INSULET CORPORATION
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the accompanying notes included in this annual report. The
following discussion may contain forward-looking statements that reflect our
plans, estimates and beliefs, which are subject to risks, uncertainties and
assumptions. Our actual results could differ materially from those discussed in
these forward-looking statements. Factors that could cause or contribute to
these differences include those discussed under the headings "Risk Factors" and
"Forward-Looking Statements."
Overview
We are primarily engaged in the development, manufacture and sale of our
proprietary Omnipod System, a continuous insulin delivery system for people with
insulin-dependent diabetes. The Omnipod System features a small, lightweight,
self-adhesive disposable tubeless Omnipod device that is worn on the body for up
to three days at a time; and its wireless companion, the handheld PDM. The
Omnipod System, which features discreet and easy-to-use devices, communicates
wirelessly, provides for virtually pain-free automated cannula insertion and
eliminates the need for traditional MDI therapy or the use of traditional pump
and tubing. We believe that the Omnipod System's unique proprietary design and
features allow people with insulin-dependent diabetes to manage their diabetes
with unprecedented freedom, comfort, convenience and ease.
In addition to the diabetes market space, we have partnered with pharmaceutical
and biotechnology companies to tailor the Omnipod System technology platform for
the delivery of subcutaneous drugs across other therapeutic areas. Most of our
drug delivery revenue currently consists of sales of pods to Amgen for use in
the Neulasta® Onpro® kit, a delivery system for Amgen's white blood cell booster
to help reduce the risk of infection after intense chemotherapy.
Our mission is to improve the lives of people with diabetes. To assist in
achieving this mission, we are focused on the following key strategic
imperatives:
•driving access and awareness;
•delivering consumer-focused innovation;
•expanding our global addressable market; and
•driving operational excellence.
Our long-term financial objective is to sustain profitable growth. To achieve
this goal, our efforts are focused on the launch of Omnipod 5, powered by
Horizon™ ("Omnipod 5"), our AID system. We completed the first phase of our
Omnipod 5 pivotal trial in October. We also recently completed our Omnipod 5
clinical study of pediatric users ages two to six years old and are planning for
an expanded indication by the end of 2021. In addition, we have begun enrolling
individuals with Type 2 diabetes in an Omnipod 5 feasibility study. Based on the
results of the feasibility work, we plan to conduct additional studies with the
goal to further expand Omnipod 5's indications.
During 2020, we began producing salable product on our second highly automated
manufacturing line in the U.S. and secured a second contract manufacturer in
China , which increased our capacity and redundancy. Additionally, in order to
support our continued growth and the expected launch of Omnipod 5 in the first
half of 2021, we recently installed a third highly automated manufacturing line
in the U.S. on which salable product is expected in 2021.
In 2020, we completed the roll out of Omnipod DASH, our digital mobile Omnipod
platform, in the countries we serve in Europe . In January 2021 , we completed our
full commercial launch of Omnipod DASH internationally with our roll out in
Canada . The majority of our global customers start on Omnipod DASH. We expect
the introduction of Omnipod DASH throughout our international markets to be a
growth driver as we increase our presence within our existing markets and enter
into new countries over the long term.
In 2020, we entered five new countries in Western Europe and the Middle East to
expand the commercial sale of Omnipod and our global footprint. While this
expansion into additional countries did not have a material impact on our 2020
revenues, it is expected to contribute to our long-term growth.
We are continuing to expand internationally in a targeted and strategic manner.
In the first quarter of 2021, we expanded into Turkey and we expect to launch
Omnipod DASH in Australia in 2021. Additionally, we are working on our strategy
to enter larger markets, such as Asia Pacific and Latin America .
Finally, we plan to continue our product development efforts and expand
awareness of and access to our products. Achieving the above strategic
imperatives is expected to require additional investments in certain initiatives
and personnel, as well as enhancements to our supply chain operation capacity,
efficiency and effectiveness.
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Table of Contents
Results of Operations
The discussion of our results of operations for 2018 has been omitted from this
Form 10-K but can be found in Item 7. Management's Discussion and Analysis and
Results of Operations in our Form 10-K for the fiscal year ended December 31,
2019 filed with the Securities and Exchange Commission on February 26, 2020 .
Comparison of the Years Ended December 31, 2020 and December 31, 2019
Revenue
Years Ended December 31,
(In millions) 2020 2019 % Change Currency Impact Constant Currency(1)
U.S. Omnipod $ 526.9 $ 420.4 25.3 % - % 25.3 %
International Omnipod 308.0 253.1 21.7 % 1.8 % 19.9 %
Total Omnipod 834.9 673.5 24.0 % 0.7 % 23.3 %
Drug Delivery 69.5 64.7 7.4 % - % 7.4 %
Total $ 904.4 $ 738.2 22.5 % 0.6 % 21.9 %
(1) Constant currency revenue growth is a non-GAAP financial measure which
should be considered supplemental to, and not a substitute for, our reported
financial results prepared in accordance with GAAP. See "Management's Use of
Non-GAAP Measures."
Total revenue for 2020 increased $166.2 million , or 22.5%, to $904.4 million ,
compared with $738.2 million in 2019. Constant currency revenue growth of 21.9%
was primarily driven by higher volume and, to a lesser extent, favorable sales
channel mix. The COVID-19 pandemic negatively impacted global new customer
starts throughout 2020, largely beginning in the second quarter. We expect our
revenues in 2021 to continue to be impacted by the global pandemic's effect on
both 2020 and 2021 new customer starts, particularly in our international
markets.
U.S. Omnipod
U.S. Omnipod revenue for 2020 increased $106.5 million , or 25.3%, to $526.9
million , compared with $420.4 million in 2019. This increase was primarily due
to higher volumes driven by growing our customer base and, to a lesser extent,
an increase due to growth through the pharmacy channel, where Pods have a higher
average selling price due in part to the fact that we offer the PDM for no
charge. In 2021, we expect strong Omnipod revenue growth driven by continued
market penetration and volume growth of Omnipod DASH, primarily in the pharmacy
channel. We expect this revenue growth to be partially offset by the impact of
lower new customer starts in 2020 stemming from COVID-19.
International Omnipod
International Omnipod revenue for 2020 increased $54.9 million , or 21.7%, to
$308.0 million , compared with $253.1 million in 2019. Excluding the 1.8%
favorable impact of currency exchange, the remaining 19.9% increase was
primarily due to higher volumes as we continue to expand awareness and access to
the Omnipod. Similar to in the U.S. , in 2021, we expect higher International
Omnipod revenue due to continued volume growth and market penetration aided by
the full launch of Omnipod DASH throughout our international markets and our
virtual training capabilities. We expect this revenue growth to be partially
offset by the impact of lower new customer starts in 2020 stemming from COVID-19
and continued lockdowns in Europe .
Drug Delivery
Drug Delivery revenue for 2020 increased $4.8 million , or 7.4%,
to $69.5 million , compared with $64.7 million in 2019. This increase was
primarily due to increased demand for Amgen's Neulasta® Onpro® kit which
includes our pods. In 2021, we expect Drug Delivery revenue to decline or grow
slightly dependent upon forecasted demand.
Operating Expenses
Years Ended December 31,
2020 2019
Percent of
(In millions) Amount Revenue Amount Percent of Revenue
Cost of revenue $ 322.1 35.6 % $ 257.9 34.9 %
Research and development expenses $ 146.8 16.2 % $ 132.3 17.9 %
Selling, general and administrative
expenses $ 384.0 42.5 % $ 298.0 40.4 %
33-------------------------------------------------------------------------------- Table of Contents Cost of Revenue Cost of revenue for 2020 increased$64.2 million , or 24.9%, to$322.1 million , compared with$257.9 million in 2019. Gross margin was 64.4% in 2020, compared with 65.1% in 2019. The 70 basis point decrease in gross margin was primarily due to start-up costs and inefficiencies driven by the addition of the second line at ourU.S. manufacturing facility, as well as two months of higher depreciation expense for under-utilized plant capacity, recruiting and screening expenses, expedited shipping costs and manufacturing incentives totaling$8.5 million , primarily associated with our contract manufacturer inChina as a result of COVID-19. This decrease was partially offset by higher average selling price due to growth in theU.S. pharmacy channel. We expect gross margin for 2021 to increase to 67% to 70%, which reflects expected revenue growth both in theU.S. and internationally, including in the pharmacy channel, and the benefits of continued improvements in manufacturing and supply chain operations. Research and Development Research and development expenses for 2020 increased$14.5 million , or 11.0%, to$146.8 million , compared with$132.3 million in 2019. This increase was primarily due to year-over-year headcount additions as we focus on driving innovation, particularly Omnipod 5, partially offset by reduced spend on Omnipod DASH, which was launched in the prior year period. We expect research and development spending in 2021 to increase compared with 2020 as we continue to invest in advancing our innovation and clinical pipeline. Selling, General and Administrative Selling, general and administrative expenses for 2020 increased$86.0 million , or 28.9%, to$384.0 million , compared with$298.0 million in 2019. This increase was primarily attributable to investments in customer support and other initiatives to support our growth, including year-over-year headcount additions, mainly sales and customer service personnel,$18.8 million increase in advertising expense driven by the pilot of our direct-to-consumer advertising campaign and online advertising,$14.6 million of cumulative amortization expense related to the resolution of a purchase price contingency associated with the acquisition of customer relationships from a former European distributor onJuly 1, 2018 , as well as$4.8 million of stock-based compensation expense from a company-wide 20th anniversary equity grant, a significant portion of which vested immediately. These increases were partially offset by a$9.7 million decrease in travel and entertainment expenses due to reduced activity resulting from COVID-19. We expect selling, general and administrative expenses to increase in 2021 compared with 2020 due to expansion of ourU.S. sales force and customer support personnel, investments to expand market acceptance and access for Omnipod 5, including direct-to-consumer advertising, and investments in our operating structure to facilitate operational efficiencies and continued growth. Non-Operating Items Interest Expense, Net Interest expense, net for 2020 increased$17.4 million , or 62.8%, to$45.1 million , compared with$27.7 million in 2019. This increase was primarily due to a$9.6 million increase in non-cash interest expense resulting from the net impact of the issuance of$800.0 million of 0.375% convertible notes and the repayment of$402.5 million principal amount of 1.25% convertible notes, a$3.9 million decrease in capitalized interest, primarily due toU.S. manufacturing line 2 being placed in service in the first quarter of 2020, and a$3.9 million decrease in interest income due to lower market rates and a shift in a portion of our investment portfolio to more liquid investments. Loss on Extinguishment of Debt During 2019, we incurred an$8.7 million loss on extinguishment of debt related to the repurchase of our 1.25% Notes. Other Income, Net Other income, net for 2020 increased$2.4 million , to$3.3 million , compared with$0.9 million in 2019. This increase was primarily driven by unrealized foreign currency gains due to the change in exchange rates, partially offset by a$1.8 million insurance recovery for damaged inventory in excess of our cost received during the year endedDecember 31, 2019 . Income Tax Expense Income tax expense was$2.9 million on pre-tax income of$9.7 million and$14.5 million for both 2020 and 2019, respectively. Our effective tax rate was 29.6% and 19.8% for 2020 and 2019, respectively. The increase in our effective tax rate primarily resulted from a decrease to pre-tax income in theU.S. , which has a valuation allowance. See Note 18 to the consolidated financial statements for additional information on our income tax expense. 