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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 March 31, 2020
 
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
dexcomgreenstandalone.jpg
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, including area code)

( 858 200-0200
(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 April 22, 2020 , there were 92,344,878 shares of the Registrant’s common stock outstanding.
 



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

2


PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
DexCom, Inc.
Consolidated Balance Sheets
(Unaudited)
(In millions, except par value data)
March 31, 2020

December 31, 2019
Assets



Current assets:



Cash and cash equivalents
$
584.6


$
446.2

Short-term marketable securities
925.9


1,087.1

Accounts receivable, net
300.7


286.3

Inventory
141.9


119.8

Prepaid and other current assets
42.6


30.0

Total current assets
1,995.7


1,969.4

Property and equipment, net
346.1


321.3

Operating lease right-of-use assets
73.8

 
71.5

Goodwill
18.6


18.6

Other assets
13.7


14.2

Total assets
$
2,447.9


$
2,395.0

Liabilities and Stockholders’ Equity



Current liabilities:



Accounts payable and accrued liabilities
$
267.5


$
256.4

Accrued payroll and related expenses
59.0


88.5

Operating lease liabilities, current portion
14.5

 
13.6

Deferred revenue
1.8


1.7

Total current liabilities
342.8


360.2

Long-term senior convertible notes
1,072.4

 
1,059.7

Operating lease liabilities, net of current portion
77.3

 
72.4

Other long-term liabilities
20.9

 
20.1

Total liabilities
1,513.4


1,512.4

Commitments and contingencies



Stockholders’ equity:



Preferred stock, $0.001 par value, 5.0 million shares authorized; no shares issued and outstanding at March 31, 2020 and December 31, 2019



Common stock, $0.001 par value, 200.0 million shares authorized; 93.1 million and 92.3 million shares issued and outstanding, respectively, at March 31, 2020; and 92.4 million and 91.6 million shares issued and outstanding, respectively, at December 31, 2019
0.1


0.1

Additional paid-in capital
1,706.5


1,675.9

Accumulated other comprehensive income
3.7


2.3

Accumulated deficit
( 675.8
)

( 695.7
)
Treasury stock, at cost; 0.8 million shares at March 31, 2020 and December 31, 2019
( 100.0
)
 
( 100.0
)
Total stockholders’ equity
934.5


882.6

Total liabilities and stockholders’ equity
$
2,447.9


$
2,395.0

See accompanying notes

3


DexCom, Inc.
Consolidated Statements of Operations
(Unaudited)

Three Months Ended
March 31,
(In millions—except per share data)
2020
 
2019
Revenues
$
405.1

 
$
280.5

Cost of sales
148.6

 
111.7

Gross profit
256.5

 
168.8

Operating expenses:

 

Research and development
73.1

 
59.0

Selling, general and administrative
149.8

 
124.2

Total operating expenses
222.9

 
183.2

Operating income (loss)
33.6

 
( 14.4
)
Interest expense
( 15.4
)
 
( 14.9
)
Loss from equity investments

 
( 4.2
)
Interest and other income, net
4.2

 
6.9

Income (loss) before income taxes
22.4

 
( 26.6
)
Income tax expense
2.5

 
0.3

Net income (loss)
$
19.9

 
$
( 26.9
)
 
 
 
 
Basic net income (loss) per share
$
0.22

 
$
( 0.30
)
Shares used to compute basic net income (loss) per share
91.8

 
90.3

Diluted net income (loss) per share
$
0.21

 
$
( 0.30
)
Shares used to compute diluted net income (loss) per share
94.1

 
90.3

See accompanying notes

4


DexCom, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 
Three Months Ended
March 31,
(In millions)
2020
 
2019
Net income (loss)
$
19.9

 
$
( 26.9
)
Other comprehensive income, net of tax:
 
 
 
Translation adjustments and other
( 0.7
)
 

Unrealized gain on marketable debt securities
2.1

 
0.1

Total other comprehensive income, net of tax
1.4

 
0.1

Comprehensive income (loss)
$
21.3

 
$
( 26.8
)

