Edgar Filing: ALIGN TECHNOLOGY INC

ALGN-2012.9.30-Q3

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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 September 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 November 2, 2012 was 81,384,625.

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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	22
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	36
ITEM 4.	CONTROLS AND PROCEDURES	37
PART II	OTHER INFORMATION	38
ITEM 1.	LEGAL PROCEEDINGS	38
ITEM 1A.	RISK FACTORS	38
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	51
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	52
ITEM 4.	MINE SAFETY DISCLOSURES	52
ITEM 5.	OTHER INFORMATION	52
ITEM 6.	EXHIBITS	52
SIGNATURES		54

Invisalign, Align, ClinCheck, Invisalign Assist, Invisalign Teen Vivera, SmartForce, Power Ridges, SmartTrack, iTero, iOC,Orthocad iCast, and Orthocad iRecord 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						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Net revenues	$	136,496		$	125,894		$	417,201		$	350,836
Cost of net revenues	36,146			33,524			107,291			85,103
Gross profit	100,350			92,370			309,910			265,733
Operating expenses:
Sales and marketing	36,468			34,655			114,272			106,062
General and administrative	23,892			21,609			68,670			66,695
Research and development	9,952			8,926			31,158			27,586
Impairment of goodwill	24,665			—			24,665			—
Amortization of acquired intangible assets	870			868			2,624			1,460
Total operating expenses	95,847			66,058			241,389			201,803
Profit from operations	4,503			26,312			68,521			63,930
Interest and other income (expense), net	(353		)	(118		)	(624		)	(335		)
Net profit before provision for income taxes	4,150			26,194			67,897			63,595
Provision for income taxes	4,494			6,930			18,765			17,328
Net profit (loss)	$	(344	)	$	19,264		$	49,132		$	46,267
Net profit (loss) per share:
Basic	$	(0.00	)	$	0.25		$	0.61		$	0.60
Diluted	$	(0.00	)	$	0.24		$	0.59		$	0.58
Shares used in computing net (loss) profit per share:
Basic	81,437			78,455			80,356			77,735
Diluted	81,437			80,266			83,016			80,040

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						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Net profit (loss)	$	(344	)	$	19,264		$	49,132		$	46,267
Foreign currency translation adjustments	248			(375		)	(108		)	211
Change in unrealized gains (losses) on available-for-sale securities, net of tax	73			(23		)	43			1
Other comprehensive income (losses)	321			(398		)	(65		)	212
Comprehensive income (loss)	$	(23	)	$	18,866		$	49,067		$	46,479

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)



	September 30, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	304,907		$	240,675
Restricted cash	1,564			4,026
Marketable securities, short-term	23,142			7,395
Accounts receivable, net of allowance for doubtful accounts and returns of $1,381 and $780, respectively	105,902			91,537
Inventories	15,137			9,402
Prepaid expenses and other current assets	33,594			31,781
Total current assets	484,246			384,816
Marketable securities, long-term	20,802			—
Property, plant and equipment, net	75,248			53,965
Goodwill	111,162			135,383
Intangible assets, net	46,817			50,022
Deferred tax assets	27,189			22,337
Other assets	2,700			2,741
Total assets	$	768,164		$	649,264
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	14,415		$	19,265
Accrued liabilities	71,949			76,600
Deferred revenues	65,324			52,252
Total current liabilities	151,688			148,117
Other long-term liabilities	14,311			10,366
Total liabilities	165,999			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; 81,784 and 78,776 issued and outstanding, respectively)	8			8
Additional paid-in capital	676,605			607,240
Accumulated other comprehensive income (loss), net	(19		)	46
Accumulated deficit	(74,429		)	(116,513		)
Total stockholders’ equity	602,165			490,781
Total liabilities and stockholders’ equity	$	768,164		$	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)