34 -------------------------------------------------------------------------------- Table of Contents Adjusted EBITDA The table below presents reconciliations of Adjusted EBITDA, a non-GAAP financial measure, to net income, the most directly comparable financial measure prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"): Years Ended December 31, (in millions) 2020 2019 Net income $ 6.8$ 11.6 Interest expense, net 45.1 27.7 Income tax expense 2.9 2.9 Depreciation and amortization(1) 55.4 27.9 Stock-based compensation(2) 35.9 28.7 Loss on extinguishment of debt - 8.7 Adjusted EBITDA$ 146.1 $ 107.5 (1) The year endedDecember 31, 2020 includes$14.6 million of cumulative amortization expense associated with customer relationships that were acquired onJuly 1, 2018 . For more information see Note 13 to the consolidated financial statements. (2) The year endedDecember 31, 2020 includes$7.3 million of stock-based compensation expense related to a company-wide 20th anniversary equity grant, a significant portion of which immediately vested. Non-GAAP Financial Measures Management uses the following non-GAAP financial measures: Constant currency revenue growth represents the change in revenue between current and prior year periods using a constant currency, the exchange rate in effect during the applicable prior year period. We present constant currency revenue growth because we believe it provides meaningful information regarding our results on a consistent and comparable basis. Management uses this non-GAAP financial measure, in addition to financial measures in accordance with GAAP, to evaluate our operating results. It is also one of the performance metrics that determines management incentive compensation. Adjusted EBITDA represents net income (loss) plus net interest expense, income tax expense (benefit), depreciation and amortization, stock-based compensation and other significant unusual items, as applicable. We present Adjusted EBITDA because management uses it as a supplemental measure in assessing our operating performance, and we believe that it is helpful to investors, and other interested parties as a measure of our comparative operating performance from period to period. Adjusted EBITDA is a commonly used measure in determining business value and we use it internally to report results. These non-GAAP financial measures should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance with GAAP. In addition, the above definitions may differ from similarly titled measures used by others. Non-GAAP financial measures exclude the effect of items that increase or decrease our reported results of operations; accordingly, we strongly encourage investors to review our consolidated financial statements in their entirety. Liquidity and Capital Resources As ofDecember 31, 2020 , we had$907.2 million in cash and cash equivalents and$40.4 million of investments in marketable securities. We believe that our current liquidity will be sufficient to meet our projected operating, investing and debt service requirements for at least the next twelve months. Convertible Debt To finance our operations and global expansion, we have periodically issued convertible senior notes, which are convertible into our common stock. As ofDecember 31, 2020 , the following notes were outstanding: Principal Outstanding Conversion Price Issuance Date Coupon (in millions) Due Date Conversion Rate (1) per Share of Common Stock November 2017 1.375%$ 402.5 November 2024 10.7315$93.18 September 2019 0.375% 800.0 September 2026 4.4105$226.73 Total$ 1,202.5 (1) Per$1,000 face value of notes. In connection with the issuance of the 0.375% Convertible Senior Notes, we purchased capped call options ("Capped Calls") on our common stock. By entering into the Capped Calls, we expect to reduce the potential dilution to our common stock (or, in 35 -------------------------------------------------------------------------------- Table of Contents the event the conversion is settled in cash, to provide a source of cash to settle a portion of our cash payment obligation) in the event that at the time of conversion our stock price exceeds the conversion price under the Convertible Senior Notes. The Capped Calls have an initial strike price of$335.90 per share and cover 3.5 million shares of our common stock. Additional information regarding our debt is provided in Note 12 to the consolidated financial statements. Summary of Cash Flows Years Ended December 31, (in millions) 2020 2019 Cash provided by (used in): Operating activities $ 84.0$ 98.4 Investing activities 14.0 (73.6) Financing activities 605.5 73.5 Effect of exchange rate changes on cash 4.8
1.5
Net increase in cash and cash equivalents$ 708.3
Operating Activities Net cash provided by operating activities of$84.0 million in 2020 was primarily attributable to net income, as adjusted for depreciation and amortization, non-cash interest, and stock-based compensation, and a$63.4 million working capital cash outflow. The working capital outflow was driven by a$50.5 million increase in inventories, a$32.2 million increase in prepaid expenses and other assets and a$15.6 million increase in accounts receivable, partially offset by a$27.8 million increase in accrued expenses and other liabilities, primarily driven by manufacturing operations costs associated with the addition of our new contract manufacturer, as well as an increase in pharmacy rebates due to growth in the pharmacy channel. The increase in inventories was primarily driven by a planned inventory build associated with the further roll out of Omnipod DASH and an increase in work in progress inventory due to additional capacity from our new contract manufacturer. The increase in prepaid expenses and other assets was primarily driven by an increase in software licenses due to head count additions, and an increase in software-as-a-service to support our strategic initiatives. The increase in accounts receivable was primarily driven by revenue growth. Net cash provided by operating activities of$98.4 million in 2019 was primarily attributable to net income, as adjusted for non-cash interest, stock-based compensation, depreciation and amortization, partially offset by a$19.7 million working capital cash outflow. The working capital outflow was driven by a$30.2 million increase in inventories and a$22.0 million increase in prepaid expenses and other assets, offset by a$25.6 million increase in accounts payable and a$17.7 million increase in accrued expenses and other liabilities, primarily driven by timing of payments. The increase in inventories was primarily due to an increase in raw materials and finished goods related to the startup of ourU.S. manufacturing plant and an increase in work-in-process to support demand for our product. The increase in prepaid expenses and other assets was primarily driven by an increase in operating lease assets resulting from new leases entered into during the year and an increase in deferred commissions. Investing Activities Net cash provided by investing activities was$14.0 million in 2020, compared with net cash used in investing activities of$73.6 million in 2019.Capital Spending-Capital expenditures were$129.0 million in 2020 and primarily related to equipment to increase our manufacturing capacity. Capital expenditures were$163.7 million in 2019 and primarily related to the construction of our manufacturing and corporate headquarters facility inActon, Massachusetts . We expect capital expenditures for 2021 to increase compared with 2020 as we continue to expand manufacturing capacity to support our growth and the launch of Omnipod 5. We expect to fund our capital expenditures using a combination of existing cash and investments as well as cash generated from operations. Purchases and Sales of Investments-During 2020, net sales of marketable securities were$180.5 million , compared with net purchases of marketable securities of$97.3 million for 2019. The increase in net sales of marketable securities was driven by a shift in a portion of our investment portfolio to investments that are classified as cash equivalents in order to satisfy future cash needs. Acquisition of Intangible Assets-In 2020, following the resolution of a purchase price contingency associated with our 2018 acquisition of customer relationships from a former European distributor, we paid the distributor an additional$36.2 million for a total purchase price of$41.2 million . We had previously paid the distributor$3.8 million in 2019 and the remainder in 2018. 36 -------------------------------------------------------------------------------- Table of Contents Financing Activities Net cash provided by financing activities was$605.5 million in 2020, compared with$73.5 million in 2019. Issuance of Common Stock-In 2020, we sold 2.4 million common shares for$478.7 million in an underwritten registered offering. Net proceeds from the offering were$477.5 million . The proceeds provide us with additional liquidity to mitigate risk and allow us to continue investing in the growth of our business and our strategic initiatives. Debt Issuance and Repayment-In 2020, we received proceeds of$70.0 million upon entering into a mortgage of ourActon facility. Additionally, we received proceeds of$60.0 million upon entering into two equipment financing transactions. Refer to Note 12 to our consolidated financial statements for additional information regarding these transactions. Option Exercises and Payment of Taxes for Restricted Stock Net Settlements-Total proceeds from option exercises decreased 20.9 million to$25.7 million in 2020, compared with$46.6 million in 2019. This decrease was primarily driven by less option exercises in 2020 from the retirement of our former CEO in the prior year period. Payments for taxes related to net restricted and performance stock unit settlements increased$21.2 million to$29.8 million in 2020, compared with$8.6 million in 2019. The increase in payments for taxes related to restricted stock net settlements was driven by increased vesting of restricted shares in 2020, compared with 2019, including the immediate vesting of a significant portion of a company-wide 20th anniversary equity grant in the fourth quarter 2020. Revision to Nine Months EndedSeptember 30, 2020 Condensed Consolidated Cash Flow Statement InFebruary 2021 , we identified an error in the presentation of certain cash flow activity that impacted several line items within the previously issued Condensed Consolidated Statement of Cash Flows for the nine months endedSeptember 30, 2020 . While these items affected cash flows from operating and investing activities, they had no impact on the net increase (decrease) in cash and cash equivalents or net income. We have assessed the materiality of the misstatement in accordance with ASC 250-10, Accounting Changes and Error Corrections, and concluded that this misstatement was not material to our previously issued consolidated financial statements. Accordingly, our Condensed Consolidated Statement of Cash Flows for the nine months endedSeptember 30, 2020 will be corrected prospectively in our Form 10-Q for the quarterly period endedSeptember 30, 2021 as shown below. Previously (in millions) Reported Adjustment As Adjusted Prepaid and other assets$ (16.8) $ 4.1 $ (12.7) Accounts payable, accrued expenses and other current liabilities$ 36.1 $ (22.1) $ 14.0 Net cash provided by operating activities$ 85.0 $
(18.0)
Capital expenditures$ (88.5) $ 10.3 $ (78.2) Acquisition of intangible assets$ (8.3) $ 7.7 $ (0.6) Net cash provided by investing activities$ 65.3 $
18.0
Commitments and Contingencies Contractual Obligations-A summary of our contractual obligations and commitments for debt, operating lease obligations and other obligations atDecember 31, 2020 is presented in the following table: (in millions) Short Term Long Term Total Operating lease obligations$ 5.6 $ 13.1 $ 18.7 Debt obligations 15.6 1,315.1 1,330.7 Interest payments 14.7 45.8 60.5 Purchase obligations (1) 257.3 36.7 294.0 Total contractual obligations$ 293.2 $ 1,410.7 $ 1,703.9 (1)Purchase obligations include commitments for the purchase of Omnipod System components, commitments related to establishing additional manufacturing capabilities and other commitments for purchases of goods or services in the normal course of business. These commitments are derived from purchase orders, supplier contracts and open orders based on projected demand information. 37 -------------------------------------------------------------------------------- Table of ContentsLegal Proceedings-Roche Diabetes Care, Inc. ("Roche") filed a patent infringement lawsuit against us and is seeking monetary damages and attorneys' fees and costs. Since the patent expired in 2019, Roche is not seeking injunctive relief and the lawsuit will have no impact on ongoing sales of our products. We believe that we have meritorious defenses to Roche's claims and intend to vigorously defend against them. At this time, based on available information regarding this litigation, we are unable to reasonably assess the ultimate outcome of this case or determine an estimate, or range of estimates, of potential losses, which could be material; accordingly, we have excluded this exposure from the contractual obligations table above. Refer to Note 13 to our consolidated financial statements for additional information regarding this matter. Off-Balance Sheet Arrangements As ofDecember 31, 2020 , we had various outstanding letters of credit and bank guarantees totaling$2.8 million , none of which are individually significant. The Company has restricted cash that serves as collateral for these outstanding letters of credit and bank guarantees that is included in cash and cash equivalents on the consolidated balance sheet. Critical Accounting Policies and Estimates The preparation of our consolidated financial statements in conformity withU.S. GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The following accounting policies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. Management's estimates are based on the relevant information available at the end of each period. Revenue Recognition We recognize revenue when a customer obtains control of the promised products in an amount that reflects the net consideration to which we expect to be entitled. We sell products both direct to consumers and through distributors who resell the products to consumers. Transaction price is typically based on contracted rates less any estimates of claim denials and historical reimbursement experience, guidelines and payor mix, and less estimated variable consideration adjustments including rebates. Recognizing revenue requires us to exercise judgment and use estimates that can have a significant impact on the amount and timing of revenue we report. We exercise significant judgment when we determine the transaction price, including variable consideration adjustments. The amount of variable consideration that is included in the transaction price is included in revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. We estimate reductions to our revenues for rebates paid to distributors inthe United States andCanada and pharmacy benefit managers ("PBM") inthe United States . Rebates are based on contractual arrangements, which may vary. Our estimates are based on products sold, historical experience, trends and, as available, channel inventory data. Rebates charged against gross sales amounted to$82.5 million ,$59.1 million and$34.1 million in 2020, 2019 and 2018, respectively. Provisions for rebates, sales discounts and returns, are accounted for as a reduction of sales when revenue is recognized and are included within accounts receivable trade or accrued expenses and other current liabilities on our consolidated balance sheets, based upon the recipient of the rebate. 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. Our drug delivery product line includes sales of a modified version of the Omnipod to pharmaceutical and biotechnology companies who use our technology as a delivery method for their drugs. Revenue from the drug delivery product was$69.5 million for 2020. Revenue for this product line is recognized as the product is produced. Accounting for drug delivery revenue requires us to select a method to measure progress towards the satisfaction of the performance obligation. This election of the most meaningful measure of progress by which to recognize drug delivery revenue requires the application of judgment. We elected the input method and selected a blend of cost and time to produce as the measure of progress. Accordingly, revenue is recognized over time using a blend of costs incurred to date relative to total estimated costs at completion and time incurred to date relative to total production time to measure progress toward the satisfaction of our performance obligations. We believe that both incurred cost and elapsed time reflect the value generated, which best depicts the transfer of control to the customer. Contract costs include third party costs as well as an allocation of manufacturing overhead. Changes from quarter to quarter in quantity and stage of production of in-process inventory could have a significant quarterly impact on revenue. Contingencies We are involved in various legal proceedings that arise in the ordinary course of business as further discussed in Note 13 to our consolidated financial statements, including a patent infringement case with Roche. Accruals recorded for various contingencies including legal proceedings, self-insurance and other claims, are based on judgment, both regarding the probability of losses and range of loss, and, where applicable, include the consideration of opinions of internal and/or external legal counsel. When a range is established but a best estimate cannot be made, we record the minimum loss contingency amount, which could be zero. An estimate is often initially developed substantially earlier than the ultimate loss is known and is reevaluated each accounting period. As information becomes known, additional loss provision is recorded when either a best estimate can be made, or the 38 -------------------------------------------------------------------------------- Table of Contents minimum loss amount is increased. When events result in an expectation of a more favorable outcome than previously expected, our best estimate is changed to a lower amount. We record receivables from third-party insurers up to the amount of the related liability when we have determined that existing insurance policies will provide reimbursement. In making this determination, we consider applicable deductibles, policy limits and the historical payment experience of the insurance carriers. Accounting Standards Issued and Not Yet Adopted as ofDecember 31, 2020 InDecember 2019 , theFinancial Accounting Standards Board ("FASB") issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 eliminates certain exceptions in the current guidance regarding the approach for intraperiod tax allocations, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This new guidance also simplifies the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies such things as the accounting for transactions that result in a step up in the tax basis of goodwill. The guidance is effective for us beginning in the first quarter of 2021 with early adoption permitted. The adoption of this guidance is not expected to have a significant impact on our consolidated financial statements. InAugust 2020 , the FASB issued ASU 2020-06, Accounting for Convertible Debt Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for convertible instruments by eliminating certain separation models. Under ASU 2020-06, a convertible debt instrument will generally be reported as a single liability at its amortized cost with no separate accounting for embedded conversion features. Consequently, the interest rate of convertible debt instruments will be closer to the coupon interest rate. In addition, ASU 2020-06 eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. The guidance is effective for us beginning in the first quarter of 2022 with early adoption permitted. Early adoption of ASU 2020-06 as ofJanuary 1, 2021 , would result in an approximate$330 million decrease in additional paid in capital from the derecognition of the bifurcated equity component,$250 million increase in debt from the derecognition of the discount associated with the bifurcated equity component and$80 million decrease to the opening balance of accumulated deficit, representing the cumulative interest expense recognized related to the amortization of the bifurcated conversion option. Additionally, we expect to write-off the related deferred tax liabilities with a corresponding adjustment to the valuation allowance, resulting in no net impact to the cumulative adjustment to retained earnings. Adoption of this standard will have no impact on our diluted earnings per share as we calculate earnings per share using the if-converted method. We are still evaluating whether we will early adopt this guidance. Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "targets," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, results of operations and financial condition. Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forward-looking statements. The risk factors discussed in "Risk Factors" could cause our results to differ materially from those expressed in forward-looking statements. In addition, there may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. We expressly disclaim any obligation to update these forward-looking statements other than as required by law. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk The primary objectives of our investment strategy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. To minimize our exposure to an adverse shift in interest rates, we invest mainly in cash equivalents and short-term investments in a variety of securities, including money market funds,U.S. Treasury debt and corporate debt securities. Due to the short-term nature of our investments, we believe that we have no material exposure to interest rate risk. Market Price Sensitive Instruments As ofDecember 31, 2020 , we had outstanding debt related to our convertible senior notes recorded on our consolidated balance sheet of$933.1 million , net of unamortized discount and issuance costs totaling$269.4 million . Changes in the fair value of our outstanding debt, which could be impacted by changes in interest rates, are not recorded in these consolidated financial statements as the debt is accounted for at cost less unamortized discount and issuance costs. The fair value of the debt, which was$2.0 billion as ofDecember 31, 2020 , is also impacted by changes in our stock price. 39 -------------------------------------------------------------------------------- Table of Contents In order to reduce potential equity dilution, in connection with the issuance of$800.0 million aggregate principal amount of 0.375% Notes, we entered into Capped Calls. We expect the Capped Calls to reduce the potential dilution to our common stock (or, in the event the conversion is settled in cash, to provide a source of cash to settle a portion of our cash payment obligation) in the event that at the time of conversion our stock price exceeds the conversion price under the 0.375% Notes. The Capped Calls have an initial strike price of$335.90 per share and cover 3.5 million shares of common stock. Foreign Currency Exchange Risk Foreign currency risk arises from our investments in subsidiaries owned and operated in non-U.S. countries. Such risk is also a result of transactions with customers in countries outsidethe United States . Approximately 34% of our revenue was denominated in foreign currencies for the year endedDecember 31, 2020 . As our business in regions outside ofthe United States continues to increase, we will be increasingly exposed to foreign currency exchange risk related to our foreign operations. The cost of revenue related to revenue generated outside ofthe United States is primarily denominated inU.S. dollars; however, operating costs related to these revenues are largely denominated in the same respective currencies, thereby partially limiting our transaction risk exposure. Fluctuations in the rate of exchange betweenthe United States dollar and foreign currencies, primarily the Euro, British Pound and 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 have intercompany receivables and payables from our foreign subsidiaries that are denominated in foreign currencies, principally the Euro, the British pound and the Canadian dollar. Fluctuations from the beginning to the end of a reporting period result in the revaluation of our foreign currency-denominated intercompany receivables and payables, generating currency translation gains or losses. Net realized and unrealized gains (losses) from foreign currency transactions are included in other income (expense), net in the consolidated statement of income and amounted to a loss of$3.2 million for the year endedDecember 31, 2020 . Item 8. Financial Statements and Supplementary Data Our financial statements as ofDecember 31, 2020 and 2019 and for each of the three years in the period endedDecember 31, 2020 , and the Report of the Registered Independent Public Accounting Firm are included in this report as listed in the index. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm 41 Consolidated Balance Sheets as of December 31, 2020 and 2019 43
Consolidated Statements of Income for the Years ended
44
Consolidated Statements of Comprehensive I ncome for the Years Ended
45
Consolidated Statements of Stockholders' Equity for the Years ended
2020, 2019 and 2018 46
Consolidated Statements of Cash Flows for the Years ended
47
Notes to Consolidated Financial Statements 48
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Insulet Corporation
Opinions on the financial statements and internal control over financial
reporting
We have audited the accompanying consolidated balance sheets of Insulet
Corporation (a Delaware corporation) and subsidiaries (the "Company") as of
December 31, 2020 and 2019, and the related consolidated statements of income,
comprehensive income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2020 , and the related notes
and financial statement schedules included under Item 15(a) (collectively
referred to as the "financial statements"). We also have audited the Company's
internal control over financial reporting as of December 31, 2020 , based on
criteria established in the 2013 Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2020 and 2019, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2020 in conformity with
accounting principles generally accepted in the United States of America . Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2020 , based on
criteria established in the 2013 Internal Control-Integrated Framework issued by
COSO.
Basis for opinions
The Company's management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management's Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the
Company's financial statements and an opinion on the Company's internal control
over financial reporting based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States )
("PCAOB") and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial statements. Our
audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
Definition and limitations of internal control over financial reporting
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Critical audit matter
The critical audit matter communicated below is a matter arising from the
current period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that: (1) relates to
accounts or disclosures that
41
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are material to the financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of critical
audit matters does not alter in any way our opinion on the financial statements,
taken as a whole, and we are not, by communicating the critical audit matter
below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Revenue Recognition - Drug Delivery
As described in Note 4 to the consolidated financial statements, the Company's
revenue from drug delivery was $69.5 million for the year ended December 31,
2020 . Drug delivery revenue is recognized over time based on the Company's
determination of the pattern over which control transfers to the customer. This
transfer of control begins during the manufacturing process and continues
through the final quality control inspection process until there is complete
satisfaction of the performance obligation. We identified drug delivery revenue
recognition and the associated unbilled receivable as a critical audit matter.
The principal considerations for our determination that this matter is a
critical audit matter are as follows:
Accounting for drug delivery revenue requires the Company to select a method to
measure progress towards the satisfaction of the performance obligation. This
election of the most meaningful measure of progress by which to recognize drug
delivery revenue requires the application of significant management judgment.
The Company elected the input method and selected a blend of cost and time to
produce for measure of progress. Given the nature of the revenue being
recognized, additional audit effort including modification of the nature and
extent of our procedures beyond that of the Company's other revenue streams was
required.
Our audit procedures included, but were not limited to, the following:
•We tested the design and operating effectiveness of controls relating to
Management's estimate of the measure of progress.
•For the measure of progress, we inspected evidence related to the cost and
length of the production cycle.
•For revenue recognized on in-process or finished goods inventory (and the
related unbilled receivable), we inspected customer orders, binding customer
forecasts, inventory records, and third party shipping documentation.
/s/ GRANT THORNTON LLP
We have served as the Company's auditor since 2016.
Boston, Massachusetts
February 23, 2021
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INSULET CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 31,
(in millions, except share and per share data) 2020 2019
ASSETS
Current Assets
Cash and cash equivalents $ 907.2 $ 213.7
Short-term investments 40.4 162.4
Accounts receivable trade, net 83.8 69.3
Inventories 154.3 101.0
Prepaid expenses and other current assets 63.0 44.6
Total current assets 1,248.7 591.0
Long-term investments - 58.4
Property, plant and equipment, net 478.7 399.4
Other intangible assets, net 28.7 13.2
Goodwill 39.8 39.8
Other assets 77.0 41.1
Total assets $ 1,872.9 $ 1,142.9
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 54.1 $ 54.5
Accrued expenses and other current liabilities 138.1 103.2
Current portion of long-term debt 15.6 -
Total current liabilities 207.8 157.7
Long-term debt, net 1,043.7 887.9
Other liabilities 17.8 21.4
Total liabilities 1,269.3 1,067.0
Commitment and Contingencies (Note 13)
Stockholders' Equity
Preferred stock, $.001 par value:
Authorized: 5,000,000 shares at December 31, 2020 and 2019.
Issued and outstanding: zero shares at December 31, 2020 and 2019. - -
Common stock, $.001 par value:
Authorized: 100,000,000 shares at December 31, 2020 and 2019.
Issued and outstanding: 66,017 and 62,685 shares at December 31,
2020 and 2019 0.1 0.1
Additional paid-in capital 1,264.3 749.0
Accumulated deficit (666.3) (672.0)
Accumulated other comprehensive income (loss) 5.5 (1.2)
Total stockholders' equity 603.6 75.9
Total liabilities and stockholders' equity $
1,872.9
The accompanying notes are an integral part of these consolidated financial
statements.
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INSULET CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
(in millions, except share and per share data) 2020 2019 2018
Revenue $ 904.4 $ 738.2 $ 563.8
Cost of revenue 322.1 257.9 193.6
Gross profit 582.3 480.3 370.2
Research and development 146.8 132.3 94.8
Selling, general and administrative 384.0 298.0 248.0
Operating income 51.5 50.0 27.4
Interest expense, net (45.1) (27.7) (21.3)
Loss on extinguishment of debt - (8.7) -
Other income (expense), net 3.3 0.9 (0.9)
Income before income taxes 9.7 14.5 5.2
Income tax expense (2.9) (2.9) (1.9)
Net income $ 6.8 $ 11.6 $ 3.3
Net income per share:
Basic $ 0.11 $ 0.19 $ 0.06
Diluted $ 0.10 $ 0.19 $ 0.05
Weighted-average number of common shares outstanding (in thousands):
Basic 64,735 60,594 58,860
Diluted 65,946 62,304 61,008
The accompanying notes are an integral part of these consolidated financial
statements.
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INSULET CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
(in millions) 2020 2019 2018
Net income $ 6.8 $ 11.6 $ 3.3
Other comprehensive income, net of tax
Foreign currency translation adjustment 6.8 0.6 (2.2)
Unrealized (loss) gain on available-for-sale securities, net of tax
(0.1) 1.1 (0.2)
Total other comprehensive income (loss), net of tax 6.7 1.7 (2.4)
Total comprehensive income $ 13.5 $ 13.3 $ 0.9 The accompanying notes are an integral part of these consolidated financial
statements.
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INSULET CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Accumulated Other Total
Shares Paid-in Accumulated Comprehensive Loss Stockholders'
(dollars in millions) (in thousands) Amount Capital Deficit (Income) Equity
Balance, December 31, 2017 58,319 $ 0.1 $ 866.2 $ (707.3) $ (0.5) $ 158.5
Exercise of options to purchase common
stock 410 - 12.8 - - 12.8
Issuance of shares for employee stock
purchase plan 46 - 3.0 - - 3.0
Stock-based compensation - - 37.5 - - 37.5
Restricted stock units vested, net of
shares withheld for taxes 414 - (17.8) - - (17.8)
Extinguishment of conversion feature on
2% Notes, net of issuance costs - - (3.2) - - (3.2)
Adoption of ASC 606 (Note 2) - - - 20.4 - 20.4
Net income - - - 3.3 - 3.3
Other comprehensive loss - - - - (2.4) (2.4)
Balance, December 31, 2018 59,189 0.1 898.5 (683.6) (2.9) 212.1
Exercise of options to purchase common
stock 1,340 - 46.6 - - 46.6
Issuance of shares for employee stock
purchase plan 51 - 4.3 - - 4.3
Stock-based compensation - - 28.7 - - 28.7
Restricted stock units vested, net of
shares withheld for taxes 230 - (8.6) - - (8.6)
Conversion feature of 0.375% Notes, net
of issuance costs - - 207.8 - - 207.8
Extinguishment of conversion feature on
1.25% Notes, net of issuance costs - - (642.3) - - (642.3)
Issuance of shares for debt repayment 1,875 - 299.4 - - 299.4
Purchase of capped call options - - (85.4) - - (85.4)
Net income - - - 11.6 - 11.6
Other comprehensive income - - - - 1.7 1.7
Balance, December 31, 2019 62,685 0.1 749.0 (672.0) (1.2) 75.9
Adoption of ASU 2016-13 (Note 1) - - - (1.1) - (1.1)
Issuance of common stock 2,370 - 477.5 - - 477.5
Exercise of options to purchase common
stock 674 - 25.7 - - 25.7
Issuance of shares for employee stock
purchase plan 38 - 6.0 - - 6.0
Stock-based compensation - - 35.9 - - 35.9
Restricted stock units vested, net of
shares withheld for taxes 250 - (29.8) - - (29.8)
Net income - - - 6.8 - 6.8
Other comprehensive income - - - - 6.7 6.7
Balance, December 31, 2020 66,017 $ 0.1 $ 1,264.3 $ (666.3) $ 5.5 $ 603.6 The accompanying notes are an integral part of these consolidated financial
statements.
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INSULET CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(in millions) 2020 2019 2018
Cash flows from operating activities
Net income $ 6.8 $ 11.6 $ 3.3
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 55.4 27.9 15.6
Non-cash interest 45.2 35.6 29.3
Stock-based compensation 35.9 28.7 37.5
Loss on extinguishment of convertible debt - 8.7 -
Provision for credit losses 3.3 4.5 3.4
Other 0.8 1.1 (0.4)
Changes in operating assets and liabilities:
Accounts receivable (15.6) (10.8) (14.6)
Inventories (50.5) (30.2) (38.8)
Prepaid expenses and other assets (32.2) (22.0) (19.9)
Accounts payable 7.1 25.6 (5.4)
Accrued expenses and other liabilities 27.8 17.7 25.9
Net cash provided by operating activities 84.0 98.4 35.9
Cash flows from investing activities
Capital expenditures (129.0) (163.7) (157.4)
Acquisition of intangible assets (37.5) (7.2) (5.0)
Purchases of investments (37.9) (150.6) (191.4)
Receipts from the maturity or sale of investments 218.4 247.9 169.3
Net cash provided by (used in) investing activities 14.0 (73.6) (184.5)
Cash flows from financing activities
Proceeds from issuance of common stock, net of issuance
costs 477.5 - -
Proceeds from mortgage, net of issuance cost 68.3 - -
Proceeds from equipment financing 60.0 - -
Proceeds from issuance of convertible debt, net of issuance cost
- 780.2 -
Purchase of capped call options - (85.4) -
Repayment of convertible debt - (663.6) (6.7)
Proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan
31.7 50.9 15.8
Payment of withholding taxes in connection with vesting of restricted stock units
(29.8) (8.6) (17.8)
Other (2.2) - -
Net cash provided by (used in) financing activities 605.5 73.5 (8.7)
Effect of exchange rate changes on cash 4.8 1.5 (1.4)
Net increase (decrease) in cash, cash equivalents, and restricted cash
708.3 99.8 (158.7)
Cash, cash equivalents, and restricted cash, beginning of year
213.7 113.9 272.6
Cash, cash equivalents, and restricted cash, end of year (Note 5)
$ 922.0
Supplemental cash flow information Cash paid for interest, net of amount capitalized$ 2.6 $ - $ - Cash paid for taxes$ 3.0
$ 6.7 $ 13.3 $ 11.4
The accompanying notes are an integral part of these consolidated financial
statements.
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INSULET CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of theBusiness Insulet Corporation (the "Company") is primarily engaged in the development, manufacture and sale of its proprietary Omnipod System, an innovative, continuous insulin delivery system for people with insulin-dependent diabetes. The Omnipod System features a small, lightweight, self-adhesive disposable tubeless Omnipod device ("Pod") that is worn on the body for up to three days at a time, and its wireless companion, the handheld Personal Diabetes Manager ("PDM"). The Omnipod System, which features two discreet, easy-to-use devices, communicates wirelessly, provides for virtually pain-free automated cannula insertion and eliminates the need for multiple daily injections using syringes or insulin pens or the use of traditional pump and tubing. The Omnipod System consists of two product lines: the Omnipod Insulin Management System ("Omnipod") and its next generation Omnipod DASHTM Insulin Management System ("Omnipod DASH" or "DASH"). Omnipod DASH features a secure Bluetooth enabled Pod and PDM with a color touch screen user interface supported by smartphone connectivity. The Company generates most of its revenue from sales of the Omnipod System, which is sold in theU.S. ,Europe ,Canada and theMiddle East . The Omnipod System is sold either directly to end-users or indirectly through intermediaries. Intermediaries include independent distributors who resell the Omnipod to end-users and wholesalers who sell the Company's product to end-users through the pharmacy channel inthe United States . In addition to selling the Omnipod System for insulin delivery, the Company also partners with global pharmaceutical and biotechnology companies to tailor the Omnipod System technology platform for the delivery of subcutaneous drugs across other therapeutic areas. The majority of the Company's drug delivery revenue consists of sales of pods to Amgen for use in the Neulasta® Onpro® kit, a delivery system for Amgen's white blood cell booster to help reduce the risk of infection after intense chemotherapy. Note 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying financial statements reflect the consolidated operations ofInsulet Corporation and its subsidiaries. The consolidated financial statements have been prepared inUnited States dollars, in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The preparation of the consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results may differ from those estimates. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. Reclassification of Prior Period Amounts Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. A portion of facility costs and certain information technology costs have been allocated from selling, general and administrative to research and development expenses based on square foot and system usage, respectively and certain quality assurance costs were reclassified from research and development expenses to selling, general and administrative expenses. The net impact of these adjustments was a$2.6 million and$4.3 million increase to research and development expenses and decrease to selling, general and administrative expenses for the years endedDecember 31, 2019 andDecember 31, 2018 , respectively. There was no change to previously reported operating or net income. Foreign Currency Translation For the foreign subsidiaries of the Company, assets and liabilities are translated intoU.S. dollars using exchange rates as of the balance sheet date, and income and expenses are translated using the average exchange rates in effect for the related month. The net effect of these translation adjustments is reported in accumulated other comprehensive loss within stockholders' equity on the consolidated balance sheet. Net realized and unrealized gains (losses) from foreign currency transactions are included in other income (expense), net in the consolidated statement of income and were$3.2 million ,$0.6 million and$1.0 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. Cash and Cash Equivalents The Company considers all highly liquid investments with maturities of 90 days or less at the time of purchase to be cash equivalents. Cash equivalents include money market mutual funds, commercial paper andU.S. government and agency bonds that are carried at cost, which approximates their fair value. Restricted cash required to be set aside in connection with 48 -------------------------------------------------------------------------------- Table of Contents equipment financings or that serves as collateral for outstanding letters of credit and bank guarantees is included in other assets and cash and cash equivalents on the consolidated balance sheet. Investments inMarketable Securities Short-term and long-term investment securities consist of certificates of deposit, commercial paper,U.S. government and agency bonds and corporate bonds. Theses available-for-sale marketable securities are carried at fair value and unrealized gains and losses are included as a component of accumulated other comprehensive income (loss) in stockholders' equity on the consolidated balance sheet. Investments with a stated maturity date of more than one year from the balance sheet date and that are not expected to be used in current operations are classified as long-term investments on the consolidated balance sheet. The Company reviews investments for other-than-temporary impairment when the fair value of an investment is less than its amortized cost. If an available-for-sale security is other than temporarily impaired, the loss is included in other income (expense), net in the consolidated statement of income. Accounts Receivable and Allowance for Credit Losses Trade accounts receivable consist of amounts due from third-party payors, customers and intermediaries and are presented at amortized cost. The allowance for credit losses reflects an estimate of losses inherent in the Company's accounts receivable portfolio determined based on historical experience, specific allowances for known troubled accounts and other available evidence. Accounts receivable are written off when management determines they are uncollectible. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the following portfolio segments and measures the allowance for credit losses using the following methods:Direct Customer Receivables-The Company measures expected credit losses on direct customer receivables using an aging methodology. The risk of loss for direct customer receivables is higher than other portfolios. The Company relies on third-party payors to accept and timely process claims and on direct consumers to have the ability to pay. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and supportable forecasts.Distributor Receivables-The Company measures expected credit losses on distributor receivables using an individual reserve methodology. The risk of loss in this portfolio is low based on the Company's historical experience. The estimate of expected credit losses considers payment history as well as credit ratings of the distributors, in addition to current conditions and supportable forecasts.National Healthcare System Receivables-The Company measures expected credit losses on national healthcare system receivables using an individual reserve methodology. The risk of loss in this portfolio is low based on the Company's historical experience. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and supportable forecasts. Inventories Inventories are stated at the lower of cost or net realizable value, with cost determined under the first-in, first-out method. The Company reduces the carrying value of inventories for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technology developments or other economic factors in order to state inventories at net realizable value. Factors influencing these adjustments include inventories on hand compared to estimated future usage and sales. Work in process is calculated based upon a buildup of cost based on the stage of production. Manufacturing variances attributable to abnormally low production are expensed in the period incurred. Contract Acquisition Costs The Company incurs commission costs to obtain a contract related to new customer starts. These costs are capitalized as contract assets in other assets, net of the short-term portion included in prepaid and other current assets. Costs to obtain a contract are amortized as sales and marketing expense on a straight-line basis over the expected period of benefit, which considers future product upgrades for which a commission would be paid. These costs are periodically reviewed for impairment. Fair Value Measurements Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. When estimating fair value, the Company may use one or all the following approaches: •Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities. 49 -------------------------------------------------------------------------------- Table of Contents •Cost approach, which is based on the cost to acquire or construct comparable assets less an allowance for functional and/or economic obsolescence. •Income approach, which is based on the present value of the future stream of net cash flows. To measure fair value of assets and liabilities, the Company uses the following fair value hierarchy based on three levels of inputs: Level 1 - observable inputs, such as quoted prices in active markets for identical assets or liabilities; Level 2 - significant other observable inputs that are observable either directly or indirectly; Level 3 - significant unobservable inputs for which there is little or no market data, which require the Company to develop its own assumptions. Certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities are carried at cost, which approximates their fair value because of their short-term maturity. See Notes 5 and 12 for financial assets and liabilities held at carrying amount on the consolidated balance sheet and Note 6 for investments measured at fair value on a recurring basis. Property, Plant and Equipment Property, plant and equipment is stated at cost less accumulated depreciation. Major improvements are capitalized, while routine repairs and maintenance are expensed as incurred. Depreciation for property, plant and equipment, other than land and construction in progress, is based upon the following estimated useful lives using the straight-line method: Building and building improvements 20 to 39 years Leasehold improvements Lesser of lease term or useful life of asset Machinery and equipment 2 to 15 years Furniture and fixtures 3 to 5 years The Company assesses the recoverability of assets whenever events or changes in circumstances suggest that the carrying value of an asset may not be recoverable. The Company recognizes an impairment loss if the carrying amount of a long-lived asset is not recoverable based on its undiscounted future cash flows. The impairment loss is measured as the difference between the carrying amount and the fair value of the asset. Business Combinations The Company recognizes the assets and liabilities assumed in business combinations based on their estimated fair values at the date of acquisition. The Company allocates the purchase price in excess of net tangible assets acquired to identifiable intangible assets. The Company assesses the fair value of assets, including intangible assets, using a variety of methods and each asset is measured at fair value from the perspective of a market participant. Assets recorded from the perspective of a market participant that are determined to not have economic use for the Company are expensed immediately. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. Transaction costs and restructuring costs associated with a business combination are expensed as incurred. Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price of an acquired entity over the amounts assigned to assets and liabilities assumed in a business combination. The Company performs an assessment of its goodwill for impairment annually onOctober 1 or whenever events or changes in circumstances indicate there might be impairment. Goodwill is evaluated for impairment at the reporting unit level. The Company may assess its goodwill for impairment initially using a qualitative approach to determine whether conditions exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. If management concludes, based on its assessment of relevant events, facts and circumstances that it is more likely than not that a reporting unit's carrying value is greater than its fair value, then a quantitative analysis will be performed to determine if there is any impairment. Alternatively, the Company may elect to initially perform a quantitative analysis instead of starting with a qualitative analysis. In performing the quantitative test, the Company utilizes a two-step approach. The first step compares the carrying value of the reporting unit to its fair value. If the reporting unit's carrying value exceeds its fair value, the Company would perform the second step and record an impairment loss to the extent that the carrying value of the reporting unit's goodwill exceeds its implied fair value. Intangible assets acquired in a business combination are recorded at fair value, while intangible assets acquired in other transactions are recorded at cost and are stated at cost less accumulated amortization. Intangible assets with finite useful lives 50 -------------------------------------------------------------------------------- Table of Contents are amortized based on the pattern in which the economic benefits of the assets are estimated to be consumed over the following estimated useful lives of the assets: Customer relationships 14 years Internal-use software 3 to 5 years Intellectual property 15 years Amortization expense is included in selling, general and administrative expenses in the consolidated statement of income. The Company reviews intangible assets for impairment by comparing the fair value of the assets, estimated using an income approach, with their carrying value. If the carrying value exceeds the fair value of the intangible asset, the Company recognizes an impairment equal to the difference between the carrying value of the asset and the present value of future cash flows. The Company assesses the remaining useful life and the recoverability of intangible assets whenever events or circumstances indicate that the carrying value of an asset may not be recoverable using undiscounted cash flows. Cloud Computing Arrangements The Company capitalizes costs incurred to implement cloud computing arrangements that are service contracts within other current and non-current assets and amortizes such costs over the expected term of the hosting arrangement to the same income statement line as the associated cloud operating expenses. As ofDecember 31, 2020 and 2019, the Company had net capitalized implementation costs of$24.2 million and$3.5 million , respectively. Amortization expense recorded during the period endedDecember 31, 2020 was$1.4 million and was insignificant for the period endedDecember 31, 2019 . Leases The Company determines if an arrangement includes a lease at inception. Lease agreements generally have lease and non-lease components, which are accounted for separately. At lease commencement, the Company recognizes operating lease liabilities equal to the present value of the lease payments and operating lease assets representing the right to use the underlying asset for the lease term. The Company assesses if it is reasonably certain to exercise lease options to extend or terminate the lease for inclusion or exclusion in the lease term when the Company measures the lease liability. As the Company's leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments. The Company's incremental borrowing rate estimates a secured rate that reflects the term of the lease, the nature of the underlying asset and the economic environment. The Company excludes leases with an expected term of one year or less from recognition on the consolidated balance sheet. Operating lease assets includes lease payments made prior to lease commencement and excludes lease incentives and initial direct costs incurred. Lease expense is recognized on a straight-line basis over the lease term. Contingencies The Company records a liability on the consolidated balance sheet for loss contingencies when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. Product Warranty The Company provides a four-year warranty on its PDMs sold inthe United States andEurope and a five-year warranty on PDMs sold inCanada and may replace Pods that do not function in accordance with product specifications. The Company estimates its warranty obligation at the time the product is shipped based on historical experience and the estimated cost to service the claims. Warranty expense is recorded in cost of revenue in the consolidated statements of income. Costs to service the claims reflect the current product cost. Since the Company continues to introduce new products and versions, the anticipated performance of the product over the warranty period is also considered in estimating warranty reserves. Revenue Recognition EffectiveJanuary 1, 2018 , the Company adopted ASU 2014-09, Revenue from Contracts with Customers, and its related amendments (collectively referred to as ASC 606) using the modified retrospective method for all contracts not completed as of the date of adoption. The cumulate effect of applying the new revenue standard resulted in a$20.4 million decrease to the opening balance of accumulated deficit upon adoption, primarily related to how revenue is recognized for the Company's drug delivery product line and the capitalization of contract acquisition costs such as commissions. Revenue is recognized when a customer obtains control of the promised products. The amount of revenue recognized reflects the consideration the Company expects to be entitled to receive in exchange for these products. To achieve this core principle, the Company applies the following five steps: 51 -------------------------------------------------------------------------------- Table of Contents •Identify Contracts with Customers. The Company's contracts with its direct customers generally consist of a physician order form, a customer information form and, if applicable, third-party insurance (payor) approval. Contracts with the Company's intermediaries are generally in the form of master service agreements against which firm purchase orders are issued. At the outset of the contract, the Company assesses the customer's ability and intention to pay, which is based on a variety of factors including historical payment experience or, in the case of a new intermediary, published credit, credit references and other available financial information pertaining to the customer and, in the case of a new direct customer, an investigation of insurance eligibility. •Identify Performance Obligations. The performance obligations in contracts for the delivery of the Omnipod to new end-users, either directly to end-users or through intermediaries, primarily consist of the PDM and the initial and subsequent quantity of Pods ordered. In the Company's judgment, these performance obligations are capable of being distinct and distinct in the context of the contract in that the customer can benefit from each item in conjunction with other readily available resources and the transfer of the PDM and the Pods is separately identifiable in the contract with the customer. •Determine Transaction Price. The price charged for the PDM and Pods is dependent on the Company's pricing as established with third party payors and intermediaries. The Company provides a right of return for sales of its Omnipod to end-users and certain of our distributors and wholesalers. The Company also provides for certain rebates and discounts for sales of its product through intermediaries. These rights of return, discounts and rebates represent variable consideration and reduce the transaction price at the outset of the contract based on the Company's estimates, which are primarily based on the expected value method using historical and other data (such as product return trends or forecast sale volumes) related to actual product returns, discounts and rebates paid in each market in which the Omnipod is sold. Variable consideration is included in the transaction price if it is probable that a significant future reversal of cumulative revenue under the contract will not occur; otherwise, the Company reduces the variable consideration. The variable consideration in the Company's contracts is not typically constrained and the Company's contracts do not contain significant financing components. •Allocate Transaction Price to Performance Obligations. The Company allocates the transaction price to each performance obligation based on its relative stand-alone selling price, which is determined based on the price at which the Company typically sells the deliverable or, if the performance obligation is not typically sold separately, the stand-alone selling price is estimated based on cost plus a reasonable profit margin or the price that a third party would charge for a similar product or service. •Recognize Revenue as Performance Obligations are Satisfied. The Company transfers the Omnipod at a point in time, which is determined based on when the customer gains control of the product. Generally, intermediaries in theU.S. obtain control upon shipment based on the contractual terms including right to payment and transfer of title and risk of ownership. For sales directly to end-users and international intermediaries, control is generally transferred at the time of delivery based on customary business practices related to risk of ownership, including transfer of title. The Company's drug delivery product line includes sales of a modified version of the Omnipod to pharmaceutical and biotechnology companies who use the Company's technology as a delivery method for their drugs. For the majority of this product line, revenue is recognized as the product is produced pursuant to the customer's firm purchase commitments as the Company has an enforceable right to payment for performance completed to date and the inventory has no alternative use to the Company. Judgment is required in the assessment of progress toward completion of in-process inventory. The Company recognizes revenue over time using a blend of costs incurred to date relative to total estimated costs at completion and time incurred to date relative to total production time to measure progress toward the satisfaction of its performance obligations. The Company believes that both incurred cost and elapsed time reflect the value generated, which best depicts the transfer of control to the customer. Contract costs include third party costs as well as an allocation of manufacturing overhead. Shipping and Handling Costs The Company does not typically charge its customers for shipping and handling costs associated with shipping its product to its customers unless non-standard shipping and handling services are requested. These shipping and handling costs are included in selling, general and administrative expenses and were$10.1 million ,$9.7 million and$6.6 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. Advertising Costs The Company expenses advertising costs as they are incurred. Advertising expenses were$30.0 million ,$11.2 million and$10.5 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. Stock-Based Compensation The Company measures stock-based compensation on the grant date based on the fair value of the award and recognizes the compensation expense over the requisite service period, which is generally the vesting period. The amount of stock-based 52 -------------------------------------------------------------------------------- Table of Contents compensation recognized during a period is based on the portion of the awards that are expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Income Taxes The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect in the years in which the differences are expected to reverse. The Company reviews its deferred tax assets for recoverability considering historical profitability, projected future taxable income, and the expected timing of the reversals of existing temporary differences and tax planning strategies. A valuation allowance is provided to reduce the deferred tax assets if, based on the available evidence, it is more likely than not that some or all the deferred tax assets will not be realized. The effect of a change in enacted tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Concentration of Credit Risk Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, short-term and long-term investments in marketable securities and accounts receivable. The Company maintains most of its cash, and short-term and long-term investments with a limited number of financial institutions that have a high investment grade credit rating. In addition to manufacturing the Omnipod System, the Company also purchases Omnipod Systems from two contract manufacturers. As ofDecember 31, 2020 , neither of these vendors represented 10% or more of the combined balance of accounts payable and accrued expenses and other current liabilities. As ofDecember 31, 2019 , one of these vendors represented 10% of the combined balance of accounts payable and accrued expenses and other current liabilities. See Note 4 for customer concentration. Recently Adopted Accounting Standards EffectiveJanuary 1, 2020 , the Company adopted Accounting Standards Update ("ASU") 2016-13, Credit Losses (Topic 326) ("ASU 2016-13"). ASU 2016-13 requires financial assets measured at amortized cost, such as the Company's trade receivables and contract assets, to be presented net of expected credit losses, which may be estimated based on relevant information such as historical experience, current conditions and future expectation for each pool of similar financial assets. The new guidance also requires enhanced disclosures related to trade receivables and associated credit losses. The Company adopted ASU 2016-13 using the modified retrospective method, whereby the guidance is applied prospectively as of the date of adoption and prior periods are not restated. The cumulative effect of adopting ASU 2016-13 resulted in a$1.1 million increase to the opening balance of accumulated deficit upon adoption related to an increase in the allowance for credit losses on accounts receivable. The following table presents the activity in the allowance for credit losses, which is comprised primarily of our direct consumer receivable portfolio. The allowance for credit losses of other portfolios is insignificant.
Year Ended
(in millions)
Credit losses at the beginning of the year $
3.8
Effect of adoption
1.1
Credit losses at the beginning of the year, after adoption
4.9
Provision for expected credit losses
3.3
Write-offs charged against allowance
(5.8)
Recoveries of amounts previously written-off
0.5
Credit losses at the end of the year $
2.9
EffectiveJanuary 1, 2020 , the Company adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 requires an entity to measure the impairment of goodwill assigned to a reporting unit as the amount by which the carrying value of the assets and liabilities of the reporting unit, including goodwill, exceeds the reporting units' fair value. The adoption of this guidance had no impact on the consolidated financial statements. Note 3. Segment and Geographic DataThe Company operates under one reportable segment. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated on a regular basis by the chief operating decision-maker ("CODM") in deciding how to allocate resources to an individual segment and in assessing performance of the segment. The Company has concluded that its Chief Executive Officer ("CEO") is the CODM as the CEO is the ultimate decision maker for key operating 53 -------------------------------------------------------------------------------- Table of Contents decisions, determining the allocation of resources and assessing the financial performance of the Company. These decisions, allocations and assessments are performed by the CODM using consolidated financial information, as the Company's current product offering primarily consists of the Omnipod System and drug delivery devices based on the Omnipod platform. Geographic information about revenue, based on customer location, is as follows: Years Ended December 31, (in millions) 2020 2019 2018 United States(1)$ 596.4 $ 485.1 $ 391.8 International 308.0 253.1 172.0 Total$ 904.4 $ 738.2 $ 563.8
(1) Includes
As of December 31,
(in millions) 2020 2019
United States $ 409.7 $ 363.0
China 66.2 35.9
Other 2.8 0.5
Total $ 478.7 $ 399.4
Note 4. Revenue and Contract Acquisition Costs
The following table summarizes the Company's disaggregated revenues:
Years Ended December 31,
(in millions) 2020 2019 2018
U.S. Omnipod $ 526.9 $ 420.4 $ 323.5
International Omnipod 308.0 253.1 172.0
Total Omnipod 834.9 673.5 495.5
Drug Delivery 69.5 64.7 68.3
Total revenue $ 904.4 $ 738.2 $ 563.8
Revenue for customers comprising 10% or more of total revenue was as follows:
Years Ended December 31,
2020 2019 2018
Anda, Inc. 11% * *
Cardinal Health Inc. and affiliates 10% 11% 12%
Amgen, Inc. * * 12%
* Represents less than 10% of revenue for the period.
At December 31, 2020 , the Company had one customer that accounted for 15% of
consolidated net accounts receivable. No customer accounted for more than 10% of
consolidated net accounts receivable at December 31, 2019 .
Deferred revenue related to unsatisfied performance obligations was included in
the following consolidated balance sheet accounts in the amounts shown:
As of December 31,
(in millions) 2020
2019
Accrued expenses and other current liabilities$ 5.4 $ 3.2 Other liabilities 1.0 1.0 Total deferred revenue$ 6.4 $ 4.2
Revenue recognized from amounts included in deferred revenue at the beginning of each respective period was as follows:
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As of December 31,
(in millions) 2020 2019 2018
Deferred revenue recognized $ 1.8 1.2 2.4
Contract acquisition costs, representing capitalized commission costs related to
new customers, net of amortization, were included in the following consolidated
balance sheet accounts in the amounts shown:
As of December 31,
(in millions) 2020 2019
Prepaid expenses and other current assets$ 11.0 $ 9.5 Other assets 21.9
19.9
Total capitalized contract acquisition costs, net
The Company recognized$10.6 million ,$8.8 million , and$6.9 million of amortization of capitalized contract acquisition costs for the years endedDecember 31, 2020 , 2019, and 2018, respectively. The Company had unbilled receivables of$11.6 million and$13.5 million atDecember 31, 2020 and 2019, respectively. Note 5. Cash and Cash Equivalents The following table provides a summary of cash and cash equivalents as ofDecember 31, 2020 and 2019 and the level in the fair value hierarchy in which those measurements fall: As of December 31, (in millions) 2020 2019 Cash$ 164.6 $ 85.3 Money market mutual funds 739.8 115.5 Commercial paper - 10.0 Restricted cash 2.8 2.9 Total cash and cash equivalents 907.2 213.7 Restricted cash included in other assets 14.8 -
Total cash, cash equivalents, and restricted cash shown in the consolidated statement of cash flows
$ 922.0 $ 213.7 The restricted cash included in other assets on the consolidated balance sheet is held as a compensating balance against long-term borrowings. All cash and cash equivalents are level 1, except for commercial paper, which is level 2. The fair value of commercial paper was determined using market prices obtained from third-party pricing sources. Note 6. Investments The Company's short-term and long-term investments in debt securities had maturity dates that range from two months to one year atDecember 31, 2020 . Realized gains or losses in each of the three years endedDecember 31, 2020 , 2019 and 2018 were insignificant. The following tables provides amortized costs, gross unrealized gains and losses, fair values and the level in the fair value hierarchy for the Company's investments atDecember 31, 2020 and 2019: 55
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Gross Unrealized Gross Unrealized
(in millions) Amortized Cost Gains Losses Fair Value Level 1 Level 2 (1)
December 31, 2020
U.S. government and agency bonds $ 35.1 $ 0.2 $ - $ 35.3 $ 35.3 $ -
Corporate bonds 2.8 0.1 - 2.9 - 2.9
Certificates of deposit 2.2 - - 2.2 - 2.2
Total short-term investments $ 40.1 $ 0.3 $ - $ 40.4 $ 35.3 $ 5.1
December 31, 2019
U.S. government and agency bonds $ 94.7 $ 0.3 $ - $ 95.0 $ 85.0 $ 10.0
Corporate bonds 51.0 0.1 - 51.1 - 51.1
Certificates of deposit 6.3 - - 6.3 - 6.3
Commercial paper 10.0 - - 10.0 - 10.0
Total short-term investments $ 162.0 $ 0.4 $ - $ 162.4 $ 85.0 $ 77.4 $ (0.1) $ 52.9 $ 42.9 $ 10.0 Corporate bonds 2.8 - - 2.8 - 2.8 Certificates of deposit 2.7 - - 2.7 - 2.7 Total long-term investments $ 58.4 $ 0.1$ (0.1) $ 58.4 $ 42.9 $ 15.5 (1) Fair value was determined using market prices obtained from third-party pricing sources. Note 7. Inventories At the end of each period, inventories were comprised of the following: As of December 31, (in millions) 2020 2019 Raw materials$ 30.7 $ 23.3 Work-in-process 59.6 40.3 Finished goods 64.0 37.4 Total inventories$ 154.3 $ 101.0 Note 8. Property, Plant and Equipment, Net Property, plant and equipment at cost and accumulated depreciation were as follows: As of December 31, (in millions) 2020 2019 Land$ 2.5 $ 2.5 Building and building improvements 147.3 116.9 Machinery and equipment 318.7 194.8 Furniture and fixtures 14.8 12.7 Leasehold improvements 4.4 1.6 Construction in process 119.6 161.5 Total property, plant and equipment 607.3 490.0 Less: accumulated depreciation (128.6) (90.6) Property, plant and equipment, net$ 478.7 $ 399.4 Depreciation expense related to property and equipment was$38.0 million ,$25.2 million and$13.8 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. Construction in process primarily consists of manufacturing equipment located at the Company'sU.S. manufacturing facility inActon, Massachusetts and new contract manufacturer inChina , most of which is expected to be placed into service during 2021. 56 -------------------------------------------------------------------------------- Table of Contents Note 9. Goodwill and Other Intangible Assets,Net Goodwill The changes in the carrying amount of goodwill for 2020 and 2019 were as follows: Years Ended December 31, (in millions) 2020 2019 Beginning balance$ 39.8 $ 39.6 Foreign currency adjustment - 0.2 Ending balance$ 39.8 $ 39.8
Intangible Assets, Net The gross carrying amount, accumulated amortization and net book value of intangible assets at the end of each period were as follows:
As of December 31,
2020 2019
Gross Carrying Accumulated Net Book Gross Carrying Accumulated Net Book
(in millions) Amount Amortization Value Amount Amortization Value
Customer relationships (1) $ 43.3 $ (18.3) $ 25.0 $ 9.9 $ (2.8) $ 7.1
Internal-use software 11.4 (8.6) 2.8 12.0 (6.8) 5.2
Intellectual property 1.1 (0.2) 0.9 1.0 (0.1) 0.9
Total intangible assets $ 55.8 $ (27.1) $ 28.7 $ 22.9 $ (9.7) $ 13.2
(1) Includes customer relationships acquired from the Company's former European
distributor. See Note 13.
Intangible asset amortization expense was $17.4 million , $2.7 million and $1.8
million for the years ended December 31, 2020 , 2019 and 2018, respectively.
Amortization expense associated with the intangible assets included on the
Company's consolidated balance sheet as of December 31, 2020 is expected to be
as follows:
Years Ending December 31, (in millions)
2021 $ 6.5
2022 5.1
2023 3.9
2024 3.0
2025 2.3
Note 10. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities were as
follows:
As of December 31,
(in millions) 2020 2019
Employee compensation and related costs $ 53.1
Professional and consulting services 19.1
19.3
Accrued rebates 13.1 7.5
Supplier purchases 7.1 2.4
Value added taxes payable 5.0 1.8
Other 40.7 26.4
Accrued expenses and other current liabilities
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Reconciliations of the changes in the Company's product warranty liability were
as follows:
Years Ended December 31,
(in millions) 2020 2019
Product warranty liability at beginning of year $ 8.5 $ 6.4
Warranty expense 10.7 13.4
Warranty claims settled (12.5) (11.3)
Product warranty liability at end of year $ 6.7 Note 11. Leases As ofDecember 31, 2020 , the Company leased certain office spaces, laboratory space, warehouse space and automobiles, all of which were classified as operating leases. Certain of the Company's operating leases include escalating rental payments, some include the option to extend, and some include options to terminate the leases at certain times within the lease term. As ofDecember 31, 2020 , the Company included options to extend certain leases for 5 years in the measurement of the lease liability. As ofDecember 31, 2020 , operating lease assets and operating lease liabilities were included in the following consolidated balance sheet accounts in the amounts shown: Years Ended December 31, (in millions) 2020 2019 Operating lease asset: Other assets$ 14.9 $ 16.1
Operating lease liabilities:
Accrued expenses and other current liabilities$ 4.9
Other liabilities 12.0 14.4 Total operating lease liabilities$ 16.9 $ 18.0 The Company's total operating lease cost was$5.4 million and$4.3 million for the years endedDecember 31, 2020 and 2019, respectively. Total rental expense was$3.3 million for the year endedDecember 31, 2018 . Cash paid for amounts included in the measurement of lease liabilities was$4.6 million and$3.6 million for the years endedDecember 31, 2020 and 2019, respectively. Operating lease liabilities arising from obtaining operating lease assets was$2.5 million and$9.8 million for the years endedDecember 31, 2020 and 2019, respectively. Maturities of lease liabilities as ofDecember 31, 2020 are as follows: Years Ending December 31, (in millions) 2021 $ 5.6 2022 5.4 2023 2.9 2024 2.8 2025 1.9 Thereafter 0.1 Total future minimum lease payments 18.7 Less: imputed interest (1.8) Present value of future minimum lease payments $ 16.9 As ofDecember 31, 2020 , the weighted average remaining lease term for operating leases was 3.8 years and the weighted-average discount rate used to determine the operating lease liability was 5.6%. 58 -------------------------------------------------------------------------------- Table of Contents Note 12. Debt The components of debt consisted of the following: As of December
31,
(in millions) 2020
2019
1.375% Convertible Senior Notes, due November 2024$ 402.5 $ 402.5 0.375% Convertible Senior Notes, due September 2026 800.0 800.0 Equipment financing, due May 2024 22.2
-
Equipment financing, dueNovember 2025 36.4
-
5.15% Mortgage, due November 2025 69.7 - Unamortized debt discount (252.5) (294.8) Debt issuance costs (19.0) (19.8) Total debt 1,059.3 887.9 Less: current portion 15.6 - Total long term-debt$ 1,043.7 $ 887.9 1.375% Convertible Senior Notes InNovember 2017 , the Company issued and sold$402.5 million in aggregate principal amount of 1.375% Convertible Senior Notes, dueNovember 15, 2024 (the "1.375% Notes"). The notes are convertible into the Company's common stock at an initial conversion rate of 10.7315 shares of common stock per$1,000 principal amount of the notes, which is equivalent to a conversion price of$93.18 per share, subject to adjustment under certain circumstances. The notes will be convertibleAugust 15, 2024 throughNovember 13, 2024 and prior to then only under certain circumstances. The Company recorded a debt discount of$120.7 million related to the 1.375% Notes resulting from the allocation of a portion of the proceeds to the fair value of the conversion feature reflecting a nonconvertible debt borrowing rate of 6.8% per annum. The Company also incurred debt issuance costs and other expenses of$10.9 million , of which$3.3 million was recorded as a reduction to the value of the conversion feature allocated to equity. The remaining$7.6 million of debt issuance costs was recorded as a reduction of debt on the consolidated balance sheet. Additional interest of 0.5% per annum is payable if the Company fails to timely file required documents or reports with theSEC . If the Company merges or consolidates with a foreign entity, the Company may be required to pay additional taxes. The Company determined that the higher interest payments and tax payments required in certain circumstances were embedded derivatives that should be bifurcated and accounted for at fair value. The Company assessed the value of the embedded derivatives at each balance sheet date and determined it had nominal value. 0.375% Convertible Senior Notes InSeptember 2019 , the Company issued$800.0 million aggregate principal amount of 0.375% Convertible Senior Notes dueSeptember 2026 (the "0.375% Notes"). The notes are convertible into the Company's common stock at an initial conversion rate of 4.4105 shares of common stock per$1,000 principal amount of the notes, which is equivalent to a conversion price of$226.73 per share, subject to adjustment under certain circumstances. The notes will be convertibleJune 1, 2026 throughAugust 28, 2026 and prior to then under certain circumstances. The Company recorded a debt discount of$213.0 million related to the 0.375% Notes resulting from the allocation of a portion of the proceeds to the fair value of the conversion feature reflecting a nonconvertible debt borrowing rate of 5.29% per annum. The Company also incurred debt issuance costs and other expenses of$19.8 million , of which$5.3 million was recorded as a reduction to the value of the conversion feature allocated to equity. The remaining$14.5 million of debt issuance costs was recorded as a reduction of debt on the consolidated balance sheet. The net proceeds of$780.2 million were used to fund the redemption of the Company's 1.25% Convertible Senior Notes dueSeptember 2021 (the "1.25% Notes") and to purchase capped call options ("Capped Calls"), both of which are discussed below. Additional interest of 0.5% per annum is payable if the Company fails to timely file required documents or reports with theSecurities and Exchange Commission ("SEC"). If the Company merges or consolidates with a foreign entity, the Company may be required to pay additional taxes. The Company determined that the higher interest payments and tax payments required in certain circumstances were embedded derivatives that should be bifurcated and accounted for at fair value. The Company assessed the value of the embedded derivatives at each balance sheet date and determined it had nominal value. In conjunction with the issuance of the 0.375% Notes, the Company paid$85.4 million to enter into Capped Calls on the Company's common stock with certain counterparties, which was recorded as a reduction to additional paid-in capital on the 59 -------------------------------------------------------------------------------- Table of Contents consolidated balance sheet. By entering into the Capped Calls, the Company expects to reduce the potential dilution to its common stock (or, in the event the conversion is settled in cash, to provide a source of cash to settle a portion of its cash payment obligation) in the event that at the time of conversion its stock price exceeds the conversion price under the 0.375% Notes. The Capped Calls have an initial strike price of$335.90 per share, which represents a premium of 100% over the last reported sale price of the Company's common stock of$167.95 per share on the date of the transaction. The Capped Calls cover 3.5 million shares of common stock. 1.25% Convertible Senior Notes In 2019, the Company repurchased its$345.0 million principal amount ($312.0 million net of discount and issuance costs) 1.25% Notes for total consideration of$963.0 million comprised of$663.6 million in cash and$299.4 million representing the fair value of the 1.87 million shares issued. The Company allocated$642.3 million of the settlement to the fair value of the equity component and$320.7 million to the debt component, which resulted in an$8.7 million loss on extinguishment. 2% Convertible Senior Notes In 2017, the Company repurchased$63.4 million in principal of its 2% Convertible Senior Notes dueJune 2019 (the "2% Notes"). The Company called the remaining 2% Notes in 2018 and settled the outstanding principal and conversion feature for$6.7 million in cash. The Company allocated$3.2 million of the settlement to the fair value of the equity component and$3.5 million to the debt component, which was consistent with the carrying value of the notes as of the settlement date, resulting in no gain or loss on extinguishment. Equipment Financings InOctober 2020 , the Company entered into a Master Equipment Lease Agreement for a loan of$60.0 million secured by two manufacturing lines located at the Company'sActon, Massachusetts manufacturing facility. The loan for the first manufacturing line is payable over 42 months and has an effective interest rate of 5.8%. The loan for the second manufacturing line is payable over 60 months and has an effective interest rate of 4.8%. 5.15% Mortgage InOctober 2020 , the Company entered into a Mortgage Loan Agreement (the "Mortgage"), which provides for a$70.0 million loan with an effective interest rate of 5.7%. Proceeds under the Mortgage are secured by the Company'sActon, Massachusetts headquarters. The Mortgage is repayable in monthly installments of$0.5 million , with the outstanding principal balance of the loan due inNovember 2025 . The Mortgage contains customary covenants, none of which are considered restrictive to the Company's operations. Maturity of Debt The maturity of debt as ofDecember 31, 2020 is as follows: Years Ending December 31, (in millions) 2021 $ 15.6 2022 15.9 2023 16.7 2024 415.4 2025 67.2 Fair Value The carrying amount and the estimated fair value of the Company's convertible debt, which is based on the Level 2 quoted market prices as ofDecember 31, 2020 and 2019 are as follows: As of December 31, 2020 2019 Carrying Estimated Carrying Estimated (in millions) Value Fair Value (1) Value Fair Value (1) 1.375% Convertible Senior Notes$ 323.9 $ 1,104.2 $ 306.9 $ 512.8 0.375% Convertible Senior Notes 609.2 902.0 581.0 840.0 Total$ 933.1 $ 2,006.2 $ 887.9 $ 1,352.8
(1) Fair value was determined using the Company's quoted stock price and contractual conversion rate.
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The Mortgage and equipment financings carrying values of $69.7 million and
$58.6 million , respectively, approximate their fair values.
Note 13. Commitments and Contingencies
Legal Proceedings
Between May 5, 2015 and June 16, 2015 , three class action lawsuits were filed by
shareholders in the U.S. District Court , for the District of Massachusetts ,
against the Company and certain then current and former executives of the
Company. Two suits subsequently were voluntarily dismissed. Arkansas Teacher
Retirement System v. Insulet , et al., 1:15-cv-12345, ("ATRS") alleged that the
Company (and certain then current and former executives) committed violations of
Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934
by making allegedly false and misleading statements about the Company's
business, operations, and prospects. On February 8, 2018 , the parties executed a
binding stipulation of settlement, under which all claims were released, and a
payment was made into an escrow account for the plaintiffs and the class they
purport to represent. On August 6, 2018 , the Court issued an order approving the
settlement, but took the plaintiffs' motion for fees and expenses under
advisement, which motion remains pending. The Company had previously accrued
fees and expenses in connection with this matter for the amount of the final
settlement liability that was not covered by insurance, the amount of which was
not material to the Company's consolidated financial statements.
In addition, on April 26, 2017 , a derivative action (Walker v. DeSisto, et al.,
1:17-cv-10738) ("Walker") was filed, and on October 13, 2017 , a second
derivative action (Carnazza v. DeSisto, et al., 1:17-cv-11977) ("Carnazza") was
filed, both on behalf of the Company, each by a shareholder in the U.S. District
Court for the District of Massachusetts against the Company (as a nominal
defendant) and certain individual then current and former officers and directors
of the Company. The allegations in the actions are substantially similar to
those alleged in the securities class action. The actions seek, among other
things, damages, disgorgement of certain types of compensation or profits, and
attorneys' fees and costs. On July 11, 2018 , the parties executed a binding
stipulation of settlement, under which all claims were released, and a payment
of attorneys' fees and reimbursement of expenses will be paid to plaintiffs'
counsel, subject to the Court's approval. On July 13, 2018 , the plaintiffs filed
a motion for preliminary approval of the settlement, which is pending. The
Company expects that such fees and expenses payable to plaintiff's counsel will
be covered by the Company's insurance.
In June 2020 , Roche Diabetes Care, Inc. ("Roche") filed a patent infringement
lawsuit against the Company in the United States District Court for the District
of Delaware alleging that the Company's manufacture and sale of its Omnipod
Insulin Management System, Omnipod Starter Kit and Omnipod 10 Pod Pack in the
United States infringed Roche's now-expired U.S. Patent 7,931,613. Roche is
seeking monetary damages and attorneys' fees and costs. Since the patent expired
in 2019, Roche is not seeking injunctive relief and the lawsuit will have no
impact on ongoing sales of the Company's products. The Company believes that it
has meritorious defenses to Roche's claims and intends to vigorously defend
against them. The court has set a trial date of July 25, 2022 . At this time,
based on available information regarding this litigation, the Company is unable
to reasonably assess the ultimate outcome of this case or determine an estimate,
or range of estimates, of potential losses, which could be material.
In July 2020 , the Company filed a patent infringement claim against Roche
Diabetes Care Limited ("Roche Ltd. ") in the United Kingdom alleging that Roche
Ltd.'s manufacture and sale of the Accu-Chek® Solo insulin pump and its
consumable components infringes European Patent No. 1 335 764 in the United
Kingdom. The Company is seeking an injunction to last until expiry of the patent
and monetary damages. Roche Ltd. has responded to the complaint and argues that
the patent is invalid and not infringed.
The Company is, from time to time, involved in the normal course of business in
various legal proceedings, including intellectual property, contract, employment
and product liability suits. Other than as described above, the Company does not
expect the outcome of these proceedings, either individually or in the
aggregate, to have a material adverse effect on its results of operations.
Fees to Former European Distributor
Following the expiration of an agreement with a former European distributor on
June 30, 2018 , the Company was required to pay a quarterly per-unit fee for
Omnipod sales to certain customers of the former European distributor for a
one-year period through June 30, 2019 . The Company recognized a liability and an
associated intangible asset for this fee as qualifying sales occurred. The
methodology applicable for determining the total fee under the distribution
agreement was subject to an arbitration proceeding in Switzerland . In December
2020 , Insulet entered into a settlement agreement with the former distributor
pursuant to which the Company paid the distributor an additional one-time
payment of $36.2 million , for a total fee of $41.2 million , representing the
cost to acquire the customer relationships. This amount was recorded as an
intangible asset on the consolidated balance sheet. Since the customer
relationships were acquired on July 1, 2018 , the Company recorded cumulative
amortization in the amount of $14.6 million during the fourth quarter of 2020,
as if the total fee for the intangible
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asset had been amortized since the acquisition date.
Note 14. Stock-Based Compensation
Equity Award Plan
In May 2017 , the Company adopted the 2017 Stock Option and Incentive Plan (the
"2017 Plan"), which replaced its previous stock option and incentive plan (the
"2007 Plan"). The 2017 Plan provides for a maximum of 5.2 million shares to be
issued, in addition to the number of shares related to awards outstanding under
the 2007 Plan that are terminated by expiration, forfeiture or cancellation. The
shares can be issued as stock options, restricted stock units, stock
appreciation rights, deferred stock awards, restricted stock, unrestricted
stock, cash-based awards, performance share awards or dividend equivalent
rights. As of December 31, 2020 , 3.6 million shares remain available for future
issuance under the 2017 Plan.
Stock-Based Compensation
Compensation cost related to stock-based awards recognized for the years ended
December 31, 2020 , 2019 and 2018 was recorded as follows:
Year Ended December 31,
(in millions) 2020 2019 2018
Cost of revenue $ 1.2 $ 1.0 $ 0.8
Research and development 10.9 9.1 8.2
Selling, general and administrative 23.8 18.6 28.5
Total $ 35.9 $ 28.7 $ 37.5
Stock Options
Options are granted to purchase common shares at prices that are equal to the
fair market value of the shares on the date the options are granted. Options
generally vest in equal annual installments over a period of four years and
expire 10 years after the date of grant. The grant-date fair value of options,
adjusted for estimated forfeitures, is recognized as expense on a straight-line
basis over the requisite service period, which is generally the vesting period.
The following summarizes the activity under the Company's stock option plans:
Weighted Average Aggregate
Remaining Intrinsic
Number of Weighted Average Contractual Term Value
Options Exercise Price (in years) (in millions)
Outstanding at December 31, 2019 1,729,512 $ 45.39
Granted 68,832 $ 202.18
Exercised (674,542) $ 38.39 $ 115.9
Forfeited and canceled (45,314) $ 89.64
Outstanding at December 31, 2020 1,078,488 $ 57.99 5.4 $ 213.2
Vested, December 31, 2020 868,407 $ 43.33 4.8 $ 184.4
Vested or expected to vest, December
31, 2020 1,056,479 $ 56.36 5.4 $ 210.5
The aggregate intrinsic value of options exercised for the years ended December
31, 2019 and 2018 was $119.2 million and $23.5 million , respectively.
The Company uses the Black-Scholes pricing model to determine the fair value of
options granted. The calculation of the fair value of stock options is affected
by the stock price on the grant date, the expected volatility of the Company's
stock over the expected term of the award, the expected life of the award, the
risk-free interest rate and the dividend yield. The assumptions used in the
Black-Scholes pricing model for options granted during each year, along with the
weighted-average grant-date fair values, were as follows:
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Years Ended December 31,
2020 2019 2018
Risk-free interest rate 0.3% - 1.4% 1.8% - 2.6% 2.2% - 2.9%
Expected life of options (in years) 4.5 4.4 - 4.8 4.5 - 5.4
Dividend yield -% -% -%
Expected stock price volatility 39.5% - 41.7% 40.1% - 40.5% 38.7% - 40.7%
Fair value per option $ 69.90 $ 34.98 $ 30.34
As of December 31, 2020 , there was $6.7 million of unrecognized compensation
cost related to non-vested stock options. This cost is expected to be recognized
over a weighted average period of 2.5 years.
Restricted Stock Units
Restricted Stock Units ("RSUs") generally vest in equal annual installments over
a three-year period, however during the fourth quarter of 2020, the Company
issued a company-wide grant, a significant portion of which immediately vested.
The grant-date fair value of RSUs, adjusted for estimated forfeitures, is
recognized as expense on a straight-line basis over the requisite service
period, which is generally the vesting period. The Company determines the fair
value of restricted stock units based on the closing price of its common stock
on the date of grant.
RSU activity is as follows:
Weighted
Number of Average
Shares Fair Value
Outstanding at
137,647 211.77
Vested (206,257) 100.29
Forfeited (23,990) 120.64
Outstanding at
The weighted-average grant-date fair value per share of RSUs granted was$96.62 and$76.03 for the years endedDecember 31, 2019 and 2018, respectively. The total fair value of RSUs vested was$20.7 million ,$11.6 million and$14.7 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. As ofDecember 31, 2020 , there was$22.5 million of unrecognized compensation cost related to time-based RSUs, which is expected to be recognized over a weighted-average period of 1.8 years. Performance Stock Units Performance stock units ("PSUs") generally vest over a three-year period from the grant date and include both a service and performance component. Stock-based payments that contain performance conditions are recognized when such conditions are probable of being achieved. Certain of these performance stock units could ultimately vest at up to 200% of the target award depending on the achievement of the performance criteria. PSU activity is as follows: Weighted Number of Average Shares Fair Value
Outstanding at
141,942 202.23
Vested (187,660) 48.66
Forfeited (23,349) 105.58
Outstanding at
(1) Based on 154% achievement of the performance metrics, approximately 83,000 shares ofInsulet were earned for awards that were granted in 2018 for the performance period endedDecember 31, 2020 . These shares vested inFebruary 2021 . The weighted-average grant-date fair value per share of PSUs granted was$95.91 and$75.07 for the years endedDecember 31, 2019 and 2018, respectively. The total fair value of PSUs vested was$9.1 million ,$3.2 million and$7.6 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. 63 -------------------------------------------------------------------------------- Table of Contents As ofDecember 31, 2020 , there was$12.4 million of unrecognized compensation cost related to PSUs, which is expected to be recognized over a weighted-average period of 1.9 years. Employee Stock Purchase Plan The Employee Stock Purchase Plan ("ESPP") authorizes the issuance of up to 880,000 shares of common stock to participating employees. Employees that participate in the Company's ESPP may annually purchase up to a maximum of 800 shares per offering period or$25,000 worth of common stock by authorizing payroll deductions of up to 10% of their base salary. The purchase price for each share purchased is 85% of the lower of the fair market value of the common stock on the first or last day of the offering period. The Company issued 38,313, 51,502 and 46,343 shares of common stock for the years endedDecember 31, 2020 , 2019 and 2018, respectively, to employees participating in the ESPP. As ofDecember 31, 2020 , 508,762 shares remain available for future issuance under the ESPP Plan. The Company uses the Black-Scholes pricing model to determine the fair value of shares purchased under the ESPP. The calculation of the fair value of shares purchased is affected by the stock price on the purchase date, the expected volatility of the Company's stock over the expected term, the risk-free interest rate and the dividend yield. The estimated fair value of shares purchased under the ESPP were based on the following assumptions: Years Ended December 31, 2020 2019 2018 Risk-free interest rate 0.1% - 0.2% 1.6% - 2.3% 2.1% - 2.5% Expected term (in years) 0.5 0.5 0.5 Dividend yield -% -% -% Expected stock price volatility 29.7% - 38.5% 27.5% - 31.4% 23.4% - 27.0% The weighted average grant date fair value of the six-month option inherent in the ESPP was$55.10 ,$46.30 , and$26.01 , for the years endedDecember 31, 2020 , 2019 and 2018, respectively. As ofDecember 31, 2020 , there was$1.0 million of unrecognized compensation cost related to the ESPP. This cost is expected to be recognized over a weighted average period of 0.4 years. Note 15. Accumulated Other Comprehensive Income (Loss) Changes in the components of accumulated other comprehensive income (loss), net of tax, were as follows: Unrealized (Losses) Foreign Currency Gains on Accumulated Other Translation Available-for-sale Comprehensive Income (in millions) Adjustment Securities (Loss) Balance, December 31, 2017 $ - $ (0.5) $ (0.5) Other comprehensive loss (2.2) (0.2) (2.4) Balance, December 31, 2018 (2.2) (0.7) (2.9) Other comprehensive income 0.6 1.1 1.7 Balance, December 31, 2019 (1.6) 0.4 (1.2) Other comprehensive income (loss) 6.8 (0.1) 6.7 Balance, December 31, 2020 $ 5.2 $ 0.3 $ 5.5 Note 16. Defined Contribution Plan The Company maintains a tax-qualified 401(k) retirement plan inthe United States . The Company generally makes a matching contribution equal to 50% of each employee's elective contribution to the plan up to 6% of the employee's eligible pay. In addition, the Company offers defined contribution plans for eligible employees in its foreign subsidiaries. The total amount contributed by the Company to these defined contribution plans was$5.4 million ,$5.3 million and$3.6 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. 64 -------------------------------------------------------------------------------- Table of Contents Note 17. Interest Expense, Net Interest expense, net of portion capitalized was as follows: Years Ended December 31, (in millions) 2020 2019 2018 Contractual interest$ 9.5 $ 9.5 $ 9.8 Accretion of debt discount 42.3
32.8 26.7
Amortization of debt issuance costs 2.9 2.8 2.6
Capitalized interest (6.6) (10.5) (10.2)
Interest expense, net of portion capitalized 48.1 34.6 28.9
Interest income (3.0) (6.9) (7.6)
Interest expense, net $ 45.1 $ 27.7 $ 21.3
Note 18. Income Taxes
The U.S. and foreign components of income before income taxes were as follows:
Years Ended December 31,
(in millions) 2020 2019 2018
U.S. $ (1.6) $ 2.5 $ (3.0)
Foreign 11.3 12.0 8.2
Income before income taxes $ 9.7 $ 14.5 Income tax expense consists of the following:
Years Ended December 31,
(in millions) 2020 2019 2018
Current:
U.S. State $ 0.2 $ 0.2 $ 0.2
Foreign 4.0 3.4 2.1
Total current expense 4.2 3.6 2.3
Deferred:
U.S. Federal - (0.1) -
Foreign (1.3) (0.6) (0.4)
Total deferred expense (1.3) (0.7) (0.4)
Income tax expense $ 2.9 $ 2.9 $ 1.9
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Reconciliations of the federal statutory income rate to the Company's effective
income tax rate are as follows:
Years Ended December 31,
2020 2019 2018
U.S. statutory rate 21.0 % 21.0 % 21.0 %
Foreign rate differential 7.0 4.2 (2.4)
State taxes, net of federal benefit 1.3 1.3 2.9
Tax credits (40.5) (15.4) (13.7)
Stock-based compensation (311.1)
(158.7) (159.1)
Loss on extinguishment of debt - 14.8 - Non-deductible officers' compensation 30.0
1.9 81.3
Permanent items 2.1
3.0 16.8
Foreign income taxed in theU.S. (21.0)
19.0 26.1
Change in valuation allowance 336.2 130.6 67.0 Other 4.6 (1.9) (2.9) Effective income tax rate 29.6 % 19.8 % 37.0 % As ofDecember 31, 2020 , 2019 and 2018 the Company had no uncertain tax positions. No provision for income taxes has been provided on undistributed earnings of the Company's foreign subsidiaries, except forCanada , because such earnings are indefinitely reinvested in the foreign operations. The Company has recorded a deferred tax liability for withholding tax that could be incurred upon repatriation of earnings from its Canadian subsidiary, the amount of which is not significant. A deferred tax liability related to the repatriation of approximately$24.3 million indefinitely reinvested earnings would not be material to the Company's consolidated financial statements, primarily due to treaty-based withholding tax rates in the jurisdictions in which the Company operates. The Company files federal, state and foreign tax returns, which are subject to examination by the relevant tax authorities. The tax filings relating to the Company'sU.S. federal and state tax returns are currently open to examination for tax years 2017 through 2019. The Company is currently under exam inOntario, Canada . There are no uncertain tax positions or adjustments associated with the exam at this time. In addition, the Company'sU.S. net operating loss carryforwards from 2001 and forward may be subject to examination if the losses are utilized in future years. Interest and penalties are classified as a component of income tax expense and were not material for any period presented. 66
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The components of the net deferred tax asset at the end of each year are as
follows:
As of December 31,
(in millions) 2020 2019
Deferred tax assets:
Net operating loss carryforwards $ 173.8 $ 144.6
Tax credits 21.3 15.2
Capital loss carryforwards 12.2 12.7
Stock-based compensation 5.8 8.9
Other 15.4 13.8
Total deferred tax assets 228.5 195.2
Deferred tax liabilities:
Prepaid assets (3.5) (2.1)
Depreciation and amortization (6.9) (2.2)
Amortization of debt discount (60.6) (73.4)
Capitalized contract acquisition costs (7.5) (7.1)
Other (4.6)
(5.0)
Total deferred tax liabilities (83.1)
(89.8)
Net deferred tax asset before valuation allowance 145.4 105.4 Valuation allowance (143.4) (104.4) Net deferred tax asset$ 2.0 $ 1.0 The Company maintained a valuation allowance of$143.4 million and$104.4 million atDecember 31, 2020 and 2019, respectively, againstU.S. federal and state deferred tax assets, as management has determined that it is more-likely-than-not that these net deferred tax assets will not be realized. The valuation allowance is based on cumulative tax losses in theU.S. and the uncertainty of generating future taxable income in theU.S. to utilize our loss and credit carryforwards. The$39.0 million increase in the Company's valuation allowance during the year endedDecember 31, 2020 was primarily due to current-year net operating losses in theU.S. The Company's net operating loss carryforwards consist of the following: Years Ended December 31, (in millions) 2020 2019 U.S. Federal$ 732.4 $ 607.4 State$ 341.3 $ 298.8 Foreign $ 5.4 $ - ForU.S. federal tax purposes,$192.1 million of the net operating losses have an indefinite carryforward period. The remainingU.S. federal carryforwards, if not utilized, will begin to expire in 2021 and will continue to expire through 2037, and the state net operating loss carryforwards expire through 2040. The utilization of such net operating loss carryforwards and the realization of tax benefits in future years depends predominantly upon the Company's ability to generate taxable income in theU.S. Research and development and other tax credits were$22.8 million and$16.1 million atDecember 31, 2020 and 2019, respectively. If not utilized, federal research and development credits will begin to expire in 2022. These loss and credit carryforwards, which may be utilized in a future period, may be subject to limitations based on changes in the ownership of the Company ordinary shares. 67 -------------------------------------------------------------------------------- Table of Contents Note 19. Net Income Per Share Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per share is computed using the weighted average number of common shares outstanding and, when dilutive, common share equivalents from outstanding stock options and restricted stock units (using the treasury-stock method), and potential common shares from the Company's convertible notes (using the if-converted method). The weighted-average number of common shares used in the computation of basic and diluted net income per share were as follow: Years Ended December 31, (in thousands) 2020 2019 2018 Weighted average number of common shares 64,735 60,594 58,860 outstanding, basic Stock options 1,025 1,487 1,678 Restricted stock units 186 223 470 Weighted average number of common shares 65,946 62,304 61,008
outstanding, diluted
The number of common share equivalents excluded from the computation of diluted
net income per share because either the effect would have been anti-dilutive, or
the performance criteria related to the units had not yet been met, were as
follows:
Years Ended December 31,
(in thousands) 2020 2019 2018
1.25% Convertible Senior Notes - - 5,911
1.375% Convertible Senior Notes 4,319 4,319
4,319
0.375% Convertible Senior Notes 3,528 3,528
-
Unvested restricted stock units 282 431 290
Outstanding stock options 58 13 237
Total 8,187 8,291 10,757
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