What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-07-29 compared with 2021-04-29 · 90 added, 41 removed, 175 unchanged (43% of the section changed)

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Impact of COVID-19 Pandemic

During 2020, we were subject to challenging social and economic conditions created as a result of the novel strain of coronavirus, SARS-CoV-2 (“COVID-19”).

The resulting impact of the COVID-19 outbreak created various financial impacts to our operations as a result of taking necessary precautions for essential personnel to operate safely both in person as well as remotely.

During 2020 and 2021, we have been subject to challenging social and economic conditions created as a result of the novel strain of coronavirus, SARS-CoV-2 (“COVID-19”).

These conditions continue to create various financial impacts to our operations by necessitating precautions for our personnel to operate safely both in person as well as remotely.

Costs incurred include items like incremental payroll costs, consulting support, IT infrastructure and facilities-related costs.

As the result of the COVID-19 pandemic, we have made Dexcom CGM systems available for use in hospital settings and other healthcare facilities to assist frontline workers.

As the result of the COVID-19 pandemic, we made Dexcom CGM systems available for use in hospital settings and other healthcare facilities to assist frontline workers.

The extent of the impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, employee or industry events, and effect on our vendors, all of which are uncertain and cannot be predicted.

The COVID-19 pandemic and its adverse effects have become more prevalent in the locations where we, our customers, suppliers or third-party business partners conduct business and as a result, we have begun to experience more pronounced disruptions in our operations.

The COVID-19 pandemic and its adverse effects have become more prevalent in the locations where we, our customers, suppliers or third-party business partners conduct business and as a result, we have experienced moderate disruptions in our global operations.

We have experienced and may experience constrained supply or curtailed customer demand, including due to customer loss of private health insurance coverage for our products, that could materially adversely impact our business, results of operations and overall financial performance in future periods.

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The global COVID-19 pandemic has and may continue to have an adverse impact on our manufacturing and distribution capabilities.

Disruptions relating to the COVID-19 pandemic, including current shelter-in-place orders in the U.S.

Disruptions relating to the COVID-19 pandemic, including shelter-in-place orders in the U.S.

and other countries, could prevent employees, suppliers, distributors, and others from accessing manufacturing facilities and from transporting our products or the components required to manufacture our products.

For example, we have experienced some supply chain disruption due to the global restrictions resulting from the COVID-19 pandemic in the manufacture of our next-generation CGM product.

For example, we have experienced some supply chain disruption due to the global restrictions resulting from the COVID-19 pandemic in the manufacturing of our next-generation CGM product.

Further, worldwide supply chain disruption relating to the COVID-19 pandemic has resulted in product shortages that has and may continue to impact our ability to manufacture our devices.

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The accounting policies and estimates that are most critical to a full understanding and evaluation of our reported financial results are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

There were no material changes to our critical accounting policies during the three months ended March 31, 2021.

There were no material changes to our critical accounting policies during the six months ended June 30, 2021.

Results of Operations

Key Highlights for the first three months of 2021

Key Highlights for the Three Months Ended June 30, 2021

Revenues Gross Profit Operating Income

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up 49% from the same period 2020

Net Income Operating Cash Flow Cash, Cash Equivalents, & Short Term Marketable Securities

Net Income Operating Cash Flow Cash, Cash Equivalents, &

Short-Term Marketable Securities

$62.9 million $61.6 million $2.58 billion

up 36% from the same period 2020

up 1,363% from the same period 2020

down 67% from the same period 2020

down 5% from fiscal year 2020

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Financial Overview

Three Months Ended March 31, 2021 - 2020

Three Months Ended June 30, 2021 - 2020

(In millions, except per share amounts) 2021 2020 $ Change % Change

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Diluted net income per share $ 0.63 $ 0.48 $ 0.15 31 %

Six Months Ended June 30, 2021 - 2020

(In millions, except per share amounts) 2021 2020 $ Change % Change

Revenues $ 1,100.1 $ 856.9 $ 243.2 28 %

Cost of sales 339.1 316.3 22.8 7 %

Gross profit $ 761.0 $ 540.6 $ 220.4 41 %

Gross profit as a percent of total revenue 69.2 % 63.1 %

Operating income $ 146.9 $ 101.4 $ 45.5 45 %

Net income 103.2 66.2 37.0 56 %

Basic net income per share 1.07 0.71 0.36 51 %

Diluted net income per share $ 1.04 $ 0.69 $ 0.35 51 %

* Not meaningful

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annual insurance deductible resets and unfunded flexible spending accounts.