	Nine Months Ended
	September 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:				Revised*
Net profit	$	49,132		$	46,267
Adjustments to reconcile net profit to net cash provided by operating activities:
Deferred taxes	13,165			13,506
Depreciation and amortization	9,214			9,099
Amortization of intangibles	3,330			4,008
Stock-based compensation	15,504			14,206
Excess tax benefit from share-based payment arrangements	(18,140		)	(5,988		)
Impairment of goodwill	24,665			—
Other	848			(156		)
Changes in assets and liabilities, net of acquired assets and liabilities:
Accounts receivable	(15,460		)	(16,086		)
Inventories	(5,735		)	(2,975		)
Prepaid expenses and other assets	(1,620		)	522
Accounts payable	(3,888		)	3,748
Accrued and other long-term liabilities	(669		)	5,504
Deferred revenues	12,674			10,836
Net cash provided by operating activities	83,020			82,491
CASH FLOWS FROM INVESTING ACTIVITIES:
Release of restricted cash	2,462			—
Purchase of property, plant and equipment	(31,485		)	(21,029		)
Acquisition, net of cash acquired	—			(186,920		)
Purchase of marketable securities	(53,862		)	—
Maturities of marketable securities	17,363			8,842
Other assets	(126		)	(190		)
Net cash used in investing activities	(65,648		)	(199,297		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock	40,194			19,882
Common stock repurchase	(9,796		)	—
Excess tax benefit from share-based payment arrangements	18,140			5,988
Employees’ taxes paid upon the vesting of restricted stock units	(1,719		)	(1,481		)
Net cash provided by financing activities	46,819			24,389
Effect of foreign exchange rate changes on cash and cash equivalents	41			(18		)
Net increase (decrease) in cash and cash equivalents	64,232			(92,435		)
Cash and cash equivalents, beginning of the period	240,675			294,664
Cash and cash equivalents, end of the period	$	304,907		$	202,229

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

*See Note 1 of 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 nine months ended September 30, 2012 and 2011, our comprehensive income for the three and nine months ended September 30, 2012 and 2011, our financial position as of September 30, 2012 and our cash flows for the nine months ended September 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 nine months ended September 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.

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.

Revision of Prior Period Financial Statements

In connection with the preparation of our consolidated financial statements for the third quarter of 2012, we determined that we had not correctly recognized the excess tax benefits related to stock-based awards in the first, second, and third quarters of 2011 and the first quarter of 2012.

In accordance with Staff Accounting Bulletin (SAB) No. 99, “Materiality”, and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, we evaluated the materiality of the errors from qualitative and quantitative perspectives, and evaluated the quantified errors under both the iron curtain and the roll-over methods. We concluded that the errors were not material to the financial statements for the first, second and third quarters of 2011 and the first quarter of 2012. We have revised the presentation of the statement of cash flows for the third quarter of 2011 and we will revise the presentation of the first quarter of 2012 statement of cash flows in future periods.

The following tables summarize the effects of the revision on our Condensed Consolidated Balance Sheets and Condensed Consolidated Statement of Cash Flows. The revision did not impact our Condensed Consolidated Statement of Operations for any of the applicable periods.

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Balance Sheets



	March 31, 2011
	(in thousands)
	Previously Reported		Adjustment		As Revised
Balance Sheet:
Deferred tax assets	$	38,024	$	2,068	$	40,092
Total assets	496,982		2,068		499,050
Additional paid-in capital	563,878		2,068		565,946
Total stockholders' equity	402,105		2,068		404,173



	June 30, 2011
	(in thousands)
	Previously Reported		Adjustment		As Revised
Balance Sheet:
Deferred tax assets	$	28,546	$	5,374	$	33,920
Total assets	547,049		5,374		552,423
Additional paid-in capital	580,274		5,374		585,648
Total stockholders' equity	429,782		5,374		435,156



	September 30, 2011
	(in thousands)
	Previously Reported		Adjustment		As Revised
Balance Sheet:
Deferred tax assets	$	22,945	$	5,988	$	28,933
Total assets	585,920		5,988		591,908
Additional paid-in capital	588,501		5,988		594,489
Total stockholders' equity	456,876		5,988		462,864



	March 31, 2012
	(in thousands)
	Previously Reported		Adjustment		As Revised
Balance Sheet:
Deferred tax assets	$	17,612	$	8,043	$	25,655
Total assets	670,436		8,043		678,479
Additional paid-in capital	619,991		8,043		628,034
Total stockholders' equity	523,022		8,043		531,065

Cash flows



	Three Months Ended March 31, 2011
	(in thousands)
	Previously Reported		Adjustment			As Revised
Statement of Cash Flows
Net cash provided by operating activities	$	17,248	$	(2,068	)	$	15,180
Net cash provided by financing activities	3,749		2,068			5,817
Net increase cash and cash equivalents	13,944		—			13,944

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	Six Months Ended June 30, 2011
	(in thousands)
	Previously Reported			Adjustment			As Revised
Statement of Cash Flows
Net cash provided by operating activities	$	46,944		$	(5,374	)	$	41,570
Net cash provided by financing activities	15,128			5,374			20,502
Net increase (decrease) cash and cash equivalents	(126,057		)	—			(126,057		)



	Nine Months Ended September 30, 2011
	(in thousands)
	Previously Reported			Adjustment			As Revised
Statement of Cash Flows
Net cash provided by operating activities	$	88,479		$	(5,988	)	$	82,491
Net cash provided by financing activities	18,401			5,988			24,389
Net increase (decrease) cash and cash equivalents	(92,435		)	—			(92,435		)



	Three Months Ended March 31, 2012
	(in thousands)
	Previously Reported			Adjustment			As Revised
Statement of Cash Flows
Net cash provided by operating activities	$	15,424		$	(8,043	)	$	7,381
Net cash provided by financing activities	6,248			8,043			14,291
Net increase (decrease) in cash and cash equivalents	(16,314		)	—			(16,314		)

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, and the adoption of this standard did not have an impact on our condensed consolidated financial statements.

