DexCom, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. DexCom develops and sells continuous glucose monitoring (CGM) systems, including reusable hardware and disposable sensors. Figures are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $500.9 | $396.3 | $1,357.8 | $1,013.2 |
| Gross profit / margin | $340.4 / 68% | $246.9 / 62% | $881.0 / 65% | $622.2 / 61% |
| Operating income | $94.1 | $56.0 | $195.5 | $40.8 |
| Net income | $72.2 | $45.8 | $138.4 | $8.4 |
| Diluted EPS | $0.73 | $0.50 | $1.43 | $0.09 |
| Cash from operations | Not provided for quarter | Not provided for quarter | $303.6 | $170.8 |
Revenue increased 26% in Q3 and 34% for the nine-month period. Management attributed growth primarily to higher disposable sensor volumes and expansion of the worldwide customer base; pricing pressure and product/channel mix partly offset growth. Sensors and other products represented about 81% of revenue in the first nine months, versus 78% a year earlier. Gross-margin gains reflected revenue growth and manufacturing and product-design efficiencies. Q3 operating expenses rose 29% to $246.3, including higher R&D and marketing costs.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $673.5 and short-term marketable securities were $1,930.3, together approximately $2.60 billion. Current assets were $3,237.1 and current liabilities $506.4.
- Operating cash flow for the first nine months was $303.6. Investing cash outflow was $994.0, including $844.6 net purchases of marketable securities and $138.8 of capital expenditures. Financing cash inflow was $917.0, primarily from the 2025 convertible-note offering, net of repurchases of 2022 notes.
- Outstanding convertible-note principal totaled $2,057.5: $850.0 due 2023 and $1,207.5 due 2025. The reported carrying amount of the liability component was $1,645.8, reflecting unamortized discounts and issuance costs. The notes carry coupons of 0.75% and 0.25%, respectively; non-cash discount accretion contributed to interest expense.
- No revolving-credit borrowings were outstanding; $194.6 remained available after letters of credit. The company reported compliance with credit-agreement covenants and expected available resources and operating cash flows to cover anticipated needs for at least 12 months.
Changes, outlook and risks
- Q3 net income rose 58%; nine-month net income increased to $138.4 from $8.4. The prior-year comparison included a $4.2 loss on an equity investment; 2020 included $5.9 of nine-month debt-extinguishment losses related to the 2022 notes.
- In May 2020, DexCom issued $1.21 billion principal amount of 2025 convertible notes, receiving approximately $1.19 billion net proceeds, and used $282.6 to repurchase part of its 2022 notes. The remaining 2022 notes were converted or redeemed by July. This increased cash and long-term debt and contributed to higher interest expense.
- Inventory increased to $200.7 from $119.8 at year-end, including finished goods growth. Excess and obsolete inventory charges were $13.2 for the first nine months, versus $10.1 in 2019.
- The filing provides no specific revenue or earnings guidance. Management described the COVID-19 impact and its duration as uncertain, noting additional operating costs, disruptions to sales activity and some delays and supply-chain disruption affecting next-generation CGM development. The company had made CGM systems available for hospital use under FDA enforcement discretion during the pandemic, with stated limitations and potential product-liability exposure.
- Principal risks include COVID-related demand, supply and clinical-trial disruption; manufacturing capacity and supplier concentration; reimbursement and pricing pressure; competition; regulatory and product-quality requirements; data security; and dilution, cash-settlement or refinancing demands associated with convertible debt. Management said no pending legal proceeding was expected to have a material adverse effect, while noting ordinary-course litigation risks.
Investor facts to verify
- Whether sensor-volume growth, channel mix and pricing pressure sustain revenue and gross-margin trends.
- Whether inventory growth reflects appropriate demand planning, and whether manufacturing capacity and suppliers can meet demand without further disruption or write-downs.
- Convertible-note conversion, dilution and potential cash-settlement exposure, as well as debt-service capacity and covenant compliance.
- How COVID-19 affects customer access and demand, supply chains, clinical timelines, hospital-use risks and future financial results; management said the full effect could not yet be predicted.
- The effect of insurance coverage, reimbursement terms and customer concentration among major distributors on sales and collections.