Quarter Ended March 31, 2021 Compared to Quarter Ended March 31, 2020

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

The revenue increase was primarily driven by increased sales volume of our disposable sensors due to the continued growth of our worldwide customer base, partially offset by pricing pressure due to the evolution of our channel strategy and product mix.

Disposable sensor and other revenue comprised approximately 84% of total revenue and Reusable Hardware revenue comprised approximately 16% of total revenue for the three months ended March 31, 2021.

Disposable sensor and other revenue comprised approximately 80% of total revenue and Reusable Hardware revenue comprised approximately 20% of total revenue for the three months ended March 31, 2020.

Disposable sensor and other revenue comprised approximately 83% of total revenue and Reusable Hardware revenue comprised approximately 17% of total revenue for the three months ended June 30, 2021.

Disposable sensor and other revenue comprised approximately 81% of total revenue and Reusable Hardware revenue comprised approximately 19% of total revenue for the three months ended June 30, 2020.

Cost of sales increased primarily due to increased sales volume.

The increase in gross profit and gross profit margin in the first quarter of 2021 compared to the first quarter of 2020 were primarily driven by increased revenues and cost savings associated with manufacturing efficiencies.

The increase in gross profit and gross profit margin in the second quarter of 2021 compared to the second quarter of 2020 were primarily driven by increased revenues and cost savings associated with manufacturing efficiencies.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Disposable sensor and other revenue comprised approximately 84% of total revenue and Reusable Hardware

revenue comprised approximately 16% of total revenue for the six months ended June 30, 2021.

Disposable sensor and other revenue comprised approximately 80% of total revenue and Reusable Hardware revenue comprised approximately 20% of total revenue for the six months ended June 30, 2020.

Cost of sales increased primarily due to increased sales volume.

The increase in gross profit and gross profit margin in the first six months of 2021 compared to the first six months of 2020 were primarily driven by increased revenues and cost savings associated with incremental improvements to product design and manufacturing efficiencies.

Operating Expenses

Quarter Ended March 31, 2021 Compared to Quarter Ended March 31, 2020

Three Months Ended March 31, 2021 - 2020

Quarter Ended June 30, 2021 Compared to Quarter Ended June 30, 2020

Three Months Ended June 30, 2021 - 2020

(In millions) 2021 2020 $ Change % Change

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as a % of total revenue (1)

(1) In the table above, the sum of the individual percentages may not equal the total due to rounding.

(1) The sum of the individual percentages may not equal the total due to rounding.

Research and Development Expense

Research and development expense increased primarily due to $12.6 million in additional salaries, bonuses, and payroll-related costs, $8.3 million in additional consulting fees, $4.2 million in additional clinical trials costs, and $2.2 million in additional share based compensation expense.

Research and development expense increased primarily due to $15.4 million in additional salaries, bonuses, and payroll-related costs, $21.1 million in additional third party and consulting fees primarily related to software, and $4.9 million in additional clinical trials costs.

We continue to believe that focused investments in research and development are critical to our future growth and competitive position in the marketplace, and to the development of new and updated products and services that are central to our core business strategy.

Selling, General and Administrative Expense

Selling, general and administrative expense increased primarily due to $22.9 million in additional advertising and marketing costs and $16.3 million in additional salaries, bonuses, and payroll-related costs.

Selling, general and administrative expense increased primarily due to $21.5 million in additional advertising and marketing costs, $17.0 million in additional salaries, bonuses, and payroll-related costs, and $3.5 million in additional legal costs.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Six Months Ended June 30, 2021 - 2020

(In millions) 2021 2020 $ Change % Change

Research and development $ 238.5 $ 153.0 $ 85.5 56 %

as a % of total revenue 22 % 18 %

Selling, general and administrative 375.6 286.2 89.4 31 %

as a % of total revenue 34 % 33 %

Total operating expenses $ 614.1 $ 439.2 $ 174.9 40 %

as a % of total revenue 56 % 51 %

(1) The sum of the individual percentages may not equal the total due to rounding.

Research and Development Expense

Research and development expense increased primarily due to $28.0 million in additional salaries, bonuses, and payroll-related costs, $31.3 million in additional third party and consulting fees primarily related to software, and $9.1 million in additional clinical trials costs.

Selling, General and Administrative Expense

Selling, general and administrative expense increased primarily due to $44.4 million in additional advertising and marketing costs, $33.3 million in additional salaries, bonuses, and payroll-related costs, and $5.1 million of investments in customer experience.

Non-Operating Income and Expenses

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Interest expense is comprised primarily of costs related to our senior convertible notes.