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 as a separate statement in our condensed consolidated financial statement.

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 not have an impact on our condensed consolidated financial statements.

In July 2012, FASB issued ASU 2012-2, "Intangibles—Goodwill and Other (ASC 350): Testing Indefinite-Lived Intangible Assets for Impairment." This accounting standard update applies to long-lived intangible assets, other than goodwill,

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that are not subject to amortization on the basis that they have indefinite useful lives. This standard is intended to simplify impairment testing by adding a qualitative review step to assess whether the required quantitative impairment analysis is necessary. Under the new standard, a company will not be required to calculate the fair value of the intangible asset unless it concludes, based on the qualitative assessment, that it is more likely than not that the fair value of that asset is less than its book value. If such a decline in fair value is deemed more likely than not to have occurred, then the quantitative impairment test must be completed; otherwise, the asset is deemed to be not impaired and no further testing is required until the next annual test date (or sooner if conditions or events before that date raise concerns of potential impairment of the asset). The amended impairment guidance does not affect the manner in which fair value is determined. The new guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We adopted this standard in the third quarter of 2012, and the adoption of this standard did not have an impact on our condensed consolidated financial statements as we do not have any indefinite-lived intangible assets other than goodwill.

Note 2. Marketable Securities and Fair Value Measurements

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

Short-term



September 30, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Commercial paper	$	5,197	$	1	$	—		$	5,198
Corporate bonds	15,741		12		(4		)	15,749
Foreign bonds	2,190		5		—			2,195
Total	$	23,128	$	18	$	(4	)	$	23,142

Long-term



September 30, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Corporate bonds	$	16,758	$	24	$	(1	)	$	16,781
Foreign bonds	4,012		10		(1		)	4,021
Total	$	20,770	$	34	$	(2	)	$	20,802

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 nine months ended September 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.

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Our Level 1 assets consist of money market funds. We did not hold any Level 1 liabilities as of September 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.

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 September 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 September 30, 2012.

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



Description	Balance as of September 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash equivalents:
Money market funds	$	119,787	$	119,787	$	—
Commercial paper	2,550		—		2,550
Short-term investments:
Commercial paper	5,198		—		5,198
Corporate bonds	15,749		—		15,749
Foreign bonds	2,195		—		2,195
Long-term investments:
Corporate bonds	16,781		—		16,781
Foreign bonds	4,021		—		4,021
Other assets:
Israeli severance funds	1,933		—		1,933
	$	168,214	$	119,787	$	48,427

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

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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

Inventories are comprised of (in thousands):



	September 30, 2012		December 31, 2011
Raw materials	$	4,445	$	4,542
Work in process	3,396		2,486
Finished goods	7,296		2,374
	$	15,137	$	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 three quarters of 2012, we increased our production volumes of our intra-oral scanners in anticipation of our move to a new facility in Israel which was completed in October 2012.

Accrued liabilities

Accrued liabilities consist of the following (in thousands):



	September 30, 2012		December 31, 2011
Accrued payroll and benefits	$	34,352	$	41,827
Accrued sales rebate	8,501		8,358
Accrued sales tax and value added tax	6,360		7,052
Unclaimed merger consideration	1,564		4,026
Accrued warranty	4,130		3,177
Accrued sales and marketing expenses	2,681		3,508
Accrued accounts payable	2,991		3,048
Accrued professional fees	2,165		654
Customer deposits	2,792		206
Accrued income taxes	461		426
Other	5,952		4,318
Total	$	71,949	$	76,600

Warranty

We regularly review the accrued balances and update these balances based on historical warranty trends. Actual warranty

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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 nine months ended September 30, 2012 and 2011, respectively (in thousands):



	Nine Months Ended September 30,
	2012			2011
Balance at beginning of period	$	3,177		$	2,607
Charged to cost of revenues	3,647			2,601
Assumed warranty from Cadent	—			350
Actual warranty expenditures	(2,694		)	(2,285		)
Balance at end of period	$	4,130		$	3,273

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 the goodwill is deductible for tax purposes. In connection with the acquisition, we allocated approximately $77.3 million of the goodwill from the Cadent acquisition to our Scanner and CAD/CAM Services ("SCCS") reporting unit and approximately $58.0 million to our Clear Aligner reporting unit based on the expected relative synergies generated by the acquisition. In the third quarter of 2012, we determined that there were sufficient indicators of a potential impairment to the goodwill attributed to the SCCS reporting unit, therefore we conducted step one of the goodwill impairment analysis and concluded that the goodwill was impaired. Based on our preliminary analysis, we recorded an estimate of $24.7 million for the SCCS goodwill impairment charge. We expect to finalize step 2 of our goodwill impairment analysis and record

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any change from our estimate, if necessary, during the fourth quarter of 2012. See Note 5 for discussion of our goodwill impairment in the third quarter of 2012.

For the three and nine months ended September 30, 2012, Cadent contributed net revenues of approximately $9.8 million and $33.5 million and gross profit of approximately $2.0 million and $8.6 million, respectively. During the period of May 2011 through September 2011, Cadent contributed net revenues of approximately $18.1 million and gross profit of approximately $4.6 million. Sales, marketing, development and administrative activities for our Clear Aligner and SCCS reporting units were integrated during the post-acquisition period, therefore the operating results below gross profit are not available.

The following table presents the results of Align and Cadent for three and nine months ended September 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 September 30,		Proforma Net Revenues and Net Profit Nine Months Ended September 30,
	2011		2011
Net revenues	$	125,894	$	363,563
Net profit	$	19,264	$	41,967

Note 5. Goodwill and Acquired Intangible Assets

Goodwill

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



Balance as of December 31, 2011	$	135,383
Adjustments to goodwill (1)	444
Impairment of goodwill	(24,665		)
Balance as of September 30, 2012	$	111,162

______________

(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.

Impairment of Goodwill

We test our goodwill balances for impairment annually on November 30th or more frequently if indicators are present or circumstances change that suggest an impairment may exist. During the third quarter of 2012, we determined that sufficient indicators of potential impairment existed to require an interim goodwill impairment analysis of our SCCS reporting unit. These indicators included the termination of an exclusive distribution arrangement with Straumann for iTero intra-oral scanners in Europe, as well as the termination of their non-exclusive distribution arrangement for iTero intra-oral scanners in North America, together with market conditions and business trends within the SCCS reporting unit. While we continue to expect revenue growth in our SCCS business, our expectations for future growth and profitability rates projected for the SCCS reporting unit are lower than our previous estimates primarily driven by overall lower than expected financial results.

As of September 30, 2012, we performed step one of the goodwill impairment test, which consists of a comparison of the fair value of the SCCS reporting unit against its carrying amount, including the goodwill allocated to it. In deriving the fair value of the SCCS reporting unit, we utilized a combination of both the income and market approach. The income approach provides an estimate of fair value based on discounted expected future cash flows. The market approach provides an estimate of fair value using various prices or market multiples applied to the reporting unit's operating results and then applies an appropriate control premium. As a result of our step one analysis, we concluded that the fair value of the SCCS reporting unit was less than its carrying value, therefore, the SCCS goodwill is impaired and we must perform step two of the goodwill impairment analysis.

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Step two of the goodwill impairment analysis measures the impairment charge by allocating the reporting unit's fair value to all of the assets and liabilities of the reporting unit in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. 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. Due to the complexity and effort required to estimate the fair value of all assets and liabilities of the reporting unit, the fair value estimates were derived from preliminary assumptions and analyses that are subject to change. Based on our preliminary analysis, the implied fair value of goodwill was substantially lower than the carrying value of the goodwill for the SCCS reporting unit by an estimated $24.7 million which we recorded as impairment to goodwill in the third quarter of 2012. As of September 30, 2012, the remaining amount of goodwill associated with our SCCS reporting unit is $52.6 million. In the fourth quarter of 2012, we expect to finalize the step two analysis and, if necessary, record any change from our original estimate.

The declines expected in our SCCS reporting unit did not impact our assumptions related our Clear Aligner reporting unit, however, we will complete our annual goodwill impairment review for both reporting units as of November 30, 2012. If there are changes to our stock price, or significant changes in the business climate or operating results of our reporting units, we may incur additional goodwill impairment charges.

