Tactile Systems Technology, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. The company develops and sells at-home medical devices, principally lymphedema systems and the AffloVest airway-clearance product. Figures below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $69.6 | $65.3 | $196.8 | $172.9 |
| Gross profit | $49.4 | $46.8 | $139.1 | $123.9 |
| Gross margin | 70.9% | 71.7% | 70.7% | 71.7% |
| Operating income (loss) | $8.0 | ($1.6) | $6.2 | ($20.6) |
| Net income (loss) | $22.3 | ($2.3) | $20.3 | ($22.5) |
| Diluted EPS | $0.94 | ($0.11) | $0.88 | ($1.12) |
- Q3 revenue grew 7%; nine-month revenue grew 14%. Sales revenue was $58.9 million and rental revenue $10.7 million in Q3.
- Lymphedema revenue rose 15% in Q3 and 18% year to date, while airway-clearance revenue fell 36% and 7%, respectively. Lymphedema products supplied 90% of Q3 revenue and 88% of nine-month revenue.
- Operating cash flow was $17.5 million for the nine months, versus $1.4 million a year earlier. Investing cash outflow was $1.5 million; financing cash inflow was $28.1 million. Cash increased $44.1 million to $66.0 million.
- At September 30, cash was $66.0 million, current assets $151.7 million, and current liabilities $45.6 million. Current and non-current accounts receivable together were $58.5 million.
- Credit Agreement borrowings totaled $46.8 million: $30.0 million term debt and $16.8 million revolving credit. The reported rate was 7.72%; maturity was extended to August 1, 2026. The company reported compliance with financial covenants.
Changes, unusual items, and outlook
- Revenue growth was led by increased productivity in the lymphedema sales force and new products. Management attributed weaker AffloVest sales to a large DME provider slowing placements after expiration of the COVID-19 Public Health Emergency waiver and return to prior eligibility requirements.
- Gross margin declined by approximately 0.8–1.0 percentage point versus the comparable periods. Nine-month rental gross profit fell 6% despite slightly higher rental revenue.
- Net income included a significant income-tax benefit: $14.7 million in Q3 and $16.3 million for nine months. The benefit principally reflected release of a valuation allowance; the company cited $17.9 million of additional deferred tax assets as more likely than not realizable. Accordingly, reported profit was materially affected by a tax item rather than operating performance alone.
- The intangible-amortization and earn-out line was a benefit of $3.1 million in Q3 and $0.6 million for nine months, including favorable earn-out fair-value adjustments. The final AffloVest earn-out was determined at $5.6 million and was payable by November 28, 2023.
- The company provided no specific revenue or earnings guidance in this filing. Management believes cash, cash flows, and other resources will be sufficient for working capital, capital expenditures, debt service, and other needs for at least the next 12 months.
- Business risks include seasonality (typically stronger Q3 and Q4 for commercially insured patients), reimbursement and payer-policy uncertainty, inflation and interest rates, labor and component costs, competition, and lingering pandemic effects. One vendor represented 29% of purchases in Q3 and 26% for the nine-month period; purchase orders outstanding were $27.7 million.
- The securities class action settlement was finally approved in August 2023; the company stated it did not expect to fund the $5 million settlement. A related stockholder derivative case remained pending, with a non-binding settlement in principle reported. Management said there were no material changes to previously disclosed risk factors and that disclosure controls were effective.
Important facts for investors to verify
- How much of the profit improvement is supported by recurring operations versus the deferred-tax valuation-allowance release and earn-out fair-value movements.
- Whether lymphedema growth continues and whether AffloVest placements recover following the eligibility-rule change and DME-provider slowdown.
- Cash conversion and receivables collection trends, including the reduction in receivables during the period.
- Debt-service capacity at the reported 7.72% borrowing rate, covenant headroom, and the effect of the $5.6 million earn-out payment.
- Exposure to the concentrated supplier, $27.7 million of purchase commitments, and the outcome of the pending derivative litigation.