Edgar Filing: ALIGN TECHNOLOGY INC

ALGN-2012.6.30-Q2

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q

____________________________

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-32259

____________________________

ALIGN TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

____________________________



Delaware	94-3267295
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

2560 Orchard Parkway

San Jose, California 95131

(Address of principal executive offices)

(408) 470-1000

(Registrant’s telephone number, including area code)

____________________________

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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



Large accelerated filer	x	Accelerated filer	¨

Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	¨

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

The number of shares outstanding of the registrant’s Common Stock, $0.0001 par value, as of July 27, 2012 was 81,352,708.

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ALIGN TECHNOLOGY, INC.

INDEX




PART I	FINANCIAL INFORMATION	3
ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED):	3
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	3
	CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME	4
	CONDENSED CONSOLIDATED BALANCE SHEETS	5
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	6
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	7
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	30
ITEM 4.	CONTROLS AND PROCEDURES	30
PART II	OTHER INFORMATION	32
ITEM 1A.	RISK FACTORS	32
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	45
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	45
ITEM 4.	MINE SAFETY DISCLOSURES	45
ITEM 5.	OTHER INFORMATION	45
ITEM 6.	EXHIBITS	45
SIGNATURES		47

Invisalign, Align, ClinCheck, Invisalign Assist, Invisalign Teen Vivera, SmartForce, Power Ridges, iTero, iOC,Orthocad iCast, Orthocad iRecord and Orthocad iQ amongst others, are trademarks belonging to Align Technology, Inc., and/or its subsidiaries and are pending or registered in the United States and other countries.

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PART I—FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012		2011			2012			2011
Net revenues	$	145,626	$	120,086		$	280,705		$	224,942
Cost of net revenues	36,826		28,949			71,145			51,579
Gross profit	108,800		91,137			209,560			173,363
Operating expenses:
Sales and marketing	39,087		38,586			77,804			71,407
General and administrative	22,152		26,094			44,778			45,086
Research and development	10,680		9,270			21,206			18,660
Amortization of acquired intangible assets	869		592			1,754			592
Total operating expenses	72,788		74,542			145,542			135,745
Profit from operations	36,012		16,595			64,018			37,618
Interest and other income (expense), net	541		(306		)	(271		)	(217		)
Net profit before provision for income taxes	36,553		16,289			63,747			37,401
Provision for income taxes	8,061		5,127			14,271			10,398
Net profit	$	28,492	$	11,162		$	49,476		$	27,003
Net profit per share:
Basic	$	0.35	$	0.14		$	0.62		$	0.35
Diluted	$	0.34	$	0.14		$	0.60		$	0.34
Shares used in computing net profit per share:
Basic	80,384		77,888			79,810			77,369
Diluted	82,954		80,321			82,446			79,903

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

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ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012			2011		2012			2011
Net profit	$	28,492		$	11,162	$	49,476		$	27,003
Foreign currency translation adjustments	(521		)	103		(361		)	586
Change in unrealized gains (losses) on available-for-sale securities, net of tax	(12		)	16		(25		)	23
Net change in accumulated other comprehensive income (losses)	(533		)	119		(386		)	609
Other comprehensive income	$	27,959		$	11,281	$	49,090		$	27,612

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

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ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)



	June 30, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	262,799		$	240,675
Restricted cash	1,178			4,026
Marketable securities, short-term	20,752			7,395
Accounts receivable, net of allowance for doubtful accounts and returns of $1,207 and $780, respectively	102,149			91,537
Inventories	14,623			9,402
Prepaid expenses and other current assets	33,634			31,781
Total current assets	435,135			384,816
Marketable securities, long-term	20,475			—
Property, plant and equipment, net	72,207			53,965
Goodwill	135,827			135,383
Intangible assets, net	47,901			50,022
Deferred tax assets	29,853			22,337
Other assets	2,765			2,741
Total assets	$	744,163		$	649,264
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	15,226		$	19,265
Accrued liabilities	69,207			76,600
Deferred revenues	59,403			52,252
Total current liabilities	143,836			148,117
Other long-term liabilities	14,032			10,366
Total liabilities	157,868			158,483
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock, $0.0001 par value (5,000 shares authorized; none issued)	—			—
Common stock, $0.0001 par value (200,000 shares authorized; 80,760 and 78,776 issued and outstanding, respectively)	8			8
Additional paid-in capital	655,307			607,240
Accumulated other comprehensive income, net	(340		)	46
Accumulated deficit	(68,680		)	(116,513		)
Total stockholders’ equity	586,295			490,781
Total liabilities and stockholders’ equity	$	744,163		$	649,264

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

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ALIGN TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Six Months Ended June 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit	$	49,476		$	27,003
Adjustments to reconcile net profit to net cash provided by operating activities:
Deferred taxes	9,228			7,905
Depreciation and amortization	5,905			6,109
Amortization of intangibles	2,246			2,175
Stock-based compensation	10,142			9,252
Provision for (recovery of) doubtful accounts and returns	310			(85		)
Loss (gain) on retirement and disposal of fixed assets	74			(10		)
Excess tax benefit from share-based payment arrangements	(16,745		)	—
Changes in assets and liabilities, net of acquired assets and liabilities:
Accounts receivable	(11,813		)	(10,789		)
Inventories	(5,221		)	(960		)
Prepaid expenses and other assets	(1,970		)	(1,036		)
Accounts payable	(1,954		)	(165		)
Accrued and other long-term liabilities	(3,927		)	1,770
Deferred revenues	7,004			5,775
Net cash provided by operating activities	42,755			46,944
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash	2,848			—
Purchase of property, plant and equipment	(25,778		)	(8,522		)
Acquisition, net of cash acquired	—			(186,949		)
Purchase of marketable securities	(43,857		)	—
Maturities of marketable securities	10,002			6,859
Other assets	(125		)	406
Net cash used in investing activities	(56,910		)	(188,206		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock	23,689			16,548
Common stock repurchase	(2,524		)	—
Excess tax benefit from share-based payment arrangements	16,745			—
Employees’ taxes paid upon the vesting of restricted stock units	(1,627		)	(1,420		)
Net cash provided by financing activities	36,283			15,128
Effect of foreign exchange rate changes on cash and cash equivalents	(4		)	77
Net increase (decrease) in cash and cash equivalents	22,124			(126,057		)
Cash and cash equivalents, beginning of the period	240,675			294,664
Cash and cash equivalents, end of the period	$	262,799		$	168,607

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

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ALIGN TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by Align Technology, Inc. (“we”, “our”, or “Align”) in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) and contain all adjustments, including normal recurring adjustments, necessary to present fairly, our results of operations for the three and six months ended June 30, 2012 and 2011, our comprehensive income for the three and six months ended June 30, 2012 and 2011, our financial position as of June 30, 2012 and our cash flows for the six months ended June 30, 2012 and 2011. The Condensed Consolidated Balance Sheet as of December 31, 2011 was derived from the December 31, 2011 audited financial statements.