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



	Clear Aligner		Scanner and CAD/CAM Services		Total
As of September 30, 2012	$	58,543	$	52,619	$	111,162
As of December 31, 2011	$	58,445	$	76,938	$	135,383

Acquired Intangible assets

In conjunction with our goodwill impairment analysis, we first tested our long-lived assets related to the SCCS reporting unit as of September 30, 2012 and, based on the undiscounted cash flows, we determined that these assets were not impaired. 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 September 30, 2012		Accumulated Amortization			Net Carrying Value as of September 30, 2012
Trademarks	$	7,100	$	(788	)	$	6,312
Existing technology	12,600		(1,440		)	11,160
Customer relationships	33,500		(4,276		)	29,224
Other	125		(4		)	121
	$	53,325	$	(6,508	)	$	46,817

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 is included in operating expenses. The following table summarizes the amortization expense of acquired intangible assets for the periods indicated (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Amortization of acquired intangible assets
In cost of net revenues	$	213	$	267	$	706	$	450
In operating expenses	870		868		2,624		1,460
Total	$	1,083	$	1,135	$	3,330	$	1,910

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

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Fiscal Year
2012 (remaining three months)	$	1,134
2013	4,537
2014	4,493
2015	4,470
2016	4,470
Thereafter	27,713
Total	$	46,817

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




Fiscal Year	Operating leases
2012 (remaining three months)	$	2,233
2013	7,713
2014	6,969
2015	5,741
2016	5,703
Thereafter	3,059
Total minimum lease payments	$	31,418

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.

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 nine months ended September 30, 2012 and 2011 are as follows (in thousands):

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Cost of net revenues	$	446	$	421	$	1,365	$	1,378
Sales and marketing	1,448		1,416		4,066		3,949
General and administrative	2,657		2,372		7,579		6,813
Research and development	811		745		2,494		2,066
Total stock-based compensation expense	$	5,362	$	4,954	$	15,504	$	14,206

Options

Activity for the nine month period ended September 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	(2,635	)
Cancelled or expired	(29	)
Outstanding as of September 30, 2012	3,526		$	15.17	4.65	$	76,880
Vested and expected to vest at September 30, 2012	3,483		$	15.12	4.65	$	76,098
Exercisable at September 30, 2012	2,788		$	14.51	4.55	$	62,627

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



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

______________


(1)	There were no stock options granted during the three months ended September 30, 2012 and 2011 and for the nine months ended September 30, 2012.

As of September 30, 2012, the total unamortized compensation cost related to stock options, net of estimated forfeitures, is $5.9 million, which we expect to recognize over a weighted average period of 1.6 years.

Restricted Stock Units (“RSUs”)

A summary of the nonvested shares for the nine months ended September 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	843
Vested and released	(414	)
Forfeited	(68	)
Nonvested as of September 30, 2012	1,569		1.54	$	58,000

As of September 30, 2012 the total unamortized compensation cost related to restricted stock units, net of estimated forfeitures, was $8.3 million, which we expect to recognize over a weighted average period of 2.6 years.

On February 20, 2012 and 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 nine months ended September 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 September 30, 2012	320	1.79	$	11,851

As of September 30, 2012, we expect to recognize $1.7 million of total unamortized compensation cost, net of estimated forfeitures, related to MSU over a weighted average period of 1.8 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 September 30, 2012, there remains 1,899,845 shares available for purchase under the 2010 Purchase Plan.

The fair value of the option component of the Purchase Plan shares was estimated at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012		2011
Employee Stock Purchase Plan:
Expected term (in years)	1.2			1.2			1.2		1.2
Expected volatility	48.0		%	44.9		%	49.7	%	43.2		%
Risk-free interest rate	0.2		%	0.3		%	0.2	%	0.4		%
Expected dividends	—			—			—		—
Weighted average fair value at grant date	$	11.99		$	7.46		$11.10		$	7.29

As of September 30, 2012, we expect to recognize $1.2 million of the total unamortized compensation cost related to

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employee purchases over a weighted average period of 1.0 year.

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 third quarter of 2012, we repurchased approximately 0.2 million shares of common stock at an average price of $34.15 per share for an aggregate purchase price of approximately $7.3 million including commissions. The common stock repurchases reduced additional paid-in capital by approximately $1.9 million and increased accumulated deficit by $5.4 million. All repurchased shares were retired.

Note 10. Accounting for Income Taxes

During the third quarter of fiscal 2012, the amount of gross unrecognized tax benefits increased by $0.2 million primarily due to current period exposures. The total amount of unrecognized tax benefits was $19.3 million as of September 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. We are currently under audit in Israel for tax years 2006 through 2009. With few exceptions, we are no longer subject to examination by foreign tax authorities for years before 2006.

