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Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2023
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-33462
INSULET CORPORATION
(Exact name of Registrant as specified in its charter)
| Delaware | 04-3523891 | ||||||||||||||||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||||||||||||||
| 100 Nagog Park | Acton | Massachusetts | 01720 | ||||||||||||||
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (978) 600-7000
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, or a smaller reporting 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 ☒
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 | PODD | The NASDAQ Stock Market, LLC |
As of August 1, 2023, the registrant had 69,821,118 shares of common stock outstanding.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
| Item 1. | Condensed Consolidated Financial Statements (Unaudited) |
INSULET CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| (in millions, except share and per share data) | June 30, 2023 | December 31, 2022 | |||||||||
| ASSETS | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 660.1 | $ | 674.7 | |||||||
| Accounts receivable trade, less allowance for credit losses of $3.1 and $2.5 | 167.6 | 140.9 | |||||||||
| Accounts receivable trade, net — related party | 82.9 | 64.7 | |||||||||
| Inventories | 411.3 | 346.8 | |||||||||
| Prepaid expenses and other current assets | 99.6 | 86.9 | |||||||||
| Total current assets | 1,421.5 | 1,314.0 | |||||||||
| Property, plant and equipment, net | 601.5 | 599.9 | |||||||||
| Other intangible assets, net | 99.5 | 75.5 | |||||||||
| Goodwill | 51.7 | 51.7 | |||||||||
| Other assets | 211.6 | 210.0 | |||||||||
| Total assets | $ | 2,385.8 | $ | 2,251.1 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable | $ | 107.5 | $ | 30.8 | |||||||
| Accrued expenses and other current liabilities | 282.8 | 301.0 | |||||||||
| Accrued expenses and other current liabilities — related party | 5.5 | 5.4 | |||||||||
| Current portion of long-term debt | 29.2 | 27.5 | |||||||||
| Total current liabilities | 425.0 | 364.7 | |||||||||
| Long-term debt, net | 1,368.6 | 1,374.3 | |||||||||
| Other liabilities | 38.3 | 35.7 | |||||||||
| Total liabilities | 1,831.9 | 1,774.7 | |||||||||
| Commitments and contingencies (Note 11) | |||||||||||
| Stockholders’ Equity | |||||||||||
| Preferred stock, $.001 par value, 5,000,000 authorized; none issued and outstanding | — | — | |||||||||
| Common stock, $.001 par value, 100,000,000 authorized; 69,804,489 and 69,511,286 issued and outstanding | 0.1 | 0.1 | |||||||||
| Additional paid-in capital | 1,070.7 | 1,040.6 | |||||||||
| Accumulated deficit | (533.2) | (584.3) | |||||||||
| Accumulated other comprehensive income | 16.3 | 20.0 | |||||||||
| Total stockholders’ equity | 553.9 | 476.4 | |||||||||
| Total liabilities and stockholders’ equity | $ | 2,385.8 | $ | 2,251.1 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
INSULET CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in millions, except share and per share data) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Revenue | $ | 287.3 | $ | 243.9 | $ | 548.6 | $ | 490.9 | |||||||||||||||
| Revenue from related party | 109.2 | 55.5 | 206.0 | 103.9 | |||||||||||||||||||
| Total revenue | 396.5 | 299.4 | 754.6 | 594.8 | |||||||||||||||||||
| Cost of revenue | 131.6 | 109.1 | 249.2 | 194.8 | |||||||||||||||||||
| Gross profit | 264.9 | 190.3 | 505.4 | 400.0 | |||||||||||||||||||
| Research and development expenses | 55.1 | 42.6 | 105.2 | 85.7 | |||||||||||||||||||
| Selling, general and administrative expenses | 178.7 | 174.4 | 341.4 | 303.1 | |||||||||||||||||||
| Operating income (loss) | 31.1 | (26.7) | 58.8 | 11.2 | |||||||||||||||||||
| Interest expense, net | (2.4) | (8.3) | (5.3) | (17.2) | |||||||||||||||||||
| Other expense, net | (0.2) | (1.1) | (0.4) | (0.8) | |||||||||||||||||||
| Income (loss) before income taxes | 28.5 | (36.1) | 53.1 | (6.8) | |||||||||||||||||||
| Income tax (expense) benefit | (1.2) | 1.1 | (2.0) | (0.4) | |||||||||||||||||||
| Net income (loss) | $ | 27.3 | $ | (35.0) | $ | 51.1 | $ | (7.2) | |||||||||||||||
| Net income (loss) per share: | |||||||||||||||||||||||
| Basic | $ | 0.39 | $ | (0.50) | $ | 0.73 | $ | (0.10) | |||||||||||||||
| Diluted | $ | 0.39 | $ | (0.50) | $ | 0.73 | $ | (0.10) | |||||||||||||||
| Weighted-average number of common shares outstanding (in thousands): | |||||||||||||||||||||||
| Basic | 69,741 | 69,356 | 69,662 | 69,305 | |||||||||||||||||||
| Diluted | 70,142 | 69,356 | 70,119 | 69,305 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
INSULET CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net income (loss) | $ | 27.3 | $ | (35.0) | $ | 51.1 | $ | (7.2) | |||||||||||||||
| Other comprehensive (loss) income, net of tax: | |||||||||||||||||||||||