Interest expense increased $9.4 million to $24.8 million for the three months ended March 31, 2021 compared to $15.4 million for the same period of 2020.

The 2021 increase in interest expense is primarily due to the May 2020 issuance of our 2025 Notes.

Interest expense increased $4.9 million to $25.2 million for the three months ended June 30, 2021 compared to $20.3 million for the same period of 2020.

Interest expense increased $14.3 million to $50.0 million for the six months ended June 30, 2021 compared to $35.7 million for the six months ended June 30, 2020.

The increase in interest expense for the periods presented is primarily due to the May 2020 issuance of our 2025 Notes.

Interest and Other Income, Net

Interest and other income, net consists primarily of interest income on our marketable debt securities portfolio and foreign currency transaction gains and losses due to the effects of foreign currency fluctuations.

Interest income was $0.5 million for the three months ended March 31, 2021 compared to $6.0 million for the three months ended March 31, 2020.

Interest income was $0.4 million and $0.9 million for the three and six months ended June 30, 2021, respectively, compared to $3.6 million and $9.6 million for the three and six months ended June 30, 2020, respectively.

The decrease in interest income was primarily related to a decline in market interest rates, partially offset by an increase in average invested balances during 2021 compared to 2020.

Income Tax Expense (Benefit)

We recorded income tax benefit of $19.1 million on pre-tax income of $21.2 million for the three months ended March 31, 2021 compared to income tax expense of $2.5 million on pre-tax income of $22.4 million for the three months ended March 31, 2020.

The income tax benefit for the three months ended March 31, 2021 is primarily attributable to excess tax benefits from stock compensation recorded discretely during the quarter, offsetting income tax expense from normal, recurring operations at an estimated annual effective rate of 21.4%.

The income tax expense for the prior period is attributable to current foreign and state income tax expense in profitable jurisdictions where we had no net operating loss carryforwards.

We recorded income tax expense of $13.8 million on pre-tax income of $76.7 million for the three months ended June 30, 2021 compared to an income tax benefit of $0.1 million on pre-tax income of $46.2 million for the three months ended June 30, 2020.

We recorded an income tax benefit of $5.3 million on pre-tax income of $97.9 million for the six months ended June 30, 2021 and income tax expense of $2.4 million on pre-tax income of $68.6 million for the six months ended June 30, 2020.

Our estimated annual effective tax rate from normal, recurring operations increased from 21.4% to 27.1% during the three months ended June 30, 2021 primarily due to an increase in forecasted pretax income in the U.S.

and a decrease in forecasted income outside the U.S.

Our income tax expense for the three months ended June 30, 2021 also includes the discrete impact of excess tax benefits from stock compensation and a one-time tax benefit related to the revaluation of our U.K.

net operating loss deferred tax asset resulting from the increase in the U.K.

corporate tax rate from 19% to 25%, effective April 2023.

Our income tax benefit for the prior period is attributable to foreign and state income tax expense in taxable jurisdictions with no net operating losses.

We maintained a valuation allowance on our deferred tax assets during the prior period, most of which was released in the fourth quarter of 2020.

Our income tax benefit for the six months ended June 30, 2021 is primarily attributable to income tax expense from normal, recurring operations at an estimated annual effective tax rate of 27.1%, offset by excess tax benefits from stock compensation net of disallowed executive compensation and a one-time tax benefit related to the revaluation of our U.K.

net operating loss deferred tax asset resulting from the increase in the U.K.

corporate tax rate from 19% to 25%, effective April 2023.

Income tax expense in the prior period is primarily related to foreign income taxes in jurisdictions with current taxable income.

We maintained a valuation allowance on our deferred tax assets during the prior period, most of which was released in the fourth quarter of 2020.

Liquidity and Capital Resources

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government-sponsored enterprises, commercial paper, corporate debt, and money market funds.

Certain of these investments are subject to general credit, liquidity and other market risks.

Certain of these investments

are subject to general credit, liquidity and other market risks.

The general condition of the financial markets and the economy may increase those risks and may affect the value and liquidity of investments and restrict our ability to access the capital markets.

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Fluctuations in the rate of exchange between the U.S.

dollar and foreign currencies, primarily the British Pound and the Euro, could adversely affect our financial results, including our revenues, revenue growth rates, gross margins, income and losses as well as assets and liabilities.

dollar and foreign currencies, primarily the British Pound, the Euro, and the Canadian Dollar, could adversely affect our financial results, including our revenues, revenue growth rates, gross margins, income and losses as well as assets and liabilities.

We currently engage in hedging transactions to reduce foreign currency risks.

We will continue to monitor and manage our financial exposures due to exchange rate fluctuations as an integral part of our overall risk management program.

Our cash, cash equivalents and short-term marketable securities totaled $2.63 billion as of March 31, 2021.

Our cash, cash equivalents and short-term marketable securities totaled $2.58 billion as of June 30, 2021.

None of those funds were restricted and approximately 96% of those funds were located in the United States.

Our cash, cash equivalents and short-term marketable securities as of March 31, 2021 decreased by $75.1 million from December 31, 2020 due to the factors described in “Cash Flows” below.

Our cash, cash equivalents and short-term marketable securities as of June 30, 2021 decreased by $122.8 million from December 31, 2020 due to the factors described in “Cash Flows” below.

We believe that our cash, cash equivalents, and marketable securities balances, projected cash contributions from our commercial operations, and our $200.0 million revolving line of credit, of which $193.6 million remains available, will be sufficient to meet our anticipated seasonal working capital needs, capital expenditure requirements, contractual obligations, commitments, debt service requirements, and other liquidity requirements associated with our operations for at least the next 12 months.

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The Credit Agreement also includes a sub-facility of up to $10.0 million for letters of credit.

Subject to customary conditions and the approval of any lender whose commitment would be increased, we have the option to increase the maximum principal amount available under the Credit Agreement by up to an additional $300.0 million, resulting in a maximum available principal amount of $500.0 million.

Subject to customary conditions and the approval of any lender whose commitment would be increased, we have the option to increase the maximum principal amount available under the Credit

Agreement by up to an additional $300.0 million, resulting in a maximum available principal amount of $500.0 million.

However, at this time none of the lenders have committed to provide any such increase in their commitments.

Revolving loans under the Credit Agreement will be available for general corporate purposes, including working capital and capital expenditures.

As of March 31, 2021, we had no outstanding borrowings, $6.4 million in outstanding letters of credit, and a total

available balance of $193.6 million under the Credit Agreement.

As of June 30, 2021, we had no outstanding borrowings, $6.4 million in outstanding letters of credit, and a total available balance of $193.6 million under the Credit Agreement.

We monitor counterparty risk associated with the institutional lenders that are providing this credit facility.

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Senior Convertible Notes

The following table summarizes our outstanding senior convertible note obligations as of March 31, 2021:

The following table summarizes our outstanding senior convertible note obligations as of June 30, 2021:

Issuance Date Coupon Rate Aggregate

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See Note 4 to the consolidated financial statements in Part I, Item 1 of this Quarterly Report for more information about the terms of the Credit Agreement, our senior convertible notes, the 2023 Note Hedge, and the 2023 Warrants.

As of March 31, 2021, we had $2.63 billion in cash, cash equivalents and short-term marketable securities, which is a decrease of $75.1 million compared to $2.71 billion as of December 31, 2020.

The primary cash flows during the three months ended March 31, 2021 and 2020 are described below.

As of June 30, 2021, we had $2.58 billion in cash, cash equivalents and short-term marketable securities, which is a decrease of $122.8 million compared to $2.71 billion as of December 31, 2020.

The primary cash flows during the six months ended June 30, 2021 and 2020 are described below.

See the consolidated financial statements in Part I, Item 1 of this Quarterly Report for complete consolidated statements of cash flows for these periods.

Three Months Ended

March 31, 2021 March 31, 2020

Six Months Ended

June 30, 2021 June 30, 2020

Operating Cash Flows $103.2 million of net income and $164.8 million of net non-cash adjustments, partially offset by $178.6 million of net changes in working capital balances

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$91.4 million capital expenditures

$4.0 million in minority equity investments

Financing Cash Flows $8.7 million in proceeds from the issuance of common stock under our employee stock plans

$6.7 million in proceeds from the issuance of common stock under our employee stock plans

$1.19 billion in proceeds from issuance of convertible notes, net of issuance costs

$8.3 million payments for financing leases

$6.7 million in proceeds from the issuance of common stock under our employee stock plans

$282.6 million cash outflow for repurchase of convertible notes

Contractual Obligations

We presented our contractual obligations as of December 31, 2020 in our Annual Report on Form 10-K for the twelve months then ended.

There were no significant changes to our contractual obligations in the three months ended March 31, 2021.

There were no significant changes to our senior convertible notes and lease obligations.

As of June 30, 2021, we had approximately $554.7 million of open purchase orders and contractual obligations in the ordinary course of business, the majority of which are due within one year.

Off-Balance Sheet Arrangements

As of March 31, 2021, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

As of June 30, 2021, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Recent Accounting Guidance

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis