Inogen, Inc. — Q2 2018 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Dollar amounts below are in millions unless otherwise noted.
Business context
Inogen develops, manufactures and markets portable oxygen concentrators and related products. Revenue comes mainly from equipment sales to consumers and business customers, with a smaller U.S. rental business reimbursed primarily by Medicare and other payors. The company reported one operating segment.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $97.2 | $64.1 | $176.3 | $116.6 |
| Sales revenue | $92.0 | $58.0 | $165.6 | $104.0 |
| Rental revenue | $5.3 | $6.1 | $10.7 | $12.6 |
| Gross profit / gross margin | $48.5 / 49.8% | $31.6 / 49.2% | $86.2 / 48.9% | $57.3 / 49.1% |
| Operating income | $14.0 | $8.5 | $22.7 | $14.1 |
| Net income | $14.6 | $8.3 | $25.4 | $14.3 |
| Diluted EPS | $0.65 | $0.38 | $1.13 | $0.66 |
| Adjusted EBITDA (non-GAAP) | $19.0 | $14.4 | $34.5 | $25.2 |
Q2 sales gross margin was 51.1% versus 51.8%; rental gross margin was 27.6% versus 25.0%. For the first half, sales gross margin was 50.5% versus 52.0%, and rental gross margin was 23.7% versus 25.5%.
- Q2 revenue grew 51.6% year over year; first-half revenue grew 51.2%. Sales-system volumes rose 68.8% in Q2 and 72.6% in the first half.
- Domestic direct-to-consumer sales rose 74.3% in Q2 and 71.5% in the first half. Domestic and international business-to-business sales also grew substantially.
- Rental revenue declined 13.7% in Q2 and 15.1% in the first half, mainly as patients on service fell 11.8% year over year. The company had approximately 28,500 rental patients at June 30, versus 32,300 a year earlier.
- Sales and marketing expense increased 92.5% in Q2 and 82.6% in the first half, reflecting sales-force expansion and higher advertising. Management said the investment supports direct-to-consumer growth.
Cash, liquidity and obligations
- At June 30, cash and cash equivalents were $166.3 million and marketable securities were $42.1 million, for combined liquid resources of $208.4 million. Net working capital was $235.8 million.
- First-half operating cash flow was $33.3 million, compared with $30.1 million in 2017. Cash increased $23.4 million to $166.3 million. Net cash used in investing was $17.4 million, including net purchases of marketable securities and $7.0 million for rental equipment and other property and equipment.
- Total liabilities were $65.7 million, including $47.2 million of current liabilities. The balance sheet reports no borrowings or other debt; operating leases and purchase commitments remain obligations.
- Outstanding supplier purchase orders were approximately $60.4 million. Minimum operating-lease, related-party lease and specified contractual payments totaled $12.6 million.
- Management stated that cash, marketable securities and expected operating cash generation should meet projected operating and investing needs for at least the next 12 months.
Outlook, commentary and risks
- Management expected 2018 rental revenue to decline approximately 10% from 2017, primarily due to the strategic emphasis on sales over rentals. A CMS interim rule effective June 1, 2018 was estimated to add approximately $0.5 million to 2018 rental revenue.
- No specific total-revenue or earnings guidance was provided in the filing. Management expected continued investment in research and development, sales and marketing, and general and administrative infrastructure.
- A Q2 direct-to-consumer pricing trial led Inogen to lower advertised starting prices for the G3 and G4 systems effective June 1, 2018. Management said the trial suggested lower pricing could increase volume and improve the overall gross-margin profile; results remain subject to execution and product/channel mix.
- Medicare reimbursement and competitive-bidding changes remain material uncertainties. CMS proposals disclosed after quarter-end included changes to DMEPOS payment and competitive bidding; they were proposals, not established outcomes. The company estimated a 1.2% decline in 2018 non-CBA stationary oxygen rates, apart from the temporary rural and non-contiguous-area rule.
- Other risks include dependence on a limited number of customers and suppliers, single-source components, foreign-exchange exposure, competition, and regulatory, reimbursement and product-liability requirements. The top 10 customers represented approximately 40.4% of total revenue in both first-half 2018 and first-half 2017.
- The company disclosed unauthorized access to an employee email account between January 2 and March 14, 2018. It notified approximately 30,000 current and former rental customers and said it would incur remedial, legal and other costs; insurance may not cover all costs.
- Tax benefits from stock-based compensation reduced first-half 2018 income tax expense by $7.1 million. The reported first-half tax benefit was $2.0 million, and the effective tax rate was negative 8.7%; tax effects and the still-incomplete accounting for the Tax Cuts and Jobs Act could affect results.
- Management reported disclosure controls were effective as of June 30, 2018 and no material change in internal control during the quarter. It did not anticipate a material adverse effect from routine legal proceedings.
Important facts for investors to verify
- Whether rapid sales growth and increased system volumes persist, and whether the lower retail prices translate into stronger volume and sustainable margins.
- Whether sales and marketing spending produces adequate returns as expenses rise, and how sales-channel and product mix affect gross margins.
- Rental-patient trends, rental revenue decline, capped-rental exposure and the effects of Medicare, Medicaid and private-payor reimbursement changes.
- Customer concentration and collectability: one business-to-business customer had $10.8 million of gross receivables at June 30; the company cited credit insurance coverage up to $18.0 million, subject to a deductible and retention.
- Supplier concentration and supply continuity, including the three largest vendors’ shares of first-half raw-material purchases (20.2%, 13.8% and 9.3%).
- The full financial, legal and regulatory costs of the email-account incident, and whether remediation and insurance are sufficient.
- Cash-flow conversion and working-capital needs as receivables and inventory grow; also assess non-GAAP Adjusted EBITDA alongside GAAP earnings and capital requirements.