| Foreign currency translation adjustment | (2.4) | (9.6) | (0.7) | (13.3) | |||||||||||||||||||
| Unrealized gain (loss) on cash flow hedges | 2.8 | 4.6 | (3.0) | 22.7 | |||||||||||||||||||
| Total other comprehensive income (loss), net of tax | 0.4 | (5.0) | (3.7) | 9.4 | |||||||||||||||||||
| Comprehensive income (loss) | $ | 27.7 | $ | (40.0) | $ | 47.4 | $ | 2.2 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
INSULET CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
Three Months Ended June 30, 2023
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||
| (dollars in millions) | Shares (in thousands) | Amount | |||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | 69,694 | $ | 0.1 | $ | 1,047.3 | $ | (560.5) | $ | 15.9 | $ | 502.8 | ||||||||||||||||||||||||
| Exercise of options to purchase common stock | 73 | — | 6.3 | — | — | 6.3 | |||||||||||||||||||||||||||||
| Issuance of shares for employee stock purchase plan | 23 | — | 5.5 | — | — | 5.5 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 13.1 | — | — | 13.1 | |||||||||||||||||||||||||||||
| Restricted stock units vested, net of shares withheld for taxes | 14 | — | (1.5) | — | — | (1.5) | |||||||||||||||||||||||||||||
| Net income | — | — | — | 27.3 | — | 27.3 | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 0.4 | 0.4 | |||||||||||||||||||||||||||||
| Balance at June 30, 2023 | 69,804 | $ | 0.1 | $ | 1,070.7 | $ | (533.2) | $ | 16.3 | $ | 553.9 |
Three Months Ended June 30, 2022
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||
| (dollars in millions) | Shares (in thousands) | Amount | |||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | 69,320 | $ | 0.1 | $ | 995.5 | $ | (561.1) | $ | 12.2 | $ | 446.7 | ||||||||||||||||||||||||
| Exercise of options to purchase common stock | 24 | — | 0.8 | — | — | 0.8 | |||||||||||||||||||||||||||||
| Issuance of shares for employee stock purchase plan | 27 | — | 4.9 | — | — | 4.9 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 11.2 | — | — | 11.2 | |||||||||||||||||||||||||||||
| Restricted stock units vested, net of shares withheld for taxes | 15 | — | (1.2) | — | — | (1.2) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (35.0) | — | (35.0) | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (5.0) | (5.0) | |||||||||||||||||||||||||||||
| Balance at June 30, 2022 | 69,386 | $ | 0.1 | $ | 1,011.2 | $ | (596.1) | $ | 7.2 | $ | 422.4 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Six Months Ended June 30, 2023
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||
| (dollars in millions) | Shares (in thousands) | Amount | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | 69,511 | $ | 0.1 | $ | 1,040.6 | $ | (584.3) | $ | 20.0 | $ | 476.4 | ||||||||||||||||||||||||
| Exercise of options to purchase common stock | 183 | — | 12.3 | — | — | 12.3 | |||||||||||||||||||||||||||||
| Issuance of shares for employee stock purchase plan | 23 | — | 5.5 | — | — | 5.5 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 25.2 | — | — | 25.2 | |||||||||||||||||||||||||||||
| Restricted stock units vested, net of shares withheld for taxes | 87 | — | (12.9) | — | — | (12.9) | |||||||||||||||||||||||||||||
| Net income | — | — | — | 51.1 | — | 51.1 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (3.7) | (3.7) | |||||||||||||||||||||||||||||
| Balance at June 30, 2023 | 69,804 | $ | 0.1 | $ | 1,070.7 | $ | (533.2) | $ | 16.3 | $ | 553.9 |
Six Months Ended June 30, 2022
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive (Loss) Income | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||
| (dollars in millions) | Shares (in thousands) | Amount | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 69,179 | $ | 0.1 | $ | 1,207.9 | $ | (649.5) | $ | (2.2) | $ | 556.3 | ||||||||||||||||||||||||
| Adoption of ASU 2020-06 (1) | — | — | (207.7) | 60.6 | (147.1) | ||||||||||||||||||||||||||||||
| Exercise of options to purchase common stock | 52 | — | 1.9 | — | — | 1.9 | |||||||||||||||||||||||||||||
| Issuance of shares for employee stock purchase plan | 27 | — | 4.9 | — | — | 4.9 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 20.7 | — | — | 20.7 | |||||||||||||||||||||||||||||
| Restricted stock units vested, net of shares withheld for taxes | 128 | — | (16.5) | — | — | (16.5) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (7.2) | — | (7.2) | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 9.4 | 9.4 | |||||||||||||||||||||||||||||
| Balance at June 30, 2022 | 69,386 | $ | 0.1 | $ | 1,011.2 | $ | (596.1) | $ | 7.2 | $ | 422.4 |
(1) The Company recorded a cumulative effect adjustment to additional paid-in capital and retained earnings to reflect the adoption of Accounting Standards Update 2020-06, Debt – Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. Refer to Note 2 of Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2022.