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, September 30,					Nine Months Ended, September 30,
	2012			2011		2012		2011
Numerator:
Net profit (loss)	$	(344	)	$	19,264	$	49,132	$	46,267
Denominator:
Weighted-average common shares outstanding, basic	81,437			78,455		80,356		77,735
Dilutive effect of potential common stock	—			1,811		2,660		2,305
Total shares, diluted	81,437			80,266		83,016		80,040
Net profit (loss) per share, basic	$	(0.00	)	$	0.25	$	0.61	$	0.60
Net profit (loss) per share, diluted	$	(0.00	)	$	0.24	$	0.59	$	0.58

For the three and nine months ended September 30, 2012, stock options, RSUs, MSUs and our employee stock purchase plan totaling 2.5 million and 0.1 million, respectively, were excluded from diluted net profit per share because of their anti-dilutive effect.

For the three and nine months ended September 30, 2011, stock options, RSUs, MSUs and our employee stock purchase plan totaling 1.9 million and 1.8 million, respectively, were excluded from diluted net profit per share because of their anti-dilutive effect.

Note 12. Segments and Geographical Information

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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 which are also our reporting units: Clear Aligner segment and SCCS 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 SCCS 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.

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 September 30,				Nine Months Ended September 30,
Revenue	2012		2011		2012		2011
Clear Aligner	$	126,725	$	114,278	$	383,722	$	332,781
Scanners and CAD/CAM Services (1)	9,771		11,616		33,479		18,055
Total	$	136,496	$	125,894	$	417,201	$	350,836
Gross profit
Clear Aligner	$	98,334	$	89,813	$	301,340	$	261,143
Scanners and CAD/CAM Services (1)	2,016		2,557		8,570		4,590
Total	$	100,350	$	92,370	$	309,910	$	265,733
	As of September 30, 2012		As of December 31, 2011
Total Assets including goodwill
Clear Aligner	$	583,832	$	469,084
Scanners and CAD/CAM Services	184,332		180,180
Total	$	768,164	$	649,264
Goodwill
Clear Aligner	$	58,543	$	58,445
Scanners and CAD/CAM Services	52,619		76,938
Total	$	111,162	$	135,383

______________


(1)	The SCCS (Scanner 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.

In the third quarter of 2012, we determined that there were sufficient indicators of a potential impairment to the goodwill attributed to the SCCS reporting unit, therefore we conducted step one of the goodwill impairment analysis and concluded that the goodwill was impaired. Based on our preliminary analysis, we recorded an estimate of $24.7 million for the SCCS goodwill impairment charge. We expect to finalize step 2 of our goodwill impairment analysis and record any change from our estimate, if necessary, during the fourth quarter of 2012. See Note 5 for discussion of our goodwill impairment in the third quarter of 2012.

Geographical Information

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

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Net revenues (1):
United States	$	105,173	$	93,925	$	319,269	$	263,047
the Netherlands	28,335		27,583		90,242		79,734
Other international	2,988		4,386		7,690		8,055
Total net revenues	$	136,496	$	125,894	$	417,201	$	350,836
	As of September 30, 2012		As of December 31, 2011
Long-lived assets:
United States	$	58,614	$	45,720
the Netherlands	4,791		1,726
Other international	14,542		9,261
Total long-lived assets	$	77,947	$	56,707

______________


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

Note 13. Exit Activities

In October 2012, we completed the consolidation of 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 remain in Or Yehuda, Israel. The transition included 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 new manufacturing facility in Juarez, Mexico; and


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

The consolidation of our New Jersey operations, which began in the fourth quarter of 2011, resulted in a total reduction of 119 full time headcount in Carlstadt, New Jersey. With the New Jersey consolidation completed, we expect to realize annualized net savings of approximately $4.0 million per year.

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



	Severance and Benefits
Balance at December 31, 2011	$	1,010
Exit cost incurred during the period	780
Cash payments	(1,729		)
Balance at September 30, 2012	$	61

During the first three quarters of 2012, we incurred approximately $0.8 million in exit costs of which approximately $0.5 million were recorded in our cost of net revenues and $0.3 million in 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 expectation on the timing and amount of the impairment charge related to our Scanner and CAD/CAM Services ("SCCS") reporting unit, 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 ("SCCS"), 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 2.0 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

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dental professionals. We intend to achieve this by focusing on the key strategic initiatives set forth in our Annual Report on 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 launches of Invisalign G3 in May 2011 and Invisalign G4 in November 2011 were important for continued growth both in our existing international markets and to support our expansion in new markets like China. We expect that these innovations, as well as the recently announced introduction of SmartTrack, a proprietary, custom engineered, aligner material, designed to deliver gentle, more constant force to improve control of tooth movements with Invisalign clear aligner treatment, will build on the success we have seen with Invisalign G3/G4 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 clear aligner manufacturing facility in Juarez, Mexico into our new 150,000 square foot facility purchased in September 2011, which is also located in Juarez, Mexico. Although the lease on our existing facility expires in July 2013, we will likely continue to perform a small portion of our manufacturing process at this facility beyond this date. In addition, in October 2012, we completed the transition of 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 manufacturing facilities is subject to significant risk and uncertainty, including delays and cost overruns. If the opening of manufacturing 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 October 2012, we completed the consolidation of 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 remain in Or Yehuda, Israel. The transition included 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 new manufacturing facility in Juarez, Mexico; and


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

The consolidation of our New Jersey operations, which began in the fourth quarter of 2011, resulted in a total reduction of 119 full time headcount in Carlstadt, New Jersey. As part of this consolidation, we incurred costs for severance of approximately $1.9 million, of which approximately $1.1 million was realized in 2011 and $0.8 million over the first three quarters of 2012. With the New Jersey consolidation completed, 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 SCCS 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 quarterly utilization rates for the previous 11 quarters are as follows:

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

Total utilization in the third quarter of 2012 decreased slightly to 4.2 cases per doctor compared to 4.3 cases in the second quarter driven primarily by the decrease in utilization by our North American General Practitioner ("GP") customers from 3.1 to 2.9 cases per doctor. This decrease by our North American GP customers reflects a decline in the number of cases shipped across all levels of GP submitters, in particular our mid-to-high volume GPs, while utilization among our North American orthodontist customers and our International customers remained relatively flat. We believe that this is due in part to more doctors being out of the office for summer vacation and holidays. 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 6,500 orthodontists and GPs in North America and internationally, which is 500 doctors more than 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 third quarter of 2012, Clear Aligner International case volumes increased 20.6% 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 8% of total worldwide case shipments in the third quarter of 2012, sales through our distributors, particularly our partner covering the Asia

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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. Based on the continued progress in the Asia Pacific region, we expect to revert to a direct sales model in this region beginning in second quarter of 2013. Therefore, we will not renew our distribution agreement when it expires in April 2013. In order to ensure a seamless transition and continuity of business for the customers impacted by this change, we expect to incur additional operating expenses during the fourth quarter of 2012 and the first quarter of 2013. After the transition in the second quarter of 2013, we will begin to recognize direct sales at our full average sales price, rather than at the discounted average sales price under the terms of the distribution agreement. While we believe that we will quickly gain revenue and contribution margin leverage, we may experience difficulties in achieving the anticipated financial benefits of this transaction.

•

International SCCS. In the third quarter of 2012, International SCCS revenue declined significantly from the same quarter in 2011. In October 2012, we reached a mutual agreement to terminate the exclusive distribution arrangement with Straumann for iTero intra-oral scanners in Europe, as well as the non-exclusive distribution agreement for iTero intra-oral scanners in North America. The global market for restorative dentistry is far more fragmented and complex than orthodontics with hundreds of thousands of labs, suppliers, general dentists and specialists. In Europe, adoption of digital restorative technology has been slowed due to challenging economic conditions and reluctance to invest in capital equipment. In view of these conditions, we have decided to market iTero on a more limited basis directly in Europe focusing on our existing Invisalign customers and pursue global scanner sales on a more opportunistic basis. We expect our International SCCS revenues in the fourth quarter of 2012 will be flat compared to the third quarter and will again consist primarily of CAD/CAM services revenues. Straumann will continue to offer first-level equipment support in Europe for at least the next 12 months, after which full responsibility for regional customer service will transfer to Align. The two companies are currently working together on plans for a smooth transition and will communicate details to customers as soon as they are finalized. Our direct sales model remains unchanged in North America where most of the SCCS revenue is generated.

•

Goodwill Impairment. During the third quarter of 2012, we determined that sufficient indicators of potential impairment existed to require an interim goodwill impairment analysis of our SCCS reporting unit. These indicators included the termination of the distribution arrangement with Straumann for iTero intra-oral scanners in Europe and North America, together with market conditions and business trends within the SCCS reporting unit. While we continue to expect revenue growth in our SCCS business, our expectations for future growth and profitability rates projected for the SCCS reporting unit are lower than our previous estimates primarily driven by overall lower than expected financial results. As of September 30, 2012, we concluded that the fair value of the SCCS reporting unit was less than its carrying value, therefore, the SCCS goodwill is impaired and we must perform step two of the goodwill impairment analysis. Due to the complexity and the effort required in the step two analysis, the fair value estimates were derived from preliminary assumptions and analyses that are subject to change. Based on our preliminary analysis, the implied fair value of goodwill was substantially lower than the carrying value of the goodwill for the SCCS reporting unit by an estimated $24.7 million which we recorded as impairment to goodwill in the third quarter of 2012. In the fourth quarter of 2012, we expect to finalize the step two analysis and, if necessary, record any change from our original estimate. More information regarding our goodwill impairment, including a description of steps one and two of the analysis, and the approaches taken in the analysis of goodwill, can be found in Note 5 of the Condensed Consolidated Financial Statements included in Part I of this Form 10-Q.

