stock Units ("RSUs")
The fair value of RSUs is based on our closing stock price on the date of grant. A summary for the year ended
December 31, 2018
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
Underlying RSUs
(in thousands)
|
|
Weighted Average Grant Date Fair Value
|
|
Weighted Average
Remaining
Contractual Term
(in years)
|
|
Aggregate
Intrinsic Value
(in thousands)
|
Nonvested as of December 31, 2017
|
1,341
|
|
|
$
|
82.30
|
|
|
|
|
|
Granted
|
235
|
|
|
262.58
|
|
|
|
|
|
Vested and released
|
(562
|
)
|
|
75.22
|
|
|
|
|
|
Forfeited
|
(83
|
)
|
|
112.33
|
|
|
|
|
|
Nonvested as of December 31, 2018
|
931
|
|
|
$
|
129.42
|
|
|
1.04
|
|
$
|
194,950
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (calculated by multiplying our closing stock price on the last trading day of
2018
by the number of nonvested RSUs) that would have been received by the unit holders had all RSUs been vested and released as of the last trading day of
2018
. This amount will fluctuate based on the fair
market value of our stock. During
2018
, of the
561,692
shares vested and released,
178,324
shares vested were withheld for employee statutory tax obligations, resulting in a net issuance of
383,368
shares.
The total intrinsic value of RSUs vested and released during
2018
,
2017
and
2016
was
$146.7 million
,
$99.5 million
and
$59.8 million
, respectively. The total fair value of RSUs vested during the year ended
December 31, 2018
,
2017
and
2016
was
$42.2 million
,
$46.2 million
and
$39.1 million
, respectively. The weighted average grant date fair value of RSUs granted during
2018
,
2017
and
2016
was
$262.58
,
$118.77
and
$67.82
, respectively. As of
December 31, 2018
, there was
$80.7 million
of total unamortized compensation costs, net of estimated forfeitures, related to RSUs and these costs are expected to be recognized over a weighted average period of
1.9
years.
Market-Performance Based Restricted Stock Units ("MSUs")
We grant MSUs to our executive officers. Each MSU represents the right to one share of Align’s common stock. The actual number of MSUs which will be eligible to vest will be based on the performance of Align’s stock price relative to the performance of a stock market index over the vesting period, and certain MSU grants are also based on Align's stock price at the end of the performance period. Generally, the vesting period of MSUs is
three years
. For MSUs granted during the year ended
December 31, 2018
, the maximum number of MSUs which will be eligible to vest are between
250%
to
300%
of the MSUs initially granted.
The following table summarizes the MSU performance for the year ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
Underlying MSUs
(in thousands)
|
|
Weighted Average Grant Date Fair Value
|
|
Weighted Average
Remaining
Contractual Term
(in years)
|
|
Aggregate
Intrinsic Value
(in thousands)
|
Nonvested as of December 31, 2017
|
428
|
|
|
$
|
78.53
|
|
|
|
|
|
|
Granted
|
208
|
|
|
266.78
|
|
|
|
|
|
Vested and released
|
(312
|
)
|
|
62.41
|
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
|
Nonvested as of December 31, 2018
|
324
|
|
|
$
|
215.07
|
|
|
1.16
|
|
$
|
67,897
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (calculated by multiplying our closing stock price on the last trading day of
2018
by the number of nonvested MSUs) that would have been received by the unit holders had all MSUs been vested and released as of the last trading day of
2018
. This amount will fluctuate based on the fair market value of our stock. During
2018
, of the
312,300
shares vested and released,
130,697
shares were withheld for tax payments, resulting in a net issuance of
181,603
shares.
The total intrinsic value of MSUs vested and released during
2018
,
2017
and
2016
was
$92.7 million
,
$28.8 million
and
$17.4 million
, respectively. The total fair value of MSUs vested during the year ended
December 31, 2018
,
2017
and
2016
was
$19.5 million
,
$15.0 million
and
$9.9 million
, respectively. As of
December 31, 2018
, we expect to recognize
$39.6 million
of total unamortized compensation cost, net of estimated forfeitures, related to MSUs over a weighted average period of
1.2
years.
