Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This document, including the following Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that are not purely historical regarding DexCom’s or its management’s intentions, beliefs, expectations and strategies for the future. These forward-looking statements fall within the meaning of the federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “intend,” “potential” or “continue” or the negative of these terms or other comparable terminology. Forward-looking statements are made as of the date of this report, deal with future events, are subject to various risks and uncertainties, and actual results could differ materially from those anticipated in those forward looking statements. The risks and uncertainties that could cause actual results to differ materially are more fully described under “Risk Factors” and elsewhere in this report and in our other reports filed with the SEC. We assume no obligation to update any of the forward-looking statements after the date of this report or to conform these forward-looking statements to actual results. You should read the following discussion and analysis together with “Selected Financial Data” in Part II, Item 6 and our financial statements and related notes in Part II, Item 8 of this Annual Report.

Overview

We are a medical device company primarily focused on the design, development and commercialization of continuous glucose monitoring, or CGM, systems for use by people with diabetes and by healthcare providers. We received approval from the Food and Drug Administration, or FDA, and commercialized our first product in 2006. We launched our latest generation system, the DexCom G6® integrated Continuous Glucose Monitoring System, or G6, in 2018. Unless the context requires otherwise, the terms “we,” “us,” “our,” the “company,” or “DexCom” refer to DexCom, Inc. and its subsidiaries.

We sell our durable CGM systems and disposable sensors through a direct sales force in the United States, Canada and some countries in Europe, and through distribution arrangements in the United States, Canada, Australia, New Zealand and some countries in Europe, Asia, Latin America, the Middle East and Africa.

We plan to develop future generations of technologies that are focused on improved performance and convenience and that will enable intelligent insulin administration. We also are aggressively exploring how to extend our offerings to other opportunities, including for people with Type 2 diabetes that are non-insulin using, people with pre-diabetes, people who are obese, people with gestational diabetes, and in the hospital setting. We will continue to develop a networked platform with open architecture, connectivity and transmitters capable of communicating with other devices and software systems. We also intend to expand our efforts to accumulate CGM patient data and metrics and apply predictive modeling and machine learning to generate interactive CGM insights that can inform patient behavior.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which we have prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 1 to the financial statements in Part II, Item 8 of this Annual Report, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results. Members of our senior management have discussed the development and selection of these critical accounting policies and their disclosure in this Annual Report with the Audit Committee of our Board of Directors.

Revenue Recognition

ASC Topic 606. We adopted ASC Topic 606 effective January 1, 2018 using the modified retrospective method. Results for reporting periods after January 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with legacy accounting guidance under ASC Topic 605. The discussion which follows describes the judgments and estimates we use in recognizing revenue under ASC Topic 606. Our adoption of ASC Topic 606 did not have a material impact on the measurement nor on the recognition of revenue from contracts, for which all revenue had

not been recognized as of January 1, 2018. Therefore, no cumulative adjustment has been made to the opening balance of retained earnings at the beginning of 2018. For more information, see “Revenue Recognition” in Note 1 to the financial statements in Part II, Item 8 of this Annual Report.

Revenue Recognition. We generate our revenue from the sale of our durable CGM systems and disposable sensors. 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 generally recognize revenue when control is transferred to our customers in an amount that 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 including rebates. The amount of variable consideration that is included in the transaction price is included in revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. We estimate reductions to our revenues for rebates paid to payors and healthcare providers in the United States. 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. For more information, see “Revenue Recognition” in Note 1 to the financial statements in Part II, Item 8 of this Annual Report.

Recognizing revenue requires us to exercise judgment and use estimates that can have a significant impact on the amount and timing of revenue we report. We exercise significant judgment when we determine the transaction price, including variable consideration adjustments. If the actual amounts of consideration that we receive differ from our estimates, we would adjust our estimates and that would affect reported revenue in the period that such variances become known.

Disaggregation of Revenue. We disaggregate revenue by geographic region and by major sales channel. We have determined that disaggregating revenue into these categories achieves the ASC Topic 606 disclosure objectives of depicting how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Reconciliations of revenue disaggregated by geographic location and by major sales channel to total revenue are provided in Note 10 to the financial statements in Part II, Item 8 of this Annual Report.

Share-Based Compensation

Share-based compensation expense is measured at the grant date based on the estimated fair value of the award and is recognized straight-line over the requisite service period of the individual grants, which typically equals the vesting period. Shared-based compensation arrangements include time-based and performance/market-based Restricted Stock Units (“RSUs”) and purchases of common stock at a discount under our Employee Stock Purchase Plan, or ESPP.

We estimate the fair value of time-based RSUs based on the market price of our common stock on the date of grant (the intrinsic value method). We estimate the fair value of performance/market-based RSUs using a Monte Carlo simulation model. We adjust share-based compensation expense quarterly for performance/market-based RSUs based on the expected achievement of the related performance conditions, which requires significant judgment.

We estimate the fair value of ESPP purchase rights using the Black-Scholes option pricing model. The model requires us to make assumptions that include expected volatility, expected term, dividends, and the risk-free interest rate. We account for forfeitures as they occur by reversing any share-based compensation expense related to awards that will not vest.

We recorded $101.9 million, $106.2 million and $110.8 million in share-based compensation expense during the twelve months ended December 31, 2018, 2017 and 2016, respectively. At December 31, 2018, unrecognized estimated compensation costs related to unvested restricted stock units totaled $126.5 million and are expected to be recognized through 2021.

Fair Value of Financial Instruments

The authoritative guidance establishes a fair value hierarchy that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities. In general, the authoritative guidance requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the measurement of its fair value. The three levels of input defined by the authoritative guidance are as follows:

Level 1—Unadjusted quoted prices that are available in active markets for identical assets or liabilities.

Level 2—Inputs other than quoted prices included in Level 1 that are observable, either directly or indirectly, through correlation with market data. These include quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing

methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the determination of fair value. Level 3 assets and liabilities include those whose fair values are determined using pricing models, discounted cash flow methodologies, or similar valuation techniques and significant judgment or estimation.

We estimate the fair value of most of our cash equivalents using Level 1 inputs. We estimate the fair value of our marketable equity securities using Level 1 inputs and we estimate the fair value of our marketable debt securities using Level 2 inputs. We carry our other financial instruments, such as cash, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities, at cost, which approximates the related fair values due to the short-term maturities of these instruments. See Note 1 and Note 3 to the financial statements in Part II, Item 8 of this Annual Report for more information about fair value measurements.

Accounts Receivable and Related Valuation Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We evaluate the collectability of our accounts receivable based on a combination of factors. We regularly analyze customer accounts, review the length of time receivables are outstanding, review historical loss rates and assess current economic trends that may impact the level of credit losses in the future. Our allowance for doubtful accounts has generally been adequate to cover our actual credit losses. However, since we cannot reliably predict future changes in the financial stability of our customers, we may need to increase our reserves if the financial conditions of our customers deteriorate.

Excess and Obsolete Inventory

Inventory is valued at the lower of cost or net realizable value. We record adjustments to inventory for potentially excess, obsolete, or scrapped goods in order to state inventory at net realizable value. Factors influencing these adjustments include inventories on hand and on order compared to estimated future usage and sales for existing and new products, as well as judgments regarding quality control testing data and assumptions about the likelihood of scrap and obsolescence. Historically, our inventory reserves have been adequate to cover our actual losses. However, if actual product life cycles, product quality or market conditions differ from our assumptions, additional inventory adjustments that would increase cost of goods sold could be required.

Income Taxes

We estimate our income taxes based on the various jurisdictions where we conduct business. Significant judgment is required in determining our worldwide income tax provision. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations and the potential for future adjustment of our uncertain tax positions by the Internal Revenue Service or other taxing jurisdictions. While we believe we have appropriate support for the positions taken on our tax returns, we regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, income taxes payable, and deferred taxes in the period in which the facts that give rise to a revision become known.

We use the asset and liability approach to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. Significant judgement is required to evaluate the need for a valuation allowance against deferred tax assets. We review all available positive and negative evidence, including projections of pre-tax book income, earnings history, and reliability of forecasting. A valuation allowance is established when it is more likely than not that some or all of the deferred tax assets will not be realized. As of December 31, 2018, we have maintained a full valuation allowance on our deferred tax assets since inception based on our historical losses and the uncertainty of generating future taxable income to utilize our loss and credit carryforwards. A future release of our valuation allowance will result in a material tax benefit recognized in the quarter of the release.

We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not of being sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Significant judgment is required to evaluate uncertain tax positions and is based upon a number of factors, including changes in facts or circumstances, changes in

tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in our income tax expense in the period in which we make the change, which could have a material impact on our effective tax rate and operating results.

Loss Contingencies

We are subject to certain legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of our business. We review the status of each significant matter quarterly and assess our potential financial exposure. If the potential loss from a claim or legal proceeding is considered probable and the amount can be reasonably estimated, we record a liability and an expense for the estimated loss and disclose it in our financial statements if it is significant. If we determine that a loss is possible and the range of the loss can be reasonably determined, we do not record a liability or an expense but we disclose the range of the possible loss. Significant judgment is required in the determination of whether a potential loss is probable, reasonably possible, or remote as well as in the determination of whether a potential exposure is reasonably estimable. We base our judgments on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Any revision of our estimates of potential liability could have a material impact on our financial position and operating results.

Results of Operations

Financial Overview

	Twelve Months Ended December 31,												2018 - 2017							2017 - 2016
(Dollars in millions)	2018				2017				2016				$ Change				% Change			$ Change				% Change
Total revenue	$	1,031.6			$	718.5			$	573.3			$	313.1			44	%		$	145.2			25	%
Gross profit	663.9				492.1				378.4				$	171.8			35	%		$	113.7			30	%
Gross profit as a percent of total revenue	64		%		68		%		66		%
Operating loss	(186.3		)		(42.5		)		(63.9		)		$	(143.8	)		338	%		$	21.4			(33	)%
Net loss	$	(127.1	)		$	(50.2	)		$	(65.6	)		$	(76.9	)		153	%		$	15.4			(23	)%
Basic and diluted net loss per share	$	(1.44	)		$	(0.58	)		$	(0.78	)		$	(0.86	)		148	%		$	0.20			(26	)%

Revenue, Cost of Sales and Gross Profit

	Twelve Months Ended December 31,												2018 - 2017							2017 - 2016
(Dollars in millions)	2018				2017				2016				$ Change				% Change			$ Change				% Change
Total revenue	$	1,031.6			$	718.5			$	573.3			$	313.1			44	%		$	145.2			25	%
Cost of sales	367.7				226.4				194.9				141.3				62	%		31.5				16	%
Gross profit	$	663.9			$	492.1			$	378.4			$	171.8			35	%		$	113.7			30	%
Gross profit as a percent of total revenue	64		%		68		%		66		%

We sell our G4 PLATINUM, G5 Mobile and G6 durable CGM systems and disposable sensors through a direct sales force in the United States, Canada and some countries in Europe, and through distribution arrangements in the United States, Canada, Australia, New Zealand and some countries in Europe, Asia, Latin America, the Middle East and Africa. Most of our distributors stock our products and fulfill orders for our products from their inventory.

We expect that revenues we generate from the sales of our products will fluctuate from quarter to quarter. We typically experience seasonality, with lower sales in the first quarter of each year compared to the immediately preceding fourth quarter. This seasonal sales pattern relates to U.S. annual insurance deductible resets and unfunded flexible spending accounts.

Cost of sales includes direct labor and materials costs related to each product sold or produced, including assembly, test labor and scrap, as well as factory overhead supporting our manufacturing operations. Factory overhead includes facilities, material procurement and control, manufacturing engineering, quality assurance, supervision and management. These costs are primarily salary, fringe benefits, share-based compensation, facility expense, supplies and purchased services. A portion of our costs are currently fixed due to our moderate level of production volumes compared to our potential capacity. All of our manufacturing costs are included in cost of sales.

2018 Compared to 2017

Total revenue increased $313.1 million or 44% for the twelve months ended December 31, 2018 compared to the twelve months ended December 31, 2017. The 2018 revenue increase was primarily driven by increased sales volume of our disposable sensors and durable systems due to the continued growth of our installed base of customers, both in the United States and outside the United States. Disposable sensor and other revenue comprised approximately 75% of total revenue and durable systems revenue comprised approximately 25% of total revenue for the twelve months ended December 31, 2018. Disposable sensor and other revenue comprised approximately 70% of total revenue and durable systems revenue comprised approximately 30% of total revenue for the twelve months ended December 31, 2017. Total distributor revenue for the twelve months ended December 31, 2018 was approximately $652.9 million or 63% of our total revenue, compared to $538.0 million or 75% of our total revenue for the same period in 2017.

