What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-28 compared with 2021-07-29 · 76 added, 64 removed, 201 unchanged (41% of the section changed)

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Global Presence

We have built a direct sales organization in the United States, Canada and certain countries in Europe to call on health care professionals, such as endocrinologists, physicians and diabetes educators, who can educate and influence patient adoption of continuous glucose monitoring.

We have built a direct sales organization in the United States, Australia, Canada, New Zealand, and certain countries in Europe to call on health care professionals, such as endocrinologists, physicians and diabetes educators, who can educate and influence patient adoption of continuous glucose monitoring.

To complement our direct sales efforts, we have entered into 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 that allow distributors to sell our products.

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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 six months ended June 30, 2021.

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

Results of Operations

Key Highlights for the Three Months Ended June 30, 2021

Key Highlights for the Three Months Ended September 30, 2021

Revenues Gross Profit Operating Income

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$70.9 million $247.3 million $2.70 billion

up 36% from the same period 2020

down 2% from the same period 2020

up 68% from the same period 2020

down .4% from fiscal year 2020

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Financial Overview

Three Months Ended June 30, 2021 - 2020

Three Months Ended

September 30, 2021 - 2020

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

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Diluted net income per share $ 0.71 $ 0.73 $ (0.02) (3) %

Six Months Ended June 30, 2021 - 2020

Nine Months Ended

September 30, 2021 - 2020

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

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Diluted net income per share $ 1.74 $ 1.43 $ 0.31 22 %

* Not meaningful

Revenue, Cost of Sales and Gross Profit

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annual insurance deductible resets and unfunded flexible spending accounts.

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 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.

Three Months Ended September 30, 2021 Compared to Three Months Ended September 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 increased volumes in the U.S.

pharmacy channel at a lower price aligned with the evolution of our U.S.

channel strategy.

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 September 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 September 30, 2020.

Cost of sales increased primarily due to increased sales volume.

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.

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

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

pharmacy channel at a lower price aligned with the evolution of our U.S.

channel strategy.

Disposable sensor and other revenue comprised approximately 84% of total revenue and Reusable Hardware revenue comprised approximately 16% of total revenue for the nine months ended

September 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 nine months ended September 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.

The increase in gross profit and gross profit margin in the first nine months of 2021 compared to the first nine 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 June 30, 2021 Compared to Quarter Ended June 30, 2020

Three Months Ended June 30, 2021 - 2020

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

Three Months Ended

September 30, 2021 - 2020

(In millions) 2021 2020 $ Change % Change

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Research and Development 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.

Research and development expense increased primarily due to $20.0 million in additional third party and consulting fees primarily related to software, $14.1 million in additional salaries, bonuses, and payroll-related costs, and $2.6 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 $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

Selling, general and administrative expense increased primarily due to $13.4 million in additional salaries, bonuses, and payroll-related costs, $12.1 million in additional advertising and marketing costs, and $5.2 million in additional legal costs partially offset by $4.7 million in lower third party service provider fees.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Nine Months Ended

September 30, 2021 - 2020

(In millions) 2021 2020 $ Change % Change

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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.

Research and development expense increased primarily due to $51.3 million in additional third party and consulting fees primarily related to software, $42.1 million in additional salaries, bonuses, and payroll-related costs, and $11.7 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.

Selling, general and administrative expense increased primarily due to $56.5 million in additional advertising and marketing costs, $46.7 million in additional salaries, bonuses, and payroll-related costs, $8.7 million of investments in customer experience, partially offset by $9.2 million in lower third party service provider fees.

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 $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.

Interest expense increased $0.7 million to $25.1 million for the three months ended September 30, 2021 compared to $24.4 million for the same period of 2020.

Interest expense increased $15.0 million to $75.1 million for the nine months ended September 30, 2021 compared to $60.1 million for the nine months ended September 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 $0.4 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 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.

Loss on Extinguishment of Debt

We recorded a $0.8 million loss on extinguishment of debt during the three and nine months ended September 30, 2021 in connection with the conversions of a portion of our 2023 Notes.

We recorded losses on extinguishment of debt of $0.5 million and $5.9 million during the three and nine months ended September 30, 2020, respectively, in connection with the repurchase and conversions of our 2022 Notes.

See Note 4 to the consolidated financial statements in Part I, Item 1 of this Quarterly Report for more information about these transactions.

Interest and Other Income (Expense), Net

Interest and other income (expense), 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 $0.3 million and $1.2 million for the three and nine months ended September 30, 2021, respectively, compared to $2.4 million and $12.0 million for the three and nine months ended September 30, 2020, respectively.

The decrease in interest income for the three months ended September 30, 2021 was primarily related to a decrease in average invested balances compared to the same period in 2020.

The decrease in interest income for the nine months ended September 30, 2021 was primarily related to a decline in market interest rates, partially offset by an increase in average invested balances compared to the same period in 2020.

Income Tax Expense

We recorded income tax expense of $19.8 million on pre-tax income of $90.7 million for the three months ended September 30, 2021 compared to income tax expense of $2.9 million on pre-tax income of $75.1 million for the three months ended September 30, 2020.

We recorded income tax expense of $14.5 million on pre-tax income of $188.6 million for the nine months ended September 30, 2021 and income tax expense of $5.3 million on pre-tax income of $143.7 million for the nine months ended September 30, 2020.

Our estimated annual effective tax rate from normal, recurring operations did not change materially during the three months ended September 30, 2021.

Our income tax expense for the three months ended September 30, 2021 also includes the discrete impact of excess tax benefits from stock compensation.

Our income tax expense 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.

Our income tax expense for the nine months ended September 30, 2021 is primarily attributable to income tax expense from normal, recurring operations at an estimated annual effective tax rate of 27.8%, 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.

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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, 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.

dollar and foreign currencies, primarily the Australian Dollar, the British Pound, the Canadian Dollar, 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.

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 $2.58 billion as of June 30, 2021.

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

Our cash, cash equivalents and short-term marketable securities totaled $2.70 billion as of September 30, 2021.

None of those funds were restricted and approximately 95% of those funds were located in the United States.

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.

Our cash, cash equivalents and short-term marketable securities as of September 30, 2021 decreased by $9.8 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.

Revolving Credit Agreement

In December 2018, we entered into an amended and restated five-year $200.0 million revolving credit agreement which was subsequently amended on May 11, 2020 (as amended, the “Credit Agreement”).

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.

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.

As of September 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.

On October 13, 2021, we amended and restated the Credit Agreement (as amended and restated, the Amended Credit Agreement).

The Amended Credit Agreement also includes a subfacility of up to $25.0 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 Amended 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 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.

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

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 June 30, 2021:

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

Issuance Date Coupon Rate Aggregate

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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.

Note 4 to the consolidated financial statements in Part I, Item 1 of this Quarterly Report for conversion activity related to the 2023 Notes and shares received as the result of exercising a portion of the 2023 Note Hedge.

2023 Warrants

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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 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.

As of September 30, 2021, we had $2.70 billion in cash, cash equivalents and short-term marketable securities, which is a decrease of $9.8 million compared to $2.71 billion as of December 31, 2020.

The primary cash flows during the nine months ended September 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.

Six Months Ended

June 30, 2021 June 30, 2020

Nine Months Ended

September 30, 2021 September 30, 2020

Operating Cash Flows $174.1 million of net income and $255.2 million of net non-cash adjustments, partially offset by $92.6 million of net changes in working capital balances

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Net non-cash adjustments were primarily related to share-based compensation, non-cash interest expense for our senior convertible notes, and depreciation and amortization.

Investing Cash Flows $456.4 million net sales of marketable securities

Investing Cash Flows $625.1 million net proceeds from marketable securities

$844.6 million net purchases of marketable securities

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$138.8 million capital expenditures

$31.6 million in acquisitions, net of cash acquired

$4.0 million in minority equity investments

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

$8.3 million payments for financing leases

$9.1 million in payments for financing leases

$15.3 million in proceeds from the issuance of common stock under our employee stock plans

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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 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.

There were no significant changes to our 2025 Notes and lease obligations.

See Note 4 to the consolidated financial statements in Part I, Item 1 of this Quarterly Report for conversion activity related to our 2023 Notes.

As of September 30, 2021, we had approximately $503.9 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 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.

As of September 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