The fair value of MSUs is estimated at the grant date using a Monte Carlo simulation that includes factors for market conditions. The following weighted-average assumptions used in the Monte Carlo simulation were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Expected term (in years)
|
3.0
|
|
|
3.0
|
|
|
3.0
|
|
Expected volatility
|
31.9
|
%
|
|
28.9
|
%
|
|
34.0
|
%
|
Risk-free interest rate
|
2.5
|
%
|
|
1.5
|
%
|
|
0.9
|
%
|
Expected dividends
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average fair value per share at grant date
|
$
|
470.75
|
|
|
$
|
120.39
|
|
|
$
|
68.88
|
|
Total payments to tax authorities for payroll taxes related to RSUs, including MSUs, that vested during the period were
$86.1 million
,
$46.2 million
and
$29.9 million
during the year ended December 31,
2018
,
2017
and
2016
, respectively, and are reflected as a financing activity in the Consolidated Statement of Cash Flows.
Employee Stock Purchase Plan ("ESPP")
In May 2010, our shareholders approved the 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”), which consists of consecutive overlapping
twenty-four
month offering periods with
four
six-month purchase periods in each offering period. Employees purchase shares at
85%
of the lower of the fair market value of the common stock at either the beginning of the offering period or the end of the purchase period. The 2010 Purchase Plan will continue until terminated by either the Board of Directors or its administrator. The maximum number of shares available for issuance under the 2010 Purchase Plan is
2,400,000
shares.
The following table summarizes the ESPP shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Number of shares issued (in thousands)
|
164
|
|
|
202
|
|
|
197
|
|
Weighted average price
|
$
|
96.95
|
|
|
$
|
59.93
|
|
|
$
|
48.65
|
|
As of
December 31, 2018
,
571,778
shares remain available for future issuance.
The fair value of the option component of the 2010 Purchase Plan shares was estimated at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Expected term (in years)
|
1.3
|
|
|
1.2
|
|
|
1.2
|
|
Expected volatility
|
35.2
|
%
|
|
26.8
|
%
|
|
30.5
|
%
|
Risk-free interest rate
|
2.2
|
%
|
|
1.0
|
%
|
|
0.7
|
%
|
Expected dividends
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average fair value at grant date
|
$
|
94.71
|
|
|
$
|
31.36
|
|
|
$
|
22.23
|
|
We recognized stock-based compensation expense related to our employee stock purchase plan of
$5.6 million
,
$5.4 million
and
$2.7 million
for the year ended
December 31, 2018
,
2017
and
2016
, respectively. As of
December 31, 2018
, there was
$2.1 million
of total unamortized compensation costs related to future employee stock purchases which we expect to be recognized over a weighted average period of
0.4
years.
Note 11. Common Stock Repurchase Programs
April 2014 Repurchase Program
In April 2014, we announced that our Board of Directors had authorized a plan to repurchase up to
$300.0 million
of our common stock ("April 2014 Repurchase Program").
Prior to 2017, we entered into accelerated share purchase agreements to repurchase
$190 million
of our common stock and received a total of approximately
3.2 million
shares. In addition, we repurchased on the open market approximately
1.6 million
shares of our common stock for an aggregate purchase price of approximately
$106.2 million
.
In 2017, we repurchased on the open market approximately
0.04 million
shares of our common stock at an average price of
$96.37
per share, including commission for an aggregate purchase price of approximately
$3.8 million
, completing the April 2014 Repurchase Program.
April 2016 Repurchase Program
In April 2016, we announced that our Board of Directors had authorized a plan to repurchase up to
$300.0 million
of our common stock ("April 2016 Repurchase Program").
In 2017, we entered into an accelerated share repurchase agreement ("2017 ASR") to repurchase
$50.0 million
of our common stock. The 2017 ASR was completed in August 2017. We received a total of approximately
0.4 million
shares for an average share price of
$146.48
. During 2017, we repurchased on the open market approximately
0.2 million
shares of our common stock at an average price of
$243.40
per share, including commissions, for an aggregate purchase price of approximately
$50.0 million
.
In 2018, we repurchased on the open market approximately
0.7 million
shares of our common stock at an average price of
$293.21
per share, including commission for an aggregate purchase price of approximately
$200.0 million
, completing the April 2016 Repurchase Program.