Cost of sales increased $141.3 million or 62% for the twelve months ended December 31, 2018 compared to the twelve months ended December 31, 2017 primarily due to increased sales volume. The gross profit of $663.9 million or 64% of total revenue for the twelve months ended December 31, 2018 increased $171.8 million compared to $492.1 million or 68% of total revenue for the same period in 2017. The 2018 increase in gross profit dollars was driven primarily by increased revenue and decreased warranty costs, partially offset by a $7.3 million excess and obsolete inventory charge that was related to the approval and launch of our G6 system and the continuous improvement and innovation of our products, as well as royalty-related cost of sales charges. The 2018 decrease in gross margin percentage is a function of channel strategy and product mix through our new product launches and international expansion.

2017 Compared to 2016

Total revenue increased $145.2 million or 25% for the twelve months ended December 31, 2017 compared to the twelve months ended December 31, 2016. The 2017 revenue increase was primarily driven by increased sales volume of our disposable sensors due to the continued growth of our installed base of customers using our durable systems and also by increased sales volume of our durable systems to both new and existing customers. Revenue attributable to our disposable sensors and durable systems was approximately 70% and 30%, respectively, of total revenue for each of the twelve months ended December 31, 2017 and 2016. Revenue from products shipped to our distributors for the twelve months ended December 31, 2017 was approximately $538.0 million or 75% of our total revenue compared to $411.8 million or 72% of our total revenue for the same period in 2016.

Cost of sales increased $31.5 million or 16% for the twelve months ended December 31, 2017 compared to the twelve months ended December 31, 2016 primarily due to increased sales volume. The gross profit of $492.1 million or 68% of total revenue for the twelve months ended December 31, 2017 increased $113.7 million compared to $378.4 million or 66% of total revenue for the same period in 2016. The increases in gross profit dollars and gross margin percentage were driven primarily by increased revenue and decreased warranty costs. Warranty costs were lower in 2017 than in 2016 primarily due to the February 2016 customer notification regarding the audible alarms and alerts associated with our receivers, which was classified as a voluntary Class 1 recall by the FDA and was closed by the FDA in August 2017.

Operating Expenses

	Twelve Months Ended December 31,												2018 - 2017							2017 - 2016
(Dollars in millions)	2018				2017				2016				$ Change				% Change			$ Change				% Change
Research and development	$	199.7			$	185.4			$	156.1			$	14.3			8	%		$	29.3			19	%
as a % of total revenue	19		%		26		%		27		%
Collaborative research and development fee	217.7				—				—				217.7				NM			—				—	%
as a % of total revenue	21		%		—		%		—		%
Selling, general and administrative	432.8				349.2				286.2				83.6				24	%		63.0				22	%
as a % of total revenue	42		%		48		%		50		%
Total operating expenses	$	850.2			$	534.6			$	442.3			$	315.6			59	%		$	92.3			21	%
as a % of total revenue	82		%		74		%		77		%

NM = Not Meaningful

Our research and development expenses primarily consist of engineering and research expenses related to our continuous glucose monitoring technology, clinical trials, regulatory expenses, quality assurance programs, materials and products for

clinical trials. Research and development expenses are primarily related to employee compensation, including salary, fringe benefits, share-based compensation, and temporary employee expenses. We also incur significant expenses to operate our clinical trials including clinical site reimbursement, clinical trial product and associated travel expenses. Our research and development expenses also include fees for design services, contractors and development materials.

Our selling, general and administrative expenses primarily consist of salary, fringe benefits and share-based compensation for our executive, financial, sales, marketing, information technology and administrative functions. Other significant expenses include commissions, marketing and advertising, IT software license costs, insurance, professional fees for our outside legal counsel and independent auditors, litigation expenses, patent application expenses and consulting expenses.

2018 Compared to 2017

Research and Development Expense. Research and development expense increased $14.3 million or 8% for the twelve months ended December 31, 2018 compared to the same period of 2017. The increase was primarily due to $15.4 million in additional salaries, bonus and payroll-related costs, $4.6 million in additional facilities costs, and $2.9 million in additional software license costs, partially offset by $4.6 million in lower stock compensation costs, $4.0 million in lower expensed equipment costs, and a $2.5 million reduction in supplies costs.

