DEXCOM INC 10-Q

ITEM 1. FINANCIAL STATEMENTS DexCom, Inc. Consolidated Balance Sheets (Unaudited) (In millions, except par value data) June 30, 2021 December 31, 2020 Assets Current assets: Cash and cash equivalents $ 1,158.8 $ 817.6 Short-term marketable securities 1,426.1 1,890.1 Accounts receivable, net 483.5 428.5 Inventory 319.3 234.7 Prepaid and other current assets 86.5 53.9 Total current assets 3,474.2 3,424.8 Property and equipment, net 676.0 515.3 Operating lease right-of-use assets 94.8 93.3 Goodwill 19.1 19.3 Deferred tax assets 216.4 216.4 Other assets 23.3 21.4 Total assets $ 4,503.8 $ 4,290.5 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable and accrued liabilities $ 482.0 $ 481.1 Accrued payroll and related expenses 98.1 114.3 Short-term operating lease liabilities 18.8 16.5 Deferred revenue 1.8 2.2 Total current liabilities 600.7 614.1 Long-term senior convertible notes 1,710.7 1,667.2 Long-term operating lease liabilities 107.1 101.8 Other long-term liabilities 87.7 80.9 Total liabilities 2,506.2 2,464.0 Commitments and contingencies Stockholders’ equity: Preferred stock, $ 0.001 par value, 5.0 million shares authorized; no shares issued and outstanding at June 30, 2021 and December 31, 2020 — — Common stock, $ 0.001 par value, 200.0 million shares authorized; 97.5 million and 96.7 million shares issued and outstanding, respectively, at June 30, 2021; and 96.9 million and 96.1 million shares issued and outstanding, respectively, at December 31, 2020 0.1 0.1 Additional paid-in capital 2,193.6 2,125.3 Accumulated other comprehensive income 2.8 3.2 Accumulated deficit ( 98.9 ) ( 202.1 ) Treasury stock, at cost; 0.8 million shares at June 30, 2021 and December 31, 2020 ( 100.0 ) ( 100.0 ) Total stockholders’ equity 1,997.6 1,826.5 Total liabilities and stockholders’ equity $ 4,503.8 $ 4,290.5 See accompanying notes 3 Table of Contents DexCom, Inc. Consolidated Statements of Operations (Unaudited) Three Months Ended June 30, Six Months Ended June 30, (In millions, except per share data) 2021 2020 2021 2020 Revenues $ 595.1 $ 451.8 $ 1,100.1 $ 856.9 Cost of sales 178.0 167.7 339.1 316.3 Gross profit 417.1 284.1 761.0 540.6 Operating expenses: Research and development 129.1 79.9 238.5 153.0 Selling, general and administrative 187.0 136.4 375.6 286.2 Total operating expenses 316.1 216.3 614.1 439.2 Operating income 101.0 67.8 146.9 101.4 Interest expense ( 25.2 ) ( 20.3 ) ( 50.0 ) ( 35.7 ) Loss on extinguishment of debt — ( 5.4 ) — ( 5.4 ) Interest and other income, net 0.9 4.1 1.0 8.3 Income before income taxes 76.7 46.2 97.9 68.6 Income tax expense (benefit) 13.8 ( 0.1 ) ( 5.3 ) 2.4 Net income $ 62.9 $ 46.3 $ 103.2 $ 66.2 Basic net income per share $ 0.65 $ 0.49 $ 1.07 $ 0.71 Shares used to compute basic net income per share 96.7 93.8 96.5 92.8 Diluted net income per share $ 0.63 $ 0.48 $ 1.04 $ 0.69 Shares used to compute diluted net income per share 99.6 97.0 99.5 95.6 See accompanying notes 4 Table of Contents DexCom, Inc. Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended June 30, Six Months Ended June 30, (In millions) 2021 2020 2021 2020 Net income $ 62.9 $ 46.3 $ 103.2 $ 66.2 Other comprehensive income (loss), net of tax: Translation adjustments and other 0.2 0.5 ( 0.1 ) ( 0.2 ) Unrealized gain (loss) on marketable debt securities ( 0.3 ) ( 0.7 ) ( 0.3 ) 1.4 Total other comprehensive income (loss), net of tax ( 0.1 ) ( 0.2 ) ( 0.4 ) 1.2 Comprehensive income $ 62.8 $ 46.1 $ 102.8 $ 67.4 See accompanying notes 5 Table of Contents DexCom, Inc. Consolidated Statements of Stockholders’ Equity (Unaudited) Three Months Ended June 30, 2021 (In millions) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Deficit Treasury Stock Total Stockholders’ Equity Shares Amount Balance at March 31, 2021 96.7 $ 0.1 $ 2,162.0 $ 2.9 $ ( 161.8 ) $ ( 100.0 ) $ 1,903.2 Issuance of common stock under equity incentive plans — — — — — — — Issuance of common stock for Employee Stock Purchase Plan — — — — — — — Share-based compensation expense — — 31.6 — — — 31.6 Net income — — — — 62.9 — 62.9 Other comprehensive loss, net of tax — — — ( 0.1 ) — — ( 0.1 ) Balance at June 30, 2021 96.7 $ 0.1 $ 2,193.6 $ 2.8 $ ( 98.9 ) $ ( 100.0 ) $ 1,997.6 Three Months Ended June 30, 2020 (In millions) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Deficit Treasury Stock Total Stockholders’ Equity Shares Amount Balance at March 31, 2020 92.3 $ 0.1 $ 1,706.5 $ 3.7 $ ( 675.8 ) $ ( 100.0 ) $ 934.5 Issuance of common stock under equity incentive plans 0.1 — — — — — — Issuance of common stock for Employee Stock Purchase Plan — — — — — — — Equity component of 2025 Notes issuance, net of issuance costs — — 289.4 — — — 289.4 Repurchase and conversions of 2022 Notes 3.0 — 53.2 — — — 53.2 Share-based compensation expense — — 30.7 — — — 30.7 Net income — — — — 46.3 — 46.3 Other comprehensive loss, net of tax — — — ( 0.2 ) — — ( 0.2 ) Balance at June 30, 2020 95.4 $ 0.1 $ 2,079.8 $ 3.5 $ ( 629.5 ) $ ( 100.0 ) $ 1,353.9 See accompanying notes 6 Table of Contents DexCom, Inc. Consolidated Statements of Stockholders’ Equity (Unaudited) Six Months Ended June 30, 2021 (In millions) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Deficit Treasury Stock Total Stockholders’ Equity Shares Amount Balance at December 31, 2020 96.1 $ 0.1 $ 2,125.3 $ 3.2 $ ( 202.1 ) $ ( 100.0 ) $ 1,826.5 Issuance of common stock under equity incentive plans 0.6 — — — — — — Issuance of common stock for Employee Stock Purchase Plan — — 8.7 — — — 8.7 Share-based compensation expense — — 59.6 — — — 59.6 Net income — — — — 103.2 — 103.2 Other comprehensive loss, net of tax — — — ( 0.4 ) — — ( 0.4 ) Balance at June 30, 2021 96.7 $ 0.1 $ 2,193.6 $ 2.8 $ ( 98.9 ) $ ( 100.0 ) $ 1,997.6 Six Months Ended June 30, 2020 (In millions) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Deficit Treasury Stock Total Stockholders’ Equity Shares Amount Balance at December 31, 2019 91.6 $ 0.1 $ 1,675.9 $ 2.3 $ ( 695.7 ) $ ( 100.0 ) $ 882.6 Issuance of common stock under equity incentive plans 0.8 — 0.3 — — — 0.3 Issuance of common stock for Employee Stock Purchase Plan — — 6.4 — — — 6.4 Equity component of 2025 Notes issuance, net of issuance costs — — 289.4 — — — 289.4 Repurchase and conversions of 2022 Notes 3.0 — 53.2 — — — 53.2 Share-based compensation expense — — 54.6 — — — 54.6 Net income — — — — 66.2 — 66.2 Other comprehensive income, net of tax — — — 1.2 — — 1.2 Balance at June 30, 2020 95.4 $ 0.1 $ 2,079.8 $ 3.5 $ ( 629.5 ) $ ( 100.0 ) $ 1,353.9 See accompanying notes 7 Table of Contents DexCom, Inc. Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, (In millions) 2021 2020 Operating activities Net income $ 103.2 $ 66.2 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 44.4 28.3 Share-based compensation 59.6 54.6 Loss on extinguishment of debt — 5.4 Non-cash interest expense 44.7 30.3 Deferred income taxes 0.1 — Other non-cash income and expenses 16.0 3.5 Changes in operating assets and liabilities: Accounts receivable, net ( 54.9 ) ( 10.4 ) Inventory ( 84.5 ) ( 45.5 ) Prepaid and other assets ( 27.1 ) ( 26.6 ) Operating lease right-of-use assets and liabilities, net 1.1 ( 1.2 ) Accounts payable and accrued liabilities — 56.8 Accrued payroll and related expenses ( 16.2 ) ( 20.8 ) Deferred revenue and other liabilities 3.0 15.4 Net cash provided by operating activities 89.4 156.0 Investing activities Purchases of marketable securities ( 1,171.9 ) ( 1,740.0 ) Proceeds from sale and maturity of marketable securities 1,628.3 849.5 Purchases of property and equipment ( 200.9 ) ( 91.4 ) Other investing activities ( 4.5 ) ( 2.8 ) Net cash provided by (used in) investing activities 251.0 ( 984.7 ) Financing activities Proceeds from issuance of convertible notes, net of issuance costs — 1,188.8 Repurchase of convertible notes — ( 282.6 ) Net proceeds from issuance of common stock 8.7 6.7 Other financing activities ( 8.3 ) ( 0.4 ) Net cash provided by financing activities 0.4 912.5 Effect of exchange rate changes on cash, cash equivalents and restricted cash 0.1 ( 0.2 ) Increase in cash, cash equivalents and restricted cash 340.9 83.6 Cash, cash equivalents and restricted cash, beginning of period 818.2 446.4 Cash, cash equivalents and restricted cash, end of period $ 1,159.1 $ 530.0 Reconciliation of cash, cash equivalents and restricted cash, end of period: Cash and cash equivalents $ 1,158.8 $ 530.0 Restricted cash 0.3 — Total cash, cash equivalents and restricted cash $ 1,159.1 $ 530.0 Supplemental disclosure of non-cash investing and financing transactions: Common stock issued for repurchase and conversions of senior convertible notes $ — $ 1,190.0 Acquisition of property and equipment included in accounts payable and accrued liabilities $ 43.2 $ 17.0 Right-of-use assets obtained in exchange for operating lease liabilities $ 10.4 $ 5.3 Right-of-use assets obtained in exchange for finance lease liabilities $ 4.6 $ — See accompanying notes 8 Table of Contents DexCom, Inc. Notes to Consolidated Financial Statements (Unaudited) 1. Organization and Significant Accounting Policies Organization and Business DexCom, Inc. is a medical device company that develops and markets continuous glucose monitoring, or CGM, systems for the management of diabetes by patients, caregivers, and clinicians around the world. Unless the context requires otherwise, the terms “we,” “us,” “our,” the “company,” or “Dexcom” refer to DexCom, Inc. and its subsidiaries. Basis of Presentation and Principles of Consolidation We have prepared the accompanying unaudited consolidated financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission, or SEC, Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. Operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. We expect that revenues we generate from the sales of our products will fluctuate from quarter to quarter. We experience seasonality that is typical in our industry, with lower sales in the first quarter of each year compared to the fourth quarter of the previous year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended December 31, 2020 included in the Annual Report on Form 10-K that we filed with the SEC on February 11, 2021. These consolidated financial statements include the accounts of DexCom, Inc. and our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. We determine the functional currencies of our international subsidiaries by reviewing the environment where each subsidiary primarily generates and expends cash. For international subsidiaries whose functional currencies are the local currencies, we translate the financial statements into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates for each period for revenue, costs and expenses. We include translation-related adjustments in comprehensive income and in accumulated other comprehensive income in the equity section of our consolidated balance sheets. We record gains and losses resulting from transactions with customers and vendors that are denominated in currencies other than the functional currency and from certain intercompany transactions in interest and other income, net in our consolidated statements of operations. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires us to make certain estimates and assumptions that affect the amounts reported in our consolidated financial statements and the disclosures made in the accompanying notes. Areas requiring significant estimates include rebates, transaction price, the collectibility of accounts receivable, excess or obsolete inventories and the valuation of inventory, accruals for litigation contingencies, and the amount of our worldwide tax provision and the realizability of deferred tax assets. Despite our intention to establish accurate estimates and use reasonable assumptions, actual results may differ from our estimates. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are generally recorded at the invoiced amount for distributors and at net realizable value for direct customers, which is determined using estimates of claim denials and historical reimbursement experience without regard to aging category. Accounts receivable are not interest bearing. We evaluate the creditworthiness of significant customers based on historical trends, the financial condition of our customers, and external market factors. We generally do not require collateral from our customers. We maintain an allowance for doubtful accounts for potential credit losses. Uncollectible accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a customer account is uncollectible. Generally, receivable balances greater than one year past due are deemed uncollectible. 9 Table of Contents Concentration of Credit Risk Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents, short-term marketable securities, and accounts receivable. We limit our exposure to credit risk by placing our cash and investments with a few major financial institutions. We have also established guidelines regarding diversification of our investments and their maturities that are designed to maintain principal and maximize liquidity. We review these guidelines periodically and modify them to take advantage of trends in yields and interest rates and changes in our operations and financial position. Revenue Recognition We generate our revenue from the sale of disposable sensors and our reusable transmitter and receiver, collectively referred to as Reusable Hardware. We also refer to Reusable Hardware in this section as Components. We generally recognize revenue when control is transferred to our customers in an amount that reflects the net consideration to which we expect to be entitled. In determining how revenue should be recognized, a five-step process is used, which includes identifying performance obligations in the contract, determining whether the performance obligations are separate, allocating the transaction price to each separate performance obligation, estimating the amount of variable consideration to include in the transaction price and determining the timing of revenue recognition for separate performance obligations. Contracts and Performance Obligations We consider customer purchase orders, which in most cases are governed by agreements with distributors or third-party payors, to be contracts with a customer. For each contract, we consider the obligation to transfer Components to the customer, each of which are distinct, to be separate performance obligations. We also provide free-of-charge software, mobile applications and updates for our Dexcom Share ® remote monitoring system. The standalone selling prices of Dexcom Share ® are estimated based on an expected cost plus a margin approach. Transaction Price Transaction price for the Components reflects the net consideration to which we expect to be entitled. Transaction price is typically based on the contracted rates less an estimate of claim denials and historical reimbursement experience by payor, which include current and future expectations regarding reimbursement rates and payor mix. Variable Consideration We include an estimate of variable consideration in the calculation of the transaction price at the time of sale, when control of the Components transfers to the customer. Variable consideration includes, but is not limited to: rebates, chargebacks, consideration payable to customers such as specialty distributor and wholesaler fees, product returns provision, prompt payment discounts, and various other promotional or incentive arrangements. We classify our provisions related to variable consideration as a reduction of accounts receivable when we are not required to make a payment or as a liability when we are required to make a payment. Rebates We are subject to rebates on pricing programs with managed care organizations, such as pharmacy benefit managers, governmental and third-party commercial payors, primarily in the U.S. We estimate provisions for rebates based on contractual arrangements, estimates of products sold subject to rebate, known events or trends and channel inventory data. Chargebacks We participate in chargeback programs, primarily with government entities in the U.S., under which pricing on products below negotiated list prices is provided to participating entities and equal to the difference between their acquisition cost and the lower negotiated price. We estimate provisions for chargebacks primarily based on historical experience on a product and program basis, current contract prices under the chargeback programs and channel inventory data. Consideration Payable to the Customer We pay administrative and service fees to certain of our distributors based on a fixed percentage of the product price. These fees are not in exchange for a distinct good or service and therefore are recognized as a reduction of the transaction price. We accrue for these fees based on actual net sales and contractual fee rates negotiated with the customer. 10 Table of Contents Product Returns In accordance with the terms of their distribution agreements, most distributors do not have rights of return. The distributors typically have a limited time frame to notify us of any missing, damaged, defective or non-conforming products. We generally provide a “ 30 -day money back guarantee” program whereby first-time end-user customers may return Reusable Hardware. We estimate our product returns provision principally based on historical experience by applying a historical return rate to the amounts of revenue estimated to be subject to returns. Additionally, we consider other specific factors such as estimated shelf life of inventory in the distribution channel and changes to customer terms. Prompt Payment Discounts We provide customers with prompt payment discounts which may result in adjustments to the price that is invoiced for the product transferred, in the case that payments are made within a defined period. We estimate prompt payment discount accruals based on actual net sales and contractual discount rates. Various Other Promotional or Incentive Arrangements Other promotional or incentive arrangements are periodically offered to customers, including but not limited to co-payment assistance we provide to patients with commercial insurance, promotional programs related to the launch of products or other targeted promotions. We record a provision for the incentive earned based on the number of estimated claims and our estimate of the cost per claim related to product sales that we have recognized as revenue. Revenue Recognition The timing of revenue recognition is based on the satisfaction of performance obligations. Substantially all of the performance obligations associated with our Components are satisfied at a point in time, which typically occurs at shipment of our products. Terms of direct and distributor orders are generally Freight on Board (FOB) shipping point for U.S. orders or Free Carrier (FCA) shipping point for international orders. For certain sales transactions, control transfers at delivery of the product to the customer. In cases where our free-of-charge software, mobile applications and updates are deemed to be separate performance obligations, revenue is recognized over time on a ratable basis over the estimated life of the related Reusable Hardware component. Our sales of Components include an assurance-type warranty. Contract Balances Contract balances represent amounts presented in our consolidated balance sheets when either we have transferred goods or services to the customer or the customer has paid consideration to us under the contract. These contract balances include accounts receivable and deferred revenue. Payment terms vary by contract type and type of customer and generally range from 30 to 90 days. Accounts receivable as of June 30, 2021 included unbilled accounts receivable of $ 11.1 million. We expect to invoice and collect all unbilled accounts receivable within 12 months. We record deferred revenue when we have entered into a contract with a customer and cash payments are received or due prior to transfer of control or satisfaction of the related performance obligation. Our performance obligations are generally satisfied within 12 months of the initial contract date. The deferred revenue balance related to performance obligations that will be satisfied after 12 months was $ 11.6 million as of June 30, 2021 and $ 8.2 million as of December 31, 2020. These balances are included in other long-term liabilities in our consolidated balance sheets. Revenue recognized in the period from performance obligations satisfied in previous periods was not material for the periods presented. Deferred Cost of Sales Deferred cost of sales are associated with transactions for which revenue recognition criteria are not met but product has shipped and released from inventory. Deferred cost of sales are included in prepaid and other current assets in our consolidated balance sheets. Incentive Compensation Costs We generally expense incentive compensation associated with our internal sales force when incurred because the amortization period for such costs, if capitalized, would have been one year or less. We record these costs in selling, general and administrative expense in our consolidated statements of operations. 11 Table of Contents Net Income Per Share Basic net income per share attributable to common stockholders is calculated by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares outstanding during the period and, when dilutive, potential common share equivalents. Potentially dilutive common shares consist of shares issuable from restricted stock units, warrants, and our senior convertible notes. Potentially dilutive common shares issuable upon vesting of restricted stock units and exercise of warrants are determined using the average share price for each period under the treasury stock method. Potentially dilutive common shares issuable upon conversion of our senior convertible notes are determined using the if-converted method. In periods of net losses, we exclude all potentially dilutive common shares from the computation of the diluted net loss per share for those periods as the effect would be anti-dilutive. The following table sets forth the computation of basic and diluted net income per share for the periods shown. Three Months Ended June 30, Six Months Ended June 30, (In millions) 2021 2020 2021 2020 Net income $ 62.9 $ 46.3 $ 103.2 $ 66.2 Net income per common share Basic $ 0.65 $ 0.49 $ 1.07 $ 0.71 Diluted $ 0.63 $ 0.48 $ 1.04 $ 0.69 Basic weighted average shares outstanding 96.7 93.8 96.5 92.8 Dilutive potential common stock outstanding: Restricted stock units 0.4 0.9 0.5 1.1 Warrants 2.5 2.3 2.5 1.7 Senior convertible notes — — — — Diluted weighted average shares outstanding 99.6 97.0 99.5 95.6 Outstanding anti-dilutive securities not included in the diluted net income per share attributable to common stockholders calculations were as follows: Three Months Ended June 30, Six Months Ended June 30, (In millions) 2021 2020 2021 2020 Restricted stock units — — — 0.1 Warrants — — — — Senior convertible notes 7.2 8.7 7.2 9.5 Total 7.2 8.7 7.2 9.6 Recent Accounting Guidance Recently Adopted Accounting Pronouncements In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and early adoption is permitted. Our adoption of ASU 2019-12 at the beginning of the first quarter of 2021 did not have a significant impact on our consolidated financial statements. Recently Issued Accounting Pronouncements Not Yet Adopted In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) . This new guidance is intended to reduce 12 Table of Contents the complexity of accounting for convertible instruments. The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation and requires enhanced disclosures about the terms of convertible instruments. Entities may adopt ASU 2020-06 using either a partial retrospective or fully retrospective method of transition. This ASU is effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the impact that this guidance will have on our consolidated financial statements. 2. Fair Value Measurements Assets and Liabilities Measured at Fair Value on a Recurring Basis We estimate the fair value of our Level 1 financial instruments, which are in active markets, using unadjusted quoted market prices for identical instruments. We obtain the fair values for our Level 2 financial instruments, which are not in active markets, from a primary professional pricing source that uses quoted market prices for identical or comparable instruments, rather than direct observations of quoted prices in active markets. Fair values obtained from this professional pricing source can also be based on pricing models whereby all significant observable inputs, including maturity dates, issue dates, settlement dates, benchmark yields, reported trades, broker-dealer quotes, issue spreads, benchmark securities, bids, offers or other market related data, are observable or can be derived from, or corroborated by, observable market data for substantially the full term of the asset. We validate the quoted market prices provided by our primary pricing service by comparing the fair values of our Level 2 marketable securities portfolio balance provided by our primary pricing service against the fair values of our Level 2 marketable securities portfolio balance provided by our investment managers. The following table summarizes financial assets that we measured at fair value on a recurring basis as of June 30, 2021, classified in accordance with the fair value hierarchy: Fair Value Measurements Using (In millions) Level 1 Level 2 Level 3 Total Cash equivalents $ 961.1 $ — $ — $ 961.1 Debt securities, available for sale: U.S. government agencies — 1,057.3 — 1,057.3 Commercial paper — 261.8 — 261.8 Corporate debt — 107.0 — 107.0 Total debt securities, available for sale — 1,426.1 — 1,426.1 Other assets (1) 5.8 — — 5.8 Total assets measured at fair value on a recurring basis $ 966.9 $ 1,426.1 $ — $ 2,393.0 (1) Includes assets which are held pursuant to a deferred compensation plan for senior management, which consist mainly of mutual funds . 13 Table of Contents The following table summarizes financial assets that we measured at fair value on a recurring basis as of December 31, 2020, classified in accordance with the fair value hierarchy: Fair Value Measurements Using (In millions) Level 1 Level 2 Level 3 Total Cash equivalents $ 491.5 $ 150.0 $ — $ 641.5 Debt securities, available for sale: U.S. government agencies — 1,570.4 — 1,570.4 Commercial paper — 258.8 — 258.8 Corporate debt — 60.9 — 60.9 Total debt securities, available for sale — 1,890.1 — 1,890.1 Other assets (1) 3.4 — — 3.4 Total assets measured at fair value on a recurring basis $ 494.9 $ 2,040.1 $ — $ 2,535.0 (1) Includes assets which are held pursuant to a deferred compensation plan for senior management, which consist mainly of mutual funds. There were no transfers into or out of Level 3 securities during the three and six months ended June 30, 2021. We hold certain other investments that we do not measure at fair value on a recurring basis. The carrying values of these investments are not significant and we include them in other assets in our consolidated balance sheets. It is impracticable for us to estimate the fair value of these investments on a recurring basis due to the fact that these entities are privately held and limited information is available. We monitor the information that becomes available from time to time and adjust the carrying values of these investments if there are identified events or changes in circumstances that have a significant adverse effect on the fair values. Fair Value of Senior Convertible Notes The fair value, based on trading prices (Level 1), of our senior convertible notes were as follows as of the dates indicated: Fair Value Measurements Using Level 1 (In millions) June 30, 2021 December 31, 2020 Senior Convertible Notes due 2023 $ 2,210.9 $ 1,936.4 Senior Convertible Notes due 2025 1,264.1 1,219.2 Total fair value of outstanding senior convertible notes $ 3,475.0 $ 3,155.6 For more information on the carrying values of our senior convertible notes, see Note 4, “Debt.” Foreign Currency and Derivative Financial Instruments From time to time we engage in hedging transactions to reduce foreign currency risks. The fair values of these derivatives are based on quoted market prices, which are Level 1 inputs, and the derivative instruments are recorded in current assets or current liabilities in our consolidated balance sheets consistent with the nature of the instrument at period end. Derivative gains and losses are included in interest and other income, net in our consolidated statements of operations. As of June 30, 2021 and December 31, 2020, notional amounts of $ 52.0 million and $ 48.0 million, respectively, were outstanding to hedge certain foreign currency risk. The resulting impact on our consolidated financial statements from currency hedging activities was not significant for the three and six months ended June 30, 2021 or 2020. Our foreign currency exposures vary but are primarily concentrated primarily in the British Pound, the Euro, and the Canadian Dollar. We monitor the costs and the impact of foreign currency risks upon our financial results as part of our risk management program. We do not use derivative financial instruments for speculation or trading purposes or for activities other than risk management. We do not require and are not required to pledge collateral for these financial instruments and we do not carry any master netting arrangements to mitigate the credit risk. 14 Table of Contents Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis In accordance with authoritative guidance, we measure certain non-financial assets and liabilities at fair value on a non-recurring basis. These measurements are usually performed using the discounted cash flow method or cost method and Level 3 inputs. These include items such as non-financial assets and liabilities initially measured at fair value in a business combination and non-financial long-lived assets measured at fair value for an impairment assessment. In general, non-financial assets, including goodwill, intangible assets, and property and equipment, are measured at fair value when there are indicators of impairment and are recorded at fair value only when any impairment is recognized. We recorded no significant impairment losses during the three and six months ended June 30, 2021 and 2020. 3. Balance Sheet Details Short-Term Marketable Securities Short-term marketable securities, consisting of debt securities, were as follows as of the dates indicated: June 30, 2021 (In millions) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Market Value Debt securities, available for sale: U.S. government agencies $ 1,057.3 $ 0.1 $ ( 0.1 ) $ 1,057.3 Commercial paper 261.8 — — 261.8 Corporate debt 107.1 — ( 0.1 ) 107.0 Total debt securities, available for sale $ 1,426.2 $ 0.1 $ ( 0.2 ) $ 1,426.1 December 31, 2020 (In millions) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Market Value Debt securities, available for sale: U.S. government agencies $ 1,570.4 $ 0.1 $ ( 0.1 ) $ 1,570.4 Commercial paper 258.7 0.1 — 258.8 Corporate debt 60.9 — — 60.9 Total debt securities, available for sale $ 1,890.0 $ 0.2 $ ( 0.1 ) $ 1,890.1 As of June 30, 2021 and December 31, 2020, all of our debt securities had contractual maturities of less than 12 months. Gross realized gains and losses on sales of our debt securities for the three and six months ended June 30, 2021 and June 30, 2020 were not significant. We periodically review our portfolio of debt securities to determine if any investment is impaired due to credit loss or other potential valuation concerns. For debt securities where the fair value of the investment is less than the amortized cost basis, we have assessed at the individual security level for various quantitative factors including, but not limited to, the nature of the investments, changes in credit ratings, interest rate fluctuations, industry analyst reports, and the severity of impairment. Unrealized losses on available-for-sale debt securities at June 30, 2021 were not significant and were primarily due to changes in interest rates, including market credit spreads, and not due to increased credit risks associated with specific securities. Accordingly, we have not recorded an allowance for credit losses. We do not intend to sell these investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity. Inventory (In millions) June 30, 2021 December 31, 2020 Raw materials $ 104.6 $ 69.9 Work-in-process 13.6 14.2 Finished goods 201.1 150.6 Total inventory $ 319.3 $ 234.7 15 Table of Contents Property and Equipment (In millions) June 30, 2021 December 31, 2020 Land (1) $ 15.6 $ 15.6 Building (1) 49.1 49.2 Furniture and fixtures 21.9 15.3 Computer software and hardware 39.3 35.7 Machinery and equipment 236.4 198.9 Leasehold improvements 225.0 135.8 Construction in progress 275.5 219.0 Total cost 862.8 669.5 Less accumulated depreciation and amortization ( 186.8 ) ( 154.2 ) Total property and equipment, net $ 676.0 $ 515.3 (1 ) Represents finance lease right-of-use assets. Accounts Payable and Accrued Liabilities (In millions) June 30, 2021 December 31, 2020 Accounts payable trade $ 165.9 $ 163.3 Accrued tax, audit, and legal fees 17.9 15.3 Accrued rebates 237.4 247.0 Accrued warranty 11.2 11.7 Other accrued liabilities 49.6 43.8 Total accounts payable and accrued liabilities $ 482.0 $ 481.1 Accrued Payroll and Related Expenses (In millions) June 30, 2021 December 31, 2020 Accrued wages, bonus and taxes $ 64.6 $ 87.7 Other accrued employee benefits 33.5 26.6 Total accrued payroll and related expenses $ 98.1 $ 114.3 Other Long-Term Liabilities (In millions) June 30, 2021 December 31, 2020 Finance lease obligations $ 57.4 $ 54.0 Contractual obligations 12.6 12.6 Other liabilities 17.7 14.3 Total other long-term liabilities $ 87.7 $ 80.9 16 Table of Contents 4. Debt Senior Convertible Notes The carrying amounts of our senior convertible notes were as follows as of the dates indicated: (Dollars in millions) June 30, 2021 December 31, 2020 Principal amount: Senior Convertible Notes due 2023 $ 850.0 $ 850.0 Senior Convertible Notes due 2025 1,207.5 1,207.5 Total principal amount 2,057.5 2,057.5 Unamortized debt discount ( 329.8 ) ( 371.1 ) Unamortized debt issuance costs ( 17.0 ) ( 19.2 ) Carrying amount of liability component $ 1,710.7 $ 1,667.2 Carrying amount of equity component $ 461.0 $ 461.0 Remaining amortization period of debt discount on the liability component: Senior Convertible Notes due 2023 2.4 years 2.9 years Senior Convertible Notes due 2025 4.4 years 4.9 years For our senior convertible notes for which the if-converted value exceeded the principal amount, the amount in excess of principal was as follows as of the dates indicated: (In millions) June 30, 2021 December 31, 2020 Senior Convertible Notes due 2023 $ 1,364.0 $ 1,077.5 Senior Convertible Notes due 2025 8.8 — Total by which the notes ’ if-converted value exceeds their principal amount $ 1,372.8 $ 1,077.5 17 Table of Contents The following table summarizes the components of interest expense and the effective interest rates for each of our senior convertible notes for the periods shown. Three Months Ended June 30, Six Months Ended June 30, (Dollars in millions) 2021 2020 2021 2020 Cash interest expense: Contractual coupon interest (1),(2) $ 2.2 $ 2.4 $ 4.6 $ 4.7 Non-cash interest expense: Accretion of debt discount 20.8 16.5 41.3 28.3 Amortization of debt issuance costs 1.1 1.1 2.2 2.0 Total interest expense recognized on senior notes $ 24.1 $ 20.0 $ 48.1 $ 35.0 Effective interest rates: Senior Convertible Notes due 2022 (2) * 5.1 % * 5.1 % Senior Convertible Notes due 2023 5.6 % 5.6 % 5.6 % 5.6 % Senior Convertible Notes due 2025 5.5 % 5.5 % 5.5 % 5.5 % (1) Interest on the 2022 Notes began accruing upon issuance and was payable semi-annually on May 15 and November 15 of each year. Interest on the 2023 Notes began accruing upon issuance and is payable semi-annually on June 1 and December 1 of each year. Interest on the 2025 Notes began accruing upon issuance and is payable semi-annually on May 15 and November 15 of each year. (2) Our $ 400.0 million aggregate principal amount of unsecured senior convertible notes issued in June 2017 with a stated interest rate of 0.75 % and maturity date of May 15, 2022 (the 2022 Notes) were repurchased and converted by August 2020. * Not applicable as no notes were outstanding at this date. Repurchase, Conversion, and Redemption of 2022 Notes In May 2020, we used approximately $ 282.6 million of the net proceeds from the 2025 Notes offering described below and issued 1,953,067 shares of Dexcom common stock to repurchase $ 260.0 million principal amount outstanding of the 2022 Notes and the associated conversion feature of the repurchased noted (which was recorded in additional paid-in capital). In addition, holders of 2022 Notes with a principal amount of $ 102.8 million exercised their option to convert their 2022 Notes during the three months ended June 30, 2020. We settled these conversions by issuing 1,037,319 shares of our common stock. As a result of the repurchase and conversions of the 2022 Notes, we recorded a loss on extinguishment of debt of $ 5.4 million for the three and six months ended June 30, 2020. The loss on extinguishment of debt includes the unamortized debt issuance costs for the 2022 Notes. 0.75% Senior Convertible Notes due 2023 In November 2018, we completed an offering of $ 850.0 million aggregate principal amount of unsecured senior convertible notes with a stated interest rate of 0.75 % and a maturity date of December 1, 2023 (the 2023 Notes). The net proceeds from the offering, after deducting initial purchasers’ discounts and costs directly related to the offering, were approximately $ 836.6 million. The initial conversion rate of the 2023 Notes is 6.0869 shares per $ 1,000 principal amount of notes, which is equivalent to a conversion price of approximately $ 164.29 per share, subject to adjustments. We entered into transactions for a convertible note hedge (the 2023 Note Hedge) and warrants (the 2023 Warrants) concurrently with the issuance of the 2023 Notes. The 2023 Notes may be settled in cash, stock, or a combination thereof, solely at our discretion. We use the if-converted method for assumed conversion of the 2023 Notes to compute the weighted average shares of common stock outstanding for diluted earnings per share. Since upon conversion by the holders we may elect to settle such conversion in shares of our common stock, cash, or a combination thereof, we accounted for the cash conversion option as an equity instrument classified to stockholders’ equity. As a result, we recognized $ 171.6 million in additional paid-in capital, net of debt issuance costs, during 2018. No principal payments are due on the 2023 Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the indenture relating to the 2023 Notes includes customary terms and covenants, including certain events of default after which the 2023 Notes may be due and payable immediately. 18 Table of Contents Conversion Rights at the Option of the Holders Holders of the 2023 Notes have the right to require us to repurchase for cash all or a portion of their notes at 100 % of their principal amount, plus any accrued and unpaid interest, upon the occurrence of a fundamental change (as defined in the indenture relating to the notes). We will also be required to increase the conversion rate for holders who convert their 2023 Notes in connection with certain fundamental changes occurring prior to the maturity date or following the delivery by Dexcom of a notice of redemption. Holders of the 2023 Notes may convert all or a portion of their notes at their option prior to 5:00 p.m., New York City time, on the business day immediately preceding September 1, 2023, in multiples of $ 1,000 principal amount, only under the following circumstances: (1) during any calendar quarter commencing after March 31, 2019 (and only during such calendar quarter), if the last reported sale price of Dexcom’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the applicable conversion price of the 2023 Notes on each such trading day; (2) during the five business day period after any five consecutive trading day period in which the trading price per $ 1,000 principal amount of the 2023 Notes for each day of that five -day consecutive trading day period was less than 98 % of the product of the last reported sale price of Dexcom’s common stock and the applicable conversion rate of the 2023 Notes on such trading day; (3) if we call any or all of the 2023 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate transactions. On or after September 1, 2023, until 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding the maturity date, holders of the 2023 Notes may convert all or a portion of their notes regardless of the foregoing circumstances. Circumstance (1) listed above occurred during the quarters ended December 31, 2020 and March 31, 2021. As a result, the 2023 Notes were convertible at the option of the holder from January 1, 2021 through June 30, 2021; actual conversions during that period were not significant. Circumstance (1) listed above also occurred during the quarter ended June 30, 2021 and as a result, the 2023 Notes will remain convertible at the option of the holder from July 1, 2021 through September 30, 2021. Conversion Rights at Our Option Dexcom may not redeem the 2023 Notes prior to December 1, 2021. On or after December 1, 2021 and prior to September 1, 2023, Dexcom may redeem for cash all or part of the 2023 Notes, at its option, if the last reported sale price of our common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which Dexcom provides notice of redemption. The redemption price will be equal to 100 % of the principal amount of the 2023 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. 2023 Note Hedge In connection with the offering of the 2023 Notes, in November 2018 we entered into convertible note hedge transactions with two of the initial purchasers of the 2023 Notes (the 2023 Counterparties) entitling us to purchase up to 5.2 million shares of our common stock at an initial price of $ 164.29 per share, each of which is subject to adjustment. The cost of the 2023 Note Hedge was $ 218.9 million and we accounted for it as an equity instrument by recognizing $ 218.9 million in additional paid-in capital during 2018. The 2023 Note Hedge will expire on December 1, 2023. The 2023 Note Hedge is expected to reduce the potential equity dilution upon any conversion of the 2023 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2023 Notes if the daily volume-weighted average price per share of our common stock exceeds the strike price of the 2023 Note Hedge. The strike price of the 2023 Note Hedge initially corresponds to the conversion price of the 2023 Notes and is subject to certain adjustments under the terms of the 2023 Note Hedge. An assumed exercise of the 2023 Note Hedge by us is considered anti-dilutive since the effect of the inclusion would always be anti-dilutive with respect to the calculation of diluted earnings per share. 2023 Warrants In November 2018, we also sold warrants to the 2023 Counterparties to acquire up to 5.2 million shares of our common stock. The 2023 Warrants require net share settlement and a pro rated number of warrants will expire on each of the 60 scheduled trading days starting on March 1, 2024. We received $ 183.8 million in cash proceeds from the sale of the 2023 Warrants, which we recorded in additional paid-in capital during 2018. The 2023 Warrants could have a dilutive effect on our earnings per share to the extent that the price of our common stock during a given measurement period exceeds the strike price 19 Table of Contents of the 2023 Warrants. The strike price of the 2023 Warrants is initially $ 198.38 per share and is subject to certain adjustments under the terms of the warrant agreements. We use the treasury share method for assumed conversion of the 2023 Warrants when computing the weighted average common shares outstanding for diluted earnings per share. 0.25% Senior Convertible Notes due 2025 In May 2020, we completed an offering of $ 1.21 billion aggregate principal amount of unsecured senior convertible notes with a stated interest rate of 0.25 % and a maturity date of November 15, 2025 (the 2025 Notes). The net proceeds from the offering, after deducting initial purchasers’ discounts and estimated costs directly related to the offering, were approximately $ 1.19 billion. The initial conversion rate of the 2025 Notes is 1.6655 shares per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $ 600.42 per share, subject to adjustments, with a maximum conversion rate of 2.3732. The 2025 Notes may be settled in cash, stock, or a combination thereof, solely at our discretion. We use the if-converted method for assumed conversion of the 2025 Notes to compute the weighted average shares of common stock outstanding for diluted earnings per share. Since upon conversion by the holders we may elect to settle such conversion in shares of our common stock, cash, or a combination thereof, we accounted for the cash conversion option as an equity instrument classified to stockholders’ equity. As a result, we recognized $ 289.4 million in additional paid-in-capital, net of debt issuance costs, during 2020. No principal payments are due on the 2025 Notes prior to maturity. Other than restrictions relating to certain fundamental changes and consolidations, mergers or asset sales and customary anti-dilution adjustments, the indenture relating to the 2025 Notes includes customary terms and covenants, including certain events of default after which the 2025 Notes may be due and payable immediately. Conversion Rights at the Option of the Holders In the event of a fundamental change (as defined in the indenture related to the 2025 Notes), holders of the 2025 Notes have the right to require us to repurchase for cash all or a portion of their notes at a price equal to 100 % of the principal amount of the 2025 Notes, plus any accrued and unpaid interest. Holders of the 2025 Notes who convert their notes in connection with a make-whole fundamental change (as defined in the indenture) or following the delivery by Dexcom of a notice of redemption are, under certain circumstances, entitled to an increase in the conversion rate. Prior to 5:00 p.m., New York City time, on the business day immediately preceding August 15, 2025, holders of the 2025 Notes may convert all or a portion of their notes, in multiples of $1,000 principal amount, only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2020 (and only during such calendar quarter), if the last reported sale price of Dexcom’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the applicable conversion price of the Notes on each such trading day; (2) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each day of that five day consecutive trading day period was less than 98 % of the product of the last reported sale price of Dexcom’s common stock and the applicable conversion rate of the Notes on such trading day; (3) if we call any or all of the Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate transactions. On or after August 15, 2025, until 5:00 p.m., New York City time, on the business day immediately preceding the maturity date, holders of the 2025 Notes may convert all or a portion of their notes regardless of the foregoing circumstances. Conversion Rights at Our Option Dexcom may not redeem the 2025 Notes prior to May 20, 2023. On or after May 20, 2023 and prior to August 15, 2025, Dexcom may redeem for cash all or part of the 2025 Notes, at its option, if the last reported sale price of our common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which Dexcom provides notice of redemption. The redemption price will be equal to 100 % of the principal amount of the 2025 Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. 20 Table of Contents Revolving Credit Agreement Terms of the Revolving Credit Agreement On December 19, 2018, we entered into an amended and restated revolving credit agreement which was subsequently amended on May 11, 2020 (as amended, the Credit Agreement). The Credit Agreement provides for available principal amount of $ 200.0 million which can be increased up to $ 500.0 million at our option subject to customary conditions and approval of our lenders. Borrowings under the Credit Agreement are available for general corporate purposes, including working capital and capital expenditures. Information related to availability and outstanding borrowings on our Credit Agreement is as follows as of the date indicated: (In millions) June 30, 2021 Available principal amount $ 200.0 Letters of credit sub-facility 10.0 Outstanding borrowings — Outstanding letters of credit 6.4 Total available balance $ 193.6 Revolving loans under the Credit Agreement bear interest at our choice of one of two base rates plus a range of applicable margin rates that are based on our leverage ratio. The first base rate is the highest of (a) the publicly announced JPMorgan Chase prime rate, (b) the federal funds rate, or (c) the overnight bank funding rate, and the applicable margin rate ranges from 0.375 % to 1.000 %. The second base rate is a LIBOR-based rate, and the applicable margin rate ranges from 1.375 % to 2.000 %. We will also pay a commitment fee of between 0.2 % and 0.3 %, payable quarterly in arrears, on the average daily unused amount of the revolving facility based on our leverage ratio. The Credit Agreement will mature on the earlier to occur of (i) December 19, 2023, (ii) 91 days prior to the maturity date of the 2022 Notes or (iii) 91 days prior to the maturity date of the 2023 Notes if both (a) the aggregate outstanding principal amount of the 2022 Notes or the 2023 Notes, as applicable, is greater than EBITDA for the period of four consecutive fiscal quarters ending prior to such date and (b) unrestricted domestic cash on hand is less than the aggregate outstanding principal amount of the 2022 Notes or the 2023 Notes, as applicable, plus $ 100.0 million. Our obligations under the Credit Agreement are guaranteed by our existing and future wholly-owned domestic subsidiaries, and are secured by a first-priority security interest in substantially all of the assets of Dexcom and the guarantors, including all or a portion of the equity interests of our domestic subsidiaries and first-tier foreign subsidiaries but excluding real property and intellectual property (which is subject to a negative pledge). The Credit Agreement contains covenants that limit certain indebtedness, liens, investments, transactions with affiliates, dividends and other restricted payments, subordinated indebtedness and amendments to subordinated indebtedness documents, and sale and leaseback transactions of Dexcom or any of its domestic subsidiaries. The Credit Agreement also requires us to maintain a maximum leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with these covenants as of June 30, 2021. 5. Contingencies Litigation We are subject to various claims, complaints and legal actions that arise from time to time in the normal course of business, including commercial insurance, product liability, intellectual property and employment related matters. In addition, from time to time we may bring claims or initiate lawsuits against various third parties with respect to matters arising out of the ordinary course of our business, including commercial and employment related matters. During the quarter ended June 30, 2021 and the third quarter of 2021, we and certain Abbott entities served complaints for patent infringement against each other in multiple jurisdictions, inside and outside the United States. We intend to vigorously pursue our claims and defenses in these cases to protect our intellectual property and to defend against Abbott’s infringement allegations. We do not believe we are party to any other currently pending legal proceedings, the outcome of which could have a material adverse effect on our business, financial condition or results of operations. There can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our business, financial condition or results of operations. 21 Table of Contents 6. Income Taxes We estimate our annual effective tax rate to be 27.1 % for the full year 2021, which differed from the U.S. federal statutory rate due to state and foreign income taxes, nondeductible executive compensation, and increases to unrecognized tax benefits offset by federal research tax credits generated. Our negative effective tax rate of 5.4 % for the six months ended June 30, 2021 was due to excess tax benefits recognized for employee share-based 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. We operate in various jurisdictions outside of the U.S., many of which are enacting Anti-Tax Avoidance Directive (ATAD) laws that may impact our ability to deduct certain costs, which could potentially affect our estimated annual effective tax rate. We have made certain estimations and assumptions in determining the estimated annual effective tax rate, including the impact of these laws, the final application of which may differ from our estimates. 7. Stockholders’ Equity Share-Based Compensation Our share-based compensation expense is associated with restricted stock units, or RSUs, performance stock units, or PSUs, and our Employee Stock Purchase Plan, or ESPP. The following table summarizes our share-based compensation expense included in our consolidated statements of operations for the periods shown. Three Months Ended June 30, Six Months Ended June 30, (In millions) 2021 2020 2021 2020 Cost of sales $ 2.6 $ 4.1 $ 4.6 $ 6.0 Research and development 11.1 9.8 21.5 18.0 Selling, general and administrative 17.9 16.8 33.5 30.6 Total share-based compensation expense $ 31.6 $ 30.7 $ 59.6 $ 54.6 At June 30, 2021, unrecognized estimated compensation costs related to RSUs, PSUs and ESPP totaled $ 210.9 million and is expected to be recognized through 2024. Equity Award Activity The total vest date fair value of RSUs and PSUs that vested during the six months ended June 30, 2021 was $ 198.6 million and $ 29.5 million, respectively. 8. Business Segment and Geographic Information Reportable Segments An operating segment is identified as a component of a business that has discrete financial information available and for which the chief operating decision maker must decide the level of resource allocation. In addition, the guidance for segment reporting indicates certain quantitative materiality thresholds. None of the components of our business meet the definition of an operating segment. We currently consider our operations to be, and manage our business globally within, one reportable segment, which is consistent with how our President and Chief Executive Officer, who is our chief operating decision maker, reviews our business, makes investment and resource allocation decisions, and assesses operating performance. Disaggregation of Revenue We disaggregate revenue by geographic region and by major sales channel. We have determined that disaggregating revenue into these categories achieves the ASC Topic 606 disclosure objectives of depicting how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Dexcom is domiciled in the United States. We sell our CGM systems through a direct sales force in the United States, Canada and some countries in Europe, and through distribution arrangements in the United States, and certain countries in Africa, Asia, Europe, Latin America, and the Middle East, as well as Australia, Canada, and New Zealand. 22 Table of Contents Revenues by geographic region During the three and six months ended June 30, 2021 and 2020, no individual country outside the United States generated revenue that represented more than 10% of our total revenue. The table below sets forth revenues by our two primary geographical markets, the United States and outside of the United States, based on the geographic location to which we deliver the components. The majority of our long-lived assets are located in the United States. Three Months Ended June 30, 2021 Three Months Ended June 30, 2020 (Dollars in millions) Amount % of Total Amount % of Total United States $ 461.5 78 % $ 367.1 81 % Outside of the United States 133.6 22 % 84.7 19 % Total revenues $ 595.1 100 % $ 451.8 100 % Six Months Ended June 30, 2021 Six Months Ended June 30, 2020 (Dollars in millions) Amount % of Total Amount % of Total United States $ 842.7 77 % $ 659.4 77 % Outside of the United States 257.4 23 % 197.5 23 % Total revenues $ 1,100.1 100 % $ 856.9 100 % Revenues by customer sales channel The following table sets forth revenues by major sales channel for the periods shown: Three Months Ended June 30, 2021 Three Months Ended June 30, 2020 (Dollars in millions) Amount % of Total Amount % of Total Distributor $ 495.9 83 % $ 331.7 73 % Direct 99.2 17 % 120.1 27 % Total revenues $ 595.1 100 % $ 451.8 100 % Six Months Ended June 30, 2021 Six Months Ended June 30, 2020 (Dollars in millions) Amount % of Total Amount % of Total Distributor $ 886.6 81 % $ 617.8 72 % Direct 213.5 19 % 239.1 28 % Total revenues $ 1,100.1 100 % $ 856.9 100 % 23 Table of Contents