Edgar Filing: ALIGN TECHNOLOGY INC

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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 March 31, 2019



¨	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)

2820 Orchard Parkway

San Jose, California 95134

(Address of principal executive offices)

(408) 470-1000

(Registrant’s telephone number, including area code)

____________________________

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



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.0001 par value	ALGN	The NASDAQ Stock Market LLC (NASDAQ Global Market)

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

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



Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	o	Smaller reporting company	¨
Emerging growth company	o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act.

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 April 26, 2019 was 80,004,892.

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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 STATEMENTS OF COMPREHENSIVE INCOME	4
	CONDENSED CONSOLIDATED BALANCE SHEETS	5
	CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY	6
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	7
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	28
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	39
ITEM 4.	CONTROLS AND PROCEDURES	41
PART II	OTHER INFORMATION	42
ITEM 1.	LEGAL PROCEEDINGS	42
ITEM 1A.	RISK FACTORS	45
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	59
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	59
ITEM 4.	MINE SAFETY DISCLOSURES	59
ITEM 5.	OTHER INFORMATION	59
ITEM 6.	EXHIBITS	60
SIGNATURES		61

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

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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 March 31,
	2019			2018
Net revenues	$	548,971		$	436,924
Cost of net revenues	146,875			109,516
Gross profit	402,096			327,408
Operating expenses:
Selling, general and administrative	247,110			199,625
Research and development	37,503			29,591
Impairments and other charges	29,782			—
Total operating expenses	314,395			229,216
Income from operations	87,701			98,192
Interest income	2,633			2,176
Other income (expense), net	(5,746		)	177
Net income before provision for income taxes and equity in losses of investee	84,588			100,545
Provision for income taxes	8,796			2,902
Equity in losses of investee, net of tax	3,944			1,777
Net income	$	71,848		$	95,866

Net income per share:
Basic	$	0.90		$	1.20
Diluted	$	0.89		$	1.17
Shares used in computing net income per share:
Basic	79,860			80,036
Diluted	80,687			81,628

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 March 31,
	2019		2018
Net income	$	71,848	$	95,866
Net change in foreign currency translation adjustment	409		1,042
Change in unrealized gains (losses) on investments, net of tax	84		(129		)
Other comprehensive income	493		913
Comprehensive income	$	72,341	$	96,779

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)



	March 31, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	588,001		$	636,899
Marketable securities, short-term	144,540			98,460
Equity method investments	41,969			—
Accounts receivable, net of allowance for doubtful accounts of $3,567 and $2,378, respectively	479,281			439,009
Inventories	68,489			55,641
Prepaid expenses and other current assets	116,833			72,470
Total current assets	1,439,113			1,302,479
Marketable securities, long-term	—			9,112
Property, plant and equipment, net	575,267			521,329
Operating lease right-of-use assets	56,384			—
Equity method investments	—			45,913
Goodwill and intangible assets, net	80,329			81,949
Deferred tax assets	57,151			64,689
Other assets	26,186			26,987
Total assets	$	2,234,430		$	2,052,458

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	62,512		$	64,256
Accrued liabilities	252,754			234,679
Finance lease liabilities	56,100			—
Deferred revenues	433,518			393,138
Total current liabilities	804,884			692,073
Income tax payable	93,463			78,008
Operating lease liabilities	59,307			—
Other long-term liabilities	21,072			29,486
Total liabilities	978,726			799,567
Commitments and contingencies (Notes 9 and 10)
Stockholders’ equity:
Preferred stock, $0.0001 par value (5,000 shares authorized; none issued)	—			—
Common stock, $0.0001 par value (200,000 shares authorized; 80,000 and 79,778 issued and outstanding, respectively)	8			8
Additional paid-in capital	855,956			877,514
Accumulated other comprehensive income (loss), net	(2,281		)	(2,774		)
Retained earnings	402,021			378,143
Total stockholders’ equity	1,255,704			1,252,891
Total liabilities and stockholders’ equity	$	2,234,430		$	2,052,458

