Inogen, Inc. — Q1 2018 Form 10-Q
Business context and period. The unaudited report covers the three months ended March 31, 2018, compared with Q1 2017. Inogen develops, manufactures and sells or rents portable oxygen concentrators. It operates as one reportable segment. Unless otherwise noted, financial amounts below are in millions of dollars.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Sales revenue | $73.6 | $46.0; up 60.1% |
| Rental revenue | $5.5 | $6.5; down 16.3% |
| Total revenue | $79.1 | $52.5; up 50.6% |
| Gross profit / margin | $37.7 / 47.7% | $25.7 / 49.0% |
| Operating income / margin | $8.7 / approximately 11.0% | $5.6 / approximately 10.6% |
| Net income / margin | $10.8 / 13.6% | $5.9 / 11.3% |
| Diluted EPS | $0.48 | $0.27 |
| Adjusted EBITDA (non-GAAP) | $15.5 | $10.9 |
| Operating cash flow | $12.2 | $13.2 |
Margins and earnings. Sales gross margin was 49.8%, versus 52.3%; rental gross margin was 20.0%, versus 25.9%. Sales margin pressure reflected lower domestic business-to-business average selling prices, partly offset by a higher direct-to-consumer sales mix and lower unit costs. Net income benefited from revenue growth, operating expense leverage and a tax benefit. The company reported an income tax benefit of $1.1 million; excess stock-compensation tax benefits reduced tax expense by $3.3 million.
Cash, liquidity and debt. At March 31, cash and cash equivalents were $154.3 million and marketable securities were $34.0 million, versus $143.0 million and $31.0 million, respectively, at December 31, 2017. Net working capital was $213.4 million. The balance sheet reports no debt. Operating cash flow was lower year over year despite higher net income, with working-capital changes using $8.7 million of cash. Investing activities used $6.0 million and financing activities provided $5.1 million. Management said existing liquidity and expected cash generation should fund projected operating and investing requirements for at least 12 months.
Other indicators. The company sold approximately 45,400 oxygen systems, up from approximately 25,600. Rental patients were approximately 29,600, down from 32,600 a year earlier. One business-to-business customer represented approximately $9.5 million of gross receivables; the filing describes credit insurance for that customer, subject to a deductible and retention. Three suppliers accounted for 18.5%, 15.1% and 12.0% of raw-material purchases. Purchase orders outstanding were approximately $48.9 million; operating lease and specified contractual obligations totaled $9.2 million.
Material changes versus Q1 2017
- Sales growth across channels drove total revenue higher: domestic direct-to-consumer sales rose 67.8%, domestic business-to-business sales 60.4%, and international business-to-business sales 48.0%.
- Rental revenue fell 16.3%, reflecting fewer rental patients, a strategic emphasis on sales, lower reimbursement rates and lower private-payor rates. The prior-year quarter included a $0.2 million Cures Act-related benefit that did not recur.
- Sales and marketing expense rose 71.3% to $18.0 million, mainly from higher headcount, commissions and advertising. Advertising and media spending was $4.8 million versus $2.0 million.
- Overall gross margin declined 1.3 percentage points, despite higher sales gross profit, as rental margin fell and sales margin also eased.
- Accounts receivable net increased to $35.1 million from $31.4 million at year-end; inventories rose to $23.0 million from $18.8 million. Cash and marketable securities together increased by $14.4 million.
Outlook, commentary and risks
- Management expects 2018 rental revenue to decline approximately 10% from 2017, primarily due to its sales-over-rentals focus. It expects rental gross margin to be flat for the year versus 2017; no clear full-year sales, total-revenue or earnings guidance is provided in the filing.
- Management intends to expand domestic sales and marketing, develop the next-generation G5 concentrator, and grow international distribution. It expects research and development and sales and marketing expenses to increase in future periods. It also expects sales seasonality, typically stronger in the second and third quarters, though patterns may vary.
- Medicare reimbursement and competitive bidding remain significant risks. Approximately 75.1% of rental revenue came from Medicare in Q1 2018; the company expects reimbursement pressure and continued decline in rental activity. Future bidding outcomes and proposed policy changes are uncertain.
- On April 13, 2018, the company disclosed unauthorized access to an employee email account, apparently between January 2 and March 14. It notified approximately 30,000 current and former rental customers and relevant regulators, offered support resources, and engaged a forensic firm. Remediation, legal and other costs are expected; insurance may not cover all costs.
- Other material risks include dependence on a limited number of customers and single-source component suppliers, manufacturing and contract-manufacturer execution, potential U.S. tariffs and trade responses, foreign-exchange movements, healthcare regulation and reimbursement, and product liability. Management said pending ordinary-course legal proceedings were not expected to have a material adverse effect, while noting litigation can still consume resources.
- The company adopted the new revenue standard on January 1, 2018; adoption had no material impact. It expects the new lease standard, when adopted, to add right-of-use assets and lease liabilities. Management reported disclosure controls were effective as of March 31, 2018, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether rapid system-sales growth can continue and whether sales mix, pricing and unit costs support margins as the company invests in sales capacity.
- Whether rental patient declines and reimbursement reductions drive rental revenue below the stated 2018 outlook, including the impact of capped-rental patients.
- Collection performance, returns and allowance adequacy as receivables and inventories grow; assess concentration in the large business-to-business customer and related credit-insurance terms.
- The financial and regulatory consequences of the email-account incident, including remediation costs, claims and insurance recovery.
- Supply availability and cost exposure given concentrated vendors, outstanding purchase orders, planned capacity expansion and potential tariffs.
- The effect of stock-based compensation tax benefits on reported earnings and the sustainability of the quarter’s unusually favorable tax result.