The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any other future period, and we make no representations related thereto. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk” and the Consolidated Financial Statements and notes thereto included in Items 7, 7A and 8, respectively, in our Annual Report on Form 10-K for the year ended December 31, 2011.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in our Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) requires our management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates, including those related to the fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, stock-based compensation, 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.

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Accounting Standards Codification “ASC” 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This accounting standard update provides certain amendments to the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for the year beginning after December 15, 2011. We adopted this standard in the first quarter of 2012.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (ASC 220): Presentation of Comprehensive Income.” This accounting standard update eliminated the option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, an entity will be required to present items of net income and other comprehensive income in one continuous statement or in two separate statements. The standard is effective for the year beginning after December 15, 2011. We adopted this standard in the first quarter of 2012.

In September 2011, FASB issued ASU 2011-08, “Intangibles—Goodwill and Other (ASC 350): Testing Goodwill for Impairment.” This accounting standard update is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We adopted this standard in the first quarter of 2012, and the adoption of this standard did

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not have an impact on our condensed consolidated financial statements.

Note 2. Marketable Securities and Fair Value Measurements

Our short-term and long-term marketable securities as of June 30, 2012 and December 31, 2011 are as follows (in thousands):

Short-term



June 30, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Commercial paper	$	5,494	$	2	$	—		$	5,496
Corporate bonds	11,449		3		(10		)	11,442
Foreign bonds	2,809		1		(1		)	2,809
Agency bonds	1,004		1		—			1,005
Total	$	20,756	$	7	$	(11	)	$	20,752

Long-term



June 30, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Corporate bonds	$	16,677	$	2	$	(22	)	$	16,657
Foreign bonds	3,822		—		(4		)	3,818
Total	$	20,499	$	2	$	(26	)	$	20,475

Short-term



December 31, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Corporate bonds	$	4,135	$	—	$	(1	)	$	4,134
Foreign bonds	1,248		—		(5		)	1,243
Agency bonds	2,015		3		—			2,018
Total	$	7,398	$	3	$	(6	)	$	7,395

For the three and six months ended June 30, 2012 and 2011, no significant gains or losses were realized on the sale of marketable securities. We had no long-term investments as of December 31, 2011.

Fair Value Measurements

We measure the fair value of our cash equivalents and marketable securities 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.

Our Level 1 assets consist of money market funds. We did not hold any Level 1 liabilities as of June 30, 2012.

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.

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Our Level 2 assets consist of commercial paper, corporate bonds, foreign bonds, agency bonds, and our Israeli severance funds that are mainly invested in insurance policies. We obtain these fair values for level 2 investments from our asset manager for each of our portfolios. 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. We did not hold any Level 2 liabilities as of June 30, 2012.

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.

We did not hold any Level 3 assets or liabilities as of June 30, 2012.

The following table summarizes our financial assets measured at fair value on a recurring basis as of June 30, 2012 (in thousands):



Description	Balance as of June 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash equivalents:
Money market funds	$	95,731	$	95,731	$	—
Commercial paper	2,200				2,200
Short-term investments:
Commercial paper	5,496				5,496
Corporate bonds	11,442				11,442
Foreign bonds	2,809				2,809
Agency bonds	1,005				1,005
Long-term investments:
Corporate bonds	16,657				16,657
Foreign bonds	3,818				3,818
Other assets:
Israeli severance funds	1,785				1,785
	$	140,943	$	95,731	$	45,212

The following table summarizes our financial assets measured at fair value on a recurring basis as of December 31, 2011 (in thousands):



Description	Balance as of December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash equivalents:
Money market funds	$	86,897	$	86,897	$	—
Short-term investments:
Corporate bonds	4,134		—		4,134
Foreign bonds	1,243		—		1,243
Agency bonds	2,018		—		2,018
Other assets:
Israeli severance funds	1,859		—		1,859
	$	96,151	$	86,897	$	9,254

Note 3. Balance Sheet Components

Inventories

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Inventories are comprised of (in thousands):



	June 30, 2012		December 31, 2011
Raw materials	$	4,029	$	4,542
Work in process	5,082		2,486
Finished goods	5,512		2,374
	$	14,623	$	9,402

Work in process includes costs to produce our clear aligner and intra-oral scanner products. Finished goods primarily represent our intra-oral scanners and ancillary products that support our clear aligner products. During the first half of 2012, we increased our production volumes of our intra-oral scanners in preparation for the move into our new facility in Israel scheduled for the second half of 2012.

Accrued liabilities

Accrued liabilities consist of the following (in thousands):



	June 30, 2012		December 31, 2011
Accrued payroll and benefits	$	35,031	$	41,827
Accrued sales rebate	8,851		8,358
Accrued sales tax and value added tax	6,371		7,052
Unclaimed merger consideration	1,178		4,026
Accrued warranty	3,513		3,177
Accrued sales and marketing expenses	3,083		3,508
Accrued accounts payable	3,155		3,048
Accrued professional fees	1,399		654
Accrued income taxes	714		426
Other	5,912		4,524
Total	$	69,207	$	76,600

Warranty

We regularly review the accrued balances and update these balances 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.

Clear Aligner

We warrant our Invisalign products against material defects until the Invisalign case is complete. We accrue for warranty costs in cost of net revenues upon shipment of products. The amount of accrued estimated warranty costs is primarily based on historical experience as to product failures as well as current information on replacement costs.

Scanners

We warrant our scanners for a period of one year from the date of training and installation. We accrue for these warranty costs which includes materials and labor based on estimated historical repair costs. Extended service packages may be purchased for additional fees.

The following table reflects the change in our warranty accrual during the six months ended June 30, 2012 and 2011, respectively (in thousands):

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	Six Months Ended June 30,
	2012			2011
Balance at beginning of period	$	3,177		$	2,607
Charged to cost of revenues	2,113			1,692
Assumed warranty from Cadent	—			339
Actual warranty expenditures	(1,777		)	(1,531		)
Balance at end of period	$	3,513		$	3,107

Note 4. Business Combination

On April 29, 2011, we completed the acquisition of Cadent Holdings, Inc. (“Cadent”) for an aggregate cash purchase price of approximately $187.6 million. Cadent is a leading provider of 3D digital scanning solutions for orthodontics and dentistry. We believe that the combination of Align’s and Cadent’s technologies and capabilities creates greater growth opportunities for Align by bringing innovative new Invisalign treatment tools to customers and by extending the value of intra-oral scanning in dental practices.

