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Table of Contents

 
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
OR
¨
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
ITEM 1.
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.

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
 
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
 
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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Table of Contents

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