See accompanying notes

5


DexCom, Inc.
Consolidated Statements of Stockholders’ Equity (Unaudited)

 
 
Three Months Ended March 31, 2020
(In millions)
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Accumulated
Deficit
 
Treasury Stock
 
Total
Stockholders’
Equity
Shares
 
Amount
 
Balance at December 31, 2019
 
91.6

 
$
0.1

 
$
1,675.9

 
$
2.3

 
$
( 695.7
)
 
$
( 100.0
)
 
$
882.6

Issuance of common stock under equity incentive plans
 
0.7

 

 
0.3

 

 

 

 
0.3

Issuance of common stock for Employee Stock Purchase Plan
 

 

 
6.4

 

 

 

 
6.4

Share-based compensation expense
 

 

 
23.9

 

 

 

 
23.9

Net income
 

 

 

 

 
19.9

 

 
19.9

Other comprehensive income, net of tax
 

 

 

 
1.4

 

 

 
1.4

Balance at March 31, 2020
 
92.3

 
$
0.1

 
$
1,706.5

 
$
3.7

 
$
( 675.8
)
 
$
( 100.0
)
 
$
934.5


 
 
Three Months Ended March 31, 2019
(In millions)
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
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
 
0.9

 

 
0.2

 

 

 

 
0.2

Issuance of common stock for Employee Stock Purchase Plan
 
0.1

 

 
4.8

 

 

 

 
4.8

Share-based compensation expense
 

 

 
25.0

 

 

 

 
25.0

Net loss
 

 

 

 

 
( 26.9
)
 

 
( 26.9
)
Other comprehensive income
 

 

 

 
0.1

 

 

 
0.1

Balance at March 31, 2019
 
91.0

 
$
0.1

 
$
1,590.6

 
$
1.6

 
$
( 823.7
)
 
$
( 100.0
)
 
$
668.6

See accompanying notes












6


DexCom, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended
 
March 31,
(In millions)
2020
 
2019
Net income (loss)
$
19.9

 
$
( 26.9
)
Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
13.0

 
9.9

Share-based compensation
23.9

 
25.0

Non-cash interest expense
12.7

 
12.2

Realized loss on equity investment

 
4.2

Other non-cash income and expenses
0.1

 
0.3

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
( 14.7
)
 
21.5

Inventory
( 22.2
)
 
( 30.4
)
Prepaid and other assets
( 7.6
)
 
( 5.2
)
Operating lease right-of-use assets and liabilities, net
( 0.4
)
 
( 0.2
)
Accounts payable and accrued liabilities
5.3

 
25.5

Accrued payroll and related expenses
( 29.1
)
 
( 21.1
)
Deferred revenue and other liabilities
1.0

 
( 3.0
)
Net cash provided by operating activities
1.9

 
11.8

Cash flows from investing activities:
 
 
 
Purchases of marketable securities
( 365.8
)
 
( 50.7
)
Proceeds from sale and maturity of marketable securities
530.0

 
222.5

Purchases of other equity investments

 
( 1.2
)
Purchases of property and equipment
( 33.2
)
 
( 39.3
)
Other investing activities
( 0.4
)
 

Net cash provided by investing activities
130.6

 
131.3

Cash flows from financing activities:
 
 
 
Net proceeds from issuance of common stock
6.7

 
5.0

Other financing activities
( 0.2
)
 
( 0.1
)
Net cash provided by financing activities
6.5

 
4.9

Effect of exchange rate changes on cash, cash equivalents and restricted cash
( 0.5
)
 
0.6

Increase in cash, cash equivalents and restricted cash
138.5

 
148.6

Cash, cash equivalents and restricted cash, beginning of period
446.4

 
1,137.1

Cash, cash equivalents and restricted cash, end of period
$
584.9

 
$
1,285.7

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash, end of period:
 
 
 
Cash and cash equivalents
$
584.6

 
$
1,285.1

Restricted cash
0.3

 
0.6

Total cash, cash equivalents and restricted cash
$
584.9

 
$
1,285.7

 
 
 
 
Supplemental disclosure of non-cash investing and financing transactions:
 
 
 
