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 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" and elsewhere in this 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 "Selected Financial Data" in Part II, Item 6 and our consolidated financial
statements and related notes in Part II, Item 8 of this Annual Report.
                                    Overview


We are a medical device company primarily focused on the design, development and
commercialization of continuous glucose monitoring, or CGM, systems for use by
people with diabetes and by healthcare providers. 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. Unless the context
requires otherwise, the terms "we," "us," "our," the "company," or "Dexcom"
refer to DexCom, Inc. and its subsidiaries.
We have built a direct sales organization in the United States, Canada and
certain countries in Europe to call on health care professionals, such as
endocrinologists, physicians and diabetes educators, who can educate and
influence patient adoption of continuous glucose monitoring. To complement our
direct sales efforts, we have entered into distribution arrangements in the
United States, and certain countries in Africa, Asia, Europe, Latin America, and
the Middle East, as well as Australia, Canada, and New Zealand that allow
distributors to sell our products.
We plan to develop future generations of technologies that are focused on
improved performance and convenience and that will enable intelligent insulin
administration. Over the longer term, we plan to continue to develop and improve
networked platforms with open architecture, connectivity and transmitters
capable of communicating with other devices. 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.
We also continue to pursue and support development partnerships with insulin
pump companies and companies or institutions developing insulin delivery
systems, including automated insulin delivery systems.
We are also 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 in
the hospital setting. Eventually, we may apply our technological expertise to
products beyond glucose monitoring.
For discussion related to the results of operations and changes in financial
condition for fiscal 2019 compared to fiscal 2018 refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Part II, Item 7 of our fiscal 2019 Form 10-K, which was filed with the United
States Securities and Exchange Commission on February 13, 2020.
Impact of COVID-19 Pandemic
During 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.
As the result of the COVID-19 pandemic, we have made Dexcom CGM systems
available for use in hospital settings and other healthcare facilities to assist
frontline workers. The extent of the impact of the COVID-19 outbreak on our
operational and
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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 conduct business and as a result, we have begun
to experience more pronounced disruptions in our operations. We have experienced
and may experience constrained supply or curtailed customer demand, including
due to loss of coverage to our products, that could materially adversely impact
our business, results of operations and overall financial performance in future
periods. We currently utilize third parties to, among other things, manufacture
components and materials for our devices, and to provide services such as
sterilization services and we purchase these materials and services from
numerous suppliers worldwide. The global COVID-19 pandemic has and may continue
to have an adverse impact on our manufacturing and distribution capabilities.
Disruptions relating to the COVID-19 pandemic, including current
shelter-in-place orders in the U.S. and other countries, could prevent
employees, suppliers, distributors, and others from accessing manufacturing
facilities and from transporting our products or the components required to
manufacture our products. For example, we have experienced some supply chain
disruption due to the global restrictions resulting from the COVID-19 pandemic
in the manufacture of our next-generation CGM product. Further, worldwide supply
chain disruption relating to the COVID-19 pandemic has resulted in product
shortages that has and may continue to impact our ability to manufacture our
devices. As of the filing date of this Form 10-K, 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 I, Item 1A of this Annual 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 with U.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.
While our significant accounting policies are more fully described in Note 1 to
the consolidated financial statements in Part II, Item 8 of this Annual Report,
we believe that the following accounting policies and estimates are most
critical to a full understanding and evaluation of our reported financial
results. Members of our senior management have discussed the development and
selection of these critical accounting policies and their disclosure in this
Annual Report with the Audit Committee of our Board of Directors.
Revenue Recognition
We generate our revenue primarily from the sale of our Reusable Hardware and
disposable sensors. We generally recognize revenue when control is transferred
to our customers in an amount that reflects the net consideration to which we
expect to be entitled.
We exercise significant judgment when we determine the transaction price,
including variable consideration adjustments. Transaction price is typically
based on the contracted rates less an estimate of claim denials and historical
reimbursement experience by payor, which include current and future expectations
regarding reimbursement rates and payor mix. Variable consideration includes but
is not limited to rebates, chargebacks, consideration payable to customers such
as specialty distributor and wholesaler fees, product returns allowance, prompt
payment discounts, and various other promotional or incentive arrangements.
Calculating certain of these items involves significant estimates and judgments
based on sales or invoice data, contractual terms and historical utilization
rates. We estimate provisions for rebates based on contractual arrangements,
estimates of products sold subject to rebate, known events or trends and channel
inventory data. Estimates associated with rebates on products sold through our
distributors under pharmacy benefits are the most significant component of our
variable consideration estimates and most at risk for changes between the
recording of the accrual estimate and its ultimate settlement, an interval that
can generally range up to one year. Due to this time lag, in any given period,
our adjustments to actuals can incorporate changes of estimates related to prior
periods.
We review the adequacy of our estimates for transaction price adjustments and
variable consideration at each reporting date. If the actual amounts of
consideration that we receive differ from our estimates, we would adjust our
estimates and that would affect reported revenue in the period that such
variances become known. If any of these judgments were to change, it could cause
a material increase or decrease in the amount of revenue we report in a
particular period.
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For more information, see "Revenue Recognition" in Note 1 to the consolidated
financial statements in Part II, Item 8 of this Annual Report.
Share-Based Compensation
Share-based compensation expense is measured at the grant date based on the
estimated fair value of the award and is recognized straight-line over the
requisite service period of the individual grants, which typically equals the
vesting period. We value time-based Restricted Stock Units or RSUs at the date
of grant using the intrinsic value method. Certain RSUs granted to senior
management vest based on the achievement of pre-established performance or
market goals.
We estimate the fair value of performance-based RSUs at the date of grant using
the intrinsic value method and the probability that the specified performance
criteria will be met. We update our assessment of the probability that the
specified performance criteria will be achieved each quarter and adjust our
estimate of the fair value of the performance-based RSUs if necessary. The Monte
Carlo methodology that we use to estimate the fair value of market-based RSUs at
the date of grant incorporates into the valuation the possibility that the
market condition may not be satisfied. Provided that the requisite service is
rendered, the total fair value of the market-based RSUs at the date of grant
must be recognized as compensation expense even if the market condition is not
achieved. However, the number of shares that ultimately vest can vary
significantly with the performance of the specified market criteria.
If any of the assumptions used change significantly, share-based compensation
expense may differ materially from what we have recorded in the current period.
Fair Value of Financial Instruments
The authoritative guidance establishes a fair value hierarchy that is based on
the extent and level of judgment used to estimate the fair value of assets and
liabilities. In general, the authoritative guidance requires us to maximize the
use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. An asset or liability's categorization within the fair
value hierarchy is based upon the lowest level of input that is significant to
the measurement of its fair value. The three levels of input defined by the
authoritative guidance are as follows:
Level 1-Uses unadjusted quoted prices that are available in active markets for
identical assets or liabilities.
Level 2-Uses inputs other than quoted prices included in Level 1 that are
observable, either directly or indirectly, through correlation with market data.
These include quoted prices in active markets for similar assets or liabilities;
quoted prices for identical or similar assets or liabilities in markets that are
not active; and inputs to valuation models or other pricing methodologies that
do not require significant judgment because the inputs used in the model, such
as interest rates and volatility, can be corroborated by readily observable
market data for substantially the full term of the assets or liabilities.
Level 3-Uses unobservable inputs that are supported by little or no market
activity and that are significant to the determination of fair value. Level 3
assets and liabilities include those whose fair values are determined using
pricing models, discounted cash flow methodologies, or similar valuation
techniques and significant judgment or estimation.
We estimate the fair value of most of our cash equivalents using Level 1 inputs.
We estimate the fair value of our marketable equity securities using Level 1
inputs and we estimate the fair value of our marketable debt securities using
Level 2 inputs. We carry our other financial instruments, such as cash, accounts
receivable, prepaid expenses and other current assets, accounts payable and
accrued liabilities, at cost, which approximates the related fair values due to
the short-term maturities of these instruments. See Note 1 and Note 3 to the
consolidated financial statements in Part II, Item 8 of this Annual Report for
more information about fair value measurements.
Accounts Receivable, Net and Related Valuation Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. We evaluate the
collectability of our accounts receivable based on a combination of factors. We
regularly analyze customer accounts, review the length of time receivables are
outstanding, review historical loss rates and assess current economic trends
that may impact the level of credit losses in the future. Our allowance for
doubtful accounts has generally been adequate to cover our actual credit losses.
However, since we cannot reliably predict future changes in the financial
stability of our customers, we may need to increase our reserves if the
financial conditions of our customers deteriorate.
Excess and Obsolete Inventory
Inventory is valued at the lower of cost or net realizable value. We record
adjustments to inventory for potentially excess, obsolete, or scrapped goods in
order to state inventory at net realizable value. Factors influencing these
adjustments include inventories on hand and on order compared to estimated
future usage and sales for existing and new products, as well as judgments
regarding quality control testing data and assumptions about the likelihood of
scrap and obsolescence. Historically, our inventory reserves have been adequate
to cover our actual losses. However, if actual product life cycles, product
quality or
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market conditions differ from our assumptions, additional inventory adjustments
that would increase cost of goods sold could be required.
Income Taxes
We estimate our income taxes based on the various jurisdictions where we conduct
business. Significant judgment is required in determining our worldwide income
tax provision. The calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax laws and regulations and the
potential for future adjustment of our uncertain tax positions by the Internal
Revenue Service or other taxing jurisdictions. While we believe we have
appropriate support for the positions taken on our tax returns, we regularly
assess the potential outcomes of examinations by tax authorities in determining
the adequacy of our provision for income taxes. We continually assess the
likelihood and amount of potential adjustments and adjust the income tax
provision, income taxes payable, and deferred taxes in the period in which the
facts that give rise to a revision become known.
We use the asset and liability approach to recognize deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
Deferred tax assets and liabilities are determined using the enacted tax rates
in effect for the years in which those tax assets are expected to be realized.
Significant judgment is required to evaluate the need for a valuation allowance
against deferred tax assets. We review all available positive and negative
evidence, including projections of pre-tax book income, earnings history,
reliability of forecasting, and reversal of temporary differences. A valuation
allowance is established when it is more likely than not that some or all of the
deferred tax assets will not be realized. Realization of deferred tax assets is
dependent upon future earnings in applicable tax jurisdictions. Prior to 2020,
due to our US operating losses and earnings volatility in previous years, which
did not allow sustainable profitability, we had established and maintained a
full valuation allowance on our deferred tax assets. In 2020, we achieved three
years cumulative income and expect to continue that profitability in future
years. We analyzed both positive and negative evidence, and as a result released
our valuation allowance on our deferred tax assets. We maintain the valuation
allowance on our California research and development tax credits and certain
foreign intangible assets, as it is more likely than not that those deferred tax
assets will not be realized.
We recognize and measure benefits for uncertain tax positions using a two-step
approach. The first step is to evaluate the tax position taken or expected to be
taken in a tax return by determining if the weight of available evidence
indicates that it is more likely than not that the tax position will be
sustained upon audit, including resolution of any related appeals or litigation
processes. For tax positions that are more likely than not of being sustained
upon audit, the second step is to measure the tax benefit as the largest amount
that is more than 50% likely of being realized upon settlement. Significant
judgment is required to evaluate uncertain tax positions and is based upon a
number of factors, including changes in facts or circumstances, changes in tax
law, correspondence with tax authorities during the course of audits and
effective settlement of audit issues. Changes in the recognition or measurement
of uncertain tax positions could result in material increases or decreases in
our income tax expense in the period in which we make the change, which could
have a material impact on our effective tax rate and operating results.
Loss Contingencies
We are subject to certain legal proceedings, as well as demands, claims and
threatened litigation that arise in the normal course of our business. We review
the status of each significant matter quarterly and assess our potential
financial exposure. If the potential loss from a claim or legal proceeding is
considered probable and the amount can be reasonably estimated, we record a
liability and an expense for the estimated loss and disclose it in our
consolidated financial statements if it is significant. If we determine that a
loss is possible and the range of the loss can be reasonably determined, we do
not record a liability or an expense but we disclose the range of the possible
loss. Significant judgment is required in the determination of whether a
potential loss is probable, reasonably possible, or remote as well as in the
determination of whether a potential exposure is reasonably estimable. We base
our judgments on the best information available at the time. As additional
information becomes available, we reassess the potential liability related to
our pending claims and litigation and may revise our estimates. Any revision of
our estimates of potential liability could have a material impact on our
financial position and operating results.

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Results of Operations


Financial Overview


                                         Twelve Months Ended December 31,                    2020 - 2019
(In millions)                             2020                    2019                               $ Change                   % Change
Total revenue                       $        1,926.7       $           1,476.0                $                450.7                     31  %
Gross profit                                 1,280.1                     931.5                                 348.6                     37  %

Operating income                               299.5                     142.3                                 157.2                         *
Net income                                     493.6                     101.1                                 392.5                         *

Basic net income per share                      5.23                      1.11                                  4.12                         *
Diluted net income per share        $           5.06       $              1.10                $                 3.96                         *


* Not meaningful

                    Revenue, Cost of Sales and Gross Profit


                    [[Image Removed: dxcm-20201231_g4.jpg]]
                                          Twelve Months Ended December 31,               2020 - 2019

(In millions)                                2020                 2019                           $ Change                 % Change
Total revenue                            $     1,926.7       $      1,476.0                $              450.7                   31  %
Cost of sales                                    646.6                544.5                               102.1                   19  %
Gross profit                             $     1,280.1       $        931.5                $              348.6                   37  %
Gross profit as a percent of total
revenue                                          66  %              63    %


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,
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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.
Fiscal 2020 Compared to Fiscal 2019
Total revenue increased $450.7 million or 31% for the twelve months ended
December 31, 2020 compared to the twelve months ended December 31, 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 twelve months ended December 31,
2020. Disposable sensor and other revenue comprised approximately 78% of total
revenue and Reusable Hardware revenue comprised approximately 22% of total
revenue for the twelve months ended December 31, 2019.
Cost of sales increased $102.1 million or 19% for the twelve months ended
December 31, 2020 compared to the twelve months ended December 31, 2019
primarily due to increased sales volume. The gross profit of $1.28 billion or
66% of total revenue for the twelve months ended December 31, 2020 increased
$348.6 million compared to $931.5 million or 63% of total revenue for the same
period in 2019. The increase in gross profit and gross profit margin in 2020
compared to 2019 were primarily driven by increased revenues and cost savings
associated with incremental improvements to product design and manufacturing
efficiencies.
Operating Expenses


                                                 Twelve Months Ended December 31,              2020 - 2019
(In millions)                                      2020               2019                       $ Change             % Change

Research and development                       $      359.9       $      273.5                 $    86.4                      32  %
as a % of total revenue                               19  %              19  %

Selling, general and administrative                   620.7              515.7                     105.0                      20  %
as a % of total revenue                               32  %              35  %
Total operating expenses                       $      980.6       $      789.2                 $   191.4                      24  %
as a % of total revenue                               51  %              53  %


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.
Fiscal 2020 Compared to Fiscal 2019
Research and Development Expense. Research and development expense increased
$86.4 million or 32% for the twelve months ended December 31, 2020 compared to
the same period of 2019. The increase was primarily due to $38.6 million in
additional salaries, bonus, and payroll-related costs, $14.1 million in
additional consulting fees, $7.5 million from losses on the disposal of assets
primarily driven by automation of our production capabilities, and $7.4 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 increased $105.0 million or 20% for the twelve months ended December 31,
2020 compared to the same period of 2019. Significant elements of the increase
in selling, general, and administrative expenses included $60.1 million in
additional advertising and marketing costs, $35.0 million in additional
salaries, bonuses, and payroll-related costs, and $16.5 million in additional
consulting fees, partially offset by $7.8 million in lower restructuring charges
associated with our 2019 Restructuring Plan and $6.5 million in lower travel and
entertainment costs.
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                       Non-Operating Income and Expenses


Interest Expense
Interest expense increased $24.4 million to $84.7 million for the twelve months
ended December 31, 2020 compared to $60.3 million for the same period of 2019.
The increase was primarily due to the May 2020 issuance of our 2025 Notes,
partially offset by the repurchase, conversion and redemption of all of our 2022
Notes during the first seven months of 2020.
Loss on Extinguishment of Debt
We recorded a loss on extinguishment of debt of $5.9 million during the twelve
months ended December 31, 2020 in connection with the repurchase and conversions
of our 2022 Notes. See Note 5 to the consolidated financial statements in Part
II, Item 8 of this Annual Report for more information about these transactions.
Income/Loss from Equity Investments
Loss from equity investments of $4.2 million for the twelve months ended
December 31, 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.
Interest and Other Income (Expense), Net
Interest income is related to our marketable debt securities portfolio. Interest
income was $13.2 million and $28.4 million for the twelve months ended
December 31, 2020 and 2019, respectively. The decrease in interest income was
primarily related to a decrease in market interest rates, partially offset by an
increase in average invested balances during 2020 compared to 2019.
Other income (expense) for the twelve months ended December 31, 2020 and
December 31, 2019 consists primarily of foreign currency transaction gains and
losses due to the effects of foreign currency fluctuations.
Income Tax Expense/Benefit
We recorded pre-tax income for the twelve months ended December 31, 2020 and
December 31, 2019. The income tax benefit we recorded for 2020 is primarily
attributable to the release of our valuation allowance on specific deferred tax
assets. The nominal income tax expense we recorded for 2019 is primarily due to
withholding and other income tax expenses in profitable jurisdictions.
                       Liquidity and Capital Resources


            Overview, Capital Resources, and Capital Requirements


Our principal sources of liquidity are our existing cash, cash equivalents and
marketable securities, cash generated from operations, proceeds from our
convertible notes issuances, 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 in U.S. dollar-denominated, investment
grade, highly liquid obligations of U.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;
•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;
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•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 in the United States, and
the majority of our sales since inception have been made in U.S. dollars.
Accordingly, our assessment is that we have no material net exposure to foreign
currency exchange rate fluctuations at this time. However, as our business in
markets outside of the United States continues to increase, we will be exposed
to foreign currency exchange risk related to our foreign operations.
Fluctuations in the rate of exchange between the U.S. dollar and foreign
currencies, primarily the British Pound, the Euro, and the Canadian Dollar,
could adversely affect our financial results, including our revenues, revenue
growth rates, gross margins, income and losses as well as assets and
liabilities. We currently engage in hedging transactions to reduce foreign
currency risks. We will continue to monitor and manage our financial exposures
due to exchange rate fluctuations as an integral part of our overall risk
management program. Our cash, cash equivalents and short-term marketable
securities totaled $2.71 billion as of December 31, 2020. None of those funds
were restricted and approximately 98% of those funds were located in the 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 of
December 31, 2020 increased by $1.18 billion from December 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 $193.7 million remains available, will be sufficient to meet our
anticipated seasonal working capital needs, capital expenditure requirements,
contractual obligations, commitments, debt service requirements, and other
liquidity requirements associated with our operations for at least the next 12
months.
Revolving Credit Agreement
In December 2018, we entered into an amended and restated five-year $200.0
million revolving Credit Agreement, including 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 of December 31, 2020, we
had no outstanding borrowings, $6.3 million in outstanding letters of credit,
and a total available balance of $193.7 million under the Credit Agreement. We
monitor counterparty risk associated with the institutional lenders that are
providing the credit facility. We currently believe that the credit facility
will be available to us should we choose to borrow under it.
Senior Convertible Notes
The following table summarizes our outstanding senior convertible note
obligations as of December 31, 2020:
                                                          Aggregate                                           Initial Conversion
                                                        Principal (in                                          Rate per Share of          Conversion Price per
    Issuance Date                Coupon Rate              millions)                Maturity Date                 Common Stock            Share of Common Stock
    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
                                                       $    2,057.5


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; the remaining 2022 Notes were converted
for shares of our common stock during 2020. We intend
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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.
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 5 to the consolidated financial statements in Part II, Item 8 of this
Annual Report for more information about the terms of the Credit Agreement, the
2023 Notes and the 2025 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 II, Item 8 of this Annual Report for complete statements of cash flows for these periods.


                                                                  Twelve Months Ended
                                                                     December 31,                    Change
(In millions)                                                2020                 2019                         2020 - 2019
Net cash provided by operating activities              $    475.6             $   314.5                      $      161.1
Net cash used in investing activities                    (1,018.0)             (1,015.2)                             (2.8)
Net cash provided by financing activities                   912.1                  10.7                             901.4

Effect of exchange rates on cash, cash equivalents, and restricted cash

                                           2.1                  (0.7)                              2.8
Increase (decrease) in cash, cash equivalents and
restricted cash                                        $    371.8             $  (690.7)                     $    1,062.5


As of December 31, 2020, we had $2.71 billion in cash, cash equivalents and
short-term marketable securities, which is an an increase of $1.18 billion
compared to $1.53 billion as of December 31, 2019. The primary cash flows during
the twelve months ended December 31, 2020 and 2019 are described below.
Operating Cash Flows
Net cash provided by operating activities during 2020 was comprised of net
income of $493.6 million and net adjustments of $288.3 million primarily related
to share-based compensation, depreciation and amortization, non-cash interest
expense for our senior convertible notes and loss on extinguishment of debt on
our 2022 Notes, partially offset by $285.5 million net benefit to tax expense
associated with the release of the valuation allowance related to deferred tax
assets and $20.8 million of changes in working capital balances.
Net cash provided by operating activities during 2019 was comprised of a net
income of $101.1 million, offset by $207.3 million of net adjustments and $6.1
million of changes in working capital balances. Net adjustments were primarily
related to share-based compensation, depreciation and amortization, non-cash
interest expense for our senior convertible notes, 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 2020 was primarily comprised of
$807.7 million for net purchases of marketable securities and $199.0 million for
capital expenditures.
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Net cash used in investing activities during 2019 was primarily comprised of
$834.0 million for net purchases of marketable securities and $180.0 million for
capital expenditures.
Financing Cash Flows
Net cash provided by financing activities during 2020 was primarily comprised of
$1.19 billion in net proceeds from the issuance of our 2025 Notes and $15.3
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 2019 was primarily comprised of
$11.9 million in proceeds from the issuance of common stock under our employee
stock plans.
Contractual Obligations


We are party to various leasing arrangements, primarily for office,
manufacturing and warehouse space that expire at various times through December
2030. We also have one land lease that expires in 2080.
The following table summarizes our outstanding contractual obligations as of
December 31, 2020 and the effect those obligations are expected to have on our
liquidity and cash flows in future periods:
                                                     Less                                    More
                                                     than         1-3           3-5          than
(In millions)                          Total        1 Year       Years         Years        5 Years
Senior convertible notes (1)        $ 2,091.7      $  9.4      $ 868.8      $ 1,213.5      $     -
Lease obligations (2)                   235.5        31.9         53.0           49.9        100.7
Total                               $ 2,327.2      $ 41.3      $ 921.8      $ 1,263.4      $ 100.7


(1) We issued senior convertible notes in November 2018 and May 2020. The
obligations presented above include both principal and interest for these notes.
Although these notes mature in 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 repayment as indicated in the table. See Note
5 to the consolidated financial statements in Part II, Item 8 of this Annual
Report for further discussion of the terms of our senior convertible notes.
(2) Includes finance lease obligations related to our Mesa, Arizona and Malaysia
facilities. See Note 6 to the consolidated financial statements in Part II, Item
8 of this Annual Report for more information.
We are also party to various purchase arrangements related to components used in
manufacturing and research and development activities. As of December 31, 2020,
we had approximately $335.6 million of open purchase orders and contractual
obligations in the ordinary course of business, the majority of which are due
within one year.
We have $1.2 million of unrecognized tax benefits, including estimated interest
and penalties, that have been recorded as liabilities for which we are uncertain
as to if or when such amounts may be settled. As a result, such amounts are
excluded from the table above.
Off-Balance Sheet Arrangements


As of December 31, 2020, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K. Recent Accounting Guidance




For a description of recently issued accounting guidance that is applicable to
our financial statements, see Note 1 to the consolidated financial statements in
Part II, Item 8 of this Annual Report.
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