filings.toolsCover and table of contents
61K characters. Original on sec.gov · Markdown
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 March 31, 2024
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 May 2, 2024, the registrant had 70,039,511 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) | March 31, 2024 | December 31, 2023 | |||||||||
| ASSETS | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 751.2 | $ | 704.2 | |||||||
| Accounts receivable trade, less allowance for credit losses of $3.5 and $2.5 | 234.1 | 240.2 | |||||||||
| Accounts receivable trade, net — related party | 86.4 | 119.5 | |||||||||
| Inventories | 430.6 | 402.6 | |||||||||
| Prepaid expenses and other current assets | 116.1 | 116.4 | |||||||||
| Total current assets | 1,618.4 | 1,582.9 | |||||||||
| Property, plant and equipment, net | 667.7 | 664.9 | |||||||||
| Other intangible assets, net | 98.5 | 98.7 | |||||||||
| Goodwill | 51.7 | 51.7 | |||||||||
| Other assets (includes $29.4 and $31.3 at fair value) | 187.7 | 190.0 | |||||||||
| Total assets | $ | 2,624.0 | $ | 2,588.2 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable | $ | 75.9 | $ | 19.2 | |||||||
| Accrued expenses and other current liabilities | 308.6 | 373.7 | |||||||||
| Accrued expenses and other current liabilities — related party | 9.0 | 8.9 | |||||||||
| Current portion of long-term debt | 38.9 | 49.4 | |||||||||
| Total current liabilities | 432.4 | 451.2 | |||||||||
| Long-term debt, net | 1,362.6 | 1,366.4 | |||||||||
| Other liabilities | 38.3 | 37.9 | |||||||||
| Total liabilities | 1,833.3 | 1,855.5 | |||||||||
| Commitments and contingencies (Note 12) | |||||||||||
| Stockholders’ Equity | |||||||||||
| Preferred stock, $.001 par value, 5,000,000 authorized; none issued and outstanding | — | — | |||||||||
| Common stock, $.001 par value, 100,000,000 authorized; 70,020,202 and 69,907,289 issued and outstanding | 0.1 | 0.1 | |||||||||
| Additional paid-in capital | 1,117.6 | 1,102.6 | |||||||||
| Accumulated deficit | (326.5) | (378.0) | |||||||||
| Accumulated other comprehensive (loss) income | (0.5) | 8.0 | |||||||||
| Total stockholders’ equity | 790.7 | 732.7 | |||||||||
| Total liabilities and stockholders’ equity | $ | 2,624.0 | $ | 2,588.2 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
INSULET CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
| Three Months Ended March 31, | |||||||||||
| (in millions, except share and per share data) | 2024 | 2023 | |||||||||
| Revenue | $ | 329.9 | $ | 261.3 | |||||||
| Revenue from related party | 111.8 | 96.8 | |||||||||
| Total revenue | 441.7 | 358.1 | |||||||||
| Cost of revenue | 134.9 | 117.6 | |||||||||
| Gross profit | 306.8 | 240.5 | |||||||||
| Research and development expenses | 50.2 | 50.1 | |||||||||
| Selling, general and administrative expenses | 199.7 | 162.7 | |||||||||
| Operating income | 56.9 | 27.7 | |||||||||
| Interest expense, net | (10.7) | (9.4) | |||||||||
| Interest income | 9.4 | 6.5 | |||||||||
| Other expense, net | (0.7) | (0.2) | |||||||||
| Income before income taxes | 54.9 | 24.6 | |||||||||
| Income tax expense | (3.4) | (0.8) | |||||||||
| Net income | $ | 51.5 | $ | 23.8 | |||||||
| Earnings per share: | |||||||||||
| Basic | $ | 0.74 | $ | 0.34 | |||||||
| Diluted | $ | 0.73 | $ | 0.34 | |||||||
| Weighted-average number of common shares outstanding (in thousands): | |||||||||||
| Basic | 69,957 | 69,583 | |||||||||
| Diluted | 73,741 | 70,096 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
INSULET CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
| Three Months Ended March 31, | |||||||||||
| (in millions) | 2024 | 2023 | |||||||||
| Net income | $ | 51.5 | $ | 23.8 | |||||||
| Other comprehensive (loss) income, net of tax: | |||||||||||
| Foreign currency translation adjustment | (6.6) | 1.7 | |||||||||
| Unrealized loss on cash flow hedges | (1.9) | (5.8) | |||||||||
| Total other comprehensive loss, net of tax | (8.5) | (4.1) | |||||||||
| Comprehensive income | $ | 43.0 | $ | 19.7 |
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 March 31, 2024
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||
| (dollars in millions) | Shares (in thousands) | Amount | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | 69,907 | $ | 0.1 | $ | 1,102.6 | $ | (378.0) | $ | 8.0 | $ | 732.7 | ||||||||||||||||||||||||