•

Increase in Invisalign Selling Price. In recent years, we have significantly increased investment in research and development-resulting in product innovations such as Invisalign G3, Invisalign G4 and SmartTrack material. We have also continued to increase our consumer advertising spending to drive more patient demand. In addition, beginning January 1, 2013, the Federal Government will impose a new excise tax on medical device manufacturers, and Invisalign clear aligners are considered a taxable medical device. As a result of this new tax and our continued investments in R&D and consumer advertising, we are increasing Invisalign pricing by $26.00 to $50.00 per case, effective January 1, 2013. The prices for Invisalign Teen, Invisalign retainers, and Vivera retainers will remain unchanged.

•

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

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revenues and profits in our consolidated financial statements.

Recent Developments

Hurricane Sandy

On October 29, 2012, Hurricane Sandy made landfall in New Jersey causing damage across large portions of the Mid-Atlantic, Northeastern, and Midwestern United States. Hurricane Sandy caused damage and business interruption to many of our customers in these regions. We are in the early stages of assessing the customer impacts of the storm, and we are, therefore, unable to estimate its full financial and operational impact.

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 nine months ended September 30, 2012 and 2011 as follows (in millions):

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	Three Months Ended September 30,									Nine Months Ended September 30,
Clear Aligner:	2012		2011		Net Change			% Change		2012		2011		Net Change			% Change
Region and Channel
North America
Ortho	$	43.1	$	37.5	$	5.6		14.9	%	$	128.7	$	109.5	$	19.2		17.5	%
GP	46.4		42.2		4.2			10.0	%	140.7		124.1		16.6			13.4	%
Total North America	89.5		79.7		9.8			12.3	%	269.4		233.6		35.8			15.3	%
International	29.7		28.3		1.4			4.9	%	92.3		81.4		10.9			13.4	%
Invisalign non-case revenues	7.5		6.3		1.2			19.0	%	22.0		17.7		4.3			24.3	%
Total	$	126.7	$	114.3	$	12.4		10.8	%	$	383.7	$	332.7	$	51.0		15.3	%
Product
Invisalign Full	$	80.3	$	75.1	$	5.2		6.9	%	$	251.3	$	222.8	$	28.5		12.8	%
Invisalign Express/Lite	12.8		10.5		2.3			21.9	%	38.2		31.7		6.5			20.5	%
Invisalign Teen	19.1		15.4		3.7			24.0	%	50.7		40.1		10.6			26.4	%
Invisalign Assist	7.0		7.0		—			—	%	21.5		20.4		1.1			5.4	%
Invisalign non-case revenues	7.5		6.3		1.2			19.0	%	22.0		17.7		4.3			24.3	%
Total	$	126.7	$	114.3	$	12.4		10.8	%	$	383.7	$	332.7	$	51.0		15.3	%
Scanners and CAD/CAM Services (1):
Region
North America	$	9.4	$	9.1	$	0.3		3.3	%	$	32.3	$	14.4	$	17.9		124.3	%
International	0.4		2.5		(2.1		)	(84.0	)%	1.2		3.7		(2.5		)	(67.6	)%
Total	$	9.8	$	11.6	$	(1.8	)	(15.5	)%	$	33.5	$	18.1	$	15.4		85.1	%
Product
Scanners	$	4.0	$	5.4	$	(1.4	)	(25.9	)%	$	15.4	$	8.2	$	7.2		87.8	%
CAD/CAM Services	5.8		6.2		(0.4		)	(6.5	)%	18.1		9.9		8.2			82.8	%
Total	$	9.8	$	11.6	$	(1.8	)	(15.5	)%	$	33.5	$	18.1	$	15.4		85.1	%
Total Revenue	$	136.5	$	125.9	$	10.6		8.4	%	$	417.2	$	350.8	$	66.4		18.9	%

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(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 nine months ended September 30, 2012 and 2011 as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
Region and Channel	2012	2011	Net Change	% Change	2012	2011