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 STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)



	Common Stock				Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss), Net			Retained Earnings			Total
	Shares		Amount		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss), Net			Retained Earnings			Total
Balance as of December 31, 2018	79,778		$	8	$	877,514		$	(2,774	)	$	378,143		$	1,252,891
Net income	—		—		—			—			71,848			71,848
Net change in unrealized gains (losses) from investments	—		—		—			84			—			84
Net change in foreign currency translation adjustment	—		—		—			409			—			409
Issuance of common stock relating to employee equity compensation plans	427		—		9,609			—			—			9,609
Tax withholdings related to net share settlements of restricted stock units	—		—		(50,181		)	—			—			(50,181		)
Common stock repurchased and retired	(205	)	—		(2,030		)	—			(47,970		)	(50,000		)
Stock-based compensation	—		—		21,044			—			—			21,044
Balance as of March 31, 2019	80,000		$	8	$	855,956		$	(2,281	)	$	402,021		$	1,255,704



	Common Stock				Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss), Net			Retained Earnings			Total
	Shares		Amount		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss), Net			Retained Earnings			Total
Balances at December 31, 2017	80,040		$	8	$	886,435		$	571		$	267,274		$	1,154,288
Net income	—		—		—			—			95,866			95,866
Net change in unrealized gains (losses) from investments	—		—		—			(129		)	—			(129		)
Net change in foreign currency translation adjustment	—		—		—			1,042			—			1,042
Issuance of common stock relating to employee equity compensation plans	500		—		8,020			—			—			8,020
Tax withholdings related to net share settlements of restricted stock units	—		—		(47,842		)	—			—			(47,842		)
Common stock repurchased and retired	(396	)	—		(3,811		)	—			(96,189		)	(100,000		)
Stock-based compensation	—		—		15,830			—			—			15,830
Other											385			385
Balance as of March 31, 2018	80,144		$	8	$	858,632		$	1,484		$	267,336		$	1,127,460

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)



	Three Months Ended March 31,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	71,848		$	95,866
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes	7,586			4,069
Depreciation and amortization	22,678			11,434
Impairments on long-lived assets	28,498			—
Impairment on equity investment	3,975			—
Stock-based compensation	21,044			15,830
Equity in losses of investee	3,944			1,777
Other non-cash operating activities	5,101			474
Changes in assets and liabilities:
Accounts receivable	(42,743		)	(36,026		)
Inventories	(13,280		)	(4,002		)
Prepaid expenses and other assets	(35,033		)	(15,873		)
Accounts payable	1,470			5,599
Accrued and other long-term liabilities	(5,183		)	(35,466		)
Long-term income tax payable	4,808			5,259
Deferred revenues	42,494			28,391
Net cash provided by operating activities	117,207			77,332
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment	(35,261		)	(57,578		)
Purchase of marketable securities	(125,823		)	—
Proceeds from maturities of marketable securities	80,306			126,825
Proceeds from sales of marketable securities	8,727			9,560
Loan repayment from equity investee	—			30,000
Other investing activities	(2,367		)	462
Net cash (used in) provided by investing activities	(74,418		)	109,269
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock	9,609			8,020
Common stock repurchases	(50,000		)	(100,000		)
Employees’ taxes paid upon the vesting of restricted stock units	(50,181		)	(47,842		)
Other financing activities	(2,190		)	—
Net cash used in financing activities	(92,762		)	(139,822		)
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash	1,089			1,715
Net (decrease) increase in cash, cash equivalents, and restricted cash	(48,884		)	48,494
Cash, cash equivalents, and restricted cash at beginning of the period	637,566			450,125
Cash, cash equivalents, and restricted cash at end of the period	$	588,682		$	498,619

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 contains all adjustments, including normal recurring adjustments, necessary to state fairly our results of operations for the three months ended March 31, 2019 and 2018, our comprehensive income for the three months ended March 31, 2019 and 2018, our financial position as of March 31, 2019, our stockholders’ equity for the three months ended March 31, 2019 and 2018, and our cash flows for the three months ended March 31, 2019 and 2018. The Condensed Consolidated Balance Sheet as of December 31, 2018 was derived from the December 31, 2018 audited financial statements. It does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.”).

