DEXCOM, INC. 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 regardingDexCom'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 include, among other things, impacts on our business due to health pandemics or other contagious outbreaks, such as the current COVID-19 pandemic. The risks and uncertainties that could cause actual results to differ materially are more fully described under "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , elsewhere in this Quarterly Report, and in our other reports filed with theSEC . 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. Overview We are 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. We received approval from theFood 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. Unless the context requires otherwise, the terms "we," "us," "our," the "company," or "DexCom" refer toDexCom, Inc. and its subsidiaries. We sell our Reusable Hardware and disposable sensors through a direct sales force inthe United States ,Canada and some countries inEurope , and through distribution arrangements inthe United States , and certain countries inAfrica ,Asia ,Europe ,Latin America , and theMiddle East , as well asAustralia ,Canada , andNew Zealand . Most of our distributors stock our products and fulfill orders for our products from their inventory. We plan to develop future generations of technologies that are focused on improved performance and convenience and that will enable intelligent insulin administration. We also are aggressively exploring how to extend our offerings to other opportunities, including for people with Type 2 diabetes that are non-insulin using, people with pre-diabetes, people who are obese, people who are pregnant, and people with diabetes in the hospital setting. We will continue to develop a networked platform with open architecture, connectivity and transmitters capable of communicating with other devices and software systems. We also intend to expand our efforts to accumulate CGM patient data and metrics and apply predictive modeling and machine learning to generate interactive CGM insights that can inform patient behavior. Impact of COVID-19 Pandemic During the first six months of 2020, we were subject to challenging social and economic conditions created as a result of the novel strain of coronavirus, SARS-CoV-2 ("COVID-19"). The resulting impact of the COVID-19 outbreak created various financial impacts to our operations as a result of taking necessary precautions for essential personnel to operate safely both in person as well as remotely. Costs incurred include items like incremental payroll costs, consulting support, IT infrastructure and facilities-related costs. During the second quarter of 2020, we made Dexcom CGM systems available for use in hospital settings and other healthcare facilities to assist frontline workers during the COVID-19 pandemic. During that time we started to see benefits from the shift to telemedicine and growing appreciation in the market forDexCom's real-time connectivity for virtual diabetes care as well as patient monitoring in the hospital setting. However, we also saw some negative impact to new patient additions due to broad stay-at-home orders and as clinicians moved to adopt virtual care models. We are continuing to monitor these potential positive and negative impacts closely. The extent of the impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, employee or industry events, and effect on our vendors, all of which are uncertain and cannot be predicted. The COVID-19 pandemic and its adverse effects have become more prevalent in the locations where we, our customers, suppliers or third-party business partners 25
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conduct business and as a result, we have begun to experience more pronounced disruptions in our operations. We may experience constrained supply or curtailed customer demand that could materially adversely impact our business, results of operations and overall financial performance in future periods. Specifically, we may experience impact from changes in how we and companies worldwide conduct business due to the COVID-19 pandemic, including but not limited to restrictions on travel and in-person meetings, production delays, closures of manufacturing facilities, warehouses and logistics supply and distribution chains and staffing shortages, decreases or delays in customer demand and spending, difficulties or changes to our sales process and customer support. As of the filing date of this Form 10-Q, the extent to which COVID-19 may impact our financial condition or results of operations or guidance is uncertain. The effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods. See Risk Factors in Part II, Item 1A of this Quarterly Report for further discussion of the possible impact of the COVID-19 pandemic on our business. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which we have prepared in accordance withU.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as the reported revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . 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 endedDecember 31, 2019 . There were no material changes to our critical accounting policies during the six months endedJune 30, 2020 . Results of Operations Financial Overview [[Image Removed: chart-bca7401069605d2c8ab.jpg]] 26
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Three Months Ended June 30, 2020 - 2019
(In millions, except per share amounts) 2020 2019 $ Change % Change
Total revenue $ 451.8 $ 336.4 $ 115.4 34 %
Gross profit 284.1 206.5 77.6 38 %
Operating income (loss) 67.8 (0.8 ) 68.6 *
Net income (loss) 46.3 (10.5 ) 56.8 *
Basic net income (loss) per share 0.49 (0.12 ) 0.61 *
Diluted net income (loss) per share
0.60 *
* = Not Meaningful
Six Months Ended June 30, 2020 - 2019
(In millions, except per share amounts) 2020 2019 $ Change % Change
Total revenue $ 856.9 $ 616.9 $ 240.0 39 %
Gross profit 540.6 375.3 165.3 44 %
Operating income (loss) 101.4 (15.2 ) 116.6 *
Net income (loss) 66.2 (37.4 ) 103.6 *
Basic net income (loss) per share 0.71 (0.41 ) 1.12 *
Diluted net income (loss) per share
1.10 *
* = Not Meaningful
Revenue, Cost of Sales and Gross Profit
We expect that revenues we generate from the sales of our products will
fluctuate from quarter to quarter. We typically experience seasonality, with
lower sales in the first quarter of each year compared to the immediately
preceding fourth quarter. This seasonal sales pattern relates to U.S. annual
insurance deductible resets and unfunded flexible spending accounts.
Cost of sales includes direct labor and materials costs related to each product
sold or produced, including assembly, test labor and scrap, as well as factory
overhead supporting our manufacturing operations. Factory overhead includes
facilities, material procurement and control, manufacturing engineering, quality
assurance, supervision and management. These costs are primarily salary, fringe
benefits, share-based compensation, facility expense, supplies and purchased
services. All of our manufacturing costs are included in cost of sales.
Quarter Ended June 30, 2020 Compared to Quarter Ended June 30, 2019
Three Months Ended June 30, 2020 - 2019
(In millions) 2020 2019 $ Change % Change
Total revenue $ 451.8 $ 336.4 $ 115.4 34 %
Cost of sales 167.7 129.9 37.8 29 %
Gross profit $ 284.1 $ 206.5 $ 77.6 38 %
Gross profit as a percent of total revenue 63 % 61 %
Total revenue increased $115.4 million or 34% for the three months ended
June 30, 2020 compared to the three months ended June 30, 2019 . The 2020 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 81% of
total revenue and Reusable Hardware revenue comprised approximately 19% of total
revenue for the three months ended June 30, 2020 . Disposable sensor and other
revenue comprised approximately 77% of total revenue and Reusable Hardware
revenue comprised approximately 23% of total revenue for the three months ended
June 30, 2019 .
Cost of sales increased $37.8 million or 29% for the three months ended June 30,
2020 compared to the three months ended June 30, 2019 primarily due to increased
sales volume. The gross profit of $284.1 million or 63% of total revenue for the
three months ended June 30, 2020 increased $77.6 million compared to $206.5
million or 61% of total revenue for the same
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period in 2019. The increase in gross profit and gross margin in the second quarter of 2020 compared to the second quarter of 2019 were primarily driven by increased revenues and cost savings associated with incremental improvements to product design and manufacturing efficiencies. These were partially offset by charges associated with discontinuing certain manufacturing equipment and processes as we shift to more automated manufacturing, charges for contract manufacturing contractual obligations, and incremental payroll costs related to the COVID-19 pandemic. Six Months EndedJune 30, 2020 Compared to Six Months EndedJune 30, 2019 Six Months Ended June 30, 2020 - 2019 (In millions) 2020 2019 $ Change % Change Total revenue$ 856.9 $ 616.9 $ 240.0 39 % Cost of sales 316.3 241.6 74.7 31 % Gross profit$ 540.6 $ 375.3 $ 165.3 44 % Gross profit as a percent of total revenue 63 % 61 % Total revenue increased$240.0 million or 39% for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . The 2020 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 80% of total revenue and Reusable Hardware revenue comprised approximately 20% of total revenue for the six months endedJune 30, 2020 . Disposable sensor and other revenue comprised approximately 77% of total revenue and Reusable Hardware revenue comprised approximately 23% of total revenue for the six months endedJune 30, 2019 . Cost of sales increased$74.7 million or 31% for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 primarily due to increased sales volume. The gross profit of$540.6 million or 63% of total revenue for the six months endedJune 30, 2020 increased$165.3 million compared to$375.3 million or 61% of total revenue for the same period in 2019. The increase in gross profit and gross margin in the first six months of 2020 compared to the first six months of 2019 were primarily driven by increased revenues and cost savings associated with incremental improvements to product design and manufacturing efficiencies. These were partially offset by charges associated with discontinuing certain manufacturing equipment and processes as we shift to more automated manufacturing, higher excess and obsolete inventory charges and charges for contract manufacturing contractual obligations, and incremental payroll costs related to the COVID-19 pandemic. Operating Expenses Our research and development expenses primarily consist of engineering and research expenses related to our continuous glucose monitoring technology, clinical trials, regulatory expenses, quality assurance programs, materials and products for clinical trials. Research and development expenses are primarily related to employee compensation, including salary, fringe benefits, share-based compensation, and temporary employee expenses. We also incur significant expenses to operate our clinical trials including clinical site reimbursement, clinical trial product and associated travel expenses. Our research and development expenses also include fees for design services, contractors and development materials. Our selling, general and administrative expenses primarily consist of salary, fringe benefits and share-based compensation for our executive, financial, sales, marketing, information technology and administrative functions. 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. Quarter EndedJune 30, 2020 Compared to Quarter EndedJune 30, 2019 Three Months Ended June 30, 2020 - 2019 (In millions) 2020 2019 $ Change % Change Research and development$ 79.9 $ 69.0 $ 10.9 16 % as a % of total revenue 18 % 21 % Selling, general and administrative 136.4 138.3 (1.9 ) (1 )% as a % of total revenue 30 % 41 % Total operating expenses$ 216.3 $ 207.3 $ 9.0 4 % as a % of total revenue 48 % 62 % 28
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Research and Development Expense. Research and development expense increased$10.9 million or 16% for the three months endedJune 30, 2020 compared to the same period of 2019. The increase was primarily due to$7.0 million in additional salaries, bonuses, and payroll-related costs and$2.3 million in additional software 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 decreased$1.9 million or 1% for the three months endedJune 30, 2020 compared to the same period of 2019. Significant elements of the decrease in selling, general, and administrative expenses included$6.8 million related to variable compensation plans and$3.6 million in lower restructuring charges associated with our 2019 Restructuring Plan, partially offset by$6.4 million in additional consulting fees and$6.1 million in additional marketing costs. Six Months EndedJune 30, 2020 Compared to Six Months EndedJune 30, 2019 Six Months Ended June 30, 2020 - 2019 (In millions) 2020 2019 $ Change % Change Research and development$ 153.0 $ 128.0 $ 25.0 20 % as a % of total revenue 18 % 21 % Selling, general and administrative 286.2 262.5 23.7 9 % as a % of total revenue 33 % 43 % Total operating expenses$ 439.2 $ 390.5 $ 48.7 12 % as a % of total revenue 51 % 63 % Research and Development Expense. Research and development expense increased$25.0 million or 20% for the six months endedJune 30, 2020 compared to the same period of 2019. The increase was primarily due to$14.8 million in additional salaries, bonuses, and payroll-related costs,$3.7 million in additional additional software costs, and$2.8 million in additional facility 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$23.7 million or 9% for the six months endedJune 30, 2020 compared to the same period of 2019. Significant elements of the increase in selling, general, and administrative expenses included$14.3 million in additional marketing costs,$8.1 million in additional consulting fees,$7.8 million in additional salaries, bonuses, and payroll-related costs and$5.0 million in additional litigation costs, partially offset by$6.8 million in lower restructuring charges associated with our 2019 Restructuring Plan and$5.5 million related to variable compensation plans. Non-Operating Income and Expenses Interest Expense Interest expense is comprised primarily of costs related to our senior convertible notes. Interest expense increased$5.3 million to$20.3 million for the three months endedJune 30, 2020 compared to$15.0 million for the same period of 2019. Interest expense increased$5.8 million to$35.7 million for the six months endedJune 30, 2020 compared to$29.9 million for the same period of 2019. The increase in interest expense for the periods presented is primarily related to the issuance of our 2025 Notes. Loss on Extinguishment of Debt We recorded a$5.4 million loss on extinguishment of debt during the three months endedJune 30, 2020 in connection with the repurchase and conversions of a portion 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. Loss from Equity Investments The loss from equity investments of$4.2 million for the six months endedJune 30, 2019 consisted solely of realized losses on our equity investment in Tandem Diabetes Care, Inc. We sold all of our remaining equity investment in Tandem during the first quarter of 2019. 29
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Interest and Other Income (Expense), Net Interest income is related to our marketable debt securities portfolio. Interest income was$3.6 million and$9.6 million for the three and six months endedJune 30, 2020 , respectively, compared to$6.8 million and$14.1 million for the three and six months endedJune 30, 2019 , respectively. The decrease in interest income was primarily related to a decline in market interest rates, partially offset by an increase in the average invested balances during 2020 compared to 2019. Other income (expense) for the three and six months endedJune 30, 2020 and 2019 consists primarily of foreign currency transaction gains and losses due to the effects of foreign currency fluctuations. Income Tax Expense We recorded an income tax benefit of$0.1 million on pre-tax income of$46.2 million for the three months endedJune 30, 2020 compared to income tax expense of$1.2 million on a pre-tax loss of 9.3 million for the three months endedJune 30, 2019 . We recorded income tax expense of$2.4 million on pre-tax income of$68.6 million for the six months endedJune 30, 2020 compared to income tax expense of$1.5 million on a pre-tax loss of$35.9 million for the six months endedJune 30, 2019 . The income tax benefit for the three months endedJune 30, 2020 is primarily related to an increase in forecastedU.S. income causing an increase in state tax expense, offset by a reversal of foreign income tax expense recognized in the prior quarter. Income tax expense for the three months endedJune 30, 2019 is primarily related to foreign income tax in jurisdictions with current taxable income. Income tax expense for the six months endedJune 30, 2020 is primarily related to state and foreign income taxes in jurisdictions where we have no operating losses. Income tax expense for the six months endedJune 30, 2019 is primarily related to foreign income taxes in jurisdictions with current taxable income. We maintain a full valuation allowance against our net deferred tax assets as ofJune 30, 2020 based on our assessment that it is not more likely than not these future benefits will be realized before expiration. We analyze our ability to realize our deferred tax assets quarterly, weighing all available positive and negative evidence of future taxable income. The future release of our valuation allowance will result in a material benefit recognized in the quarter of release. Liquidity and Capital Resources
Overview, Capital Resources, and Capital Requirements
The impact of the COVID-19 outbreak created various financial impacts to our operations as a result of taking necessary precautions for essential personnel to operate safely both in person as well as remotely. Costs incurred include items like incremental payroll costs, consulting support, IT infrastructure and facilities related costs. The estimated impact of COVID-19 for the year is currently unknown. The final impact may vary based on how long the current social and economic conditions exist. We do not believe the accumulated costs will present a material impact to our financial liquidity or position. Our principal sources of liquidity are our existing cash, cash equivalents and marketable securities, cash generated from operations, proceeds from issuance of senior convertible notes, and access to our revolving line of credit. Our primary uses of cash have been for research and development programs, selling and marketing activities, capital expenditures, acquisitions of businesses, and debt service costs. We expect that cash provided by our operations may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, working capital requirements and capital deployment decisions. We have historically invested our cash primarily inU.S. dollar-denominated, investment grade, highly liquid obligations ofU.S. 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. 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. Our future capital requirements will depend on many factors, including but not limited to: • the revenue generated by sales of our approved products and other future
products;
• the expenses we incur in manufacturing, developing, selling and marketing
our products;
• the quality levels of our products and services;
• the third-party reimbursement of our products for our customers;
• our ability to efficiently scale our operations to meet demand for our
current and any future products;
• the costs, timing and risks of delays of additional regulatory approvals;
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• the costs of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights;
• the rate of progress and cost of our clinical trials and other development
activities;
• the success of our research and development efforts;
• the emergence of competing or complementary technological developments;
• the terms and timing of any collaborative, licensing and other
arrangements that we may establish;
• the acquisition of businesses, products and technologies and our ability
to integrate and manage any acquired businesses, products and
technologies; and
• the evolution of the international expansion of our business.
We expect that existing cash and cash flows from our future operations will generally be sufficient to fund our ongoing core business. As current borrowing sources become due, we may be required to access the capital markets for additional funding. As we assess inorganic growth strategies, we may need to supplement our internally generated cash flow with outside sources. In the event that we are required to access the debt market, we believe that we will be able to secure reasonable borrowing rates. As part of our liquidity strategy, we will continue to monitor our current level of earnings and cash flow generation as well as our ability to access the market in light of those earning levels. A substantial portion of our operations are located inthe United States , and the majority of our sales since inception have been made inU.S. dollars. However, as our business in markets outside ofthe United States continues to increase, we will be exposed to foreign currency exchange risk related to our foreign operations. As a result, we monitor exposures in foreign currencies and where necessary employ various methods, including financial instruments, to mitigate the impact of foreign currency as needed. Fluctuations in the rate of exchange between theU.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. We currently engage in limited hedging transactions to reduce foreign currency risks on certain intercompany balances. 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$2.51 billion as ofJune 30, 2020 . None of those funds were restricted and approximately 97% of those funds were located inthe United States . We intend to reinvest a substantial portion of our foreign earnings in those businesses, and we currently do not anticipate that we will need funds generated by foreign operations to fund our domestic ones. Our cash, cash equivalents and short-term marketable securities as ofJune 30, 2020 increased by$975.5 million fromDecember 31, 2019 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$194.6 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 InDecember 2018 , we entered into an amended and restated five-year$200.0 million revolving credit agreement which was subsequently amended onMay 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 . 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 ofJune 30, 2020 , we had no outstanding borrowings,$5.4 million in outstanding letters of credit, and a total available balance of$194.6 million under the Credit Agreement. We monitor counterparty risk associated with the institutional lenders that are providing this credit facility. We currently believe that this credit facility will be available to us should we choose to borrow under it. 31
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Senior Convertible Notes
The following table summarizes our outstanding senior convertible note
obligations as of
Initial
Conversion
Aggregate Rate per Conversion Price
Principal Share of per Share of Common
Issuance Date Coupon Rate (in millions) Maturity Date Common Stock Stock
June 2017 0.75% $ 37.2 May 15, 2022 10.0918 $ 99.09
November 2018 0.75% 850.0 December 1, 2023 6.0869 $ 164.29
May 2020 0.25% 1,207.5 November 15, 2025 1.6655 $ 600.42
Total $ 2,094.7
We used a portion of the net proceeds from the offering of the 2022 Notes to
repay $75.0 million of borrowings under our existing credit facility in 2017. We
used a portion of the net proceeds from the offering of the 2023 Notes to
repurchase 0.8 million shares of our common stock for $100.0 million in 2018. We
used $282.6 million of the net proceeds from the offering of the 2025 Notes to
repurchase a portion of our 2022 Notes. We intend to use the remainder of the
net proceeds from the 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.
On June 29, 2020 , we issued a notice of redemption to the holders of our
outstanding 2022 Notes pursuant to which we will redeem the outstanding 2022
Notes for cash at a price of 100% of the principal amount of the 2022 Notes plus
accrued and unpaid interest, if any, on July 31, 2020 , unless earlier converted.
Prior to July 31, 2020 , holders of outstanding 2022 Notes are entitled to
convert their 2022 Notes to shares of our common stock at a rate of 10.0918
shares per $1,000 principal amount of 2022 Notes. In the event any holder
delivers a conversion notice as provided in the indenture related to the 2022
Notes, we intend to satisfy our conversion obligation by delivering shares of
our common stock.
2023 Note Hedge
In connection with the offering of the 2023 Notes, in November 2018 we entered
into convertible note hedge transactions (the 2023 Note Hedge) 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 it 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.
2023 Warrants
In November 2018 , we also sold warrants (the 2023 Warrants) to the 2023
Counterparties to acquire up to 5.2 million shares of our common stock for cash
proceeds of $183.8 million . 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 .
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,
the senior convertible notes, the 2023 Note Hedge, and the 2023 Warrants.
Cash Flows
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.
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Six Months Ended
June 30, Change
(In millions) 2020 2019 2020 - 2019
Net cash provided by operating activities $ 156.0 $ 76.3 $ 79.7
Net cash used in investing activities (984.7 ) (508.1 ) (476.6 )
Net cash provided by financing activities 912.5 4.8 907.7
Effect of exchange rates on cash, cash equivalents, and restricted cash
(0.2 ) (0.3 ) 0.1
Increase (decrease) in cash, cash equivalents and
restricted cash $ 83.6 $
(427.3 )
As ofJune 30, 2020 , we had$2.51 billion in cash, cash equivalents and short-term marketable securities, which is an increase of$975.5 million compared to$1.53 billion as ofDecember 31, 2019 . The primary cash flows during the six months endedJune 30, 2020 and 2019 are described below. Operating Cash Flows Net cash provided by operating activities during the six months endedJune 30, 2020 was comprised of net income of$66.2 million and net non-cash adjustments of$122.1 million , partially offset by$32.3 million of net changes in working capital balances. Net non-cash adjustments were primarily related to share-based compensation, depreciation and amortization, and non-cash interest expense for our senior convertible notes. Net cash provided by operating activities during the six months endedJune 30, 2019 was comprised of a net loss of$37.4 million , net non-cash adjustments of$103.0 million , and$10.7 million of net changes in working capital balances. Net non-cash adjustments were primarily related to share-based compensation, non-cash interest expense for our senior convertible notes, depreciation and amortization, and a loss on the sale of our remaining equity investment in Tandem Diabetes Care, Inc. Investing Cash Flows Net cash used in investing activities during the six months endedJune 30, 2020 was primarily comprised of$890.5 million for net purchases of marketable securities and$91.4 million for capital expenditures. Net cash used in investing activities during the six months endedJune 30, 2019 was primarily comprised of$421.9 million for net purchases of marketable securities and$86.2 million for capital expenditures. Financing Cash Flows Net cash provided by financing activities during the six months endedJune 30, 2020 was primarily comprised of$1.19 billion in net proceeds from the issuance of our 2025 Notes and$6.7 million in proceeds from the issuance of common stock under our employee stock plans, partially offset by$282.6 million for the repurchase of a portion of our 2022 Notes. Net cash provided by financing activities during the six months endedJune 30, 2019 was primarily comprised of$5.1 million from the issuance of common stock under our employee stock plans. Contractual Obligations
The following table summarizes the future expected payment obligations related
to our outstanding contractual obligations as of
Less More
than 1-3 3-5 than
(in millions) Total 1 Year Years Years 5 Years
Senior convertible notes (1) $ 2,134.2 $ 9.7 $ 56.3 $ 859.2 $ 1,209.0
Lease obligations (2) 122.8 20.2 36.0 31.5 35.1
Total $ 2,257.0 $ 29.9 $ 92.3 $ 890.7 $ 1,244.1 (1) We issued senior convertible notes in May and
for these notes. Although these notes mature in 2022, 2023, and 2025, they
may be converted into cash and 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 repayments as
indicated in the table. On
the holders of our outstanding 2022 Notes pursuant to which we will redeem
the outstanding 2022 Notes for cash on
converted. In the event any holder of 2022 Notes delivers a conversion
notice, we intend to satisfy our conversion obligation by delivering shares
of
year does not include the
outstanding at
Note 4 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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(2) Includes a finance lease obligation related to our
See Note 6 to the consolidated financial statements in Part II, Item 8 of our
Annual Report on Form 10-K for the year ended
information.
We are also party to various purchase arrangements related to components used in
manufacturing and research and development activities. As of June 30, 2020 , we
had approximately $165 million of open purchase orders and contractual
obligations in the ordinary course of business, most of which are due within one
year.
Off-Balance Sheet Arrangements
As of
For a description of recent accounting pronouncements and the potential impact of these pronouncements on our consolidated financial statements, see Note 1 to the consolidated financial statements in Part I, Item 1 of this Quarterly Report.
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