The following table summarizes the allocation of the purchase price as of April 29, 2011 (in thousands):



Assets	$	15,745
Property, plant and equipment	3,624
Acquired identifiable intangible assets:
Trademarks (one to fifteen-year useful lives)	7,100
Existing technology (thirteen year useful life)	12,600
Customer relationships (eleven year useful life)	33,500
Goodwill	135,349
Liabilities assumed	(20,330		)
Total	$	187,588

Goodwill of $135.3 million represents the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets, and represents the expected synergies of the transaction and the knowledge and experience of the workforce in place. None of this goodwill will be deductible for tax purposes. Under the applicable accounting guidance, goodwill will not be amortized but will be tested for impairment on an annual basis or more frequently if certain indicators are present. We allocated approximately $77.3 million of the goodwill from the Cadent acquisition to our Scanner and CAD/CAM Services reporting unit and approximately $58.0 million to our Clear Aligner reporting unit. We allocated this goodwill to our reporting units based on the expected relative synergies generated by the acquisition.

For the three and six months ended June 30, 2012, Cadent contributed net revenues of approximately $12.0 million and $23.7 million and gross profit of approximately $3.2 million and $6.6 million, respectively. During the period of May 2011 through June 2011, Cadent contributed net revenues of approximately $6.4 million and gross profit of approximately $2.1 million. Sales, marketing, development and administrative activities for our Clear Aligner and Scanner and CAD/CAM Services reporting units were integrated during the post-acquisition period, therefore the operating results below gross profit is not available.

The following table presents the results of Align and Cadent for three and six months ended June 30, 2011, on a proforma basis, as though the companies had been combined as of January 1, 2011. The proforma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place as of January 1, 2011 or of results that may occur in the future (in thousands):



	Proforma Net Revenues and Net Profit Three Months Ended June 30,		Proforma Net Revenues and Net Profit Six Months Ended June 30,
	2011		2011
Net revenues	$	123,626	$	237,669
Net profit	$	8,116	$	22,703

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Note 5. Goodwill and Acquired Intangible Assets

Goodwill

The change in the carrying value of goodwill for the period ended June 30, 2012 is as follows (in thousands):



Balance as of December 31, 2011	$	135,383
Adjustment to Goodwill (1)	444
Balance as of June 30, 2012	$	135,827

______________

(1)

Pursuant to the accounting guidance for business combinations, we recorded goodwill adjustments for the effect on goodwill of changes to net assets acquired related our acquisition of Cadent during the measurement period (up to one year from April 29, 2011, the date of our acquisition of Cadent). Goodwill adjustments were not significant to our previously reported operating results or financial position.

Goodwill of $135.8 million primarily represents the excess of the purchase price of Cadent over the fair value of the underlying net tangible and identifiable intangible assets, and represents the expected relative synergies of the transaction and the knowledge and experience of the workforce in place.

The following table summarizes goodwill by reportable segment as of June 30, 2012 and December 31, 2011 (in thousands):



	Clear Aligner		Scanner and CAD/CAM Services		Total
As of June 30, 2012	$	58,543	$	77,284	$	135,827
As of December 31, 2011	$	58,445	$	76,938	$	135,383

Acquired Intangible assets

Information regarding our intangible assets either as a direct result from the Cadent acquisition or individually acquired are being amortized as follows (in thousands):



	Gross Carrying Amount as of June 30, 2012		Accumulated Amortization			Net Carrying Value as of June 30, 2012
Trademarks	$	7,100	$	(670	)	$	6,430
Existing technology	12,600		(1,227		)	11,373
Customer relationships	33,500		(3,527		)	29,973
Other	125		—			125
	$	53,325	$	(5,424	)	$	47,901

Amortization of the acquired existing technology is recorded in cost of revenue, while the amortization of acquired trademarks, customer relationships, and individually acquired intangible assets are included in operating expenses. The following table summarizes the amortization expense of acquired intangible assets for the periods indicated (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Amortization of acquired intangible assets
In cost of net revenues	$	231	$	183	$	492	$	183
In operating expenses	869		592		1,754		592
Total	$	1,100	$	775	$	2,246	$	775

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The total estimated annual future amortization expense for these acquired intangible assets as of June 30, 2012 is as follows (in thousands):



Fiscal Year
2012 (remaining six months)	$	2,268
2013	4,537
2014	4,493
2015	4,470
2016	4,470
Thereafter	27,663
Total	$	47,901

Impairment assessment

We perform an impairment test whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Examples of such events or circumstances include significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of acquired assets or the strategy for its business, significant negative industry or economic trends, and/or a significant decline in our stock price for a sustained period. Impairments are recognized based on the difference between the fair value of the asset and its carrying value, and fair value is generally measured based on discounted cash flow analysis. There were no impairments of intangible assets during the periods presented.

Note 6. Credit Facilities

On December 14, 2010, we renegotiated and amended our existing credit facility with Comerica Bank. Under this revolving line of credit, we have $30.0 million of available borrowings with a maturity date of December 31, 2012. The interest rate on borrowings will range from Libor plus 1.5% to 2.0% depending upon the amount of cash we maintain at Comerica Bank. This credit facility requires a quick ratio covenant and also requires us to maintain a minimum unrestricted cash balance of $10.0 million. Additionally, in the event our unrestricted cash deposited is less than $55.0 million, the unused facility fee will increase from 0.050% per quarter to 0.125% per quarter. As of June 30, 2012, we had no outstanding borrowings under this credit facility and are in compliance with the financial covenants.

Note 7. Commitments and Contingencies

Operating Leases

As of June 30, 2012, minimum future lease payments for non-cancelable leases are as follows (in thousands):




Fiscal Year	Operating leases
2012 (remaining six months)	$	3,780
2013	6,016
2014	4,741
2015	4,569
2016	4,612
Thereafter	2,217
Total minimum lease payments	$	25,935

Note 8. Stock-based Compensation

Summary of stock-based compensation expense

On May 19, 2011 the Shareholders approved an increase of 3,000,000 shares to the 2005 Incentive Plan (as amended) for a total reserve of 16,283,379 shares for issuance, plus up to an aggregate of 5,000,000 shares that would have been returned to our 2001 Stock Incentive Plan as a result of termination of options on or after March 28, 2005.

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Stock-based compensation expense 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 expense related to all of our stock-based awards and employee stock purchases for the three and six months ended June 30, 2012 and 2011 are as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Cost of net revenues	$	457	$	440	$	920	$	957
Sales and marketing	1,447		1,435		2,618		2,533
General and administrative	2,493		2,340		4,922		4,440
Research and development	882		758		1,682		1,322
Total stock-based compensation expense	$	5,279	$	4,973	$	10,142	$	9,252

Options

Activity for the six month period ended June 30, 2012 under the stock option plans are set forth below (in thousands, except years and per share amounts):



	Stock Options Number of Shares Underlying Stock Options		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (in years )	Aggregate Intrinsic Value
Outstanding as of December 31, 2011	6,190
Granted (1)	—
Exercised	(1,603	)
Cancelled or expired	(21	)
Outstanding as of June 30, 2012	4,566		$	14.66	4.78	$	85,831
Vested and expected to vest at June 30, 2012	4,508		$	14.61	4.77	$	84,967
Exercisable at June 30, 2012	3,667		$	14.05	4.64	$	71,187

The fair value of stock options granted was estimated at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions:



	Three Months Ended June 30,					Six Months Ended June 30,
	2012		2011			2012		2011
Stock options (1):
Expected term (in years)	—		4.3			—		4.4
Expected volatility	—		60.0		%	—		61.0		%
Risk-free interest rate	—		1.5		%	—		1.7		%
Expected dividends	—		—			—		—
Weighted average fair value at grant date	$	—	$	11.70		$	—	$	10.87

______________


(1)	There were no stock options granted during the three and six months ended June 30, 2012.

As of June 30, 2012, we expect to recognize $7.0 million of total unamortized compensation cost, net of estimated forfeitures, related to stock options over a weighted average period of 1.8 years.

Restricted Stock Units (“RSUs”)

A summary of the nonvested shares for the six months ended June 30, 2012 is as follows (in thousands, except years):

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	Number of Shares Underlying RSUs		Weighted Remaining Vesting Period	Aggregate Intrinsic Value
			(in years)
Nonvested as of December 31, 2011	1,208
Granted	808
Vested and released	(382	)
Forfeited	(36	)
Nonvested as of June 30, 2012	1,598		1.74	$	53,467

As of June 30, 2012 the total unamortized compensation cost related to restricted stock units, net of estimated forfeitures, was $28.5 million, which we expect to recognize over a weighted average period of 2.8 years.

On February 18, 2011, we granted market-performance based restricted stock units (“MSUs”) to our executive officers. Each MSU represents the right to one share of Align’s common stock and will be issued through our amended 2005 Incentive Plan. 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 the NASDAQ Composite Index over the vesting period, generally two to three years, up to 150% of the MSUs initially granted.

The following table summarizes the MSU performance for the six months ended June 30, 2012 (in thousands, except years):



	Number of Shares Underlying MSUs	Weighted Average Remaining Vesting Period	Aggregate Intrinsic Value
		(in years )
Nonvested as of December 31, 2011	128
Granted	192
Vested and released	—
Forfeited	—
Nonvested as of June 30, 2012	320	2.04	$	10,726

As of June 30, 2012, we expect to recognize $5.0 million of total unamortized compensation cost, net of estimated forfeitures, related to MSU over a weighted average period of 2.0 years.

Employee Stock Purchase Plan

In May 2010, our shareholders approved the 2010 Employee Stock Purchase Plan (the “2010 Purchase Plan”) to replace the 2001 Purchase Plan. The terms and features of the 2010 Purchase Plan are substantially the same as the 2001 Purchase Plan and will continue until terminated by either the Board or its administrator. The maximum number of shares available for purchase under the 2010 Purchase Plan is 2,400,000 shares. As of June 30, 2012, there remains 2,076,302 shares available for purchase under the 2010 Purchase Plan.

As of June 30, 2012, we expect to recognize $0.8 million of the total unamortized compensation cost related to employee purchases over a weighted average period of 0.4 years.

Note 9. Common Stock Repurchase Program

On October 27, 2011, we announced that our Board of Directors approved a stock repurchase program pursuant to which we may repurchase up to $150.0 million of common stock. Purchases under the stock repurchase program may be made from time to time in the open market. During the first half of 2012, we repurchased approximately 0.1 million shares of common stock at an average price of $24.68 per share for an aggregate purchase price of approximately $2.5 million including commissions. The common stock repurchases reduced additional paid-in capital by approximately $0.9 million and increased accumulated deficit by $1.6 million. All repurchased shares were retired.

Note 10. Accounting for Income Taxes

During the second quarter of fiscal 2012, the amount of gross unrecognized tax benefits increased by $1.2 million

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primarily due to current period exposures. The total amount of unrecognized tax benefits was $17.9 million as of June 30, 2012, all of which would impact our effective tax rate if recognized. We do not expect any significant changes to the amount of unrecognized tax benefit within the next twelve months.

We are subject to taxation in the U.S., various states and foreign jurisdictions. All of our tax years will be open to examination by the U.S. federal and most state tax authorities due to our net operating loss and overall credit carryforward position. With few exceptions, we are no longer subject to examination by foreign tax authorities for years before 2007.

Note 11. Net Profit Per Share

Basic net profit per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net profit per share is computed using the weighted average number of shares of common stock, adjusted for the dilutive effect of potential common stock. Potential common stock, computed using the treasury stock method, includes options, RSUs, MSUs and the dilutive component of our employee stock purchase plan.

The following table sets forth the computation of basic and diluted net profit per share attributable to common stock (in thousands, except per share amounts):



	Three Months Ended, June 30,				Six Months Ended, June 30,
	2012		2011		2012		2011
Numerator:
Net profit	$	28,492	$	11,162	$	49,476	$	27,003
Denominator:
Weighted-average common shares outstanding, basic	80,384		77,888		79,810		77,369
Dilutive effect of potential common stock	2,570		2,433		2,636		2,534
Total shares, diluted	82,954		80,321		82,446		79,903
Net profit per share, basic	$	0.35	$	0.14	$	0.62	$	0.35
Net profit per share, diluted	$	0.34	$	0.14	$	0.60	$	0.34

For the three and six months ended June 30, 2012, stock options, RSUs, MSUs and our employee stock purchase plan totaling 0.1 million and 0.1 million, respectively, were excluded from diluted net profit per share because of their anti-dilutive effect.