The accompanying notes are an integral part of these condensed consolidated financial statements.
INSULET CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Six Months Ended June 30, | |||||||||||
| (in millions) | 2023 | 2022 | |||||||||
| Cash flows from operating activities | |||||||||||
| Net income (loss) | $ | 51.1 | $ | (7.2) | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 35.3 | 31.1 | |||||||||
| Stock-based compensation expense | 25.2 | 20.7 | |||||||||
| Non-cash interest expense | 3.0 | 2.8 | |||||||||
| Provision for credit losses | 2.0 | 1.9 | |||||||||
| Other | 1.0 | 1.0 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (27.1) | (24.7) | |||||||||
| Accounts receivable — related party | (18.2) | (26.7) | |||||||||
| Inventories | (62.7) | (24.0) | |||||||||
| Prepaid expenses and other assets | (19.8) | (23.3) | |||||||||
| Accounts payable | 74.5 | 20.1 | |||||||||
| Accrued expenses and other liabilities | (19.7) | 38.2 | |||||||||
| Accrued expenses and other liabilities — related party | (0.1) | 1.7 | |||||||||
| Net cash provided by operating activities | 44.5 | 11.6 | |||||||||
| Cash flows from investing activities | |||||||||||
| Capital expenditures | (26.2) | (27.4) | |||||||||
| Investments in developed software | (3.9) | (7.6) | |||||||||
| Acquisition of intangible assets | (25.1) | — | |||||||||
| Acquisition of a business | (3.0) | (26.0) | |||||||||
| Cash paid for investments | (7.0) | (7.8) | |||||||||
| Net cash used in investing activities | (65.2) | (68.8) | |||||||||
| Cash flows from financing activities | |||||||||||
| Repayment of equipment financings | (9.9) | (8.6) | |||||||||
| Repayment of term loan | (2.5) | (2.5) | |||||||||
| Repayment of mortgage | (1.1) | (1.1) | |||||||||
| Proceeds from exercise of stock options | 12.3 | 1.9 | |||||||||
| Proceeds from issuance of common stock under employee stock purchase plan | 5.5 | 4.9 | |||||||||
| Payment of withholding taxes in connection with vesting of restricted stock units | (12.9) | (16.5) | |||||||||
| Other | (0.3) | — | |||||||||
| Net cash used in financing activities | (8.9) | (21.9) | |||||||||
| Effect of exchange rate changes on cash | — | (3.5) | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | (29.6) | (82.6) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period (Note 3) | 689.7 | 806.4 | |||||||||
| Cash, cash equivalents and restricted cash at end of period (Note 3**)** | $ | 660.1 | $ | 723.8 | |||||||
| Supplemental noncash information: | |||||||||||
| Purchases of property and equipment included in accounts payable and accrued expenses | $ | 5.6 | $ | 4.9 | |||||||
| Purchases of property, plant and equipment included in long-term debt | $ | 7.0 | $ | — | |||||||
| Purchases of developed software included in accounts payable and accrued expenses | $ | 0.4 | $ | 2.4 | |||||||
| Lease liabilities arising from obtaining right-of-use assets | $ | 5.0 | $ | 12.0 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
INSULET CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements reflect the consolidated operations of Insulet Corporation and its subsidiaries (“Insulet” or the “Company”). The unaudited consolidated financial statements have been prepared in United States dollars, in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of the consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results may differ from those estimates. In management’s opinion, the unaudited consolidated financial statements contain all normal recurring adjustments necessary for a fair statement of the interim results reported. Operating results for the six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2023, or for any other subsequent interim period.
The year-end balance sheet data was derived from audited consolidated financial statements. These unaudited consolidated financial statements do not include all of the annual disclosures required by GAAP; accordingly, they should be read in conjunction with the Company’s audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Related Party Transactions
The Company has a distribution agreement with a related party that contains terms consistent with those prevailing at arm’s length. The spouse of one of the members of the Company’s Board of Directors is an executive officer of the distributor.