Collaborative Research and Development Fee. We and Verily Life Sciences LLC (an Alphabet Company) (“Verily”) have been jointly developing certain next-generation CGM products since August 2015. In November 2018, we entered into an amended and restated collaboration and license agreement with Verily. Under the terms of that agreement, we made an initial payment of $250.0 million through the issuance of 1,840,943 shares of our common stock. We recorded a $217.7 million collaborative research and development charge in our statement of operations during 2018 relating to the issuance of this common stock. See Note 2 to the financial statements in Part II, Item 8 of this Annual Report for more information about this collaboration agreement.

Selling, General and Administrative Expense. Selling, general and administrative expense increased $83.6 million or 24% for the twelve months ended December 31, 2018 compared to the same period of 2017. The increase was primarily due to higher sales-related costs that were driven by increased headcount and marketing costs to support revenue growth and the continued commercialization of our products in both the United States and Europe. Significant elements of the increase in selling, general, and administrative expenses included $19.9 million in additional salaries, bonus and payroll-related costs, $12.3 million in additional consulting fees, $9.2 million in additional incentive compensation paid to our sales personnel, $8.6 million in additional temporary labor costs, $8.2 million in additional marketing costs, $5.4 million in additional legal fees, and $4.4 million in additional software license costs.

2017 Compared to 2016

Research and Development Expense. Research and development expense increased $29.3 million or 19% for the twelve months ended December 31, 2017 compared to the same period of 2016. The increase was primarily due to $18.3 million in additional salaries, bonus and payroll-related costs, $8.4 million in additional expensed equipment, and $2.4 million of additional clinical trial costs related to development of our future products.

Selling, General and Administrative Expense. Selling, general and administrative expense increased $63.0 million or 22% for the twelve months ended December 31, 2017 compared to the same period of 2016. The increase was primarily due to higher headcount-related selling, marketing and customer support costs to support revenue growth and the continued commercialization of our products. Significant elements of the increase in selling, general, and administrative expenses included $37.8 million in additional salaries, bonus, and payroll-related costs, $10.6 million in additional marketing costs, and $4.4 million in additional software license costs.

Non-Operating Income and Expenses

Interest Expense

Interest expense is $22.7 million for the twelve months ended December 31, 2018 compared to $12.8 million for the same period of 2017 and is related to our 2022 Notes, 2023 Notes and Revolving Credit Agreement. The 2018 increase is primarily due to an additional $6.9 million of interest expense for the 2022 Notes, which were issued in May and June 2017, and $3.3 million of interest expense for the 2023 Notes, which were issued in November 2018.

Interest expense is $12.8 million for the twelve months ended December 31, 2017 compared to $0.7 million for the same period of 2016 and is related to our 2022 Notes and Revolving Credit Agreement. The 2017 increase is primarily due to an additional $11.1 million of interest expense for the 2022 Notes.

Income from Equity Investments

Income from equity investments of $80.1 million for the twelve months ended December 31, 2018 consists solely of realized gains of $44.1 million and unrealized gains of $36.0 million on our equity investment in Tandem Diabetes Care, Inc.

Interest and Other Income (Expense), Net

Interest income is $10.5 million, $3.3 million and $0.4 million for the twelve months ended December 31, 2018, 2017 and 2016, respectively, and is related to our marketable debt securities portfolio. Average interest rates and average invested balances both increased during 2018 compared to 2017 and during 2017 compared to 2016.

Other income (expense) for the twelve months ended December 31, 2018, 2017 and 2016 consists primarily of foreign currency transaction gains and losses due to the effects of foreign currency fluctuations.

Income Tax Expense

We recorded pre-tax losses in the each of the twelve months ended December 31, 2018, 2017 and 2016. The nominal income tax expense we recorded for 2018 is primarily attributable to state and foreign income tax expense, partially offset by the release of a valuation allowance related to acquired intangible assets for which we have no tax basis. The nominal income tax expense we recorded for 2017 and 2016 is primarily due to withholding and other income tax expenses in profitable jurisdictions.

Liquidity and Capital Resources

Overview, Capital Resources, and Capital Requirements

Our principal sources of liquidity are our existing cash, cash equivalents and marketable securities, cash generated from operations, proceeds from our convertible notes issuances, and access to our revolving line of credit. Our primary uses of cash have been for research and development programs, selling and marketing activities, capital expenditures, acquisitions of businesses, and debt service costs.

We expect that cash provided by our operations may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, working capital requirements and capital deployment decisions. We have historically invested our cash primarily in U.S. dollar-denominated, investment grade, highly liquid obligations of U.S. government-sponsored enterprises, commercial paper, corporate debt, and money market funds. Certain of these investments are subject to general credit, liquidity and other market risks. The general condition of the financial markets and the economy may increase those risks and may affect the value and liquidity of investments and restrict our ability to access the capital markets.

Our future capital requirements will depend on many factors, including but not limited to:

•	the revenue generated by sales of our approved products and other future products;

•	the expenses we incur in manufacturing, developing, selling and marketing our products;

•	the quality levels of our products and services;

•	the third-party reimbursement of our products for our customers;

•	our ability to efficiently scale our operations to meet demand for our current and any future products;

•	the costs, timing and risks of delays of additional regulatory approvals;

•	the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

•	the rate of progress and cost of our clinical trials and other development activities;

•	the success of our research and development efforts;

•	the emergence of competing or complementary technological developments;

•	the terms and timing of any collaborative, licensing and other arrangements that we may establish;

•	the acquisition of businesses, products and technologies and our ability to integrate and manage any acquired businesses, products and technologies; and

•	the evolution of the international expansion of our business.

We expect that existing cash and cash flows from our future operations will generally be sufficient to fund our ongoing core business. As current borrowing sources become due, we may be required to access the capital markets for additional funding. As we assess inorganic growth strategies, we may need to supplement our internally generated cash flow with outside

sources. In the event that we are required to access the debt market, we believe that we will be able to secure reasonable borrowing rates. As part of our liquidity strategy, we will continue to monitor our current level of earnings and cash flow generation as well as our ability to access the market in light of those earning levels.

A substantial portion of our operations are located in the United States, and the majority of our sales since inception have been made in U.S. dollars. Accordingly, our assessment is that we have no material net exposure to foreign currency exchange rate fluctuations at this time. However, as our business in markets outside of the United States continues to increase, we will be exposed to foreign currency exchange risk related to our foreign operations. Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies, primarily the British Pound, the Euro, and the Canadian Dollar, could adversely affect our financial results, including our revenues, revenue growth rates, gross margins, income and losses as well as assets and liabilities. We currently engage in limited hedging transactions to reduce foreign currency risks on certain intercompany balances. We will continue to monitor and manage our financial exposures due to exchange rate fluctuations as an integral part of our overall risk management program. As of December 31, 2018, the cash balance held by our foreign subsidiaries with currencies other than the U.S. dollar was approximately $18.0 million. We intend to reinvest a substantial portion of our foreign earnings in those businesses, and we currently do not anticipate that we will need funds generated by foreign operations to fund our domestic operations.

As of December 31, 2018, our cash, cash equivalents and marketable securities totaled $1.386 billion, an increase of $837.0 million from December 31, 2017 due to the factors described in “Cash Flows” below. We believe that our cash, cash equivalents, and marketable securities balances, projected cash contributions from our commercial operations, and our $200.0 million revolving line of credit, of which $195.6 million remains available, will be sufficient to meet our anticipated seasonal working capital needs, capital expenditure requirements, contractual obligations, commitments, debt service requirements, and other liquidity requirements associated with our operations for at least the next 12 months.

Revolving Credit Agreement

In December 2018, we entered into an amended and restated five-year $200.0 million revolving Credit Agreement, including a sub-facility of up to $10.0 million for letters of credit. Subject to customary conditions and the approval of any lender whose commitment would be increased, we have the option to increase the maximum principal amount available under the Credit Agreement by up to an additional $300.0 million, resulting in a maximum available principal amount of $500.0 million. However, at this time none of the lenders have committed to provide any such increase in their commitments. Revolving loans under the Credit Agreement will be available for general corporate purposes, including working capital and capital expenditures. In March 2017, we drew $75.0 million on the Credit Agreement under a six-month term and we repaid the entire principal balance in May 2017. As of December 31, 2018, we had no outstanding borrowings, $4.4 million in outstanding letters of credit, and a total available balance of $195.6 million under the Credit Agreement. We monitor counterparty risk associated with the institutional lenders that are providing the credit facility. We currently believe that the credit facility will be available to us should we choose to borrow under it.

See Note 5 to the financial statements in Part II, Item 8 of this Annual Report for more information about the terms of the Credit Agreement.

Senior Convertible Notes

In June 2017, we completed an offering of $400.0 million aggregate principal amount of unsecured senior convertible notes with a stated interest rate of 0.75% and a maturity date of May 15, 2022 (the 2022 Notes). Holders may elect to convert the 2022 Notes any time after February 15, 2022 for shares of our common stock. The 2022 Notes may be settled in cash, stock, or a combination thereof, solely at our discretion. Interest on the 2022 Notes began accruing upon issuance and payable semi-annually on May 15 and November 15 of each year.

In November 2018, we completed an offering of $850.0 million aggregate principal amount of unsecured senior convertible notes with a stated interest rate of 0.75% and a maturity date of December 1, 2023 (the 2023 Notes). Holders may elect to convert the 2023 Notes any time after September 1, 2023 for shares of our common stock. The 2023 Notes may be settled in cash, stock, or a combination thereof, solely at out discretion. Interest on the 2023 Notes began accruing upon issuance and payable semi-annually on June 1 and December 1 of each year.

We used a portion of the net proceeds from the offering of the 2022 Notes to repay $75.0 million of borrowings under our existing credit facility in 2017. We used a portion of the net proceeds from the offering of the 2023 Notes to repurchase 0.8 million shares of our common stock for $100.0 million in 2018. The remainder of the net proceeds from the 2022 Notes and the 2023 Notes offerings are available for general corporate purposes and capital expenditures, including working capital needs. We may also use the net proceeds to expand our current business through in-licensing or acquisitions of, or investments in, other businesses, products or technologies; however, we do not have any significant commitments with respect to any such acquisitions or investments at this time.

2023 Note Hedge

In connection with the offering of the 2023 Notes, in November 2018 we entered into convertible note hedge transactions (the 2023 Note Hedge) with two of the initial purchasers of the 2023 Notes (the 2023 Counterparties) entitling us to purchase up to 5.2 million shares of our common stock at an initial price of $164.29 per share, each of which is subject to adjustment. The cost of the 2023 Note Hedge was $218.9 million and it will expire on December 1, 2023. The 2023 Note Hedge is expected to reduce the potential equity dilution upon any conversion of the 2023 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2023 Notes if the daily volume-weighted average price per share of our common stock exceeds the strike price of the 2023 Note Hedge. The strike price of the 2023 Note Hedge initially corresponds to the conversion price of the 2023 Notes and is subject to certain adjustments under the terms of the 2023 Note Hedge.

2023 Warrants

In November 2018, we also sold warrants (the 2023 Warrants) to the 2023 Counterparties to acquire up to 5.2 million shares of our common stock for cash proceeds of $183.8 million. The 2023 Warrants require net share settlement and a pro-rated number of warrants will expire on each of the 60 scheduled trading days starting on March 1, 2024.

See Note 5 to the financial statements in Part II, Item 8 of this Annual Report for more information about the 2022 Notes and the 2023 Notes, the 2023 Note Hedge, and the 2023 Warrants.

Cash Flows

The following table sets forth a summary of our cash flows for the periods indicated. See the financial statements in Part II, Item 8 of this Annual Report for complete statements of cash flows for these periods.

	Twelve Months Ended December 31,												Change
(In millions)	2018				2017				2016				2018-2017				2017-2016
Net cash provided by operating activities	$	123.2			$	92.0			$	56.2			$	31.2			$	35.8
Net cash used in investing activities	(139.8		)		(144.4		)		(55.9		)		4.6				(88.5		)
Net cash provided by financing activities	710.4				399.1				8.1				311.3				391.0
Effect of exchange rates on cash, cash equivalents, and restricted cash	1.8				0.3				—				1.5				0.3
Net increase in cash, cash equivalents, and restricted cash	$	695.6			$	347.0			$	8.4			$	348.6			$	338.6

As of December 31, 2018, we had $1.386 billion in cash, cash equivalents and short-term marketable securities, which is an increase of $837.0 million compared to $548.6 million as of December 31, 2017. The primary cash flows during the twelve months ended December 31, 2018, 2017 and 2016 are described below.

Operating Cash Flows

Net cash provided by operating activities during 2018 was comprised of a net loss of $127.1 million and changes in working capital balances of $40.9 million, offset by $291.2 million of net non-cash expenses. Net non-cash expenses were primarily related to a $217.7 million non-cash collaborative research and development fee, share-based compensation, depreciation and amortization, non-cash interest expense for our senior convertible notes, and realized and unrealized gains on our equity investment in Tandem Diabetes Care, Inc.

Net cash provided by operating activities during 2017 was comprised of a net loss of $50.2 million, offset by $139.6 million of net non-cash expenses and $2.6 million of changes in working capital balances. Net non-cash expenses were primarily related to share-based compensation, depreciation and amortization, and non-cash interest expense for our senior convertible notes.

Net cash provided by operating activities during 2016 was comprised of a net loss of $65.6 million and changes in working capital balances of $6.3 million, offset by $128.1 million of net non-cash expenses. Net non-cash expenses were primarily related to share-based compensation and depreciation and amortization.

Investing Cash Flows

Net cash used in investing activities during 2018 was primarily comprised of $61.4 million for net purchases of marketable securities and $67.1 million for capital expenditures.

Net cash used in investing activities during 2017 was primarily comprised of $78.4 million for net purchases of marketable securities and $66.0 million for capital expenditures.

Net cash used in investing activities during 2016 was primarily comprised of $55.7 million for capital expenditures.

Financing Cash Flows

Net cash provided by financing activities during 2018 was primarily comprised of $836.6 million in net proceeds from the issuance of our 2023 Notes and $183.8 million in proceeds from the sale of the 2023 Warrants, partially offset by $218.9 million for the purchase of the 2023 Note Hedge and $100.0 million for the purchase of treasury shares.

Net cash provided by financing activities during 2017 was primarily comprised of $389.0 million in net proceeds from the issuance of our 2022 Notes.

Net cash provided by financing activities during 2016 was primarily comprised of $10.4 million from the issuance of common stock under our employee stock plans.

Contractual Obligations

We are party to various leasing arrangements, primarily for office, manufacturing and warehouse space that expire at various times through March 2028.

The following table summarizes our outstanding contractual obligations as of December 31, 2018 and the effect those obligations are expected to have on our liquidity and cash flows in future periods:

(In millions)		Total(3)				Less than 1 Year(3)				1-3 Years				3-5 Years(1)				More than 5 Years
Senior convertible notes (1)		$	1,292.4			$	9.4			$	18.8			$	1,264.2			$	—
Lease obligations (2)		68.8				14.4				34.2				11.3				8.9
Total		$	1,361.2			$	23.8			$	53.0			$	1,275.5			$	8.9

(1)

We issued senior convertible notes in May and June 2017 that are due in May 2022 and we issued senior convertible notes in November 2018 that are due in December 2023. The obligations presented above include both principal and interest for these notes. Although these notes mature in 2022 and 2023, they may be converted into cash and shares of our common stock prior to maturity if certain conditions are met. Any conversion prior to maturity can result in repayment of the principal amounts sooner than the scheduled repayment as indicated in the table. See Note 5 to the financial statements in Part II, Item 8 of this Annual Report for further discussion of the terms of our senior convertible notes.

(2)	Includes a financing lease obligation related to our Mesa, Arizona facility. See Note 6 to the financial statements in Part II, Item 8 of this Annual Report for more information.

(3)

We are also party to various purchase arrangements related to components used in manufacturing and research and development activities. As of December 31, 2018, we had firm purchase commitments with vendors totaling approximately $204.0 million, most of which are due within one year. Firm purchase commitments represent agreements to purchase products and services that are enforceable, legally binding and specify terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the payments.

Off-Balance Sheet Arrangements

As of December 31, 2018, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Recent Accounting Guidance

For a description of recently issued accounting guidance that is applicable to our financial statements, see Note 1 to the financial statements in Part II, Item 8 of this Annual Report.