For the three and six months ended June 30, 2011, stock options, RSUs, MSUs and our employee stock purchase plan totaling 0.8 million and 1.7 million, respectively, were excluded from diluted net profit per share because of their anti-dilutive effect.

Note 12. Segments and Geographical Information

Segment Information

Operating segments are defined as components of an enterprise about 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 management for decision making and performance assessment as the basis for determining our reportable segments. The performance measures of our reportable segments include net revenues and gross profit.

We have grouped our operations into two reportable segments: Clear Aligner segment and Scanner and CAD/CAM Services segment.


•	Our Clear Aligner segment consists of our Invisalign system which includes Invisalign Full, Express/Lite, Teen, Assist, Vivera retainers, along with our training and ancillary products for treating malocclusion.


•	Our Scanners and CAD/CAM Services segment consists of intra-oral scanning systems and additional services

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available with the intra-oral scanners that provide digital alternatives to the traditional cast models. This segment includes our iTero scanners, iOC scanners, and OrthoCAD services.

These reportable operating segments are based on how our CODM views and evaluates our operations as well as allocation of resources (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
Revenue	2012		2011		2012		2011
Clear Aligner	$	133,669	$	113,647	$	256,997	$	218,503
Scanners and CAD/CAM Services (1)	11,957		6,439		23,708		6,439
Total	$	145,626	$	120,086	$	280,705	$	224,942
Gross profit
Clear Aligner	$	105,617	$	89,047	$	203,006	$	171,273
Scanners and CAD/CAM Services (1)	3,183		2,090		6,554		2,090
Total	$	108,800	$	91,137	$	209,560	$	173,363
	As of June 30, 2012		As of December 31, 2011
Total Assets including goodwill
Clear Aligner	$	538,832	$	469,084
Scanners and CAD/CAM Services	205,331		180,180
Total	$	744,163	$	649,264
Goodwill
Clear Aligner	$	58,543	$	58,445
Scanners and CAD/CAM Services	77,284		76,938
Total	$	135,827	$	135,383

______________


(1)	The Scanners and CAD/CAM services segment was created as a result of our acquisition of Cadent on April 29, 2011 and the financial results for that segment reflect activity since that date.

Geographical Information

Net revenues and long-lived assets are presented below by geographic area (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Net revenues (1):
United States	$	110,838	$	89,988	$	214,096	$	169,123
the Netherlands	32,460		27,613		61,907		52,150
Other international	2,328		2,485		4,702		3,669
Total net revenues	$	145,626	$	120,086	$	280,705	$	224,942
	As of June 30, 2012		As of December 31, 2011
Long-lived assets:
United States	$	56,639	$	45,720
the Netherlands	4,571		1,726
Other international	13,761		9,261
Total long-lived assets	$	74,971	$	56,707

______________


(1)	Net Revenues are attributed to countries based on location of where revenue is recognized.

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Note 13. Exit Activities

In the third quarter of 2011, we announced our plan to consolidate our Carlstadt, New Jersey-based Scanner and CAD/CAM services activities with our existing manufacturing and shared services organizations in order to optimize efficiency, consolidate customer-facing functions, and reduce operating costs. The exit from our New Jersey operations includes a total reduction of 119 full time headcount in Carlstadt, New Jersey. These actions include a phased transition of our CAD/CAM services, intra-oral scanner customer care, distribution and repair into our existing shared services organization in San Jose, Costa Rica and our manufacturing facilities in Juarez, Mexico. Additionally, all accounting and finance functions will be consolidated into our corporate headquarters in San Jose, California. The transition began in the fourth quarter of 2011 and is expected to be completed in the third quarter of 2012. We expect to realize annualized net savings of approximately $4.0 million per year as a result of these consolidation activities.

Activity and liability balances related to this exit activity during the first six months of 2012 are as follows (in thousands):



	Severance and Benefits
Balance at December 31, 2011	$	1,010
Exit cost incurred during the period	636
Cash payments	(856		)
Balance at June 30, 2012	$	790

During the first half of 2012, we incurred approximately $0.6 million in exit costs of which approximately $0.4 million were recorded in our cost of net revenues and $0.2 million operating expenses.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

In addition to historical information, this quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, among other things, our expectations regarding the anticipated impact of our new products and product enhancements will have on doctor utilization and our market share, our expectations regarding product mix and product adoption, our expectations regarding the existence and impact of seasonality, our expectations regarding the financial and strategic benefits of the Cadent Holdings, Inc. (“Cadent”) acquisition, our expectations to increase our investment in manufacturing capacity, our expectations regarding the continued expansion of our international markets, the timing of our plans and transition into our new manufacturing facilities, the anticipated number of new doctors trained and their impact on volumes, our expectations regarding the International Scanner and CAD/CAM Services revenues, the level of our operating expenses and gross margins, and other factors beyond our control, as well as other statements regarding our future operations, financial condition and prospects and business strategies. These statements may contain words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or other words indicating future results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and in particular, the risks discussed below in Part II, Item 1A “Risk Factors”. We undertake no obligation to revise or update these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

The following discussion and analysis of our financial condition and results of operations should be read together with our Condensed Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

Align Technology, Inc. is a global medical device company that pioneered the invisible orthodontics market with the introduction of the Invisalign system in 1999. Today, we are focused on designing, manufacturing and marketing innovative, technology-rich products to help dental professionals achieve the clinical results they expect and deliver effective, convenient cutting-edge dental treatment options to their patients. Align Technology was founded in March 1997 and is headquartered in San Jose, California with offices worldwide. Our international headquarters are located in Amsterdam, the Netherlands. We have two operating segments: (1) Clear Aligner, known as the Invisalign system; and (2) Scanner and CAD/CAM Services, known as iTero and iOC intra-oral scanners and OrthoCAD services.

We received FDA clearance in 1998 as a Class II medical device. Commercial sales to U.S. orthodontists began in 1999 followed by U.S General Practitioner Dentists (GPs) in 2002. Over the next decade, we introduced Invisalign to the European market and Japan, added distribution partners in Asia Pacific, Latin America, and EMEA, and introduced a full range of treatment options including Invisalign Express 10, Invisalign Teen, Invisalign Assist, and Vivera retainers. Most recently we launched Invisalign G3 and Invisalign G4, which includes significant new aligner and software features across all Invisalign products that make it easier for doctors to use Invisalign on more complex cases, and introduced Invisalign to the People’s Republic of China.