Investments
In February and June 2023, the Company made strategic investments in two companies in the amount of $2.0 million and $5.0 million, respectively. As of June 30, 2023 and December 31, 2022, the total carrying value of the Company’s investments primarily recorded at cost less impairment was $15.7 million and $8.7 million, respectively.
Shipping and Handling Costs
Shipping and handling costs included in selling, general and administrative expenses were $3.5 million and $3.1 million for the three months ended June 30, 2023 and 2022, respectively, and were $5.8 million and $6.2 million for the six months ended June 30, 2023 and 2022, respectively.
Fair Value Measurements
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. To measure fair value of assets and liabilities, the Company uses the following fair value hierarchy based on three levels of inputs:
Level 1—observable inputs, such as quoted prices in active markets for identical assets or liabilities;
Level 2—significant other observable inputs that are observable either directly or indirectly; and
Level 3—significant unobservable inputs for which there are little or no market data, which require the Company to develop its own assumptions.
Certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities are carried at cost, which approximates their fair value because of their short-term maturity. See Notes 3 and 9 for financial assets and liabilities held at carrying amount on the consolidated balance sheet and Note 10 for derivative instruments measured at fair value on a recurring basis.
Note 2. Revenue and Contract Acquisition Costs
The following table summarizes the Company’s disaggregated revenue:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||
| U.S. Omnipod | $ | 276.8 | $ | 196.4 | $ | 535.8 | $ | 370.5 | |||||||||||||||||||||||||||
| International Omnipod | 103.7 | 89.4 | 202.3 | 184.8 | |||||||||||||||||||||||||||||||
| Total Omnipod | 380.5 | 285.8 | 738.1 | 555.3 | |||||||||||||||||||||||||||||||
| Drug Delivery | 16.0 | 13.6 | 16.5 | 39.5 | |||||||||||||||||||||||||||||||
| Total revenue | $ | 396.5 | $ | 299.4 | $ | 754.6 | $ | 594.8 |
The percentages of total revenue for customers that represent 10% or more of total revenue were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Distributor A | 28% | 19% | 28% | 18% | |||||||||||||||||||
| Distributor B | 17% | 16% | 16% | 14% | |||||||||||||||||||
| Distributor D | 22% | 16% | 22% | 13% |
- Represents less than 10% of revenue for the period.
Deferred revenue related to unsatisfied performance obligations was included in the following consolidated balance sheet accounts in the amounts shown:
| (in millions) | June 30, 2023 | December 31, 2022 | |||||||||
| Accrued expenses and other current liabilities | $ | 19.4 | $ | 16.1 | |||||||
| Other liabilities | 1.8 | 1.6 | |||||||||
| Total deferred revenue | $ | 21.2 | $ | 17.7 |
Revenue recognized from amounts included in deferred revenue at the beginning of each respective period was as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Deferred revenue recognized | $ | 2.3 | $ | 0.3 | $ | 12.2 | $ | 1.6 |
Contract acquisition costs, representing capitalized commission costs related to new customers, net of amortization, were included in the following consolidated balance sheet captions in the amounts shown:
| (in millions) | June 30, 2023 | December 31, 2022 | |||||||||
| Prepaid expenses and other current assets | $ | 16.3 | $ | 15.2 | |||||||
| Other assets | 33.1 | 31.3 | |||||||||
| Total capitalized contract acquisition costs, net | $ | 49.4 | $ | 46.5 |
The Company recognized $4.0 million and $3.6 million of amortization of capitalized contract acquisition costs during the three months ended June 30, 2023 and 2022, respectively, and recognized $8.0 million and $7.0 million of amortization of capitalized contract acquisition costs during the six months ended June 30, 2023 and 2022, respectively.
Note 3. Cash and Cash Equivalents
The following table provides a summary of cash and cash equivalents:
| (in millions) | June 30, 2023 | December 31, 2022 | |||||||||||||||
| Cash | $ | 94.5 | $ | 136.1 | |||||||||||||
| Money market mutual funds | 446.9 | 487.3 | |||||||||||||||
| Time deposits | 103.3 | 50.8 | |||||||||||||||
| Restricted cash | 15.4 | 0.5 | |||||||||||||||
| Total cash and cash equivalents | 660.1 | 674.7 | |||||||||||||||
| Restricted cash included in other assets | — | 15.0 | |||||||||||||||
| Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | 660.1 | $ | 689.7 |
All cash and cash equivalents are Level 1 in the fair value hierarchy. Restricted cash is held as a compensating balance against long-term borrowings.
Certain of the Company’s subsidiaries participate in a multi-currency, notional cash pooling arrangement with a third-party bank provider to manage global liquidity requirements. Under this arrangement, cash deposited by participating subsidiaries may be used to offset amounts owed to the bank by other participating subsidiaries to the extent the overall balance in the cash pool is at least zero, providing legal rights of offset. As of June 30, 2023, the Company had a net cash position of approximately $1.1 million, consisting of a gross cash position of approximately $47.1 million less cash borrowings of approximately $46.0 million by participating subsidiaries, which is reflected as cash and cash equivalents in the consolidated balance sheet.
Note 4. Accounts Receivable, Net
At the end of each period, net accounts receivable were comprised of the following:
| (in millions) | June 30, 2023 | December 31, 2022 | |||||||||
| Accounts receivable trade, net | $ | 154.6 | $ | 128.6 | |||||||
| Unbilled receivable | 13.0 | 12.3 | |||||||||
| Accounts receivable, net | $ | 167.6 | $ | 140.9 |
The percentages of total net accounts receivable trade for customers that represent 10% or more of total net accounts receivable trade were as follows:
| June 30, 2023 | December 31, 2022 | ||||||||||
| Distributor A | 37% | 34% | |||||||||
| Distributor B | 13% | 11% | |||||||||
| Distributor D | 26% | 23% |
Note 5. Inventories
At the end of each period, inventories were comprised of the following:
| (in millions) | June 30, 2023 | December 31, 2022 | |||||||||
| Raw materials | $ | 101.7 | $ | 79.1 | |||||||
| Work in process | 101.4 | 84.2 | |||||||||
| Finished goods | 208.2 | 183.5 | |||||||||
| Total inventories | $ | 411.3 | $ | 346.8 |
Amounts charged to the consolidated statements of operations for excess and obsolete inventory were insignificant for both the three months ended June 30, 2023 and 2022, and were $2.4 million and $1.5 million for the six months ended June 30, 2023 and 2022, respectively.
Note 6. Cloud Computing Costs
Capitalized costs to implement cloud computing arrangements at cost and accumulated amortization were as follows:
| (in millions) | June 30, 2023 | December 31, 2022 | |||||||||
| Short-term portion | $ | 22.3 | $ | 18.0 | |||||||
| Long-term portion | 101.7 | 87.1 | |||||||||
| Total capitalized implementation costs | 124.0 | 105.1 | |||||||||
| Less: accumulated amortization | (25.6) | (17.1) | |||||||||
| Capitalized implementation costs, net | $ | 98.4 | $ | 88.0 |
Amortization expense is recognized on a straight-line basis over the expected term of the hosting arrangements, which range from three to ten years. Amortization expense was $5.0 million and $3.7 million for the three months ended June 30, 2023 and 2022, respectively, and was $9.3 million and $5.0 million for the six months ended June 30, 2023 and 2022, respectively.
Note 7. Goodwill and Other Intangible Assets, Net
The carrying amount of goodwill was $51.7 million at both June 30, 2023 and December 31, 2022.
The gross carrying amount, accumulated amortization and net book value of intangible assets at the end of each period were as follows:
| June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| (in millions) | Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | |||||||||||||||||||||||||||||
| Customer relationships | $ | 43.2 | $ | (29.2) | $ | 14.0 | $ | 43.2 | $ | (27.5) | $ | 15.7 | |||||||||||||||||||||||
| Internal-use software | 38.7 | (13.0) | 25.7 | 34.8 | (12.0) | 22.8 | |||||||||||||||||||||||||||||
| Developed technology | 27.4 | (2.0) | 25.4 | 27.4 | (1.0) | 26.4 | |||||||||||||||||||||||||||||
| Patents | 36.2 | (1.8) | 34.4 | 11.0 | (0.4) | 10.6 | |||||||||||||||||||||||||||||
| Total intangible assets | $ | 145.5 | $ | (46.0) | $ | 99.5 | $ | 116.4 | $ | (40.9) | $ | 75.5 |
Amortization expense for intangible assets was $2.7 million and $1.7 million for the three months ended June 30, 2023 and 2022, respectively, and was $5.1 million and $3.5 million for the six months ended June 30, 2023 and 2022, respectively.
In February 2023, the Company paid Bigfoot Biomedical, Inc. $25.1 million, including transaction costs, to acquire patent assets related to pump-based automated insulin delivery technologies. The acquired patent assets have a useful life of 11 years.
Note 8. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities were as follows:
| (in millions) | June 30, 2023 | December 31, 2022 | |||||||||
| Accrued rebates | $ | 87.2 | $ | 69.6 | |||||||
| Employee compensation and related costs | 82.2 | 95.9 | |||||||||
| Professional and consulting services | 34.1 | 27.5 | |||||||||
| Warranty liability - current portion | 17.2 | 57.3 | |||||||||
| Other | 62.1 | 50.7 | |||||||||
| Accrued expenses and other current liabilities | $ | 282.8 | $ | 301.0 |
Product Warranty Costs
The Company provides a four-year warranty on Personal Diabetes Managers (“PDMs”) and Controllers sold in the United States and Europe and a five-year warranty on PDMs sold in Canada and may replace Pods that do not function in accordance with product specifications. The Company estimates its warranty obligation at the time the product is shipped based on historical experience and the estimated cost to service the claims. Cost to service the claims reflects the current product cost, reclaim costs, shipping and handling costs and direct and incremental distribution and customer service support costs. Since the Company continues to introduce new products and versions, the anticipated performance of the product over the warranty period is also considered in estimating warranty reserves. Warranty expense is recorded in cost of revenue in the consolidated statements of operations. Reconciliations of the changes in the Company’s product warranty liability were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Product warranty liability at beginning of period | $ | 39.2 | $ | 6.9 | $ | 62.1 | $ | 6.8 | |||||||||||||||
| Warranty expense | 3.3 | 8.1 | 8.8 | 11.1 | |||||||||||||||||||
| Change in estimate | (0.8) | — | (8.8) | — | |||||||||||||||||||
| Warranty fulfillment | (20.4) | (3.4) | (40.8) | (6.3) | |||||||||||||||||||
| Product warranty liability at the end of period | $ | 21.3 | $ | 11.6 | $ | 21.3 | $ | 11.6 |
During the fourth quarter of 2022, the Company issued two voluntary medical device correction notices (“MDCs”), one for its Omnipod DASH PDM relating to its battery and the other for its Omnipod 5 Controller relating to its charging port and cable. During the six months ended June 30, 2023, the Company revised the estimated liability for these MDCs by $8.8 million. This change in estimate primarily relates to lower shipping costs for replacement DASH PDMs and lower expected distribution costs for Omnipod 5 Controllers. The Company had an estimated liability of $13.2 million and $54.6 million related to the MDCs included in its product warranty liability at June 30, 2023 and December 31, 2022, respectively.
Note 9. Debt
The components of debt consisted of the following:
| (in millions) | June 30, 2023 | December 31, 2022 | |||||||||
| Revolving Credit Facility expires June 2028 | $ | — | $ | — | |||||||
| Equipment Financing due May 2024 | 6.1 | 9.5 | |||||||||
| Equipment Financing due November 2025 | 18.9 | 22.5 | |||||||||
| 5.15% Mortgage due November 2025 | 64.4 | 65.5 | |||||||||
| 0.375% Convertible Senior Notes due September 2026 | 800.0 | 800.0 | |||||||||
| Equipment Financing | 6.9 | — | |||||||||
| Term loan due May 2028 | 490.0 | 492.5 | |||||||||
| Equipment Financing due July 2028 | 31.7 | 34.4 | |||||||||
| Unamortized debt discount | (7.2) | (7.6) | |||||||||
| Debt issuance costs | (13.0) | (15.0) | |||||||||
| Total debt, net | 1,397.8 | 1,401.8 | |||||||||
| Less: current portion | 29.2 | 27.5 | |||||||||
| Total long-term debt, net | $ | 1,368.6 | $ | 1,374.3 |
0.375% Convertible Senior Notes
The Company’s 0.375% Convertible Senior Notes due September 2026 (the “Notes”) have an effective interest rate of 0.76%. The Notes are convertible into the Company’s common stock at an initial conversion rate of 4.4105 shares of common stock per $1,000 principal amount of the notes, which is equivalent to a conversion price of $226.73 per share, subject to adjustment under certain circumstances. The notes will be convertible June 1, 2026 through August 28, 2026 by its holders for any reason. Additionally, on or after September 6, 2023, the Company may redeem for cash all, or any portion of the Notes, if its stock price has been equal to or greater than $294.75 for at least 20 of the prior 30 consecutive trading days including the date which the Company provides notice of redemption.
Additional interest of 0.5% per annum is payable if the Company fails to timely file required documents or reports with the Securities and Exchange Commission (“SEC”). If the Company merges or consolidates with a foreign entity, the Company may be required to
pay additional taxes. The Company determined that the higher interest payments and tax payments required in certain circumstances were embedded derivatives that should be bifurcated and accounted for at fair value. The Company assessed the value of the embedded derivatives at each balance sheet date and determined it had nominal value.
In conjunction with the issuance of the Notes, the Company purchased capped calls on the Company’s common stock with certain counterparties to reduce the potential dilution to its common stock (or, in the event the conversion is settled in cash, to provide a source of cash to settle a portion of its cash payment obligation) in the event that at the time of conversion its stock price exceeds the conversion price under the Notes. The capped calls have an initial strike price of $335.90 per share, which represents a premium of 100% over the last reported sale price of the Company’s common stock of $167.95 per share on the date of the transaction. The capped calls cover 3.5 million shares of common stock.
Equipment Financing
In May 2023, the Company entered into an arrangement under which the Company may obtain up to $24.0 million of financing for manufacturing equipment. The Company is involved in the construction of the manufacturing equipment; accordingly, it is included in property, plant and equipment on the consolidated balance sheet at June 30, 2023. The Company’s obligation reflects payments made to date by the third-party bank to the equipment manufacturer, net of discount and less repayment of principal. The financing obligation will mature 36 months following completion of construction and has an effective interest rate of approximately 9.4%.
Senior Secured Credit Agreement
In June 2023, the Company increased the size of its Revolving Credit Facility by $200.0 million bringing the total to $300.0 million and extended the maturity date of the revolving credit facility to the earlier of June 2028 or 91 days prior to the maturity date of the Company’s term loan if still outstanding. Under the amended credit agreement, outstanding borrowings bear interest at a rate of Secured Overnight Financing Rate plus an applicable margin of 2.625% to 3.25%, based on the Company's net leverage ratio and credit rating.
Fair Value of Debt
The carrying amount and the estimated fair value of the Company’s debt were as follows:
| June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| (in millions) | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value (1) | |||||||||||||||||||
| Term loan due May 2028(1) | $ | 480.6 | $ | 490.0 | $ | 482.1 | $ | 485.1 | |||||||||||||||
| 0.375% Convertible Senior Notes(2) | 790.3 | 1,017.4 | 788.8 | 1,038.7 | |||||||||||||||||||
| Equipment financings(3) | 63.3 | 63.3 | 66.4 | 66.4 | |||||||||||||||||||
| 5.15% Mortgage(3) | 63.6 | 63.6 | 64.5 | 64.5 | |||||||||||||||||||
| Total | $ | 1,397.8 | $ | 1,634.3 | $ | 1,401.8 | $ | 1,654.7 |
(1) Term debt is classified as Level 1 in the fair value hierarchy. Fair value was determined using quoted market prices.
(2) The Notes are classified as Level 2 in the fair value hierarchy. Fair value was determined using the Company’s quoted stock price and the contractual conversion rate.
(3) The equipment financings and mortgage are classified as Level 3 in the fair value hierarchy. The fair values were determined using the cost bases of the financial liabilities, which approximate their carrying values.
Note 10. Derivative Instruments
The Company manages interest rate exposure through the use of interest rate swap transactions with financial institutions acting as principal counterparties. Under the Company’s interest rate swap agreements that expire on April 30, 2025, the Company receives variable rate interest payments and pays fixed interest rates of 0.95% and 0.96% on a total notional value of $480.0 million of its Term Loan. The Company has designated the interest rate swaps as cash flow hedges.
The fair value of interest rate swaps, which are classified as Level 2 in the fair value hierarchy, represent the estimated amounts the Company would receive or pay to terminate the contracts and is determined using industry standard valuation models and market-based observable inputs, including credit risk and interest rate yield curves. The fair value of the interest rate swaps was $34.0 million and $36.9 million at June 30, 2023 and December 31, 2022, respectively, and was included in other assets on the consolidated balance sheets. As of June 30, 2023, the Company estimates that $20.4 million of net gains related to the interest rate swaps included in accumulated other comprehensive income will be reclassified into the statement of operations over the next 12 months. When recognized, gains and losses on cash flow hedges reclassified from accumulated other comprehensive income are recognized within interest expense, net.
Note 11. Commitments and Contingencies
Legal Proceedings
During the three months ended June 30, 2022, the Company entered into a Settlement and License Agreement (the “Settlement Agreement”) with Roche Diabetes Care, Inc. (“Roche”) to settle pending patent infringement litigation. Pursuant to the Settlement Agreement, in exchange for a release of claims, mutual covenant not to sue for five years, and license to the patent in suit from Roche, the Company made a one-time payment of $20 million to Roche. The $20 million charge is included in selling, general and administrative expenses for both the three and six months ended June 30, 2022.
The Company is, from time to time, involved in the normal course of business in various legal proceedings, including intellectual property, contract, employment and product liability suits. The Company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on its results of operations.
Note 12. Stock-Based Compensation Expense
Compensation expense related to stock-based awards was recorded as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Cost of revenue | $ | 0.1 | $ | 0.1 | $ | 0.2 | $ | 0.2 | |||||||||||||||
| Research and development expenses | 3.3 | 2.2 | 6.1 | 4.2 | |||||||||||||||||||
| Selling, general and administrative expenses | 9.7 | 8.9 | 18.9 | 16.3 | |||||||||||||||||||
| Total | $ | 13.1 | $ | 11.2 | $ | 25.2 | $ | 20.7 |
Note 13. Accumulated Other Comprehensive Income
Changes in the components of accumulated other comprehensive income, net of tax, were as follows:
| Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | ||||||||||||||||||||||||||||||||||
| (in millions) | Foreign Currency Translation Adjustment | Unrealized Gain on Cash Flow Hedges | Accumulated Other Comprehensive Income | Foreign Currency Translation Adjustment | Unrealized Gain on Cash Flow Hedges | Accumulated Other Comprehensive Income | |||||||||||||||||||||||||||||
| Balance at beginning of period | $ | (15.3) | $ | 31.2 | $ | 15.9 | $ | (17.0) | $ | 37.0 | $ | 20.0 | |||||||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | (2.4) | 7.9 | 5.5 | (0.7) | 6.5 | 5.8 | |||||||||||||||||||||||||||||
| Amounts reclassified to net income | — | (5.1) | (5.1) | — | (9.5) | (9.5) | |||||||||||||||||||||||||||||
| Balance at the end of period | $ | (17.7) | $ | 34.0 | $ | 16.3 | $ | (17.7) | $ | 34.0 | $ | 16.3 |
| Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||||
| (in millions) | Foreign Currency Translation Adjustment | Unrealized Gain on Cash Flow Hedges | Accumulated Other Comprehensive Income | Foreign Currency Translation Adjustment | Unrealized Gain on Cash Flow Hedges | Accumulated Other Comprehensive (Loss) Income | |||||||||||||||||||||||||||||
| Balance at beginning of period | $ | (10.4) | $ | 22.6 | $ | 12.2 | $ | (6.7) | $ | 4.5 | $ | (2.2) | |||||||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | (9.6) | 4.4 | (5.2) | (13.3) | 21.9 | 8.6 | |||||||||||||||||||||||||||||
| Amounts reclassified to net loss | — | 0.2 | 0.2 | — | 0.8 | 0.8 | |||||||||||||||||||||||||||||
| Balance at the end of period | $ | (20.0) | $ | 27.2 | $ | 7.2 | $ | (20.0) | $ | 27.2 | $ | 7.2 |
Note 14. Interest Expense, Net
Interest expense, net was as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Cash interest, net of interest rate swaps | $ | 8.6 | $ | 8.1 | $ | 16.9 | $ | 16.0 | |||||||||||||||
| Accretion of debt discount | 0.3 | 0.3 | 0.7 | 0.7 | |||||||||||||||||||
| Amortization of debt issuance costs | 1.2 | 1.0 | 2.3 | 2.1 | |||||||||||||||||||
| Capitalized interest | (0.4) | (0.3) | (0.8) | (0.7) | |||||||||||||||||||
| Interest expense, net of portion capitalized | 9.7 | 9.1 | 19.1 | 18.1 | |||||||||||||||||||
| Interest income | (7.3) | (0.8) | (13.8) | (0.9) | |||||||||||||||||||
| Interest expense, net | $ | 2.4 | $ | 8.3 | $ | 5.3 | $ | 17.2 |
Note 15. Income Taxes
The Company’s effective tax rate for the three and six months ended June 30, 2023 was 4.2% and 3.8%, compared with 2.9% and (6.5)% for the three and six months ended June 30, 2022, respectively. Income tax benefits have not been recorded for losses in the United Kingdom where a valuation allowance exists against net deferred tax assets. The Company had a full valuation allowance against its net deferred tax assets in the United Kingdom and the United States at June 30, 2023 and December 31, 2022. The Company had no uncertain tax positions at June 30, 2023 and December 31, 2022.
Note 16. Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding and, when dilutive, common share equivalents. The weighted-average number of common shares used in the computation of basic and diluted net income (loss) per share were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Weighted average number of common shares outstanding, basic | 69,741 | 69,356 | 69,662 | 69,305 | |||||||||||||||||||
| Stock options | 318 | — | 356 | — | |||||||||||||||||||
| Restricted stock units | 83 | — | 101 | — | |||||||||||||||||||
| Weighted average number of common shares outstanding, diluted | 70,142 | 69,356 | 70,119 | 69,305 |
The number of common share equivalents excluded from the computation of diluted net income (loss) per share because either the effect would have been anti-dilutive, or the performance criteria related to the units had not yet been met, were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| 0.375% Convertible Senior Notes due September 2026 | 3,528 | 3,528 | 3,528 | 3,528 | |||||||||||||||||||
| Restricted stock units | 231 | 348 | 235 | 358 | |||||||||||||||||||
| Stock options | 157 | 635 | 156 | 607 | |||||||||||||||||||
| Total | 3,916 | 4,511 | 3,919 | 4,493 |
Next: Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations