What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-10-26 compared with 2023-07-27 · 61 added, 67 removed, 207 unchanged (38% of the section changed)

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We received approval from the Food and Drug Administration, or FDA, and commercialized our first product in 2006.

We launched our latest generation system, the Dexcom G6 ® integrated Continuous Glucose Monitoring System, or G6, in 2018 and more recently received marketing clearance from the FDA on the Dexcom G7 ® in December 2022.

We launched our latest generation systems, the Dexcom G6 ® integrated Continuous Glucose Monitoring System, or G6, in 2018 and more recently received marketing clearance from the FDA on the Dexcom G7 ® , or G7, in December 2022.

Unless the context requires otherwise, the terms “we,” “us,” “our,” the “company,” or “Dexcom” refer to DexCom, Inc.

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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 six months ended June 30, 2023.

There were no material changes to our critical accounting estimates during the nine months ended September 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 June 30, 2023 include the following:

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

Revenue Gross Profit Operating Income Net Income Operating

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up 19% from the same period 2022

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.

down 8% from the same period 2022

We ended the third quarter of 2023 with cash, cash equivalents and short-term marketable securities totaling $3.24 billion.

Business Trends

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Financial Overview

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

Three Months Ended June 30, 2023 - 2022

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

Three Months Ended September 30, 2023 - 2022

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

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Operating income 205.5 21 % 147.5 19 % 58.0 39 %

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

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

Income from equity investments 1.0 — % — — % 1.0 **

Other income (expense), net 33.9 3 % (1.3) — % 35.2 **

Income before income taxes 240.4 25 % 146.2 19 % 94.2 64 %

Income tax expense (benefit) 43.4 5 % 24.4 4 % 19.0 78 %

Income tax expense 119.7 12 % 45.0 6 % 74.7 **

Net income $ 120.7 12 % $ 101.2 13 % $ 19.5 19 %

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Other significant expenses include commissions, marketing and advertising, IT software license costs, insurance, professional fees for our outside legal counsel and independent auditors, litigation expenses, patent application expenses and consulting expenses.

Interest expense

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

Income from equity investments

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

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 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.

Other income (expense), net

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

Three Months Ended September 30, 2023 Compared to

Three Months Ended September 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 and the shift to G7, partially offset by mix shift and price associated with the evolution of our channel and product strategy.

Disposable sensor and other revenue comprised approximately 90% of total revenue and Reusable Hardware revenue comprised approximately 10% of total revenue for the three months ended September 30, 2023.

Disposable sensor and other revenue comprised approximately 87% of total revenue and Reusable Hardware revenue comprised approximately 13% of total revenue for the three months ended September 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 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.

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

Research and development expense Research and development expense increased primarily due to $13.6 million in compensation-related costs most notably 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 $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.

Selling, general and administrative expense Selling, general and administrative expense increased primarily due to $32.2 million in compensation-related costs most notably due to higher headcount and $12.6 million in legal expense primarily related to a patent infringement lawsuit.

Other income (expense), net Other income (expense), net, increased primarily due to $35.8 million in interest and dividend 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

Income tax expense Our estimated annual effective tax rate from normal, recurring operations decreased from 28.5% to 24.7% during the three months ended September 30, 2023 primarily due to decrease in state and foreign taxes, increase in federal tax credits generated, partially offset by an increase to unrecognized tax benefits and an increase in disallowed executive compensation.

There are discrete taxes related to the intra-entity transfer of certain intellectual property and decrease in the state tax rate applied to beginning of year deferred tax assets.

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

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Nine Months Ended September 30, 2023 - 2022

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

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Operating income 380.8 15 % 265.8 13 % 115.0 43 %

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

Income from equity investments 1.0 — % 0.2 — % 0.8 **

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

Other income (expense), net 82.4 3 % (8.4) — % 90.8 **

Income before income taxes 464.2 18 % 257.6 12 % 206.6 80 %

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

Income tax expense 179.0 7 % 8.2 — % 170.8 **

Net income $ 285.2 11 % $ 249.4 12 % $ 35.8 14 %

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** 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.