In 2011, we acquired Cadent Holdings, Inc., a leading provider of 3D digital scanning solutions for orthodontics and dentistry, and makers of the iTero and iOC intra-oral scanners and OrthoCAD services. We believe that the combination of Align’s and Cadent’s technologies and capabilities creates greater growth opportunities for Align by bringing innovative new Invisalign treatment tools to customers and by extending the value of intra-oral scanning in dental practices. Intra-oral scanners provide a dental “chair-side” platform for accessing valuable digital diagnosis and treatment tools, with potential for enhancing accuracy of records, treatment efficiency, and the overall patient experience. We believe there are numerous benefits for customers and the opportunity to accelerate the adoption of Invisalign through interoperability with our intra-oral scanners. The use of digital technologies such as CAD/CAM for restorative dentistry or in-office restorations has been growing rapidly and intra-oral scanning is a critical part of enabling these new digital technologies and procedures in dental practices.

The Invisalign system is offered in more than 45 countries and has been used to treat more than 1.9 million patients. Our iTero and iOC intra-oral scanners are available in over 25 countries and provide dental professionals with an open choice to send digital impressions to any laboratory-based CAD/CAM system or to any of the more than 1,800 dental labs worldwide.

Our goal is to establish the Invisalign system as the standard method for treating malocclusion and to establish our intra-oral scanning platform as the preferred scanning protocol for 3D digital scans, ultimately driving increased product adoption by dental professionals. We intend to achieve this by focusing on the key strategic initiatives set forth in our Annual Report on

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Form 10-K.

In addition to the successful execution of our business strategy, there are a number of other factors which may affect our results in 2012 and beyond, which are updated below:

•

Product innovation and clinical effectiveness. We believe feature innovations introduced in Invisalign G3 and Invisalign G4 are important contributors to the increased utilization across our channels worldwide. Additionally, due to the higher number of complex malocclusion cases in international markets compared to North America, we believe the international launch of Invisalign G3 in May 2011 was important for continued growth both in our existing international markets and to support our expansion in new markets like China. We expect that the innovations in Invisalign G4 (launched October 2011 in North America and in international markets) will build on the success we have seen with Invisalign G3 and encourage even greater confidence and adoption in our customers’ practices. Additionally, with the introduction of new software features to the iOC and iTero intra-oral scanners along with Invisalign interoperability, we believe that over the long-term these types of product and clinical innovations will increase adoption of Invisalign and increase sales of our intra-oral scanners. However, it is difficult to predict the rate of adoption which may vary by region and channel.

•

Investments to Increase Manufacturing Capacity. We are currently transitioning from our existing manufacturing facility in Juarez, Mexico into our new 150,000 square foot facility purchased in September 2011, which is also located in Juarez, Mexico. The lease on our existing facility expires in July 2013. In addition, in the second half of 2012, we plan to transition our intra-oral scanner research and development and manufacturing operations in Or Yehuda, Israel into a new, larger facility in the same city. Our ability to plan, construct and equip either of these manufacturing facilities is subject to significant risk and uncertainty, including delays and cost overruns. If the opening of either of these facilities is significantly delayed for any reason, or if demand for our product in 2012 exceeds our current expectations, or if the timing of receipt of case product orders during a given quarter is different from our expectations, we may not be able to fulfill orders in a timely manner, which may negatively impact our financial results and overall business.

•

Consolidation of New Jersey Operations. In September 2011, we announced plans to consolidate our CAD/CAM services and intra-oral scanner-related activities based in Carlstadt, New Jersey with our existing manufacturing and shared services organizations in order to optimize efficiency, consolidate customer-facing functions, and reduce operating costs. All existing intra-oral scanner research and development and manufacturing operations will remain in Or Yehuda, Israel. These actions include a phased transition of the following activities:


•	Consolidation of customer care for CAD/CAM services and intra-oral scanners into our existing shared services organization in San Jose, Costa Rica;


•	Transition of CAD/CAM services and intra-oral scanner distribution and repair to our Treat operations in San Jose, Costa Rica and our manufacturing facility in Juarez, Mexico; and


•	Consolidation of accounting and finance functions at our corporate headquarters in San Jose, California; and


•	Closure of the New Jersey facility in the third quarter of 2012.

The consolidation of our New Jersey operations includes a total reduction of 119 full time headcount in Carlstadt, New Jersey. The transition began in the fourth quarter of 2011 and is expected to be completed in the third quarter of 2012. As part of this consolidation, we will incur costs for severance estimated to be approximately $2.0 million, of which approximately $1.1 million was realized in 2011 and $0.9 million over the first three quarters of 2012. During the first half of 2012, we incurred approximately $0.6 million of severance costs. After the New Jersey consolidation is complete, we expect to realize annualized net savings of approximately $4.0 million per year. In the course of creating a more integrated business, we have recently experienced lower service levels in our scanner and CAD/CAM services business negatively impacting our customer-facing functions such as customer service and technical support. We are committed to improving customer service levels, however if these issues persist, our financial results may be affected. See Part II, Item 1A— “Risk Factors” for risks related to the Consolidation of New Jersey Operations”.


•	Invisalign Utilization rates. Our goal is to establish Invisalign as the treatment of choice for treating malocclusion ultimately driving increased product adoption and frequency of use by dental professionals, or utilization. Our

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quarterly utilization rates for the previous 10 quarters are as follows:

______________

Invisalign Utilization rates = # of cases shipped divided by # of doctors cases were shipped to

Total utilization in the second quarter of 2012 increased slightly to 4.3 cases per doctor, driven by all channels particularly our North American orthodontic customers. Utilization among our North American orthodontist customers increased from 7.2 the first quarter of 2012 to 7.7 cases per doctor, reflecting continued adoption of our Invisalign products driven by ongoing product improvements and feature launches such as Invisalign G3 and Invisalign G4. Although we expect that over the long-term our utilization rates will gradually improve, we expect that period over period comparisons of our utilization rates will fluctuate.

•

Acquisition of Cadent. On April 29, 2011, we acquired privately-held Cadent, a leading provider of 3D digital scanning solutions for orthodontics and dentistry. The acquisition of Cadent positions us as a leader in one of the best growth opportunities in dentistry and medical devices today. Over the next five years, we expect that intra-oral scanners will become widely used in dental practices. We believe that the combination of the two companies will help accelerate the use of intra-oral scanning in the dental industry by leveraging Align’s global sales reach, extensive professional and consumer marketing capabilities and base of over 55 thousand ClinCheck software users. Intra-oral scanners also strengthen our ability to drive adoption of Invisalign by integrating Invisalign treatment more fully with mainstream tools and procedures in doctors’ practices. We may, however, experience difficulties in achieving the anticipated financial or strategic benefits of the acquisition. Information regarding risks associated with the Cadent acquisition may be found in See Part II, Item A – “Risk Factors” for risks related to the acquisition of Cadent.


•	Number of new Invisalign doctors trained. We continue to expand our Invisalign customer base through training new doctors. In 2012, we expect to train approximately 6,000 orthodontists and GPs in North America and internationally, which is approximately the same number we trained in 2011.

•

International Clear Aligner. We will continue to focus our efforts towards increasing adoption of our products by dental professionals in our core European markets as well as expansion into new markets. In the second quarter of 2012, Clear Aligner International case volumes increased 34.5% compared to the same quarter in 2011, driven primarily by growth in our direct business in Europe as well as by continued strong performance by our distribution partners. Although sales through our distribution partners represented 7% of total worldwide case shipments in the second quarter of 2012, sales through our distributors, particularly our partner covering the Asia Pacific region, continued to grow at a faster rate than direct sales in other international geographic regions and we expect this trend to continue in the near term. If this shift in sales to distributors continues at the same pace or accelerates, our average selling price may decline.

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•	International Scanner and CAD/CAM Services. In the second quarter of 2012, International Scanner and CAD/CAM Services declined significantly from the same quarter in 2011. Although we are committed to working through the challenges we face in Europe, we expect our International Scanner and CAD/CAM Services revenues in the third quarter of 2012 will be flat compared to the second quarter.

•

Foreign exchange rates. Although the U.S. dollar is our reporting currency, a portion of our net revenues and profits are generated in foreign currencies. Net revenues and profits generated by subsidiaries operating outside of the U.S. are translated into U.S. dollars using exchange rates effective during the respective period and as a result are affected by changes in exchange rates. We have generally accepted the exposure to exchange rate movements without using derivative financial instruments to manage this risk. Therefore, both positive and negative movements in currency exchanges rates against the U.S. dollar will continue to affect the reported amount of net revenues and profits in our consolidated financial statements.

Results of Operations

Net revenues by Reportable Segment

We group our operations into two reportable segments: Clear Aligner segment and Scanners and CAD/CAM Services segment.


•	Our Clear Aligner segment consists of our Invisalign system which includes Invisalign Full, Express/Lite, Teen, Assist, Vivera retainers, along with our training and ancillary products for treating malocclusion.


•	Our Scanners and CAD/CAM Services segment consists of intra-oral scanning systems and additional services available with the intra-oral scanners that provide digital alternatives to the traditional cast models. This segment includes our iTero scanners, iOC scanners, and OrthoCAD services.

The below represents net revenues for our Clear Aligner segment by region, channel, and product and our Scanner and CAD/CAM Services segment by region and product for the three and six months ended June 30, 2012 and 2011 as follows (in millions):

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	Three Months Ended June 30,									Six Months Ended June 30,
Clear Aligner:	2012		2011		Net Change			% Change		2012		2011		Net Change			% Change
Region and Channel
North America
Ortho	$	43.9	$	37.1	$	6.8		18.3	%	$	85.6	$	72.1	$	13.5		18.7	%
GP	49.1		42.6		6.5			15.3	%	94.2		81.9		12.3			15.0	%
Total North America	93.0		79.7		13.3			16.7	%	179.8		154.0		25.8			16.8	%
International	32.9		27.9		5.0			17.9	%	62.6		53.0		9.6			18.1	%
Invisalign non-case revenues	7.8		6.0		1.8			30.0	%	14.6		11.4		3.2			28.1	%
Total	$	133.7	$	113.6	$	20.1		17.7	%	$	257.0	$	218.4	$	38.6		17.7	%
Product
Invisalign Full	$	88.6	$	76.6	$	12.0		15.7	%	$	171.0	$	147.7	$	23.3		15.8	%
Invisalign Express/Lite	13.6		11.1		2.5			22.5	%	25.4		21.2		4.2			19.8	%
Invisalign Teen	16.4		12.8		3.6			28.1	%	31.5		24.7		6.8			27.5	%
Invisalign Assist	7.3		7.1		0.2			2.8	%	14.5		13.4		1.1			8.2	%
Invisalign non-case revenues	7.8		6.0		1.8			30.0	%	14.6		11.4		3.2			28.1	%
Total	$	133.7	$	113.6	$	20.1		17.7	%	$	257.0	$	218.4	$	38.6		17.7	%
Scanners and CAD/CAM Services (1):
Region
North America	$	11.7	$	5.3	$	6.4		120.8	%	$	22.9	$	5.3	$	17.6		332.1	%
International	0.2		1.2		(1.0		)	(83.3	)%	0.8		1.2		(0.4		)	(33.3	)%
Total	$	11.9	$	6.5	$	5.4		83.1	%	$	23.7	$	6.5	$	17.2		264.6	%
Product
Scanners	$	6.0	$	2.7	$	3.3		122.2	%	$	11.4	$	2.7	$	8.7		322.2	%
CAD/CAM Services	5.9		3.8		2.1			55.3	%	12.3		3.8		8.5			223.7	%
Total	$	11.9	$	6.5	$	5.4		83.1	%	$	23.7	$	6.5	$	17.2		264.6	%
Total Revenue	$	145.6	$	120.1	$	25.5		21.2	%	$	280.7	$	224.9	$	55.8		24.8	%

______________


(1)	The Scanners and CAD/CAM services segment was created as a result of our acquisition of Cadent on April 29, 2011 and the financial results for that segment reflect activity since that date.

Clear Aligner Case Volume by Channel and Product

Case volume data which represents Invisalign case shipments by channel and product, for the three and six months ended June 30, 2012 and 2011 as follows (in thousands):

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	Three Months Ended June 30,					Six Months Ended June 30,
Region and Channel	2012	2011	Net Change	% Change		2012	2011	Net Change	% Change
North America:
Ortho	35.4	28.5	6.9	24.2	%	67.7	55.4	12.3	22.2	%
GP	37.3	30.7	6.6	21.5	%	70.3	59.0	11.3	19.2	%
Total North American Invisalign	72.7	59.2	13.5	22.8	%	138.0	114.4	23.6	20.6	%
International Invisalign	22.6	16.8	5.8	34.5	%	42.6	33.0	9.6	29.1	%
Total Invisalign case volume	95.3	76.0	19.3	25.4	%	180.6	147.4	33.2	22.5	%
Product
Invisalign Full	62.5	51.1	11.4	22.3	%	119.7	99.2	20.5	20.7	%
Invisalign Express/Lite	15.3	11.3	4.0	35.4	%	28.2	21.8	6.4	29.4	%
Invisalign Teen	11.9	8.6	3.3	38.4	%	21.8	16.5	5.3	32.1	%
Invisalign Assist	5.6	5.0	0.6	12.0	%	10.9	9.9	1.0	10.1	%
Total Invisalign case volume	95.3	76.0	19.3	25.4	%	180.6	147.4	33.2	22.5	%

Total net revenues increased by $25.5 million and $55.8 million for the three and six months ended June 30, 2012, respectively, as compared to the same period in 2011 primarily as a result of worldwide volume growth across all customer channels and products for the Clear Aligner segment as well as the addition of our Scanners and CAD/CAM Services segment resulting from the acquisition of Cadent in April 2011.

Clear Aligner

In the three and six months ended June 30, 2012, Clear Aligner North America net revenues increased by 16.7% and 16.8%, respectively, compared to the same period in 2011. The growth was primarily driven by volume growth across all products and customer channels partially offset by lower average selling price (“ASPs”), as a result of an overall increase in our volume rebate and other promotions.

In the three and six months ended June 30, 2012, Clear Aligner International net revenues increased by 17.9% and 18.1%, respectively, compared to the same period in 2011, driven primarily by volume growth across all products, partially offset by lower ASPs due to an increase in discounts and promotions and an unfavorable exchange rate of the Euro against the U.S. dollar.

Other non-case revenues, consisting of training fees and sales of ancillary products, increased 30.0% and 28.1% for the three and six months ended June 30, 2012, respectively, compared to the same period in 2011 primarily due to increased sales of Vivera and training fees in North America and International.

We expect total net revenues and ASPs to decline in the third quarter of 2012 compared to the second quarter of 2012 primarily due to revenue deferrals associated with the Teen/Vivera Retainer promotion, higher volume rebates and adverse impact of foreign exchange rates.

Scanner and CAD/CAM Services

The Scanner and CAD/CAM Services segment was created when we acquired Cadent on April 29, 2011 and the financial results of Cadent have been included in this segment since the acquisition date. Scanners and CAD/CAM services revenue increased 83.1% and 264.6% for the three and six months ended June 30, 2012, respectively, compared to the same period in 2011. The revenue increase for the three months ended June 30, 2012 was primarily driven by scanner volume growth in North America as well as the inclusion of Cadent for a full quarter compared to two months in the prior year. The revenue increase for the six months ended June 30, 2012 was due to the inclusion of Cadent revenue for a full six months in 2012, compared to two months in 2011.

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



	Three Months Ended June 30,								Six Months Ended June 30,
	2012			2011			Change		2012			2011			Change
Clear Aligner
Cost of net revenues	$	28.0		$	24.6		$	3.4	$	54.0		$	47.3		$	6.7
% of net segment revenues	21.0		%	21.6		%			21.0		%	21.6		%
Gross profit	$	105.6		$	89.0		$	16.6	$	203.0		$	171.3		$	31.7
Gross margin %	79.0		%	78.4		%			79.0		%	78.4		%
Scanner and CAD/CAM Services (1)
Cost of net revenues	$	8.8		$	4.3		$	4.5	$	17.2		$	4.3		$	12.9
% of net segment revenues	73.4		%	67.5		%			72.4		%	67.5		%
Gross profit	$	3.2		$	2.1		$	1.1	$	6.6		$	2.1		$	4.5
Gross margin %	26.6		%	32.5		%			27.6		%	32.5		%
Total cost of net revenues	$	36.8		$	28.9		$	7.9	$	71.2		$	51.6		$	19.6
% of net revenues	25.3		%	24.1		%			25.3		%	22.9		%
Gross profit	$	108.8		$	91.1		$	17.7	$	209.6		$	173.4		$	36.2
Gross margin %	74.7		%	75.9		%			74.7		%	77.1		%

______________


(1)	The Scanners and CAD/CAM services segment was created as a result of our acquisition of Cadent on April 29, 2011 and the financial results for that segment reflect activity since that date.

Cost of net revenues for our Clear Aligner and Scanner and CAD/CAM Services includes salaries for staff involved in the production process, the cost of materials, packaging, shipping costs, depreciation on capital equipment used in the production process, amortization of acquired intangible assets from Cadent, training costs and stock-based compensation expense.

Clear Aligner

Gross margin improved slightly for the three and six months ended June 30, 2012 compared to the same periods in 2011 primarily due to increased cost absorption due to higher production volumes resulting from the increase of our Invisalign sales during the first half 2012.

Scanner and CAD/CAM Services

Gross margin decreased for the three and six months ended June 30, 2012 compared to the same periods in 2011 largely resulting from costs incurred by our Israeli operations that were included in gross margin during 2012 whereas these costs were included in operating expenses in 2011. Additionally, we incurred higher training costs during the first half of 2012 as compared to the same period in 2011 as we increased our in-office training personnel for our scanner products. Both the inclusion of our Israeli operations and higher training costs reflect a full three and six month impact in 2012 compared to only two months in 2011 as the acquisition of Cadent was completed on April 29, 2011.

Sales and marketing (in millions):



	Three Months Ended June 30								Six Months Ended June 30,
	2012			2011			Change		2012			2011			Change
Sales and marketing	$	39.1		$	38.6		$	0.5	$	77.8		$	71.4		$	6.4
% of net revenues	26.8		%	32.1		%			27.7		%	31.7		%

Sales and marketing expense includes sales force and marketing compensation (including travel-related costs), media and advertising, clinical education, expenses for trade shows and industry events, product marketing and stock-based compensation expense.

Our sales and marketing expense for the three months ended June 30, 2012 increased slightly compared to the same period in 2011 primarily due to higher advertising and media costs of approximately $1.6 million offset by lower clinical

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education costs of approximately $1.1 million largely as a result of the Invisalign European Summit which was held during the second quarter of 2011 but not 2012.

Our sales and marketing expense for the six months ended June 30, 2012 increased compared to the same period in 2011 primarily due to higher payroll and payroll-related costs of approximately $4.9 million primarily attributed to the inclusion of Cadent's headcount during the full six months of the 2012 compared to only two months during same period in 2011 as the acquisition was completed in April 2011. Additionally, we incurred higher advertising and media costs of approximately $2.3 million. These costs were partially offset by lower clinical education of approximately $1.1 million primarily because of the Invisalign European Summit which was held during the second quarter of 2011 but not 2012.

General and administrative (in millions):



Three Months Ended June 30,			Six Months Ended June 30,
2012	2011	Change