May 2018 Repurchase Program
In May 2018, we announced that our Board of Directors had authorized a plan to repurchase up to
$600.0 million
of our common stock ("May 2018 Repurchase Program").
In 2018, we repurchased on the open market approximately
0.1 million
shares of our common stock at an average price of
$356.54
per share, including commissions, for an aggregate purchase price of approximately
$50.0 million
. In November 2018, we entered into an accelerated stock repurchase agreement to repurchase
$50.0 million
of our common stock which was completed in December 2018. We received a total of approximately
0.2 million
shares for an average share price of
$213.18
. As of
December 31, 2018
, we have
$500.0 million
remaining under the May 2018 Repurchase Program.
In February 2019, we purchased on the open market approximately
0.2 million
shares of our common stock at an average price of
$243.42
per share, including commission for an aggregate purchase price of approximately of
$50.0 million
.
Note 12. Employee Benefit Plans
401(k) Plan
We have defined contribution retirement plan under Section 401(k) of the Internal Revenue Code for our U.S. employees which covers substantially all U.S. employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. We match
50%
of our employee’s salary deferral contributions up to a
6%
of the employee’s eligible compensation effective 2010. We contributed approximately
$5.2 million
,
$4.3 million
and
$3.4 million
to the 401(k) plan during the year ended December 31,
2018
,
2017
and
2016
, respectively.
Israeli Funds
Under the Israeli severance fund law, we are required to make payments to dismissed employees and employees leaving employment in certain circumstances. The funding requirement is calculated based on the salary of the employee multiplied by the number of years of employment as of the applicable balance sheet date. Our Israeli employees are entitled to one month’s salary for each year of employment, or a pro-rata portion thereof. We fund the liability through monthly deposits into funds, and the values of these contributions are recorded in other current assets in the Consolidated Balance Sheet. As of
December 31, 2018
and
2017
, the balance of the fund liability was approximately
$3.3 million
and
$3.2 million
, respectively.
Note 13. Income Taxes
The TCJA was enacted into law on December 22, 2017 and impacted our effective tax rate for the year ended December 31, 2017 and 2018. The TCJA made significant changes to the Internal Revenue Code, including, but not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. As of December 31, 2017, we recorded a provisional tax charge for the estimated impact of the TCJA of
$84.3 million
, of which
$73.9 million
was related to a provisional transition tax liability on the mandatory deemed repatriation of foreign earnings and
$10.4 million
was related to the remeasurement of certain deferred tax assets and liabilities. As of December 31, 2018, we have finalized our assessment of the impact of the TCJA
on our 2017 financial statements and recorded additional charges of
$3.0 million
in 2018, all of which relate to the transition tax on the mandatory deemed repatriation of foreign earnings.
The TCJA also includes provisions for certain foreign-sourced earnings, referred to as Global Intangible Low-Taxed Income (“GILTI”), which impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. FASB guidance issued in January 2018 allows companies to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which the tax is incurred (the “period cost method”), or (ii) account for GILTI in the measurement of deferred taxes (the “deferred method”). We have made the election to record GILTI tax using the period cost method.
Net income before provision for income taxes and equity in losses of investee consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Domestic
|
$
|
171,658
|
|
|
$
|
123,696
|
|
|
$
|
118,871
|
|
Foreign
|
294,993
|
|
|
241,103
|
|
|
123,695
|
|
Net income before provision for income taxes and equity in losses of investee
|
$
|
466,651
|
|
|
$
|
364,799
|
|
|
$
|
242,566
|
|
The provision for (benefit from) income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Federal
|
|
|
|
|
|
Current
|
$
|
35,788
|
|
|
$
|
91,214
|
|
|
$
|
40,235
|
|
Deferred
|
(5,989
|
)
|
|
15,724
|
|
|
24,794
|
|
|
29,799
|
|
|
106,938
|
|
|
65,029
|
|
State
|
|
|
|
|
|
Current
|
9,568
|
|
|
2,580
|
|
|
2,603
|
|
Deferred
|
(3,274
|
)
|
|
2,677
|
|
|
2,636
|
|
|
6,294
|
|
|
5,257
|
|
|
5,239
|
|
Foreign
|
|
|
|
|
|
Current
|
22,753
|
|
|
15,285
|
|
|
8,964
|
|
Deferred
|
(1,123
|
)
|
|
2,682
|
|
|
(28,032
|
)
|
|
21,630
|
|
|
17,967
|
|
|
(19,068
|
)
|
Provision for income taxes
|
$
|
57,723
|
|
|
$
|
130,162
|
|
|
$
|
51,200
|
|
The differences between income taxes using the federal statutory income tax rate of
21%
for
2018
and
35%
for
2017
and
2016
and our effective tax rate are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
U.S. federal statutory income tax rate
|
21.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal tax benefit
|
1.3
|
|
|
1.4
|
|
|
2.1
|
|
U.S. tax on foreign earnings
|
4.1
|
|
|
1.5
|
|
|
0.2
|
|
Impact of U.S. Tax Cuts and Jobs Act (“TCJA”)
|
2.1
|
|
|
23.1
|
|
|
—
|
|
Impact of differences in foreign tax rates
|
(6.7
|
)
|
|
(18.0
|
)
|
|
(6.3
|
)
|
Impact of expiration of statute of limitations
|
(6.2
|
)
|
|
—
|
|
|
—
|
|
Stock-based compensation
|
(3.4
|
)
|
|
(6.3
|
)
|
|
1.2
|
|
Other items not individually material
|
0.2
|
|
|
(1.0
|
)
|
|
1.8
|
|
Valuation allowance release for Israel
|
—
|
|
|
—
|
|
|
(12.9
|
)
|
|
12.4
|
%
|
|
35.7
|
%
|
|
21.1
|
%
|
As of
December 31, 2018
, undistributed earnings of the Company's foreign subsidiaries totaled
$533.5 million
. As a result of the TCJA, during the year ended
December 31, 2017
, we provided for U.S. income taxes on undistributed foreign earnings through December 31, 2017, and we have reassessed our capital needs and investment strategy with regard to the indefinite reinvestment, determining that certain of those are no longer indefinitely reinvested. Of the total undistributed foreign earnings as of December 31, 2018, the amount that is not indefinitely reinvested is
$239.2 million
. The remaining amount of undistributed foreign earnings of approximately
$294.3 million
continues to be indefinitely reinvested in our international operations. Since U.S. income taxes have already been provided under the GILTI provisions of the TCJA, the additional tax impact of the distribution of such foreign earnings to the U.S. parent company would be limited to withholding taxes and is not significant.
On July 1, 2016, we implemented a new international corporate structure. This changed the structure of our international procurement and sales operations, as well as realigned the ownership and use of intellectual property among our wholly-owned subsidiaries. We continue to anticipate that an increasing percentage of our consolidated pre-tax income will be derived from, and reinvested in our foreign operations. We believe that income taxed in certain foreign jurisdictions at a lower rate relative to the U.S. federal statutory rate will have a beneficial impact on our worldwide effective tax rate over time. Although the license of intellectual property rights between consolidated entities did not result in any gain in the consolidated financial statements, we generated taxable income in certain jurisdictions in 2016 resulting in a tax expense of
$34.3 million
. Additionally, as a result of the restructuring in 2016, we reassessed the need for a valuation allowance against our deferred tax assets considering all available evidence. Given the earnings in 2016 and anticipated future earnings of our subsidiary in Israel, we concluded that we had sufficient positive evidence to release the valuation allowance against our Israel operating loss carryforwards of
$31.4 million
, which resulted in an income tax benefit in 2016 of the same amount.
In June 2017, the Costa Rica Ministry of Foreign Trade, an agency of the Government of Costa Rica, granted an extension of certain income tax incentives for an additional twelve year period. Under these incentives, all of the income in Costa Rica is subject to a reduced tax rate. In order to receive the benefit of these incentives, we must hire a specified number of employees and maintain certain minimum levels of fixed asset investment in Costa Rica. If we do not fulfill these conditions for any reason, our incentive could lapse, and our income in Costa Rica would be subject to taxation at higher rates, which could have a negative impact on our operating results. The Costa Rica corporate income tax rate that would apply, absent the incentives, is
30%
for
2018
,
2017
and
2016
. As a result of these incentives, our income taxes were reduced by
$2.4 million
,
$1.8 million
and
$19.1 million
in the year ended December 31,
2018
,
2017
and
2016
, respectively, representing a benefit to diluted net income per share of
$0.03
,
$0.02
and
$0.23
in the year ended
December 31, 2018
,
2017
and
2016
, respectively.
As of
December 31, 2018
and
2017
, the significant components of our deferred tax assets and liabilities are (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
|
Net operating loss and capital loss carryforwards
|
|
$
|
25,410
|
|
|
$
|
24,971
|
|
Reserves and accruals
|
|
24,769
|
|
|
12,547
|
|
Stock-based compensation
|
|
8,571
|
|
|
10,074
|
|
Deferred revenue
|
|
14,285
|
|
|
10,811
|
|
Net translation losses
|
|
1,158
|
|
|
1,928
|
|
Credit carryforwards
|
|
115
|
|
|
792
|
|
|
|
74,308
|
|
|
61,123
|
|
Deferred tax liabilities:
|
|
|
|
|
Depreciation and amortization
|
|
8,320
|
|
|
7,522
|
|
Prepaid expenses
|
|
902
|
|
|
751
|
|
Unremitted foreign earnings
|
|
612
|
|
|
3,305
|
|
|
|
9,834
|
|
|
11,578
|
|
Net deferred tax assets before valuation allowance
|
|
64,474
|
|
|
49,545
|
|
Valuation allowance
|
|
(251
|
)
|
|
(278
|
)
|
Net deferred tax assets
|
|
$
|
64,223
|
|
|
$
|
49,267
|
|
The total valuation allowance as of
December 31, 2018
was not material. During the year ended
December 31, 2018
, the valuation allowance decreased by a nominal amount which was mainly related to foreign currency translation adjustments.
As of
December 31, 2018
, we have fully utilized California net operating loss carryforwards. As of
December 31, 2018
, we have California research credit carryforwards of approximately
$1.9 million
which can be carried forward indefinitely. In addition, we have foreign net operating loss carryforwards of approximately
$105.7 million
, the majority of which can be carried forward indefinitely, and a minor portion of which, if not utilized, will expire beginning after 2023.
In the event of a change in ownership, as defined under federal and state tax laws, our tax credit carryforwards may be subject to annual limitations. The annual limitations may result in the expiration of the tax credit carryforwards before utilization.
The changes in the balance of gross unrecognized tax benefits, which exclude interest and penalties, for the year ended December 31,
2018
,
2017
and
2016
, are as follows (in thousands):
|
|
|
|
|
Unrecognized tax benefit as of December 31, 2015
|
$
|
39,413
|
|
Tax positions related to current year:
|
|
Additions for uncertain tax positions
|
6,971
|
|
Unrecognized tax benefit as of December 31, 2016
|
46,384
|
|
Tax positions related to current year:
|
|
Additions for uncertain tax positions
|
1,819
|
|
Tax positions related to prior year:
|
|
Additions for uncertain tax positions
|
1,809
|
|
Decreases for uncertain tax positions
|
(826
|
)
|
Settlements with tax authorities
|
(1,527
|
)
|
Reductions due to lapse of applicable statute of limitations
|
(3
|
)
|
Unrecognized tax benefit as of December 31, 2017
|
47,656
|
|
Tax positions related to current year:
|
|
Additions for uncertain tax positions
|
14,519
|
|
Tax positions related to prior year:
|
|
Additions for uncertain tax positions
|
80
|
|
Reductions due to lapse of applicable statute of limitations
|
(28,993
|
)
|
Unrecognized tax benefit as of December 31, 2018
|
$
|
33,262
|
|
As of
December 31, 2018
,
$29.9 million
of our unrecognized tax benefits would impact our effective tax rate if recognized.
We file U.S. federal, U.S. state, and non-U.S. income tax returns. Our major tax jurisdictions include U.S. federal, the State of California and the Netherlands. For U.S. federal and state tax returns, we are no longer subject to tax examinations for years before 2015. We are currently under examination by the Internal Revenue Service for tax years 2015 and 2016. With few exceptions, we are no longer subject to examination by foreign tax authorities for years before 2010.
We have elected to recognize interest and penalties related to unrecognized tax benefits as a component of income taxes. For the year ended
December 31, 2018
and
2017
, interest and penalties included in tax expense was a benefit of
$1.5 million
and an expense of
$0.8 million
, respectively. Our total interest and penalties accrued as of
December 31, 2018
and
2017
was
$0.9 million
and
$2.9 million
, respectively. The timing and resolution of income tax examinations is uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Although it is possible that our balance of gross unrecognized tax benefits could materially change in the next 12 months, given the uncertainty in the development of ongoing income tax examinations, we are unable to estimate the full range of possible adjustments to this balance.
Note 14. Net Income per Share
Basic net income per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed using the weighted average number of shares of common stock, adjusted for any dilutive effect of potential common stock. Potential common stock, computed using the treasury stock method, includes RSUs, MSUs, stock options and our ESPP.
The following table sets forth the computation of basic and diluted net income per share attributable to common stock (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
Net income
|
$
|
400,235
|
|
|
$
|
231,418
|
|
|
$
|
189,682
|
|
Denominator:
|
|
|
|
|
|
Weighted average common shares outstanding, basic
|
80,064
|
|
|
80,085
|
|
|
79,856
|
|
Dilutive effect of potential common stock
|
1,293
|
|
|
1,747
|
|
|
1,628
|
|
Total shares, diluted
|
81,357
|
|
|
81,832
|
|
|
81,484
|
|
Net income per share, basic
|
$
|
5.00
|
|
|
$
|
2.89
|
|
|
$
|
2.38
|
|
Net income per share, diluted
|
$
|
4.92
|
|
|
$
|
2.83
|
|
|
$
|
2.33
|
|
For the year ended
December 31, 2018
,
2017
and
2016
, potentially anti-dilutive shares excluded from diluted net income per share related to RSUs, MSUs, stock options and ESPP were not material.
Note 15. Supplemental Cash Flow Information
The supplemental cash flow information consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Taxes paid
|
$
|
114,601
|
|
|
$
|
51,231
|
|
|
$
|
47,289
|
|
Non-cash investing activities:
|
|
|
|
|
|
Fixed assets acquired with accounts payable or accrued liabilities
|
$
|
15,069
|
|
|
$
|
15,105
|
|
|
$
|
4,434
|
|
Conversion of convertible notes receivable into equity securities
|
$
|
4,862
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Fair value of option to purchase property
|
$
|
—
|
|
|
$
|
3,936
|
|
|
$
|
—
|
|
Note 16. Segments and Geographical Information
Segment Information
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is our Chief Executive Officer. We report segment information based on the management approach. The management approach designates the internal reporting used by CODM for decision making and performance assessment as the basis for determining our reportable segments. The performance measures of our reportable segments include net revenues, gross profit and income from operations. Income from operations for each segment includes all geographic revenues, related cost of net revenues and operating expenses directly attributable to the segment. Certain operating expenses are attributable to operating segments and each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Costs not specifically allocated to segment income from operations include various corporate expenses such as stock-based compensation and costs related to IT, facilities, human resources, accounting and finance, legal and regulatory, and other separately managed general and administrative costs outside the operating segments.
We group our operations into
two
reportable segments: Clear Aligner segment and Scanner segment.
|
|
•
|
Our Clear Aligner segment consists of Comprehensive Products, Non-Comprehensive Products and Non-Case revenues as defined below:
|
|
|
•
|
Comprehensive Products include, but not limited to, our Invisalign Comprehensive (formerly known as Invisalign Full and Invisalign Teen), Invisalign Assist and Invisalign First.
|
|
|
•
|
Non-Comprehensive Products include, Invisalign Express 10, Invisalign Express 5, Express Package, Lite Package and Invisalign Go products in addition to revenues from the sale of aligners to SDC under our supply agreement.
|
|
|
•
|
Non-Case includes, but not limited to, Vivera retainers along with our training and ancillary products for treating malocclusion.
|
|
|
•
|
Our Scanner segment consists of intraoral scanning systems, additional services and ancillary products available with the intraoral scanners that provide digital alternatives to the traditional cast models. This segment includes our iTero scanner and OrthoCAD services.
|
These reportable operating segments are based on how our CODM views and evaluates our operations as well as allocation of resources. The following information relates to these segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Net revenues
|
|
|
|
|
|
Clear Aligner
|
$
|
1,691,467
|
|
|
$
|
1,309,262
|
|
|
$
|
958,327
|
|
Scanner
|
275,025
|
|
|
164,151
|
|
|
121,547
|
|
Total net revenues
|
$
|
1,966,492
|
|
|
$
|
1,473,413
|
|
|
$
|
1,079,874
|
|
Gross profit
|
|
|
|
|
|
Clear Aligner
|
$
|
1,280,495
|
|
|
$
|
1,019,563
|
|
|
$
|
747,494
|
|
Scanner
|
167,372
|
|
|
97,384
|
|
|
67,800
|
|
Total gross profit
|
$
|
1,447,867
|
|
|
$
|
1,116,947
|
|
|
$
|
815,294
|
|
Income from operations
|
|
|
|
|
|
Clear Aligner
|
$
|
712,439
|
|
|
$
|
564,648
|
|
|
$
|
411,817
|
|
Scanner
|
98,998
|
|
|
49,613
|
|
|
37,498
|
|
Unallocated corporate expenses
|
(344,873
|
)
|
|
(260,650
|
)
|
|
(200,394
|
)
|
Total income from operations
|
$
|
466,564
|
|
|
$
|
353,611
|
|
|
$
|
248,921
|
|
Depreciation and amortization
|
|
|
|
|
|
Clear Aligner
|
$
|
29,001
|
|
|
$
|
21,581
|
|
|
$
|
13,742
|
|
Scanner
|
4,965
|
|
|
4,385
|
|
|
3,871
|
|
Unallocated corporate expenses
|
20,761
|
|
|
11,773
|
|
|
6,389
|
|
Total depreciation and amortization
|
$
|
54,727
|
|
|
$
|
37,739
|
|
|
$
|
24,002
|
|
The following table reconciles total segment income from operations in the table above to net income before provision for income taxes and equity in losses of investee (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Total segment income from operations
|
$
|
811,437
|
|
|
$
|
614,261
|
|
|
$
|
449,315
|
|
Unallocated corporate expenses
|
(344,873
|
)
|
|
(260,650
|
)
|
|
(200,394
|
)
|
Total income from operations
|
466,564
|
|
|
353,611
|
|
|
248,921
|
|
Interest income
|
8,576
|
|
|
6,948
|
|
|
4,213
|
|
Other income (expense), net
|
(8,489
|
)
|
|
4,240
|
|
|
(10,568
|
)
|
Net income before provision for income taxes and equity in losses of investee
|
$
|
466,651
|
|
|
$
|
364,799
|
|
|
$
|
242,566
|
|
Geographical Information
Net revenues are presented below by geographic area (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Net revenues
(1)
:
|
|
|
|
|
|
United States
(2)
|
$
|
1,023,559
|
|
|
$
|
836,200
|
|
|
$
|
692,254
|
|
The Netherlands
(2)
|
610,039
|
|
|
456,108
|
|
|
286,911
|
|
China
|
155,790
|
|
|
81,661
|
|
|
46,480
|
|
Other International
|
177,104
|
|
|
99,444
|
|
|
54,229
|
|
Total net revenues
|
$
|
1,966,492
|
|
|
$
|
1,473,413
|
|
|
$
|
1,079,874
|
|
|
|
(1)
|
Net revenues are attributed to countries based on location of where revenue is recognized.
|
(2)
Effective July 2016, we implemented a new international corporate structure. This changed the structure of our international procurement and sales operations.
Tangible long-lived assets are presented below by geographic area (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
Long-lived assets
(3)
:
|
|
|
|
The Netherlands
|
$
|
206,679
|
|
|
$
|
143,673
|
|
United States
|
139,239
|
|
|
128,171
|
|
Costa Rica
|
80,218
|
|
|
30,738
|
|
China
|
36,249
|
|
|
5,480
|
|
Mexico
|
33,240
|
|
|
25,090
|
|
Other International
|
25,704
|
|
|
15,641
|
|
Total long-lived assets
|
$
|
521,329
|
|
|
$
|
348,793
|
|
(3)
Long-lived assets are attributed to countries based on entity that owns the assets.