We adopted Accounting Standards Update (“ASU”) 2016-02, “Leases” (Topic 842) in the first quarter of fiscal year 2019 by electing the transition method issued in ASU 2018-11 and the package of practical expedients available in the standard. The standard had a material impact on our Condensed Consolidated Balance Sheet as of March 31, 2019 as we recognized assets and liabilities related to our leases. The adoption did not have an impact to prior periods.

The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 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, 2018.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the U.S. requires our management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates, including those related to the fair values of financial instruments, valuation of investments in privately held companies, useful lives of intangible assets and property and equipment, revenue recognition, stock-based compensation, long-lived assets and goodwill, income taxes and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Significant Accounting Policies

Our significant accounting policies are described in Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K. Significant changes to the Lease policy is discussed below:

Lease

We lease office and retail spaces, vehicles and office equipment with original lease periods of up to 10 years. We determine if an arrangement is a lease at inception under ASC 842. Operating lease right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. If a lease arrangement does not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Our lease terms may include options to extend or terminate the lease which we include in our lease term when it is reasonably certain that we will exercise that option. We have lease agreements with lease and non-lease components which are accounted for as a single lease component. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

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Recent Accounting Pronouncements

(i) New Accounting Updates Recently Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “Leases” (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. In July 2018, the FASB issued ASU 2018-11, “Leases-Targeted Improvements,” which provides an additional transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. We adopted the guidance in the first quarter of fiscal year 2019 by electing the transition method issued in ASU 2018-11 and the package of practical expedients available in the standard. The standard had a material impact on our Condensed Consolidated Balance Sheet as of March 31, 2019 as we recognized assets and liabilities related to our leases. The adoption did not have an impact to prior periods.

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which gives entities the option to reclassify to retained earnings the tax effects resulting from the U.S. Tax Cuts and Jobs Act (the “TCJA”) related to items in accumulated other comprehensive income. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2018 on a retrospective basis and early adoption is permitted. We adopted the standard in the first quarter of fiscal year 2019 which did not have a material impact on our consolidated financial statements and related disclosures. The TCJA did not affect our accumulated other comprehensive income (loss), net, and therefore we did not reclassify any income tax effects from accumulated other comprehensive income (loss), net to our retained earnings.

(ii) Recent Accounting Updates Not Yet Effective

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses” (Topic 326). The FASB issued this update to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this update replace the existing guidance of incurred loss impairment methodology with an approach that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses” which clarifies the scope of guidance in the ASU 2016-13. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the update is permitted in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the impact of this guidance on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” to simplify the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. Under the amendments, an entity will recognize an impairment charge for the amount by which the carrying value exceeds the fair value. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2019 on a prospective basis and early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement,” to modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2019 on a prospective basis and early adoption is permitted. We are currently evaluating the impact of this guidance on our related disclosures.

In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” to clarify the guidance on the costs of implementing a cloud computing hosting arrangement that is a service contract. Under the amendments, the entity is required to follow the guidance in Subtopic 350-40, Internal-Use Software, to determine which implementation costs under the service contract to be capitalized as an asset and which costs to expense. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2019 either on a retrospective or prospective basis and early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements and related disclosures.

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Note 2. Investments and Fair Value Measurements

Marketable Securities

As of March 31, 2019 and December 31, 2018, the estimated fair value of our short-term and long-term marketable securities, classified as available for sale, are as follows (in thousands):

Short-term



March 31, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Commercial paper	$	38,234	$	—	$	—		$	38,234
Corporate bonds	33,240		8		(2		)	33,246
U.S. government agency bonds	14,253		—		(31		)	14,222
U.S. government treasury bonds	45,854		7		(3		)	45,858
Foreign bonds	12,960		3		(3		)	12,960
Certificates of deposit	20		—		—			20
Total marketable securities, short-term	$	144,561	$	18	$	(39	)	$	144,540

There are no long-term marketable securities as of March 31, 2019.