| Exercise of options to purchase common stock | 55 | — | 5.8 | — | — | 5.8 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 14.2 | — | — | 14.2 | |||||||||||||||||||||||||||||
| Restricted stock units vested, net of shares withheld for taxes | 58 | — | (5.0) | — | — | (5.0) | |||||||||||||||||||||||||||||
| Net income | — | — | — | 51.5 | — | 51.5 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (8.5) | (8.5) | |||||||||||||||||||||||||||||
| Balance at March 31, 2024 | 70,020 | $ | 0.1 | $ | 1,117.6 | $ | (326.5) | $ | (0.5) | $ | 790.7 |
Three Months Ended March 31, 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 | 110 | — | 6.0 | — | — | 6.0 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 12.1 | — | — | 12.1 | |||||||||||||||||||||||||||||
| Restricted stock units vested, net of shares withheld for taxes | 73 | — | (11.4) | — | — | (11.4) | |||||||||||||||||||||||||||||
| Net income | — | — | — | 23.8 | — | 23.8 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (4.1) | (4.1) | |||||||||||||||||||||||||||||
| Balance at March 31, 2023 | 69,694 | $ | 0.1 | $ | 1,047.3 | $ | (560.5) | $ | 15.9 | $ | 502.8 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
INSULET CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Three Months Ended March 31, | |||||||||||
| (in millions) | 2024 | 2023 | |||||||||
| Cash flows from operating activities | |||||||||||
| Net income | $ | 51.5 | $ | 23.8 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 18.8 | 17.2 | |||||||||
| Stock-based compensation expense | 14.2 | 12.1 | |||||||||
| Non-cash interest expense | 2.0 | 1.5 | |||||||||
| Provision for credit losses | 1.2 | 1.2 | |||||||||
| Other | 0.1 | 0.7 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | 3.5 | (19.2) | |||||||||
| Accounts receivable — related party | 33.1 | 7.1 | |||||||||
| Inventories | (29.6) | (38.2) | |||||||||
| Prepaid expenses and other assets | (0.4) | (20.7) | |||||||||
| Accounts payable | 55.5 | 51.5 | |||||||||
| Accrued expenses and other liabilities | (62.4) | (35.9) | |||||||||
| Accrued expenses and other liabilities — related party | 0.1 | (0.6) | |||||||||
| Net cash provided by operating activities | 87.6 | 0.5 | |||||||||
| Cash flows from investing activities | |||||||||||
| Capital expenditures | (22.1) | (10.5) | |||||||||
| Investments in developed software | (1.9) | (1.5) | |||||||||
| Acquisition of intangible assets | — | (25.1) | |||||||||
| Acquisition of a business | — | (3.0) | |||||||||
| Cash paid for investments | — | (2.0) | |||||||||
| Net cash used in investing activities | (24.0) | (42.1) | |||||||||
| Cash flows from financing activities | |||||||||||
| Repayment of equipment financings | (7.2) | (4.8) | |||||||||
| Repayment of financing lease | (5.8) | — | |||||||||
| Repayment of term loan | (1.3) | (1.3) | |||||||||
| Repayment of mortgage | (0.6) | (0.6) | |||||||||
| Proceeds from exercise of stock options | 5.8 | 6.0 | |||||||||
| Payment of withholding taxes in connection with vesting of restricted stock units | (5.0) | (11.4) | |||||||||
| Net cash used in financing activities | (14.1) | (12.1) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (2.5) | (0.1) | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 47.0 | (53.8) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 704.2 | 689.7 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 751.2 | $ | 635.9 | |||||||
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 income 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 three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2024, 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, 2023.
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.
Shipping and Handling Costs
Shipping and handling costs included in selling, general and administrative expenses were $3.4 million and $2.3 million for the three months ended March 31, 2024 and 2023, 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.
Judgement is involved in estimating inputs, such as discount rates, used in Level 3 fair value measurements. Changes to these inputs can have a significant effect on fair value measurements and amounts that could be realized.
Certain of the Company’s financial instruments, including accounts receivable, accounts payable, accrued expenses and other liabilities, are carried at cost, which approximates their fair value because of their short-term maturity.
Note 2. Revenue and Contract Acquisition Costs
The following table summarizes the Company’s disaggregated revenue:
| Three Months Ended March 31, | |||||||||||||||||||||||
| (in millions) | 2024 | 2023 | |||||||||||||||||||||
| U.S. Omnipod | $ | 317.7 | $ | 259.0 | |||||||||||||||||||
| International Omnipod | 115.3 | 98.6 | |||||||||||||||||||||
| Total Omnipod products | 433.0 | 357.6 | |||||||||||||||||||||
| Drug Delivery | 8.7 | 0.5 | |||||||||||||||||||||
| Total revenue | $ | 441.7 | $ | 358.1 |
The percentages of total revenue for customers that represent 10% or more of total revenue were as follows:
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Distributor A | 25 | % | 28 | % | |||||||
| Distributor B | 31 | % | 20 | % | |||||||
| Distributor C | 22 | % | 16 | % |
Deferred revenue related to unsatisfied performance obligations was included in the following consolidated balance sheet accounts in the amounts shown:
| (in millions) | March 31, 2024 | December 31, 2023 | |||||||||
| Accrued expenses and other current liabilities | $ | 18.2 | $ | 15.4 | |||||||
| Other liabilities | 2.0 | 1.9 | |||||||||
| Total deferred revenue | $ | 20.2 | $ | 17.3 |
Revenue recognized from amounts included in deferred revenue at the beginning of each respective period was as follows:
| Three Months Ended March 31, | |||||||||||
| (in millions) | 2024 | 2023 | |||||||||
| Deferred revenue recognized | $ | 3.1 | $ | 9.9 |
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) | March 31, 2024 | December 31, 2023 | |||||||||
| Prepaid expenses and other current assets | $ | 16.8 | $ | 16.6 | |||||||
| Other assets | 32.1 | 32.0 | |||||||||
| Total capitalized contract acquisition costs, net | $ | 48.9 | $ | 48.6 |
The Company recognized $4.2 million and $4.0 million of amortization of capitalized contract acquisition costs during the three months ended March 31, 2024 and 2023, respectively.
Note 3. Accounts Receivable, Net
At the end of each period, accounts receivable were comprised of the following:
| (in millions) | March 31, 2024 | December 31, 2023 | |||||||||
| Accounts receivable trade, net | $ | 228.1 | $ | 234.5 | |||||||
| Unbilled receivable | 6.0 | 5.7 | |||||||||
| Accounts receivable, net | $ | 234.1 | $ | 240.2 |
The percentages of total net accounts receivable trade for customers that represent 10% or more of total net accounts receivable trade were as follows:
| March 31, 2024 | December 31, 2023 | ||||||||||
| Distributor A | 29 | % | 35 | % | |||||||
| Distributor B | 33 | % | 25 | % | |||||||
| Distributor C | 13 | % | 18 | % |
The following table presents the activity in the allowance for credit losses, which is comprised primarily of the Company’s direct consumer receivable portfolio. The allowance for credit losses of other portfolios is insignificant.
| Three Months Ended March 31, | |||||||||||
| (in millions) | 2024 | 2023 | |||||||||
| Credit losses at beginning of year | $ | 2.5 | $ | 2.5 | |||||||
| Provision for expected credit losses | 1.2 | 1.2 | |||||||||
| Write-offs charged against allowance | (0.2) | (0.7) | |||||||||
| Recoveries of amounts previously reserved | — | 0.1 | |||||||||
| Credit losses at the end of period | $ | 3.5 | $ | 3.1 |
Note 4. Inventories
At the end of each period, inventories were comprised of the following:
| (in millions) | March 31, 2024 | December 31, 2023 | |||||||||
| Raw materials | $ | 146.5 | $ | 118.2 | |||||||
| Work in process | 64.0 | 60.6 | |||||||||
| Finished goods | 220.1 | 223.8 | |||||||||
| Total inventories | $ | 430.6 | $ | 402.6 |
Amounts charged to the consolidated statements of income for excess and obsolete inventory were $2.6 million and $2.2 million for the three months ended March 31, 2024 and 2023.
Note 5. Cloud Computing Costs
Capitalized costs to implement cloud computing arrangements at cost and accumulated amortization were as follows:
| (in millions) | March 31, 2024 | December 31, 2023 | |||||||||
| Short-term portion | $ | 27.1 | $ | 26.4 | |||||||
| Long-term portion | 122.3 | 116.9 | |||||||||
| Total capitalized implementation costs | 149.4 | 143.3 | |||||||||
| Less: accumulated amortization | (42.7) | (36.6) | |||||||||
| Capitalized implementation costs, net | $ | 106.7 | $ | 106.7 |
Amortization expense was $6.1 million and $4.3 million for the three months ended March 31, 2024 and 2023, respectively.
Note 6. Goodwill and Other Intangible Assets, Net
The carrying amount of goodwill was $51.7 million at both March 31, 2024 and December 31, 2023.
The gross carrying amount, accumulated amortization and net book value of intangible assets at the end of each period were as follows:
| March 31, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||
| (in millions) | Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | |||||||||||||||||||||||||||||
| Customer relationships | $ | 43.2 | $ | (31.6) | $ | 11.6 | $ | 43.2 | $ | (30.9) | $ | 12.3 | |||||||||||||||||||||||
| Internal-use software | 45.3 | (14.3) | 31.0 | 43.1 | (13.9) | 29.2 | |||||||||||||||||||||||||||||
| Developed technology | 27.4 | (3.5) | 23.9 | 27.4 | (3.0) | 24.4 | |||||||||||||||||||||||||||||
| Patents | 36.2 | (4.2) | 32.0 | 36.2 | (3.4) | 32.8 | |||||||||||||||||||||||||||||
| Total intangible assets | $ | 152.1 | $ | (53.6) | $ | 98.5 | $ | 149.9 | $ | (51.2) | $ | 98.7 |
Amortization expense for intangible assets was $2.4 million for both the three months ended March 31, 2024 and 2023.
Note 7. Investments
Equity Securities
Refer to “Assets Measured at Fair Value on a Non-Recurring Basis” in Note 10 for disclosures regarding investments in equity securities without readily determinable fair values.
Debt Securities
The Company has an investment in debt securities, which matures in December 2024 unless converted earlier, that are reported within other assets on the consolidated balance sheets. The amortized cost basis of the debt securities was $5.0 million at both March 31, 2024 and December 31, 2023. The amount of interest earned on the investment for both the three months ended March 31, 2024 and 2023 was insignificant. Refer to Note 10 for the fair values.
Other
The Company has a $2.0 million strategic investment in a privately held entity. The investment is a debt security with embedded derivatives and is accounted for by applying the fair value option, as this approach best reflects the underlying economics of the transaction. The fair value of the investment is calculated using a combination of the market approach and income approach methodologies and is reported within other assets on the consolidated balance sheets. Refer to Note 10 for the fair values.
Note 8. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities were as follows:
| (in millions) | March 31, 2024 | December 31, 2023 | |||||||||
| Accrued rebates | $ | 130.7 | $ | 144.0 | |||||||
| Employee compensation and related costs | 64.4 | 122.0 | |||||||||
| Professional and consulting services | 44.6 | 34.1 | |||||||||
| Other | 68.9 | 73.6 | |||||||||
| Accrued expenses and other current liabilities | $ | 308.6 | $ | 373.7 |
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 income. Reconciliations of the changes in the Company’s product warranty liability were as follows:
| Three Months Ended March 31, | |||||||||||
| (in millions) | 2024 | 2023 | |||||||||
| Product warranty liability at beginning of period | $ | 10.3 | $ | 62.1 | |||||||
| Warranty expense | 5.5 | 5.5 | |||||||||
| Change in estimate | — | (8.0) | |||||||||
| Warranty fulfillment | (4.5) | (20.4) | |||||||||
| Product warranty liability at the end of period | $ | 11.3 | $ | 39.2 |
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 three months ended March 31, 2023, the Company revised the estimated liability for these MDCs by $8.0 million. This change in estimate primarily resulted from lower shipping costs for replacement DASH PDMs and lower expected distribution costs for Omnipod 5 Controllers. The Company had a liability of $0.4 million and $0.7 million related to the MDCs included in its product warranty liability at March 31, 2024 and December 31, 2023, respectively.
Note 9. Debt
The components of debt consisted of the following:
| (in millions) | March 31, 2024 | December 31, 2023 | |||||||||
| Equipment Financing due May 2024 | $ | 0.8 | $ | 2.7 | |||||||
| Equipment Financing due November 2025 | 13.3 | 15.2 | |||||||||
| 5.15% Mortgage due November 2025 | 62.7 | 63.3 | |||||||||
| 0.375% Convertible Senior Notes due September 2026 | 800.0 | 800.0 | |||||||||
| Equipment Financing | 10.6 | 12.7 | |||||||||
| Term Loan due May 2028 | 486.3 | 487.5 | |||||||||
| Revolving Credit Facility expires June 2028 | — | — | |||||||||
| Equipment Financing due July 2028 | 27.6 | 29.0 | |||||||||
| Finance lease obligation | 16.3 | 22.9 | |||||||||
| Unamortized debt discount | (6.0) | (6.4) | |||||||||
| Debt issuance costs | (10.1) | (11.1) | |||||||||
| Total debt, net | 1,401.5 | 1,415.8 | |||||||||
| Less: current portion | 38.9 | 49.4 | |||||||||
| Total long-term debt, net | $ | 1,362.6 | $ | 1,366.4 |
0.375% Convertible Senior Notes
The Company’s 0.375% Convertible Senior Notes due September 2026 (the “Convertible Notes”) have an effective interest rate of 0.76%. The components of interest expense related to the Notes for the three months ended March 31, 2024 and 2023 were as follows:
| Three Months Ended March 31, | |||||||||||
| (in millions) | 2024 | 2023 | |||||||||
| Contractual interest expense | $ | 0.8 | $ | 0.8 | |||||||
| Amortization of debt issuance costs | 0.7 | 0.7 | |||||||||
| Total interest recognized on the Convertible Notes | $ | 1.5 | $ | 1.5 |
As of March 31, 2024 and December 31, 2023, unamortized issuance costs associated with the Convertible Notes were $7.4 million and $8.2 million, respectively.
The Convertible Notes are convertible into cash, shares of the Company’s common stock, or the combination of cash and shares of common stock, at the Company’s election, 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 at the holder’s election, from June 1, 2026 through August 28, 2026 and prior to then under certain circumstances as set forth in the agreement. Additionally, on or after September 6, 2023, the Company may redeem for cash all or a 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 Convertible 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 Convertible 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 and are recorded within stockholders’ equity on the consolidated balance sheets.
Equipment Financing
In 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 both March 31, 2024 and December 31, 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.
Senior Secured Credit Agreement
In January 2024, the Company amended its Term Loan due May 2028 to bear interest at a rate of Secured Overnight Financing Rate (“SOFR”) plus 3.00%, with a 0% SOFR floor. At the same time, the Company amended its Revolving Credit Facility such that outstanding borrowings bear interest at a rate of SOFR plus an applicable margin of 2.375% to 3.00% based on the Company’s net leverage ratio and credit rating.
Carrying Value
At the end of each period, the carrying value of the Company’s debt was comprised of the following:
| (in millions) | March 31, 2024 | December 31, 2023 | |||||||||
| Term Loan due May 2028 | $ | 478.4 | $ | 479.2 | |||||||
| Convertible Notes | 792.6 | 791.8 | |||||||||
| Equipment financings | 52.1 | 59.3 | |||||||||
| 5.15% Mortgage | 62.1 | 62.6 | |||||||||
| Finance lease obligation | 16.3 | 22.9 | |||||||||
| Total debt, net | $ | 1,401.5 | $ | 1,415.8 |
Note 10. Financial Instruments and Fair Value
Financial Instruments Disclosed at Fair Value
The following tables provide a summary of the significant financial instruments that are disclosed at fair value on a recurring basis as of March 31, 2024 and December 31, 2023:
| Fair Value Measurements at March 31, 2024 | |||||||||||||||||||||||
| (in millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Term Loan due May 2028**(1)** | $ | 488.1 | $ | — | $ | — | $ | 488.1 | |||||||||||||||
| Convertible Notes**(2)** | — | 834.8 | — | 834.8 | |||||||||||||||||||
| Equipment financings**(3)** | — | — | 52.1 | 52.1 | |||||||||||||||||||
| 5.15% Mortgage**(3)** | — | — | 62.1 | 62.1 | |||||||||||||||||||
| Total | $ | 488.1 | $ | 834.8 | $ | 114.2 | $ | 1,437.1 |
| Fair Value Measurements at December 31, 2023 | |||||||||||||||||||||||
| (in millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Term Loan due May 2028**(1)** | $ | 490.2 | $ | — | $ | — | $ | 490.2 | |||||||||||||||
| Convertible Notes**(2)** | — | 928.7 | — | 928.7 | |||||||||||||||||||
| Equipment financings**(3)** | — | — | 59.3 | 59.3 | |||||||||||||||||||
| 5.15% Mortgage**(3)** | — | — | 62.6 | 62.6 | |||||||||||||||||||
| Total | $ | 490.2 | $ | 928.7 | $ | 121.9 | $ | 1,540.8 |
(1) Fair value was determined using quoted market prices.