Nine Months Ended September 30, 2023 Compared to

Nine Months Ended September 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 nine months ended September 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 nine months ended September 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.

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

Research and development expense Research and development expense increased primarily due to $26.8 million in compensation-related costs most notably due to higher headcount and various increases to individually insignificant items, partially offset by $16.4 million of lower third party and consulting fees primarily related to software development for new products and significant enhancements and $11.5 million in lower costs related to set-up and validation costs for new CGM equipment.

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.

Selling, general and administrative expense Selling, general and administrative expense increased primarily due to $73.9 million in compensation-related costs most notably due to higher headcount, $43.0 million in legal expense primarily related to a patent infringement lawsuit, and $30.7 million in advertising and marketing costs associated with global product launches.

Other income (expense), net Other income (expense), net, increased primarily due to $90.8 million in interest and dividend 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.

Income tax expense The income tax expense recorded for the nine months ended September 30, 2023 is primarily attributable to state and foreign income taxes, nondeductible executive compensation, increases to unrecognized tax benefits, and impact of foreign operations, partially offset by federal tax credits generated.

There are discrete taxes related to the intra-entity asset transfer of certain intellectual property, and decrease in the state tax rate applied to beginning of year deferred tax assets, partially offset by excess tax benefits recognized for share-based compensation for employees, net of disallowed executive compensation.

The income tax expense recorded for the nine months ended September 30, 2022 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 the Verily milestone payment, and generation of research and development tax credits.

Liquidity and Capital Resources

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Cash, cash equivalents and short-term marketable securities

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

Our cash, cash equivalents and short-term marketable securities totaled $3.24 billion as of September 30, 2023.

None of those funds were restricted and $3.07 billion (approximately 95%) of those funds were located in the United States.

Cash flow from Operations

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

For the nine months ended September 30, 2023, we had positive cash flows of $614.9 million from operating activities.

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

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Revolving 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.

As of September 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 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.

As of September 30, 2023, we had a working capital ratio of 2.80 and a quick ratio of 2.40, 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.

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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.

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 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.

The outstanding principal related to our 2023 Notes of $124.3 million as of September 30, 2023 and any amount in excess of the principal amount will primarily settle through a combination of cash and stock on or before the maturity date of December 1, 2023.

Long-term Liquidity Requirements

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 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 of September 30, 2023, we had a debt-to-assets ratio of 0.39, 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 June 30, 2023, we have outstanding senior convertible notes that will mature in November 2025 and May 2028.

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

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.

As of September 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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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 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.

As of September 30, 2023, we had $3.24 billion in cash, cash equivalents and short-term marketable securities, which is an increase of $784.1 million compared to $2.46 billion as of December 31, 2022.

The primary cash flows during the nine months ended September 30, 2023 and September 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.

Six Months Ended

June 30, 2023 June 30, 2022

Nine Months Ended

September 30, 2023 September 30, 2022

Operating Cash Flows + $285.2 million of net income, $68.4 million of net non-cash adjustments, and a net increase of $261.3 million in changes of working capital balances

+ $148.2 million of net income and $141.3 million of net non-cash adjustments, partially offset by $45.7 million of net changes in working capital balances

+ $249.4 million of net income and $194.9 million of net non-cash adjustments, and a net increase of $92.7 million in changes of working capital balances

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

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Investing Cash Flows - $719.5 million in net purchases of marketable securities

- $358.1 million in net purchases of marketable securities

- $301.3 million in capital expenditures

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- $12.5 million in purchases of equity investments

- 19.5 million in purchases of equity investments

- $9.9 million in net purchases of marketable securities

- $3.9 million in acquisitions, net of cash acquired

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

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+ $26.6 million in proceeds from issuance of common stock under our employee stock plans

- $557.7 million in purchases of treasury stock

- $650.5 million in payments for conversions of senior convertible notes

- $14.6 million in payments for financing leases

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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 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.

There were no significant changes to our lease obligations during the nine months ended September 30, 2023.

As of September 30, 2023, we had approximately $420.3 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 six months ended June 30, 2023.

There were no material changes to our quantitative and qualitative disclosures about market risk during the nine months ended September 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