Acquisition of property and equipment included in accounts payable and accrued liabilities
$
19.6

 
$
10.1

Right-of-use assets obtained in exchange for lease liabilities
$
5.3

 
$
45.2

See accompanying notes

7


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 months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 . 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, 2019 included in the Annual Report on Form 10-K that we filed with the SEC on February 13, 2020 .
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.
The functional currencies of our international subsidiaries are generally the local currencies. We translate the financial statements of our foreign subsidiaries into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates for each period for revenue, costs and expenses. We include translation-related adjustments in comprehensive income (loss) and in accumulated other comprehensive income in the equity section of our consolidated balance sheet. Gains and losses resulting from certain intercompany transactions as well as transactions with customers and vendors that are denominated in currencies other than the functional currency of each entity give rise to foreign exchange gains or losses that we record in interest and other income, net in our consolidated statements of operations.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make certain estimates and assumptions that affect the amounts reported in our financial statements and the disclosures made in the accompanying notes. Areas requiring significant estimates include transaction price, net accounts receivable, excess or obsolete inventories and the valuation of inventory, and accruals for litigation contingencies. Despite our intention to establish accurate estimates and use reasonable assumptions, actual results may differ from our estimates.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are generally recorded at the invoiced amount for Distributors and at net realizable value for Direct customers, which is determined using estimates of claim denials and historical reimbursement experience without regard to aging category. Accounts receivable are not interest bearing. We evaluate the creditworthiness of significant customers based on historical trends, the financial condition of our customers, and external market factors. We generally do not require collateral from our customers. We maintain an allowance for doubtful accounts for potential credit losses. Uncollectable accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a customer account is uncollectable. Generally, receivable balances greater than one year past due are deemed uncollectable.

8


Concentration of Credit Risk
Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents, short-term marketable 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.
Revenue Recognition
We generate our revenue from the sale of our reusable transmitter and receiver, collectively referred to as “ Reusable Hardware ” and disposable sensors . We refer to Reusable Hardware and disposable sensors in this section as “ Components ”.
Policy elections and 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 Components to the customer, each of which are distinct, to be separate performance obligations. We also provide free-of-charge software, mobile applications and updates for our DexCom Share ® remote monitoring system. The standalone selling prices of our free-of-charge software, mobile applications and updates are estimated 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 the contracted rates less an estimate of claim denials and historical reimbursement experience by payor, which include current and future expectations regarding reimbursement rates and payor mix.
Variable consideration
Rebates. We estimate reductions for rebates based on contractual arrangements, estimates of products sold subject to rebate, known events or trends and channel inventory data.
Product Returns. 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. We generally provide a “ 30 -day money back guarantee” program whereby first-time end-user customers may return Reusable Hardware . Product returns have historically been immaterial.
Revenue recognition
The timing of revenue recognition is based on the satisfaction of performance obligations. Substantially all of the performance obligations associated with our Components are satisfied at a point in time, which typically occurs at shipment of our products. 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 sales transactions, 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 related Reusable Hardware component.
Our sales of Components include an assurance-type warranty.

9


Judgments and Estimates
In determining how revenue should be recognized, a five-step process is used, which requires judgment and estimates that can have a significant impact on the amount and timing of revenue we report. These judgments and estimates include identifying performance obligations in the contract, determining whether the performance obligations are separate, allocating the transaction price to each separate performance obligation, determining the timing of revenue recognition for separate performance obligations and estimating the amount of variable consideration to include in the transaction price.
Contract balances
Contract balances represent amounts presented in the consolidated balance sheets when either we have transferred goods or services to the customer or the customer has paid consideration to us under the contract. These contract balances include accounts receivable and deferred revenue. Payment terms vary by contract type and type of customer and generally range from 30 to 90 days.
Accounts receivable as of March 31, 2020 included unbilled accounts receivable of $ 6.9 million . Unbilled accounts receivable consists 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 12 months.
We record deferred revenue when we have entered into a contract with a customer and cash payments are received or due prior to transfer of control or satisfaction of the related performance obligation. 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
March 31,
(In millions)
2020
 
2019
Revenue recognized in the period from:
 
 
 
Amounts included in contract liabilities at the beginning of the period
$
1.1

 
$
2.4


Our performance obligations are generally satisfied within 12 months of the initial contract date. The deferred revenue balance related to performance obligations that will be satisfied after 12 months was $ 3.6 million as of March 31, 2020 and $ 2.1 million as of December 31, 2019 , and is included in other long-term liabilities on our consolidated balance sheets.
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. Deferred cost of sales are included in prepaid and other current assets in our consolidated balance sheets.
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.
Net Income (Loss) Per Share
Basic net income (loss) per share attributable to common stockholders is calculated by dividing the net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding during the period and, when dilutive, potential common share equivalents.
Potentially dilutive common shares consist of shares issuable from stock options, unvested RSUs, warrants and our 0.75 % convertible senior notes due 2022 (the “2022 Notes”) and our 0.75 % convertible senior notes due 2023 (the “2023 Notes,” together with the 2022 Notes, the “ senior convertible notes ”). Potentially dilutive common share equivalents shares from outstanding stock options, warrants and unvested RSUs are determined using the average share price for each period under the treasury stock method. Potentially dilutive shares issuable upon conversion of our senior convertible notes are determined using the if-converted method.

10


The following table sets forth the computation of basic and diluted net income (loss) per share for the periods shown.
 
 
Three Months Ended
March 31,
(In millions)
 
2020
 
2019
Net income (loss)
 
$
19.9

 
$
( 26.9
)
 
 
 
 
 
Net income (loss) per common share
 
 
 
 
Basic
 
$
0.22

 
$
( 0.30
)
Diluted
 
$
0.21

 
$
( 0.30
)
 
 
 
 
 
Basic weighted average shares outstanding
 
91.8

 
90.3

Dilutive potential common stock outstanding:
 
 
 
 
Stock options and employee stock purchase plan
 

 

Restricted stock units
 
1.2

 

2023 Warrants
 
1.1

 

2022 senior convertible notes
 

 

2023 senior convertible notes
 

 

Diluted weighted average shares outstanding
 
94.1

 
90.3


In periods of net losses, we exclude potentially dilutive common shares from the computation of the diluted net loss per share for those periods as the effect would be anti-dilutive.
Outstanding anti-dilutive securities not included in the diluted net income (loss) per share attributable to common stockholders calculations were as follows:
 
Three Months Ended March 31,
(In millions)
2020
 
2019
Options outstanding to purchase common stock

 

Unvested restricted stock units
0.1

 
2.3

2023 Warrants
4.1

 
5.2

Senior convertible notes due 2022
4.0

 
4.0

Senior convertible notes due 2023
5.2

 
5.2

Total
13.4

 
16.7

Recent Accounting Guidance
Recently Adopted Accounting Pronouncements
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. Our adoption of ASU 2016-13 at the beginning of the first quarter of 2020 did not have a significant impact on our consolidated financial statements. The Company will continue to monitor the impact of the novel strain of coronavirus, SARS-CoV-2 (“COVID-19”) outbreak on expected credit losses.
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. Our adoption of ASU 2017-04 at the beginning of the first quarter of 2020 did not have a significant impact on our consolidated financial statements.

11


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. Our adoption of ASU 2018-13 at the beginning of the first quarter of 2020 did not have a significant impact on our consolidated 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 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 adopted the new standard on January 1, 2020 on a prospective basis. Our adoption of ASU 2018-15 at the beginning of the first quarter of 2020 did not have a significant impact on our consolidated financial statements, however, the adoption of the standard resulted in an increase in capitalized assets related to qualifying cloud computing arrangement implementation costs incurred after the adoption date.
Recently Issued Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, 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 consolidated financial statements.
2. 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 pricing models whereby all significant observable inputs, including maturity dates, issue dates, settlement date, 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.

12


The following table summarizes financial assets that we measured at fair value on a recurring basis as of March 31, 2020 , classified in accordance with the fair value hierarchy:
 
Fair Value Measurements Using
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
363.7

 
$
100.0

 
$

 
$
463.7

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

 
623.9

 

 
623.9

Commercial paper

 
189.1

 

 
189.1

Corporate debt

 
112.9

 

 
112.9

Total debt securities, available for sale

 
925.9

 

 
925.9

 
 
 
 
 
 
 
 
Other assets (1)
1.8

 

 

 
1.8

 
 
 
 
 
 
 
 
Total assets measured at fair value on a recurring basis
$
365.5

 
$
1,025.9

 
$

 
$
1,391.4

(1) Includes assets which are held pursuant to a deferred compensation plan for our executives, which consist mainly of mutual funds.
The following table summarizes financial assets that we measured at fair value on a recurring basis as of December 31, 2019 , classified in accordance with the fair value hierarchy:
 
Fair Value Measurements Using
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
110.1

 
$
144.9

 
$

 
$
255.0

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

 
676.0

 

 
676.0

Commercial paper

 
248.2

 

 
248.2

Corporate debt

 
162.9

 

 
162.9

Total debt securities, available for sale

 
1,087.1

 

 
1,087.1

 
 
 
 
 
 
 
 
Other assets (1)
0.7

 

 

 
0.7

 
 
 
 
 
 
 
 
Total assets measured at fair value on a recurring basis
$
110.8

 
$
1,232.0

 
$

 
$
1,342.8

(1) Includes assets which are held pursuant to a deferred compensation plan for our executives, which consist mainly of mutual funds.
There were no transfers between Level 1 and Level 2 securities during the three months ended March 31, 2020 and 2019 . There were no transfers into or out of Level 3 securities during the three months ended March 31, 2020 and 2019 .
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 often 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.

13


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:
 
Fair Value Measurements Using Level 1
(In millions)
March 31, 2020
 
December 31, 2019
0.75% Senior Convertible Notes due 2022
$
1,088.9

 
$
890.8

0.75% Senior Convertible Notes due 2023
1,474.0

 
1,260.0

Total fair value of outstanding senior convertible notes
$
2,562.9

 
$
2,150.8

For more information on the carrying values of our senior convertible notes , see Note 4, “Debt.”
Foreign Currency and Derivative Financial Instruments
From time to time we engage in limited hedging transactions to reduce foreign currency risks. The fair values of these derivatives are based on quoted market prices, which are Level 1 inputs, and the derivative instruments are recorded in current assets or current liabilities in our balance sheets consistent with the nature of the instrument at period end. Derivative gains and losses are included in interest and other income, net in our consolidated statement of operations.
As of March 31, 2020 and December 31, 2019 , notional amounts of $ 20.0 million and $ 8.0 million were outstanding to hedge currency risk relating to certain intercompany balances. The resulting impact from the hedging activity on our consolidated financial statements was not significant for the periods presented.
Our foreign currency exposures vary but are primarily concentrated in the British Pound, the Euro, and the Canadian Dollar. We monitor the costs and the impact of foreign currency risks upon our financial results as part of our risk management program. We do not use derivative financial instruments for speculation or trading purposes or for activities other than risk management. We do not require and are not required to pledge collateral for these financial instruments and we do not carry any master netting arrangements to mitigate the credit risk.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Certain non-financial assets and liabilities are measured at fair value, usually with Level 3 inputs including the discounted cash flow method or cost method, on a nonrecurring basis in accordance with authoritative guidance. These include items such as non-financial assets and liabilities initially measured at fair value in a business combination and non-financial long-lived assets measured at fair value for an impairment assessment. In general, non-financial assets, including goodwill, intangible assets and property and equipment, are measured at fair value when there is an indication of impairment and are recorded at fair value only when any impairment is recognized. We recorded no significant impairment losses during the three months ended March 31, 2020 , and March 31, 2019.
3. 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:   
 
March 31, 2020
(In millions)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Market
Value
Debt securities, available for sale:
 
 
 
 
 
 
 
U.S. government agencies
$
620.4

 
$
3.5

 
$

 
$
623.9

Commercial paper
189.1

 
0.1

 
( 0.1
)
 
$
189.1

Corporate debt
113.7

 

