Tandem Diabetes Care, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and reporting period
Tandem designs and sells insulin pumps and related supplies, principally through its t:slim X2 platform and Control-IQ technology. Its business also includes cartridges, infusion sets, software and support. The company reported one operating segment. In July 2022, after quarter-end, it launched a U.S. mobile bolus feature for compatible smartphones.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales | $200.3 | $172.1 | $376.2 | $313.2 |
| Gross profit | $101.9 | $92.5 | $193.0 | $165.7 |
| Gross margin | 51% | 54% | 51% | 53% |
| Operating income (loss) | $(12.2) | $5.4 | $(27.6) | $2.2 |
| Net income (loss) | $(15.1) | $4.0 | $(29.8) | $(1.0) |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $20.7 | $57.6 |
- Q2 sales rose 16% year over year, primarily on 44% growth in pump-related supply sales as the estimated worldwide installed customer base grew about 40%. Worldwide pump sales were consistent with the prior-year quarter; U.S. pump shipments increased 1%, while shipments outside the U.S. declined 14%.
- For the first half, sales increased 20%. Pump-related supply sales grew 40%, and worldwide pump sales grew 7%.
- Gross profit increased, but gross margin declined. Management attributed pressure to higher material and supply-chain costs, alternative component sourcing, and product mix; pump sales, which have the highest gross margin, were a smaller share of worldwide sales.
- Operating expenses increased: Q2 SG&A was $80.6 million, up 21%, and R&D was $33.6 million, up 64%. For the first half, SG&A rose 23% to $153.9 million and R&D rose 74% to $66.7 million. Higher staffing, stock-based compensation and development-related spending contributed.
- At June 30, cash and cash equivalents were $115.0 million and short-term investments were $520.4 million, totaling $635.3 million. Current assets were $835.0 million versus current liabilities of $139.3 million.
- First-half operating cash flow fell to $20.7 million from $57.6 million, reflecting the larger net loss and working-capital changes, including inventory growth. Cash and cash equivalents increased by $43.8 million during the half.
- Convertible senior notes had $287.5 million principal outstanding, carrying value of $282.3 million, a 1.50% coupon and May 2025 maturity. A new $100 million revolving credit facility was undrawn at quarter-end; the company reported compliance with its financial covenants.
Material changes, outlook and risks
- Management said it expects continued pressure from supply-chain and material costs through the end of 2022. It also expects operating expenses, particularly R&D and customer-support costs, to increase as the business expands. The filing gives no numeric revenue, earnings or margin guidance.
- The company stated that cash, investments, available revolver capacity and expected operating cash flows should fund ongoing core activities. It cautioned that future capital needs depend on sales, margins, working capital, investment and external conditions.
- COVID-19 effects, inflation, recession concerns, labor shortages, component constraints, shipping disruption and distributor ordering variability may affect demand, costs and forecasts. The company specifically cited semiconductor and copper shortages and reliance on a limited number of suppliers.
- Product development priorities include Tandem Mobi, t:slim X3, tubeless and patch-pump concepts, Control-IQ expansions, and integration work with Dexcom and Abbott. Timing and regulatory clearance remain uncertain.
- A California class action related to a 2020 data breach remained pending, with class-certification and summary-adjudication decisions awaited; the company could not estimate a loss or range. A separate wage-and-hour class action was resolved and closed in May 2022.
- Operating lease liabilities rose to $139.7 million, including a new lease for expanded San Diego facilities. Phase II of the Tech Center lease had not commenced; the company estimated $34.7 million of future base rent for that phase, subject to timing and other factors.
- Available-for-sale investments had $4.3 million of gross unrealized losses, which the company attributed primarily to higher interest rates and did not consider credit losses. The filing reports a full valuation allowance against net deferred tax assets.
Important facts for investors to verify
- Whether installed-base growth and recurring supply sales can offset uneven pump shipments, particularly internationally.
- Whether supply-chain costs, alternative sourcing and product mix continue to weigh on gross margin.
- Whether rising SG&A and R&D spending translates into product launches, growth and a path back to sustained profitability.
- Whether liquidity and operating cash generation remain adequate as inventory, facility commitments and development spending grow, and as the 2025 notes approach maturity.
- Developments in the data-breach litigation, product regulatory reviews, supplier availability and planned products and integrations.