Short-term



December 31, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Commercial paper	$	17,793	$	—	$	—		$	17,793
Corporate bonds	45,100		—		(48		)	45,052
U.S. government agency bonds	19,981		—		(77		)	19,904
U.S. government treasury bonds	15,292		—		(1		)	15,291
Certificates of deposit	420		1		(1		)	420
Total marketable securities, short-term	$	98,586	$	1	$	(127	)	$	98,460

Long-term



December 31, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Corporate bonds	$	4,957	$	5	$	(2	)	$	4,960
U.S. government agency bonds	1,399		8		—			1,407
U.S. government treasury bonds	2,235		9		—			2,244
Certificates of deposit	500		1		—			501
Total marketable securities, long-term	$	9,091	$	23	$	(2	)	$	9,112

Cash equivalents are not included in the tables above as the gross unrealized gains and losses are not material. We have no short-term or long-term investments that have been in a continuous material unrealized loss position for greater than twelve months as of March 31, 2019 and December 31, 2018. Amounts reclassified to earnings from accumulated other comprehensive income (loss), net related to unrealized gains or losses were not material for the three months ended March 31, 2019 and 2018. For the three months ended March 31, 2019 and 2018, realized gains or losses were not material.

Our fixed-income securities investment portfolio consists of investments that can have a maximum effective maturity of up to 40 months on any individual security. The securities that we invest in are generally deemed to be low risk based on their credit ratings from the major rating agencies. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. As interest rates increase, those securities purchased at a lower yield show a mark-to-market unrealized loss. The unrealized losses are due primarily to changes in credit spreads and interest rates. We expect to realize the

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full value of all these investments upon maturity or sale. The weighted average remaining duration of these securities was approximately five months and four months as of March 31, 2019 and December 31, 2018, respectively.

As the carrying value approximates the fair value for our short-term and long-term marketable securities shown in the tables above, the following table summarizes the fair value of our short-term and long-term marketable securities classified by contractual maturity as of March 31, 2019 and December 31, 2018 (in thousands):



	March 31, 2019		December 31, 2018
One year or less	$	144,540	$	98,460
Due in greater than one year	—		9,112
Total available for sale short-term and long-term marketable securities	$	144,540	$	107,572

Investments in Privately Held Companies

Our investments in privately held companies as of March 31, 2019 and December 31, 2018 are as follows (in thousands):



	March 31, 2019		December 31, 2018
Equity securities under the equity method investment ¹	$	41,969	$	45,913
Equity securities without readily determinable fair values ²	$	5,887	$	9,862


¹	Refer to Note 5 “Equity Method Investments” of the Notes to Condensed Consolidated Financial Statements for more information


²	The equity securities are reported as a nonrecurring investment within other assets in our Condensed Consolidated Balance Sheet. During the three months ended March 31, 2019, there was approximately $4.0 million of impairment resulting from an observable price change.

Fair Value Measurements

We measure the fair value of financial assets as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We use the GAAP fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value:

Level 1 — Quoted (unadjusted) prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. We obtain fair values for our Level 2 investments. Our custody bank and asset managers independently use professional pricing services to gather pricing data which may include quoted market prices for identical or comparable financial instruments, or inputs other than quoted prices that are observable either directly or indirectly, and we are ultimately responsible for these underlying estimates.

Level 3 — Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.

