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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 000-51222
DEXCOM, INC.
(Exact name of Registrant as specified in its charter)
 
 
 
 
 
Delaware
 
33-0857544
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
6340 Sequence Drive
San Diego,
CA
 
92121
(Address of Principal Executive Offices)
 
(Zip Code)
(858200-0200
(Registrant’s Telephone Number, including area code)
(Former Name, Former Address, and Former Fiscal Year, if changed from last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol(s)
 
Name of Each Exchange on Which Registered
Common Stock, $0.001 Par Value Per Share
 
DXCM
 
Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer
 
Accelerated Filer
 
 
 
 
 
Non-Accelerated Filer
 
Smaller Reporting Company
 
 
 
 
 
Emerging Growth Company
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of November 1, 2019, there were 91,528,588 shares of the Registrant’s common stock outstanding.
 


Table of Contents

DexCom, Inc.
Table of Contents
 
 
 
Page
Number
 
ITEM 1.
 
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.

2

Table of Contents


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DexCom, Inc.
Consolidated Balance Sheets
(In millions, except par value and share data)
 

September 30, 2019

December 31, 2018
Assets
(Unaudited)


Current assets:



Cash and cash equivalents
$
395.6


$
1,137.0

Short-term marketable securities
1,034.3


248.6

Accounts receivable, net
234.9


226.7

Inventory
120.4


70.7

Prepaid and other current assets
30.5


16.5

Total current assets
1,815.7


1,699.5

Property and equipment, net
301.0


183.1

Operating lease right-of-use assets
34.6

 

Goodwill
18.4


18.7

Other assets
16.0


14.7

Total assets
$
2,185.7


$
1,916.0

Liabilities and Stockholders’ Equity



Current liabilities:



Accounts payable and accrued liabilities
$
232.4


$
147.1

Accrued payroll and related expenses
70.9


72.4

Operating lease liabilities, current portion
14.8

 

Deferred revenue
4.3


2.9

Total current liabilities
322.4


222.4

Long-term senior convertible notes
1,047.1

 
1,010.3

Operating lease liabilities, net of current portion
34.3

 

Other long-term liabilities
17.6

 
20.0

Total liabilities
1,421.4


1,252.7

Commitments and contingencies



Stockholders’ equity:



Preferred stock, $0.001 par value, 5.0 million shares authorized; no shares issued and outstanding at September 30, 2019 and December 31, 2018



Common stock, $0.001 par value, 200.0 million shares authorized; 92.3 million and 91.5 million shares issued and outstanding, respectively, at September 30, 2019; and 91.1 million and 90.0 million shares issued and outstanding, respectively, at December 31, 2018
0.1


0.1

Additional paid-in capital
1,651.6


1,560.6

Accumulated other comprehensive income
1.0


1.5

Accumulated deficit
(788.4
)

(798.9
)
Treasury stock, at cost; 0.8 million shares at September 30, 2019 and December 31, 2018
(100.0
)
 
(100.0
)
Total stockholders’ equity
764.3


663.3

Total liabilities and stockholders’ equity
$
2,185.7


$
1,916.0

See accompanying notes

3

Table of Contents

DexCom, Inc.
Consolidated Statements of Operations
(In millions, except per share data)
(Unaudited)


Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Revenues
$
396.3

 
$
266.7

 
$
1,013.2

 
$
693.6

Cost of sales
149.4

 
98.1

 
391.0

 
252.5

Gross profit
246.9

 
168.6


622.2

 
441.1

Operating expenses:

 

 

 

Research and development
66.7

 
50.1

 
194.7

 
142.1

Selling, general and administrative
124.2

 
104.6

 
386.7

 
320.7

Total operating expenses
190.9

 
154.7


581.4

 
462.8

Operating income (loss)
56.0

 
13.9


40.8

 
(21.7
)
Interest expense
(15.1
)
 
(4.9
)
 
(45.0
)
 
(14.5
)
Income (loss) from equity investments

 
34.9

 
(4.2
)
 
85.0

Interest and other income, net
4.9

 
0.9

 
18.3

 
1.6

Income before income taxes
45.8

 
44.8

 
9.9

 
50.4

Income tax expense (benefit)

 
(1.8
)
 
1.5

 
(2.2
)
Net income
$
45.8

 
$
46.6

 
$
8.4

 
$
52.6

 
 
 
 
 

 
 
Basic net income per share
$
0.50

 
$
0.53

 
$
0.09

 
$
0.60

Shares used to compute basic net income per share
91.3

 
88.5

 
90.9

 
88.0

Diluted net income per share
$
0.50

 
$
0.52

 
$
0.09

 
$
0.59

Shares used to compute diluted net income per share
92.5

 
90.3

 
92.2

 
89.3

See accompanying notes

4

Table of Contents

DexCom, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net income
$
45.8

 
$
46.6

 
$
8.4

 
$
52.6

Other comprehensive income (loss), net of income taxes:
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
(0.9
)
 
0.9

 
(1.0
)
 
2.2

Unrealized income (loss) on marketable debt securities
(0.1
)
 
0.1

 
0.5

 
0.1

Total other comprehensive income (loss), net
(1.0
)
 
1.0

 
(0.5
)
 
2.3

Comprehensive income
$
44.8

 
$
47.6

 
$
7.9

 
$
54.9


See accompanying notes

5

Table of Contents

DexCom, Inc.
 
Consolidated Statements of Stockholders’ Equity
For the Three Months Ended September 30, 2019 and 2018
(In millions)
(Unaudited)

 
 
Three Months Ended September 30, 2019
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Treasury Stock
 
Total
Stockholders’
Equity
Shares
 
Amount
 
Balance at June 30, 2019
 
91.2

 
$
0.1

 
$
1,620.4

 
$
2.0

 
$
(834.2
)
 
$
(100.0
)
 
$
688.3

Issuance of common stock under equity incentive plans
 
0.2

 

 

 

 

 

 

Issuance of common stock for Employee Stock Purchase Plan
 
0.1

 

 
6.8

 

 

 

 
6.8

Share-based compensation expense
 

 

 
24.4

 

 

 

 
24.4

Net income
 


 

 

 

 
45.8

 

 
45.8

Other comprehensive loss
 

 

 

 
(1.0
)
 

 

 
(1.0
)
Balance at September 30, 2019
 
91.5

 
$
0.1

 
$
1,651.6

 
$
1.0

 
$
(788.4
)
 
$
(100.0
)
 
$
764.3




 
 
Three Months Ended September 30, 2018
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Treasury Stock
 
Total
Stockholders’
Equity
Shares
 
Amount
 
Balance at June 30, 2018
 
88.4

 
$
0.1

 
$
1,149.1

 
$
(1.3
)
 
$
(665.8
)
 
$

 
$
482.1

Issuance of common stock under equity incentive plans
 
0.3

 

 
0.6

 

 

 

 
0.6

Issuance of common stock for Employee Stock Purchase Plan
 
0.1

 

 
4.8

 

 

 

 
4.8

Share-based compensation expense
 

 

 
27.1

 

 

 

 
27.1

Net income
 

 

 

 

 
46.6

 

 
46.6

Other comprehensive income
 

 

 

 
1.0

 

 

 
1.0

Balance at September 30, 2018
 
88.8

 
$
0.1

 
$
1,181.6

 
$
(0.3
)
 
$
(619.2
)
 
$

 
$
562.2



See accompanying notes


6

Table of Contents

DexCom, Inc.
 
Consolidated Statements of Stockholders’ Equity
For the Nine Months Ended September 30, 2019 and 2018
(In millions)
(Unaudited)


 
 
Nine Months Ended September 30, 2019
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Treasury Stock
 
Total
Stockholders’
Equity
Shares
 
Amount
 
Balance at December 31, 2018
 
90.0

 
$
0.1

 
$
1,560.6

 
$
1.5

 
$
(798.9
)
 
$
(100.0
)
 
$
663.3

Cumulative-effect adjustment from adoption of new lease accounting standard (Note 2)
 

 

 

 

 
2.1

 

 
2.1

Issuance of common stock under equity incentive plans
 
1.3

 

 
0.3

 

 

 

 
0.3

Issuance of common stock for Employee Stock Purchase Plan
 
0.2

 

 
11.6

 

 

 

 
11.6

Share-based compensation expense
 

 

 
79.1

 

 

 

 
79.1

Net income
 

 

 

 

 
8.4

 

 
8.4

Other comprehensive loss
 

 

 

 
(0.5
)
 

 

 
(0.5
)
Balance at September 30, 2019
 
91.5

 
$
0.1

 
$
1,651.6

 
$
1.0

 
$
(788.4
)
 
$
(100.0
)
 
$
764.3




 
 
Nine Months Ended September 30, 2018
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Treasury Stock
 
Total
Stockholders’
Equity
Shares
 
Amount
 
Balance at December 31, 2017
 
87.0

 
$
0.1

 
$
1,093.7

 
$
(2.6
)
 
$
(671.8
)
 
$

 
$
419.4

Issuance of common stock under equity incentive plans
 
1.6

 

 
1.7

 

 

 

 
1.7

Issuance of common stock for Employee Stock Purchase Plan
 
0.2

 

 
8.9

 

 

 

 
8.9

Share-based compensation expense
 

 

 
77.3

 

 

 

 
77.3

Net income
 

 

 

 

 
52.6

 

 
52.6

Other comprehensive income
 

 

 

 
2.3

 

 

 
2.3

Balance at September 30, 2018
 
88.8

 
$
0.1

 
$
1,181.6

 
$
(0.3
)
 
$
(619.2
)
 
$

 
$
562.2



See accompanying notes


7

Table of Contents

DexCom, Inc.
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
8.4

 
$
52.6

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
34.4

 
20.5

Share-based compensation
79.1

 
77.3

Non-cash interest expense
37.0

 
11.3

Unrealized (gain) loss on equity investment

 
(40.8
)
Realized (gain) loss on equity investment
4.2

 
(44.2
)
Other non-cash income and expenses
0.6

 
5.1

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(9.2
)
 
(36.2
)
Inventory
(49.7
)
 
(10.0
)
Prepaid and other assets
(2.6
)
 
(3.4
)
Accounts payable and accrued liabilities
78.2

 
50.2

Accrued payroll and related expenses
(1.2
)
 
6.2

Deferred revenue and other liabilities
(8.4
)
 
0.9

Net cash provided by operating activities
170.8

 
89.5

Cash flows from investing activities:
 
 
 
Purchases of marketable securities
(1,556.8
)
 
(340.0
)
Proceeds from sale and maturity of marketable securities
773.0

 
231.0

Purchases of other equity investments
(1.2
)
 
(1.0
)
Purchases of property and equipment
(135.9
)
 
(49.4
)
Acquisitions, net of cash acquired

 
(11.3
)
Net cash used in investing activities
(920.9
)
 
(170.7
)
Cash flows from financing activities:
 
 
 
Net proceeds from issuance of common stock
11.9

 
10.6

Payments on acquisition related contingent consideration liability
(0.7
)
 
(1.8
)
Other financing activities
(0.4
)
 

Net cash provided by financing activities
10.8

 
8.8

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(1.7
)
 
(1.4
)
Decrease in cash, cash equivalents and restricted cash
(741.0
)
 
(73.8
)
Cash, cash equivalents and restricted cash, beginning of period
1,137.1

 
441.5

Cash, cash equivalents and restricted cash, end of period
$
396.1

 
$
367.7

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash, end of period:
 
 
 
Cash and cash equivalents
$
395.6

 
$
367.4

Restricted cash
0.5

 
0.3

Total cash, cash equivalents and restricted cash
$
396.1

 
$
367.7

 
 
 
 
Supplemental disclosure of non-cash investing and financing transactions:
 
 
 
Acquisition of property and equipment included in accounts payable and accrued liabilities
$
22.3

 
$
3.0

Right-of-use assets obtained in exchange for lease liabilities
$
57.2

 
$

See accompanying notes

8

Table of Contents

DexCom, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Significant Accounting Policies
Organization and Business
DexCom, Inc. is a medical device company focused on the design, development and commercialization of continuous glucose monitoring, or CGM, systems for use by people with diabetes and by healthcare providers. Unless the context requires otherwise, the terms “we,” “us,” “our,” the “company,” or “DexCom” refer to DexCom, Inc. and its subsidiaries.
Basis of Presentation and Principles of Consolidation
We have prepared the accompanying unaudited consolidated financial statements (the “financial statements”) in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission, or SEC, Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included.
Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. We expect that revenues we generate from the sales of our products will fluctuate from quarter to quarter. We experience seasonality that is typical in our industry, with lower sales in the first quarter of each year compared to the fourth quarter of the previous year.
These financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended December 31, 2018 included in the Annual Report on Form 10-K that we filed with the SEC on February 21, 2019.
These financial statements include the accounts of DexCom, Inc. and our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. We have reclassified certain amounts previously reported in our financial statements to conform to the current presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in our financial statements and the disclosures made in the accompanying notes. Despite our intention to establish accurate estimates and use reasonable assumptions, actual results may differ from our estimates.
Concentration of Credit Risk and Significant Customers
Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investment securities, and accounts receivable. We limit our exposure to credit risk by placing our cash and investments with high credit quality financial institutions. We have also established guidelines regarding diversification of our investments and their maturities that are designed to maintain principal and maximize liquidity. We review these guidelines periodically and modify them to take advantage of trends in yields and interest rates and changes in our operations and financial position.









9

Table of Contents

Three of our customers are significant. The following table sets forth the percentage of total revenues that the revenues of these customers represented for the periods shown:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Distributor A
17
%
 
15
%
 
16
%
 
15
%
Distributor B
11
%
 
*

 
12
%
 
13
%
Distributor C
12
%
 
*

 
10
%
 
*

* less than 10%
 
 
 
 
 
 
 

The following table sets forth the percentage of accounts receivable that is attributable to our significant customers for the periods shown:
 
September 30, 2019
 
December 31, 2018
Distributor A
20
%
 
19
%
Distributor B
11
%
 
15
%
Distributor C
13
%
 
*

* less than 10%
 
 
 

Revenue Recognition
We generate our revenue from the sale of our durable systems and disposable sensors (the Components). Our durable systems include a reusable transmitter and receiver. Disposable sensors are sold separately. We also provide free-of-charge software and mobile applications for use with our durable systems and disposable sensors. The initial durable system price is generally not dependent upon the subsequent purchase of any amount of disposable sensors.
We sell our durable systems and disposable sensors through two main sales channels: 1) directly to customers who use our products or organizations (the Direct Channel) and 2) to distribution partners who resell our products (the Distributor Channel).
In the Direct Channel, we sell the Components to customers and we receive payment directly from customers, organizations and third-party payors. Third-party payors primarily include commercial insurance companies and federal and state agencies (under Medicare and Medicaid programs).
Policy elections and ASC Topic 606 practical expedients taken
We report revenue net of taxes collected from customers, which are subsequently remitted to governmental authorities;
We account for shipping and handling activities that are performed after a customer has obtained control of a good as fulfillment costs rather than as separate performance obligations;
We do not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer; and
If we expect, at contract inception, that the period between the transfer of control and corresponding payment from the customer will be one year or less, we do not adjust the amount of consideration for the effects of a significant financing component.
Contracts and performance obligations
We consider customer purchase orders, which in most cases are governed by agreements with distributors or third-party payors, to be contracts with a customer. For each contract, we consider the obligation to transfer the Components to the customer, each of which are distinct, to be separate performance obligations. The Components are individually priced and can be purchased separately or bundled in a contract. We also provide free-of-charge software, mobile applications and updates for our DexCom Share® remote monitoring system. The standalone selling prices of our mobile applications and updates are based on an expected cost plus a margin approach.
Transaction price
Transaction price for the Components reflects the net consideration to which we expect to be entitled. Transaction price is typically based on contracted rates less any estimates of claim denials and historical reimbursement experience, which would include current and future expectations regarding reimbursement contracts, guidelines and payor mix, and less estimated variable consideration adjustments.

10

Table of Contents

Variable consideration
Rebates. We estimate reductions to our revenues for rebates paid to payors, healthcare providers and distributors. Rebates are based on contractual arrangements or statutory requirements, which may vary by product, payor and individual payor plans. Our estimates are based on products sold, historical payor mix and, as available, known market events or trends and channel inventory data. We also take into consideration, as available, new information regarding changes in programs’ regulations and guidelines that would impact the amount of the actual rebates and/or our expectations regarding future payor mix for these programs.
Product Returns. We generally provide a “30-day money back guarantee” program whereby first-time end-user customers may return the durable system. In accordance with the terms of their distribution agreements, most distributors do not have rights of return outside of our limited warranty. The distributors typically have a limited time frame to notify us of any missing, damaged, defective or non-conforming products. Our returns have historically been immaterial.
Revenue recognition
We recognize revenue when control is transferred to our customers. The timing of revenue recognition is based on the satisfaction of performance obligations. Substantially all of the performance obligations associated with the Components are satisfied at a point in time, which typically occurs at shipment. Terms of direct and distributor orders are generally Freight on Board (FOB) shipping point for U.S. orders or Free Carrier (FCA) shipping point for international orders. For certain of our distributors, control transfers at delivery of the product to the customer.
In cases where our free-of-charge software, mobile applications and updates are deemed to be separate performance obligations, revenue is recognized over time on a ratable basis over the estimated life of the durable systems.
Our sales of the durable systems include an assurance-type warranty which is accounted for based on the cost accrual method recognized as expense when the products are sold and is not considered a separate performance obligation.
See Note 9, “Business Segment and Geographic Information,” for revenues disaggregated by geographic region and by sales channel.
Contract balances
The timing of revenue recognition, billing and cash collections results in the recording of trade receivables and deferred revenue in our consolidated balance sheets. We recognize a receivable in the period in which our right to the consideration is unconditional. We generally do not have contracts or performance obligations with a term of more than one year.
Payment terms vary by contract type and type of customer and generally range from 30 to 90 days.
Accounts receivable as of September 30, 2019 and December 31, 2018 included unbilled accounts receivable of $5.2 million and $5.1 million, respectively. Unbilled accounts receivable consist of revenue recognized for Components we have delivered but not yet invoiced to customers. We expect to invoice and collect all unbilled accounts receivable within twelve months.
Most of our deferred revenue as of September 30, 2019 is associated with certain of our free-of-charge software and mobile applications and will be recognized over the next twelve months. The table below shows revenue that we recognized as a result of changes in the contract liability balances in the periods shown.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions)
2019
 
2018
 
2019
 
2018
Revenue recognized in the period from:
 
 
 
 
 
 
 
Amounts included in contract liabilities at the beginning of the period
$
2.9

 
$
5.0

 
$
2.6

 
$
1.9


Deferred cost of sales
Deferred cost of sales are associated with sales for which revenue recognition criteria are not met but product has shipped and released from inventory. These costs are recognized in cost of sales when the associated revenue is recognized. Deferred cost of sales are included in prepaid and other current assets in our consolidated balance sheets.

11

Table of Contents

Incentive compensation costs
We generally expense incentive compensation associated with our internal sales force when incurred because the amortization period for such costs, if capitalized, would have been one year or less. We record these costs in selling, general and administrative expense in our consolidated statement of operations.
Leases
We adopted Accounting Standards Codification Topic 842 (ASC 842) utilizing the modified retrospective transition method at the beginning of the first quarter of 2019. Under ASC 842, we determine if an arrangement is a lease at inception. We record operating lease right-of-use assets and liabilities based on the present value of the lease payments over the lease term. In determining the present value of the lease payments, we use our incremental borrowing rate at the lease commencement date. We define the initial lease term to include the construction build-out period but to exclude lease extension periods when we are not reasonably certain to exercise our extension option. We record lease expense on a straight-line basis over the expected lease term. Lease costs which are variable and dependent on a rate, an index, or on usage of the asset are expensed in the period they are incurred.
We have facilities lease agreements with lease and non-lease components, such as common area maintenance. We generally account for the lease and non-lease components of these agreements as a single lease component.
We account for short-term lease expense on a straight-line basis over the lease term.
Net Income Per Share
Basic net income per share attributable to common stockholders is calculated by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares outstanding during the period and, when dilutive, potential common share equivalents.
Common share equivalents that we calculate using the treasury stock method include outstanding stock options and unvested RSUs that are settleable in shares of common stock and potential common shares from convertible securities that we intend to settle using a combination of shares of our common stock and cash. Common share equivalents that we calculate using the if-converted method include potential common shares from convertible securities that we intend to settle using only shares of our common stock.
The following table sets forth the computation of basic and diluted net income per share for the periods shown.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions)
2019
 
2018
 
2019
 
2018
Net income
$
45.8

 
$
46.6

 
$
8.4

 
$
52.6

 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.50

 
$
0.53

 
$
0.09

 
$
0.60

Diluted
$
0.50

 
$
0.52

 
$
0.09

 
$
0.59

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
91.3

 
88.5

 
90.9

 
88.0

Effect of potentially dilutive stock options

 
0.2

 

 
0.2

Effect of potentially dilutive restricted stock units
1.2

 
1.6

 
1.3

 
1.1

Diluted weighted average shares outstanding
92.5

 
90.3

 
92.2

 
89.3



12

Table of Contents

Outstanding anti-dilutive securities not included in the diluted net income per share attributable to common stockholders calculations were as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions)
2019
 
2018
 
2019
 
2018
Unvested restricted stock units

 

 
0.3

 
0.3

Senior convertible notes due 2022
4.0

 
4.0

 
4.0

 
4.0

Senior convertible notes due 2023
5.2

 

 
5.2

 

2023 Warrants
5.2

 

 
5.2

 

Total
14.4

 
4.0

 
14.7

 
4.3


Recent Accounting Guidance
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (ASU 2016-02), which requires a lessee to recognize most leases on the consolidated balance sheet as lease liabilities with corresponding right-of-use assets. We adopted ASU 2016-02 utilizing the modified retrospective transition method at the beginning of the first quarter of 2019. See Note 2, “Leases,” for more information on the impact of our adoption of ASU 2016-02 and related disclosures.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (ASU 2017-12), which is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency regarding the scope and results of hedging programs. The guidance in this update is applied using a cumulative-effect adjustment to retained earnings at the beginning of the fiscal year of adoption. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Our adoption of ASU 2017-12 at the beginning of the first quarter of 2019 did not have a significant impact on our financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods, and early adoption is permitted. We expect to adopt the standard on its effective date in the first quarter of 2020. We believe the adoption will modify the way we analyze financial instruments, but currently do not expect the adoption to have a material financial impact on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). This new guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. We are currently evaluating the impact that this guidance will have on our financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement: Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13), which adds and modifies certain disclosure requirements for fair value measurements. Under the new guidance, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, or valuation processes for Level 3 fair value measurements. However, public business entities will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and related changes in unrealized gains and losses included in other comprehensive income. ASU 2018-13 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. We are currently evaluating the impact that this guidance will have on our financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other – Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU

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2018-15). This new guidance requires a customer in a cloud computing arrangement to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. ASU 2018-15 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. Application of this guidance can be applied either prospectively or retrospectively. We are currently evaluating the impact that this guidance will have on our financial statements.

2. Leases
Impact of Adoption of ASC 842
We adopted ASC 842 utilizing the modified retrospective transition method through a $2.1 million cumulative-effect adjustment to retained earnings at the beginning of the first quarter of 2019. We will continue to report financial information for fiscal years prior to 2019 under the previous lease accounting standards. We elected the package of practical expedients permitted under the transition guidance in the new standard, which allowed us to carry forward the historical classification of leases that were in place as of January 1, 2019.
Under the previous lease accounting standards we were deemed the owner of our Mesa, Arizona building during the construction period. As a result of our adoption of ASC 842, we have de-recognized the estimated fair value of the building shell and the related lease liability as of December 31, 2018 and recorded the difference between the asset and liability as an adjustment to retained earnings at the beginning of the first quarter of 2019.
In addition, as a result of our adoption of ASC 842 we recorded operating lease right-of-use assets of $26.7 million, finance lease right-of-use assets of $15.3 million, operating lease liabilities of $40.4 million and finance lease liabilities of $15.9 million in our consolidated balance sheets at the beginning of the first quarter of 2019, with no material impact to our consolidated statement of operations.
Operating lease right-of-use assets and liabilities are presented separately in our consolidated balance sheets. Finance lease right-of-use assets are included in property and equipment and finance lease liabilities are included in accounts payable and accrued liabilities and in other long-term liabilities in our consolidated balance sheets.
Information About Our Leases
Our corporate headquarters are located in San Diego, California. Our manufacturing facilities are located in San Diego, California and Mesa, Arizona. We lease approximately 219,000 square feet of space in San Diego under leases that expire in February and March 2022. We have the option to renew each of these leases for two additional five-year terms. In San Diego we also lease approximately 87,000 square feet of space under a lease that expires in February 2022 with no renewal options and approximately 132,600 square feet of space under a sublease that expires in January 2022. We lease approximately 148,800 square feet of space in Mesa, Arizona under a lease that expires in March 2028. We have the option to renew this lease for four additional five-year terms. We have also entered into other domestic and international operating lease agreements, primarily for office and warehouse space, that expire at various times through September 2029.
The components of lease expense for the three and nine months ended September 30, 2019 were as follows:
(In millions)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2019
Finance lease cost:
 
 
 
Amortization of right-of-use assets
$
0.3

 
$
0.8

Interest on lease liabilities
0.2

 
0.6

Operating lease cost
2.8

 
8.4

Short-term lease cost
1.3

 
3.3

Variable lease cost(1)
1.0

 
3.0

Total lease cost
$
5.6

 
$
16.1

(1) Variable lease costs are primarily related to common area maintenance charges and property taxes.  

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Other information related to leases was as shown in the table below. All figures include the leases recorded at the beginning of the first quarter of 2019 as a result of our adoption of ASC 842.
(Dollars in millions)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows from operating leases
$
4.0

 
$
10.0

Operating cash flows from finance leases
$
0.2

 
$
0.6

Financing cash flows from finance leases
$
0.1

 
$
0.4

Right-of-use assets obtained in exchange for lease liabilities:
 
 
 
Operating leases
$
1.4

 
$
41.7

Finance leases
$

 
$
15.5

Weighted average remaining lease term in years:
 
 
 
Operating leases
3.8

 
3.8

Finance leases
13.5

 
13.5

Weighted average discount rate:
 
 
 
Operating leases
5.0
%
 
5.0
%
Finance leases
5.0
%
 
5.0
%
Amortization of operating lease right-of-use asset included in cash flows from operating activities in the Consolidated Statements of Cash Flows was $2.7 million and $6.7 million for the three and nine months ended September 30, 2019, respectively.
Future minimum lease payments under non-cancellable leases as of September 30, 2019 were as shown in the table below.
(In millions)
Operating Leases
 
Finance Leases
Remaining 2019
$
4.1

 
$
0.3

2020
16.9

 
1.3

2021
17.1

 
1.3

2022
6.3

 
1.4

2023
4.4

 
1.4

Thereafter
5.4

 
15.3

Total future lease cost
54.2

 
21.0

Less: Amount representing interest
(4.9
)
 
(5.9
)
Present value of future payments
49.3

 
15.1

Less: Short-term leases not recorded as a liability
(0.2
)
 

Revised present value of future lease payments
49.1

 
15.1

Less: Current portion
(14.8
)
 
(0.6
)
Long-term portion
$
34.3

 
$
14.5


3. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
We estimate the fair value of our Level 1 financial instruments, which are in active markets, using unadjusted quoted market prices for identical instruments.
We obtain the fair values for our Level 2 financial instruments, which are not in active markets, from a primary professional pricing source that uses quoted market prices for identical or comparable instruments, rather than direct observations of quoted prices in active markets. Fair values obtained from this professional pricing source can also be based on

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pricing models whereby all significant observable inputs, including maturity dates, issue dates, settlement dates, benchmark yields, reported trades, broker-dealer quotes, issue spreads, benchmark securities, bids, offers or other market-related data, are observable or can be derived from, or corroborated by, observable market data for substantially the full term of the asset. We validate the quoted market prices provided by our primary pricing service by comparing the fair values of our Level 2 marketable securities portfolio balance provided by our primary pricing service against the fair values of our Level 2 marketable securities portfolio balance provided by our investment managers.
The following table summarizes financial assets that we measured at fair value on a recurring basis as of September 30, 2019, classified in accordance with the fair value hierarchy. We sold the equity investment in Tandem Diabetes Care, Inc. that we held as of December 31, 2018 during the first quarter of 2019.
 
Fair Value Measurements Using
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
256.9

 
$
45.0

 
$

 
$
301.9

 
 
 
 
 
 
 
 
Debt securities, available for sale:
 
 
 
 
 
 
 
U.S. government agencies

 
699.0

 

 
699.0

Commercial paper

 
277.9

 

 
277.9

Corporate debt

 
57.4

 

 
57.4

Total debt securities, available for sale

 
1,034.3

 

 
1,034.3

 
 
 
 
 
 
 
 
Total assets measured at fair value on a recurring basis
$
256.9

 
$
1,079.3

 
$

 
$
1,336.2

The following table summarizes financial assets that we measured at fair value on a recurring basis as of December 31, 2018, classified in accordance with the fair value hierarchy.
 
Fair Value Measurements Using
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
199.3

 
$
66.7

 
$

 
$
266.0

 
 
 
 
 
 
 
 
Equity investment in Tandem Diabetes Care, Inc.
38.0

 

 

 
38.0

 
 
 
 
 
 
 
 
Debt securities, available for sale:
 
 
 
 
 
 
 
U.S. government agencies

 
173.1

 

 
173.1

Commercial paper

 
36.2

 

 
36.2

Corporate debt

 
1.3

 

 
1.3

Total debt securities, available for sale

 
210.6

 

 
210.6

 
 
 
 
 
 
 
 
Total assets measured at fair value on a recurring basis
$
237.3

 
$
277.3

 
$

 
$
514.6


There were no transfers between Level 1 and Level 2 securities during the three and nine months ended September 30, 2019 and 2018. There were no transfers into or out of Level 3 securities during the three and nine months ended September 30, 2019 and 2018.
We hold certain other investments that we do not measure at fair value on a recurring basis. The carrying values of these investments are not significant and we include them in other assets in our consolidated balance sheets. It is impracticable for us to estimate the fair value of these investments on a recurring basis due to the fact that these entities are privately held and limited information is available. We monitor the information that becomes available from time to time and adjust the carrying values of these investments if there are identified events or changes in circumstances that have a significant adverse effect on the fair values.
Fair Value of Senior Convertible Notes
The fair value, based on trading prices (Level 1), of our Senior Convertible Notes were as follows as of the dates indicated.

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Fair Value Measurements Using Level 1
(In millions)
September 30, 2019
 
December 31, 2018
0.75% Senior Convertible Notes due 2022
$
635.6

 
$
540.2

0.75% Senior Convertible Notes due 2023
996.5

 
859.6

Total fair value of outstanding senior convertible notes
$
1,632.1

 
$
1,399.8


For more information on the carrying values and fair values of our 2022 Notes and 2023 Notes, see Note 5, “Debt.”
Foreign Currency and Derivative Financial Instruments
From time to time we engage in limited hedging transactions to reduce foreign currency risks on certain intercompany balances. The fair values of these derivatives are based on quoted market prices, which are Level 1 inputs. As of September 30, 2019, we had no outstanding currency hedging transactions.
4. Balance Sheet Details
Short-Term Marketable Securities
Short-term marketable securities, consisting of equity securities and debt securities, were as follows as of the dates indicated.
 
September 30, 2019
(In millions)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Market
Value
Debt securities, available for sale:
 
 
 
 
 
 
 
U.S. government agencies
$
698.6

 
$
0.4

 
$

 
$
699.0

Commercial paper
277.9

 
0.1

 
(0.1
)
 
277.9

Corporate debt
57.4