 
( 0.8
)
 
$
112.9

Total debt securities, available for sale
923.2

 
3.6

 
( 0.9
)
 
925.9


14


 
December 31, 2019
(In millions)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Market
Value
Debt securities, available for sale:
 
 
 
 
 
 
 
U.S. government agencies
$
675.6

 
$
0.4

 
$

 
$
676.0

Commercial paper
248.1

 
0.1

 

 
248.2

Corporate debt
163.0

 

 
( 0.1
)
 
162.9

Total debt securities, available for sale
$
1,086.7

 
$
0.5

 
$
( 0.1
)
 
$
1,087.1


As of March 31, 2020 and December 31, 2019 , all of our debt securities had contractual maturities of less than 12 months . Gross realized gains and losses on sales of our debt securities during the three months ended March 31, 2020 and 2019 were not significant.
We periodically review our portfolio of debt securities to determine if any investment is impaired due to credit loss or other potential valuation concerns. For the debt securities where the fair value of the investment is less than the amortized cost basis, we have assessed at the individual security level for various quantitative factors including, but not limited to the nature of the investments, changes in credit ratings, interest rate fluctuations, industry analyst reports, and the severity of impairment. Unrealized losses on available-for-sale debt securities as of March 31, 2020 were not significant and were primarily due to changes in interest rates, including market credit spreads, and not due to increased credit risks associated with specific securities. Accordingly, we have no t recorded an allowance for credit losses associated with these investments. We do not intend to sell these investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity.
Inventory  

Inventory was as follows as of the dates indicated:
(In millions)
March 31, 2020
 
December 31, 2019
Raw materials
$
64.4

 
$
64.9

Work-in-process
17.7

 
11.1

Finished goods
59.8

 
43.8

Total inventory
$
141.9

 
$
119.8


During the three months ended March 31, 2020 , we recorded excess and obsolete inventory charges of $ 5.1 million in cost of sales as a result of our ongoing assessment of sales demand, inventory on hand for each product and the continuous improvement and innovation of our products. During the three months ended March 31, 2019 , we recorded excess and obsolete inventory charges of $ 1.6 million in cost of sales primarily as a result of our ongoing assessment of sales demand and inventory on hand.
Property and Equipment
Property and equipment was as follows as of the dates indicated:
(In millions)
March 31, 2020
 
December 31, 2019
Building and land (1)
$
15.5

 
$
15.5

Furniture and fixtures
12.8

 
12.8

Computer software and hardware
31.7

 
32.7

Machinery and equipment
129.5

 
130.2

Leasehold improvements
119.5

 
102.5

Construction in progress
144.1

 
132.6

Total cost
453.1

 
426.3

Less accumulated depreciation and amortization
( 107.0
)
 
( 105.0
)
Total property and equipment, net
$
346.1

 
$
321.3

(1 ) Represents our finance lease right-of-use assets.

15


Accounts Payable and Accrued Liabilities  
Accounts payable and accrued liabilities were as follows as of the dates indicated:
(In millions)
March 31, 2020
 
December 31, 2019
Accounts payable trade
$
110.2

 
$
102.3

Accrued tax, audit, and legal fees
13.8

 
14.0

Accrued rebates
103.6

 
93.3

Accrued warranty
7.7

 
7.4

Other accrued liabilities
32.2

 
39.4

Total accounts payable and accrued liabilities
$
267.5

 
$
256.4


Other Long-Term Liabilities
Other long-term liabilities were as follows as of the dates indicated:
(In millions)
March 31, 2020
 
December 31, 2019
Finance lease obligations
$
14.2

 
$
14.4

Other liabilities
6.7

 
5.7

Total other liabilities
$
20.9

 
$
20.1


4. Debt
Senior Convertible Notes
The carrying amounts of our senior convertible notes were as follows as of the dates indicated:
(In millions)
March 31, 2020
 
December 31, 2019
Principal amount of 0.75% Senior Convertible Notes due 2022
$
400.0

 
$
400.0

Principal amount of 0.75% Senior Convertible Notes due 2023
850.0

 
850.0