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The following tables summarize our financial assets measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018 (in thousands):



Description	Balance as of March 31, 2019		Level 1		Level 2
Cash equivalents:
Money market funds	$	369,896	$	369,896	$	—
Commercial paper	7,978		—		7,978
Corporate bonds	6,809		—		6,809
Short-term investments:
Commercial paper	38,234		—		38,234
Corporate bonds	33,246		—		33,246
U.S. government treasury bonds	45,858		45,858		—
U.S. government agency bonds	14,222		—		14,222
Foreign bonds	12,960		—		12,960
Certificates of deposit	20		—		20
Prepaid expenses and other current assets:
Israeli funds	3,031		—		3,031
	$	532,254	$	415,754	$	116,500



Description	Balance as of December 31, 2018		Level 1		Level 2
Cash equivalents:
Money market funds	$	431,081	$	431,081	$	—
Commercial paper	4,681		—		4,681
U.S. government treasury bonds	2,195		2,195		—
Corporate bonds	3,880		—		3,880
Short-term investments:
Commercial paper	17,793		—		17,793
Corporate bonds	45,052		—		45,052
U.S. government agency bonds	19,904		—		19,904
U.S. government treasury bonds	15,291		15,291		—
Certificates of deposit	420		—		420
Long-term investments:
U.S. government agency bonds	1,407		—		1,407
Corporate bonds	4,960		—		4,960
U.S. government treasury bonds	2,244		2,244		—
Certificates of deposit	501		—		501
Prepaid expenses and other current assets:
Israeli funds	3,047		—		3,047
	$	552,456	$	450,811	$	101,645

Derivative Financial Instruments

We enter into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations on certain trade and intercompany receivables and payables. These forward contracts are classified within Level 2 of the fair value hierarchy. The gain from the settlement of foreign currency forward contracts during the three months ended March 31, 2019 was not material. There was no net gain or loss from the settlement of foreign currency forward contracts during the three months ended March 31, 2018. As of March 31, 2019, the fair value of foreign exchange forward contracts outstanding was not material.

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The following table presents the gross notional value of all our foreign exchange forward contracts outstanding as of March 31, 2019 and December 31, 2018 (in thousands):



	March 31, 2019
	Local Currency Amount	Notional Contract Amount (USD)
Euro	€73,000	$	82,059
Chinese Yuan	¥540,000	80,380
Canadian Dollar	C$33,500	25,105
British Pound	£16,500	21,508
Japanese Yen	¥2,100,000	18,962
Brazilian Real	R$69,000	17,660
Mexican Peso	M$115,000	5,942
Australian Dollar	A$3,000	2,128
		$	253,744



	December 31, 2018
	Local Currency Amount	Notional Contract Amount (USD)
Euro	€62,000	$	71,095
Chinese Yuan	¥375,000	54,515
Brazilian Real	R$81,000	20,858
Canadian Dollar	C$27,000	19,808
British Pound	£13,000	16,635
Japanese Yen	¥1,700,000	15,357
Australian Dollar	A$3,000	2,114
		$	200,382

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Note 3. Balance Sheet Components

Inventories

Inventories consist of the following (in thousands):



	March 31, 2019		December 31, 2018
Raw materials	$	29,002	$	26,119
Work in process	19,710		13,784
Finished goods	19,777		15,738
Total inventories	$	68,489	$	55,641

Other Assets

Other assets consist of the following (in thousands):



	March 31, 2019		December 31, 2018
Capitalized commissions	$	10,747	$	9,185
Equity securities	5,887		9,862
Security deposits	5,038		5,162
Other long-term assets	4,514		2,778
Total other assets	$	26,186	$	26,987

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):



	March 31, 2019		December 31, 2018
Accrued payroll and benefits	$	87,603	$	127,109
Accrued expenses	44,343		39,323
Deferred litigation settlement gain	35,000		—
Accrued customer credits and deposits	18,094		12,439
Current operating lease liabilities	15,592		—
Accrued warranty	10,233		8,551
Accrued property, plant and equipment	9,901		8,193
Accrued sales return reserve	8,202		6,534
Accrued sales rebate	6,612		5,668
Accrued sales tax and value added tax	5,893		6,276
Accrued professional fees	4,955		6,752
Accrued income taxes	2,255		5,752
Other accrued liabilities	4,071		8,082
Total accrued liabilities	$	252,754	$	234,679

Warranty

We regularly review the balance for accrued warranty and update based on historical warranty trends. Actual warranty costs incurred have not materially differed from those accrued; however, future actual warranty costs could differ from the estimated amounts.

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Warranty accrual as of March 31, 2019 and 2018 consists of the following activity (in thousands):



	Three Months Ended March 31,
	2019			2018
Balance at beginning of period	$	8,551		$	5,929
Charged to cost of revenues	3,133			2,359
Actual warranty expenditures	(1,451		)	(1,631		)
Balance at end of period	$	10,233		$	6,657

Deferred Revenues

Deferred revenues consist of the following (in thousands):



	March 31, 2019		December 31, 2018
Deferred revenues - current	$	433,518	$	393,138
Deferred revenues - long-term ¹	19,166		17,051

¹ Included in other long-term liabilities within our Condensed Consolidated Balance Sheets

During the three months ended March 31, 2019 and March 31, 2018, we recognized $549.0 million and $436.9 million of revenue, respectively, of which $68.4 million and $47.3 million was included in the deferred revenues balance at December 31, 2018, and December 31, 2017, respectively. Our unfilled performance obligations as of March 31, 2019 were $483.8 million. These performance obligations are expected to be recognized over the next one to five years. Align has revised certain previous disclosed amounts within this footnote. Management has concluded that the changes are not material to the current or prior period financial statements.

Note 4. Leases

We have operating and finance leases for office and retail spaces, vehicles and office equipment.

The supplemental balance sheet information consists of following (in thousands):



Leases	March 31, 2019
Operating leases:
Operating lease right-of-use assets¹	$	56,384

Accrued liabilities	$	15,592
Operating lease liabilities	59,307
Total operating lease liabilities	$	74,899

Finance leases:
Property, plant and equipment, net	$	50,655
Finance lease liabilities	$	56,100

¹ The balance is net of impairment charges recorded in the first quarter of 2019. Refer to Note 8“Impairments and Other Charges” of the Notes to Condensed Consolidated Financial Statements for more information

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The components of lease expenses consists of following (in thousands):



Lease Cost	Three Months Ended March 31, 2019
Operating lease cost¹	$	5,301
Finance lease cost:
Amortization of leased assets¹	$	409
Interest on lease liabilities²	392
Total finance lease cost	$	801

¹ Included in operating expenses on our Condensed Consolidated Statement of Operations

² Included in other income (expense), net on our Condensed Consolidated Statement of Operations



Remaining Lease Term and Discount Rate	March 31, 2019
Weighted average remaining lease term (in years)
Operating leases	5.8
Finance leases¹	0

Weighted average discount rate
Operating leases	4.7	%
Finance leases	4.2	%

¹ On April 5, 2019, we paid the balance of the $56.0 million purchase price and closed the Purchase and Sale Agreement. Refer to Note 10“Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements for more information

Maturities of operating lease liabilities as of March 31, 2019 are as follows (in thousands):



Fiscal Year Ending December 31,	Operating Leases			Finance Leases
Remainder of 2019	$	15,709		$	56,100
2020	18,148			—
2021	16,398			—
2022	11,915			—
2023	8,899			—
Thereafter	13,302			—
Total lease payments	$	84,371		$	56,100
Less: Interest	(9,472		)	—
Total lease liabilities	$	74,899		$	56,100

As of March 31, 2019, we had additional operating leases that have not yet commenced of $9.2 million. These operating leases will commence between fiscal year 2019 to 2022 with lease terms of 3 years to 5 years.

Minimum future lease payments previously disclosed under ASC 840 in our Annual Report on Form 10-K for the year ended December 31, 2018 (in thousands) are as follows:



Fiscal Year Ending December 31,		Operating Leases