What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-27 compared with 2023-04-27 · 103 added, 65 removed, 171 unchanged (50% of the section changed)

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This document, including the following Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that are not purely historical regarding Dexcom’s or its management’s intentions, beliefs, expectations and strategies for the future.

These forward-looking statements fall within the meaning of the federal securities laws that relate to future events or our future financial performance.

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “intend,” “potential” or “continue” or the negative of these terms or other comparable terminology.

Forward-looking statements are made as of the date of this report, deal with future events, are subject to various risks and uncertainties, and actual results could differ materially from those anticipated in those forward-looking statements.

The risks and uncertainties that could cause actual results to differ materially are more fully described under “Risk Factors” in Part II, Item 1A of this Quarterly Report, elsewhere in this Quarterly Report, and in our other reports filed with the SEC.

We assume no obligation to update any of the forward-looking statements after the date of this report or to conform these forward-looking statements to actual results.

You should read the following discussion and analysis together with our consolidated financial statements and related notes in Part I, Item 1 of this Quarterly Report.

We are a medical device company primarily focused on the design, development and commercialization of continuous glucose monitoring, or CGM, systems for the management of diabetes by patients, caregivers, and clinicians around the world.

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We believe that the estimates, assumptions and judgments involved in the accounting policies described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates.

There were no material changes to our critical accounting estimates during the three months ended March 31, 2023.

There were no material changes to our critical accounting estimates during the six months ended June 30, 2023.

Overview of Financial Results

The most important financial indicators that we use to assess our business are revenue, gross profit, operating income, net income, and operating cash flow.

Key Highlights for the Three Months Ended March 31, 2023 include the following:

Key Highlights for the Three Months Ended June 30, 2023 include the following:

Revenue Gross Profit Operating Income Net Income Operating

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up 66% from the same period 2022

down 50% from the same period 2022

up 128% from the same period 2022

We ended the first quarter of 2023 with cash, cash equivalents and short-term marketable securities totaling $2.57 billion.

up 10% from the same period 2022

We ended the second quarter of 2023 with cash, cash equivalents and short-term marketable securities totaling $3.64 billion.

Business Trends

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• Continued product innovation and competition from other CGM device makers.

• Our ability to scale efficiently with our Malaysia manufacturing facility, currently under construction.

• Our ability to scale efficiently with our Malaysia manufacturing facility.

Results of Operations

Financial Overview

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

Three Months Ended March 31, 2023 - 2022

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

Three Months Ended June 30, 2023 - 2022

(In millions, except per share amounts) 2023 % of Revenue (1)

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Interest expense (5.9) (1) % (4.7) (1) % (1.2) 26 %

Income from equity investments — — % 0.2 — % (0.2) **

Interest and other income (expense), net 21.9 3 % (0.8) — % 22.7 **

Interest and other income, net 37.1 4 % 3.0 — % 34.1 **

Income before income taxes 159.3 18 % 75.3 11 % 84.0 **

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Income from equity investments is comprised of realized gains from the sale of an equity investment.

Interest and other income (expense), net

Interest and other income (expense), net consists primarily of interest income on our cash, cash equivalents and short-term marketable securities portfolio and foreign currency transaction gains and losses due to the effects of foreign currency fluctuations.

Three Months Ended March 31, 2023 Compared to

Three Months Ended March 31, 2022

Interest and other income, net

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

Three Months Ended June 30, 2023 Compared to

Three Months Ended June 30, 2022

Revenue 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 mix shift and price associated with the evolution of our channel and product strategy.

Disposable sensor and other revenue comprised approximately 88% of total revenue and Reusable Hardware revenue comprised approximately 12% of total revenue for the three months ended March 31, 2023.

Disposable sensor and other revenue comprised approximately 86% of total revenue and Reusable Hardware revenue comprised approximately 14% of total revenue for the three months ended March 31, 2022.

Disposable sensor and other revenue comprised approximately 89% of total revenue and Reusable Hardware revenue comprised approximately 11% of total revenue for the three months ended June 30, 2023.

Disposable sensor and other revenue comprised approximately 86% of total revenue and Reusable Hardware revenue comprised approximately 14% of total revenue for the three months ended June 30, 2022.

Cost of sales & Gross profit Cost of sales and gross profit increased primarily due to an increase in sales volume.

The decrease in gross profit margin percentage in the first quarter of 2023 compared to the first quarter of 2022 was primarily driven by price, product, and channel mix changes, amortization of an intangible asset, and impact of foreign currencies on revenue.

Research and development expense Research and development expense decreased primarily due to $8.5 million in lower costs related to set-up and validation costs for new CGM equipment and $8.2 million in lower third party and consulting fees, most notably related to software development for new products and significant enhancements.

The decrease in gross profit margin percentage in the second quarter of 2023 compared to the second quarter of 2022 was primarily driven by price, product, and channel mix changes, amortization of an intangible asset, and impact of foreign currencies on revenue.

Research and development expense Research and development expense decreased primarily due to $7.8 million of lower third party and consulting fees, most notably related to software development for new products and significant enhancements and $4.0 million in lower costs related to set-up and validation costs for new CGM equipment, partially offset by $6.5 million in compensation-related costs primarily due to higher headcount.

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 $21.7 million in advertising and marketing costs as a result of an increase in worldwide marketing campaigns, $19.3 million in compensation-related costs primarily due to higher headcount, and $16.9 million in legal expense primarily related to a patent infringement lawsuit.

Interest and other income (expense), net Interest and other income (expense), net, increased primarily due to $21.3 million in interest income on our short-term marketable securities portfolio.

The increase in interest income was primarily related to a significant increase in market interest rates, partially offset by a decrease in the average invested balances compared to the same period in 2022.

Income tax expense (benefit) The income tax expense recorded for the three months ended March 31, 2023 was primarily due to income tax expense from normal, recurring operations at an estimated annual effective rate of 30.9%, partially offset by discrete excess tax benefits recognized for share-based compensation for employees.

The income tax benefit recorded for the three months ended March 31, 2022 was primarily attributable to discrete excess tax benefits recognized for share-based compensation for employees and the Verily milestone payment.

Selling, general and administrative expense Selling, general and administrative expense increased primarily due to $22.4 million in compensation-related costs most notably due to higher headcount, $13.5 million in legal expense primarily related to a patent infringement lawsuit, and $10.3 million in advertising and marketing costs as a result of an increase in worldwide marketing campaigns.

Interest and other income, net Interest and other income, net, increased primarily due to $33.7 million in interest income on our cash, cash equivalents, and marketable securities portfolio.

The increase in interest income was related to a significant increase in market interest rates, as well as an increase in the average invested balances compared to the same period in 2022.

Income tax expense (benefit) Our estimated annual effective tax rate from normal, recurring operations decreased from 30.9% to 28.5% during the three months ended June 30, 2023 primarily due to impacts of foreign operations.

There were no significant discrete items recognized during the three months ended June 30, 2023.

The income tax expense recorded for the three months ended June 30, 2022 was primarily attributable to income tax expense from normal, recurring operations.

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

Six Months Ended June 30, 2023 - 2022

(In millions, except per share amounts) 2023 % of Revenue (1)

2022 % of Revenue (1)

$ Change % Change

Revenue $ 1,612.8 100 % $ 1,325.0 100 % $ 287.8 22 %

Cost of sales 603.8 37 % 477.4 36 % 126.4 26 %

Gross profit 1,009.0 62.6 % 847.6 64.0 % 161.4 19 %

Operating expenses:

Research and development 238.3 15 % 257.6 19 % (19.3) (7) %

Amortization of intangible assets 3.5 — % 3.9 — % (0.4) (10) %

Selling, general and administrative 591.9 37 % 467.8 35 % 124.1 27 %

Total operating expenses 833.7 52 % 729.3 55 % 104.4 14 %

Operating income 175.3 11 % 118.3 9 % 57.0 48 %

Interest expense (10.5) (1) % (9.3) (1) % (1.2) 13 %

Income from equity investments — — % 0.2 — % (0.2) (100) %

Interest and other income, net 59.0 4 % 2.2 — % 56.8 **

Income before income taxes 223.8 14 % 111.4 8 % 112.4 **

Income tax expense (benefit) 59.3 4 % (36.8) (3) % 96.1 **

Net income $ 164.5 10 % $ 148.2 11 % $ 16.3 11 %

Basic net income per share $ 0.43 ** $ 0.38 ** $ 0.05 13 %

Diluted net income per share $ 0.40 ** $ 0.36 ** $ 0.04 11 %

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

** Not meaningful

Six Months Ended June 30, 2023 Compared to

Six Months Ended June 30, 2022

Disposable sensor and other revenue comprised approximately 89% of total revenue and Reusable Hardware revenue comprised approximately 11% of total revenue for the six months ended June 30, 2023.

Disposable sensor and other revenue comprised approximately 86% of total revenue and Reusable Hardware revenue comprised approximately 14% of total revenue for the six months ended June 30, 2022.

Cost of sales & Gross profit Cost of sales and gross profit increased primarily due to an increase in sales volume.

The decrease in gross profit margin percentage in 2023 compared to 2022 was primarily driven by price, product, and channel mix changes, amortization of an intangible asset, and impact of foreign currencies on revenue.

Research and development expense Research and development expense decreased primarily due to $16.0 million of lower third party and consulting fees most notably related to software development for new products and significant enhancements and $12.5 million in lower costs related to set-up and validation costs for new CGM equipment, partially offset by $13.2 million in compensation-related costs primarily due to higher headcount.

Selling, general and administrative expense Selling, general and administrative expense increased primarily due to $41.7 million in compensation-related costs most notably due to higher headcount, $30.4 million in legal expense primarily related to a patent infringement lawsuit, and $32.0 million in advertising and marketing costs due to an increase in worldwide marketing campaigns.

Interest and other income, net Interest and other income, net, increased primarily due to $55.0 million in interest income on our cash, cash equivalents, and marketable securities portfolio.

The increase in interest income was related to a significant increase in market interest rates, as well as an increase in the average invested balances compared to the same period in 2022.

Income tax expense (benefit) The income tax expense recorded for the six months ended June 30, 2023 is primarily attributable to income tax expense from normal, recurring operations, partially offset by excess tax benefits recognized for share-based compensation for employees (net of disallowed executive compensation), and generation of research and development tax credits.

The income tax benefit recorded for the six months ended June 30, 2022 is primarily attributable to income tax expense from normal, recurring operations, offset by excess tax benefits recognized for share-based compensation for employees (net of disallowed executive compensation) and the Verily milestone payment, and generation of research and development tax credits.

Liquidity and Capital Resources

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A substantial portion of our operations are located in the United States, and the majority of our sales since inception have been made in U.S.

We will be exposed to additional foreign currency exchange risk related to our international operations when we begin manufacturing internationally and as our business continues to increase in international markets.

We will be exposed to additional foreign currency exchange risk related to our international operations as we expand our manufacturing internationally and as our business continues to increase in international markets.

See “Foreign Currency Exchange Risk” in Part II, Item 7A of our Annual Report for more information.

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Cash, cash equivalents and short-term marketable securities

Our cash, cash equivalents and short-term marketable securities totaled $2.57 billion as of March 31, 2023.

Our cash, cash equivalents and short-term marketable securities totaled $3.64 billion as of June 30, 2023.

None of those funds were restricted and $3.47 billion (approximately 95%) of those funds were located in the United States.

Cash flow from Operations

For the three months ended March 31, 2023, we had positive cash flows of $155.4 million from operating activities.

For the six months ended June 30, 2023, we had positive cash flows of $345.7 million from operating activities.

We anticipate that we will continue to generate positive cash flows from operations for the foreseeable future.

Senior Convertible Notes

We received net proceeds of $836.6 million in November 2018 from the 2023 Notes offering and net proceeds of $1.19 billion in May 2020 from the 2025 Notes offering.

We received net proceeds of $836.6 million in November 2018 from the 2023 Notes offering, net proceeds of $1.19 billion in May 2020 from the 2025 Notes offering, and net proceeds of $1.23 billion from the 2028 Notes offering.

We used $100.0 million of the net proceeds from the offering of the 2023 Notes to repurchase a portion of our common stock in 2018.

We used $282.6 million of the net proceeds from the offering of the 2025 Notes to repurchase a portion of our senior convertible notes due 2022, or 2022 Notes.

We intend to use the remainder of the net proceeds from the 2023 Notes and 2025 Notes offerings for general corporate purposes and capital expenditures, including working capital needs.

We used $282.6 million of the net proceeds from the offering of the 2025 Notes to repurchase a portion of our senior convertible notes due in 2022.

We used $289.9 million of the net proceeds from the offering of the 2028 Notes to purchase capped call transactions and repurchase shares of our common stock in May 2023.

We intend to use the remainder of the net proceeds from the 2023 Notes, 2025 Notes, and 2028 Notes offerings for general corporate purposes and capital expenditures, including working capital needs.

We may also use the net proceeds to expand our current business through in-licensing or acquisitions of, or investments in, other businesses, products or technologies;

however, we do not have any significant commitments with respect to any such acquisitions or investments at this time.

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.

See Note 5 “Debt” 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 as well as for more information about the 2023 Notes and the 2025 Notes, the 2023 Note Hedge, and the 2023 Warrants.

In connection with the 2023 Notes and 2028 Notes offerings, we purchased the 2023 Note Hedge and 2028 Capped Calls, respectively.

See Note 5 “Debt” 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 as well as for more information about our senior convertible notes, the 2023 Note Hedge, the 2023 Warrants, and the 2028 Capped Calls.

Revolving Credit Agreement

As of March 31, 2023, we had no outstanding borrowings, $7.3 million in outstanding letters of credit, and a total available balance of $192.7 million under the Amended Credit Agreement.

As of June 30, 2023, we had no outstanding borrowings, $7.3 million in outstanding letters of credit, and a total available balance of $192.7 million under the Amended Credit Agreement.

We monitor counterparty risk associated with the institutional lenders that are providing the Credit Facility.

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Our short-term liquidity requirements primarily consist of regular operating costs, interest payments related to our senior convertible notes, capital expenditures for the development of our manufacturing facilities and office spaces, and short-term material cash requirements as described below.

As of March 31, 2023, we had a working capital ratio of 2.02 and a quick ratio of 1.72, which indicates that our current assets are more than enough to cover our short-term liabilities.

We expect to have significant capital expenditures for the next year to drive our strategic initiative of building out our manufacturing facility and equipment in Malaysia and the capacity scale-up in Mesa, Arizona.

As of June 30, 2023, we had a working capital ratio of 2.42 and a quick ratio of 2.12, which indicates that our current assets are more than enough to cover our short-term liabilities.

We expect to have significant capital expenditures for the next year to drive our strategic initiative of building out our manufacturing facilities and/or equipment in Malaysia and Ireland and the capacity scale-up in Mesa, Arizona.

We believe that our cash, cash equivalents, and marketable securities balances, projected cash contributions from our commercial operations, and borrowings under our Credit Facility will be sufficient to meet our anticipated seasonal working capital needs, all capital expenditure requirements, material cash requirements as described below, and other liquidity requirements associated with our operations for at least the next 12 months.

We may use cash to repurchase Dexcom shares or for other strategic initiatives that strengthen our foundation for long-term growth.

We may use cash for strategic initiatives that strengthen our foundation for long-term growth.

On July 26, 2022, a duly authorized committee of our Board of Directors authorized a share repurchase program of up to $700.0 million of our outstanding common stock, with a repurchase period ending no later than June 30, 2023.

As of March 31, 2023, approximately $142.3 million remained available for repurchase pursuant to our share repurchase program.

The Share Repurchase Program and the remaining authorization of approximately $142.3 million expired on June 30, 2023.

See Note 8 “Stockholders’ Equity” to the consolidated financial statements in Part I, Item 1 of this Quarterly Report for more details.

As of March 31, 2023, we have outstanding senior convertible notes that will mature in December 2023.

As of June 30, 2023, we have outstanding senior convertible notes that will mature in December 2023.

During the second quarter of 2023, holders of $532.2 million in aggregate principal amount of the 2023 Notes exercised their conversion option.

We elected to settle these conversions through a combination of cash for the principal amount and common stock for any amount due in excess of the principal amount.

The conversions will settle in the third quarter of 2023.

From July 1, 2023 through July 26, 2023, holders of $7.8 million in aggregate principal amount of the 2023 Notes exercised their conversion option.

We may elect to settle the remaining principal amount outstanding of the 2023 Notes with cash and/or shares of our common stock prior to maturity once certain conditions are met.

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Our long-term liquidity requirements primarily consist of interest and principal payments related to our senior convertible notes, capital expenditures for the development of our manufacturing facilities and office spaces, and long-term material cash requirements as described below.

As of March 31, 2023, we had a debt-to-assets ratio of 0.36, which indicates that our total assets are more than enough to cover our short-term and long-term debts.

As of June 30, 2023, we had a debt-to-assets ratio of 0.47, which indicates that our total assets are more than enough to cover our short-term and long-term debts.

As demand grows for our products, we will continue to expand global operations to meet demand through investments in manufacturing and operations.

We expect to meet our long-term liquidity requirements from our main sources of liquidity as described above to support our future operations, capital expenditures, acquisitions, and other liquidity requirements associated with our operations beyond the next 12 months.

As of March 31, 2023, we have outstanding senior convertible notes that will mature in November 2025 for the 2025 Notes.

As of June 30, 2023, we have outstanding senior convertible notes that will mature in November 2025 and May 2028.

However, the outstanding principal of our senior convertible notes could be converted into cash and/or shares of our common stock prior to maturity once certain conditions are met.

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See “Contractual Obligations” below in Part I, Item 2 of this Quarterly Report for more information.

We issued senior convertible notes in November 2018 and May 2020.

We issued senior convertible notes in November 2018, May 2020, and May 2023.

These obligations include both principal and interest for these notes.

Although these notes mature in December 2023 and November 2025, they may be converted into cash and shares of our common stock prior to maturity if certain conditions are met.

Although these notes mature in December 2023, November 2025, and May 2028, respectively, they may be converted into cash and/or shares of our common stock prior to maturity if certain conditions are met.

Any conversion prior to maturity can result in repayment of the principal amounts sooner than the scheduled repayment.

As of March 31, 2023, we had outstanding letters of credit of $7.3 million for which we cannot forecast with certainty the amount and timing of repayments.

As of June 30, 2023, we had outstanding letters of credit of $7.3 million for which we cannot forecast with certainty the amount and timing of repayments.

See Note 5 “Debt” to the consolidated financial statements in Part I, Item 1 of this Quarterly Report for further discussion of the terms of our senior convertible notes.

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We also have land leases in Penang, Malaysia for the build-out of our international manufacturing facility lease that expire through 2082.

We anticipate incurring significant expenditures related to the build-out of the Malaysia manufacturing facility and equipment in the next two years.

We anticipate incurring significant expenditures related to the build-out of the Malaysia manufacturing facility and equipment over the next year and the build-out of the Ireland manufacturing facility and equipment over the next five years.

See Note 6 “Leases and Other Commitments” to the consolidated financial statements in Part II, Item 8 of our Annual Report for more information about our leases.

See Note 5 “Debt” 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.

The following table sets forth a summary of our cash flows for the periods indicated.

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

As of March 31, 2023, we had $2.57 billion in cash, cash equivalents and short-term marketable securities, which is an increase of $110.8 million compared to $2.46 billion as of December 31, 2022.

The primary cash flows during the three months ended March 31, 2023 and March 31, 2022 are described below.

As of June 30, 2023, we had $3.64 billion in cash, cash equivalents and short-term marketable securities, which is an increase of $1.18 billion compared to $2.46 billion as of December 31, 2022.

The primary cash flows during the six months ended June 30, 2023 and June 30, 2022 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, 2023 March 31, 2022

Six Months Ended

June 30, 2023 June 30, 2022

Operating Cash Flows + $164.5 million of net income, $82.9 million of net non-cash adjustments, and a net increase of $98.3 million in changes of working capital balances

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Net non-cash adjustments were primarily related to share-based compensation and depreciation and amortization.

Investing Cash Flows - $112.0 million net purchases of marketable securities

- $304.7 million net purchases of marketable securities

- $74.7 million capital expenditures

- $101.6 million capital expenditures

Financing Cash Flows + $12.3 million in proceeds from the issuance of common stock under our employee stock plans

+ $10.1 million in proceeds from the issuance of common stock under our employee stock plans

- $1.1 million in payments for financing leases

Investing Cash Flows - $592.9 million in net purchases of marketable securities

- $358.1 million in net purchases of marketable securities

- $133.7 million in capital expenditures

- $193.1 million in capital expenditures

- $16.0 million in purchases of equity investments

Financing Cash Flows + $1.23 billion in proceeds from issuance of senior convertible notes, net of issuance costs

+ $10.1 million in proceeds from issuance of common stock under our employee stock plans

+ $12.3 million in proceeds from issuance of common stock under our employee stock plans

- $7.7 million in payments for financing leases

- $188.7 million in purchases of treasury stock

- $101.3 million in purchases of capped call transactions

Contractual Obligations

We presented our contractual obligations as of December 31, 2022 in Note 6 “Leases and Other Commitments” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

There were no significant changes to our lease obligations during the three months ended March 31, 2023.

As of March 31, 2023, we had approximately $314.7 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 lease obligations during the six months ended June 30, 2023.

As of June 30, 2023, we had approximately $295.9 million of open purchase orders and contractual obligations in the ordinary course of business, the majority of which are due within one year.

See Note 5 “Debt” to the consolidated financial statements in Part I, Item 1 of this Quarterly Report for conversion activity related to our senior convertible notes.

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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes to our quantitative and qualitative disclosures about market risk during the three months ended March 31, 2023.

There were no material changes to our quantitative and qualitative disclosures about market risk during the six months ended June 30, 2023.

See Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for a detailed discussion of our market risks.

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