(2) Fair value was determined using market prices obtained from third-party pricing sources.
(3) Fair value approximates carrying value and was determined using the cost basis.
Assets Measured at Fair Value on a Recurring Basis
The following tables provide a summary of assets that are measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023:
| Fair Value Measurements at March 31, 2024 | |||||||||||||||||||||||
| (in millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Cash(1) | $ | 140.4 | $ | — | $ | — | $ | 140.4 | |||||||||||||||
| Money market mutual funds(1) | 556.5 | — | — | 556.5 | |||||||||||||||||||
| Term deposits(1) | — | 54.3 | — | 54.3 | |||||||||||||||||||
| Interest rate swaps(2) | — | 20.9 | — | 20.9 | |||||||||||||||||||
| Debt securities(3) | — | — | 4.7 | 4.7 | |||||||||||||||||||
| Other investments(3) | — | — | 3.8 | 3.8 | |||||||||||||||||||
| Total assets | $ | 696.9 | $ | 75.2 | $ | 8.5 | $ | 780.6 |
| Fair Value Measurements at December 31, 2023 | |||||||||||||||||||||||
| (in millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Cash(1) | $ | 103.7 | $ | — | $ | — | $ | 103.7 | |||||||||||||||
| Money market mutual funds(1) | 547.0 | — | — | 547.0 | |||||||||||||||||||
| Term deposits(1) | — | 53.5 | — | 53.5 | |||||||||||||||||||
| Interest rate swaps(2) | — | 22.8 | — | 22.8 | |||||||||||||||||||
| Debt securities(3) | — | — | 4.7 | 4.7 | |||||||||||||||||||
| Other investments(3) | — | — | 3.8 | 3.8 | |||||||||||||||||||
| Total assets | $ | 650.7 | $ | 76.3 | $ | 8.5 | $ | 735.5 | |||||||||||||||
(1) Cash and cash equivalents are carried at face amounts, which approximate their fair values.
(2) Fair value represents 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 swaps is included in other assets on the consolidated balance sheets.
(3) Fair value is determined using industry standard valuation models and market-based unobservable inputs, including credit spread and risk free rate. The range used for the risk free rate is 3.8% - 5.6%.
There were no changes in the fair values of the Level 3 debt securities and other investments during the three months ended March 31, 2024. During the three months ended March 31, 2023, the Company purchased $2.0 million in other investments. Judgement is involved in estimating inputs, such as discount rates, used in Level 3 fair value measurements. Changes to these inputs can have a significant effect on fair value measurements and amounts that could be realized.
Assets Measured at Fair Value on a Non-Recurring Basis
As of March 31, 2024, and December 31, 2023, the total carrying value of the Company’s investments in equity securities without readily determinable fair values was $9.7 million and was included within other assets on the consolidated balance sheets. These investments are carried at cost less impairment, if any. If an observable price change in orderly transactions for the identical or similar investment in the same issuer is identified, the investments are measured at fair value as of the date that the observable transaction occurred and categorized as Level 2 in the fair value hierarchy. As of both March 31, 2024 and December 31, 2023 cumulative gains were $0.8 million.
Note 11. 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.
As of March 31, 2024, the Company estimates that $19.5 million of net gains related to the interest rate swaps included in accumulated other comprehensive income will be reclassified into the statement of income over the next 12 months. When recognized, gains and losses on cash flow hedges reclassified from accumulated other comprehensive income (loss) are recognized within interest expense, net.
Note 12. Commitments and Contingencies
Legal Proceedings
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.
Letters of Credit
As of March 31, 2024, the Company had $19.8 million of letters of credit outstanding, primarily under its $20.0 million uncommitted letter of credit facility to backstop bank guarantees for the same amount. The bank guarantees primarily serve as security for the newly constructed manufacturing building in Malaysia until the Company purchases the property. The Company pays interest on outstanding borrowings and commitment fees on the maximum amount available to be drawn under the letters of credit at a rate of between 1.65% and 2.25%, depending on the Company’s credit rating. The letters of credit include customary covenants, none of which are considered restrictive to the Company’s operations. The Company had letters of credit outstanding totaling $20.9 million as of December 31, 2023.
Note 13. Stock-Based Compensation Expense
Compensation expense related to stock-based awards was recorded as follows:
| Three Months Ended March 31, | |||||||||||
| (in millions) | 2024 | 2023 | |||||||||
| Cost of revenue | $ | 0.1 | $ | 0.1 | |||||||
| Research and development expenses | 2.1 | 2.8 | |||||||||
| Selling, general and administrative expenses | 12.0 | 9.2 | |||||||||
| Total | $ | 14.2 | $ | 12.1 |
Note 14. Accumulated Other Comprehensive Income
Changes in the components of accumulated other comprehensive income, net of tax, were as follows:
| Three Months Ended March 31, 2024 | |||||||||||||||||||||||
| (in millions) | Foreign Currency Translation Adjustment | Unrealized Loss on Securities | Unrealized Gain on Cash Flow Hedges | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||
| Balance at beginning of period | $ | (14.5) | $ | (0.3) | $ | 22.8 | $ | 8.0 | |||||||||||||||
| Other comprehensive loss before reclassifications | (6.6) | — | (8.5) | (15.1) | |||||||||||||||||||
| Amounts reclassified to net income | — | — | 6.6 | 6.6 | |||||||||||||||||||
| Balance at the end of period | $ | (21.1) | $ | (0.3) | $ | 20.9 | $ | (0.5) |
| Three Months Ended March 31, 2023 | |||||||||||||||||||||||
| (in millions) | Foreign Currency Translation Adjustment | Unrealized Loss on Securities | Unrealized Gain on Cash Flow Hedges | Accumulated Other Comprehensive Income | |||||||||||||||||||
| Balance at beginning of period | $ | (17.0) | $ | — | $ | 37.0 | $ | 20.0 | |||||||||||||||
| Other comprehensive (loss) income before reclassifications | 1.7 | — | (1.4) | 0.3 | |||||||||||||||||||
| Amounts reclassified to net income | — | — | (4.4) | (4.4) | |||||||||||||||||||
| Balance at the end of period | $ | (15.3) | $ | — | $ | 31.2 | $ | 15.9 |
Note 15. Income Taxes
The Company’s effective tax rate for the three months ended March 31, 2024 was 6.2%, compared with 3.4% for the three months ended March 31, 2023. The increase in the effective tax rate primarily resulted from changes in the distribution of income among the jurisdictions in which we operate and a corresponding reduction to available net operating loss carryforwards to reduce taxable income. The Company had a full valuation allowance against its net deferred tax assets in the United Kingdom and the United States at March 31, 2024 and December 31, 2023 because management determined that it is more-likely-than-not that these net deferred tax assets will not be realized. These valuation allowances are based on the weighting of positive and negative evidence, including a history of cumulative tax losses in prior years.
Note 16. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding and, when dilutive, common share equivalents. The computation of basic and diluted earnings per share was as follows:
| Three Months Ended March 31, | |||||||||||
| (in millions, except share and per share data) | 2024 | 2023 | |||||||||
| Net income | $ | 51.5 | $ | 23.8 | |||||||
| Add back interest expense, net of tax | 2.6 | — | |||||||||
| Net income, diluted | $ | 54.1 | $ | 23.8 | |||||||
| Weighted average number of common shares outstanding, basic (in thousands) | 69,957 | 69,583 | |||||||||
| Convertible Notes | 3,528 | — | |||||||||
| Stock options | 174 | 394 | |||||||||
| Restricted stock units | 82 | 119 | |||||||||
| Weighted average number of common shares outstanding, diluted (in thousands) | 73,741 | 70,096 | |||||||||
| Earnings per share | |||||||||||
| Basic | $ | 0.74 | $ | 0.34 | |||||||
| Diluted | $ | 0.73 | $ | 0.34 |
The number of common share equivalents excluded from the computation of diluted earnings 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 March 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
| Convertible Notes | — | 3,528 | |||||||||
| Restricted stock units | 459 | 238 | |||||||||
| Stock options | 213 | 155 | |||||||||
| Total | 672 | 3,921 |
Next: Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations