Tactile Systems Technology, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results; dollar amounts below are in millions unless noted.
Business context
Tactile Medical develops and sells home-use medical devices for lymphedema and chronic venous conditions. Flexitouch generated 91% of revenue in both the quarter and first half. The company sells primarily through third-party payers in the United States.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $45.2 | $34.1 | $82.8 | $61.0 |
| Gross profit | $31.5 | $24.5 | $57.8 | $44.1 |
| Gross margin | 69.7% | 71.9% | 69.7% | 72.3% |
| Operating income (loss) | $3.0 | $1.3 | $1.2 | $(0.5) |
| Net income | $2.8 | $2.6 | $4.3 | $2.5 |
| Diluted EPS | $0.14 | $0.13 | $0.22 | $0.13 |
| Operating cash flow | Not separately provided for quarter | $0.9 | $(1.4) |
- Q2 revenue grew 32%; first-half revenue grew 36%. Sales revenue rose 27% for the quarter and 28% for the half; rental revenue rose 80% and 95%, respectively.
- Q2 operating margin improved to 6.7% from 3.8%; first-half operating margin was 1.5%, versus a loss margin of 0.8%. Net income grew 8% in Q2 and 69% in the first half.
- Q2 sales gross margin was 70% versus 72%; rental gross margin was 67% versus 70%. Management attributed margin pressure to pricing under a large private-insurer contract, payer/product mix, and amortization of licensed assets.
- At June 30, cash and cash equivalents were $25.0, marketable securities $20.4, accounts receivable $24.8, and total current assets $94.1 against current liabilities of $18.7. Total assets were $121.8 and stockholders’ equity $99.0.
- Operating cash flow was $0.9 for the first half despite $4.3 of net income, principally because of a $5.9 increase in net investment in leases and increases in inventory and income taxes receivable. Cash rose $4.9 to $25.0.
- No borrowings were outstanding under the $10.0 revolving credit facility, which expires August 2021; the company reported compliance with its covenants. It stated available resources should meet working-capital and capital-expenditure needs for at least 12 months.
Material changes, outlook, and risks
- Growth reflected higher Flexitouch sales and rentals, expanded salesforce, greater patient and physician awareness, expanded payer coverage, and Medicare-channel growth. Medicare revenue increased to $4.8 in Q2 from $2.0 and to $8.9 in the first half from $4.6.
- Adoption of ASC 842 changed rental accounting: new rental agreements are generally treated as sales-type leases, with revenue and cost recognized at lease commencement. Management said the change contributed 5 percentage points to Q2 and 7 percentage points to first-half year-over-year revenue growth. Prior-year periods were not restated.
- Seasonality typically depresses first-quarter demand and supports higher third- and fourth-quarter revenue as commercially insured patients meet deductibles. The filing provides no numerical full-year revenue or earnings guidance.
- The salesforce exceeded 215 employees, versus more than 170 a year earlier. Management planned to begin selling the Airwear wrap in Q4 2019 and intended to discontinue Actitouch in Q4 2019; Actitouch inventory and intangibles had been fully impaired in 2018.
- Commitments include $46.4 of purchase orders expected within one year and $19.9 of future headquarters lease commitments not yet recognized on the balance sheet. The new headquarters lease is expected to commence in Q4 2019 and runs through February 2030.
- Two vendors accounted for 33% of purchases in the first half. Key stated risks include reimbursement access, payer coverage, competition, supplier reliance, regulation, product development, and the company’s ability to expand and integrate acquisitions.
- A competitor’s qui tam lawsuit alleges violations involving Medicare and Medicaid claims and alleged retaliation under the False Claims Act. The U.S. declined to intervene; the company’s motion to dismiss was pending. The company denied the allegations and said it would defend the case. Potential exposure is not quantified in the filing.
Important facts for investors to verify
- Whether reported growth persists after separating underlying demand from ASC 842’s effect on rental revenue recognition.
- Trends in gross margins, particularly the effects of payer pricing, payer mix, and rental economics.
- Cash conversion and working-capital needs, including lease investments, inventory, and receivables.
- Execution and costs associated with the Q4 2019 Airwear launch, Actitouch discontinuation, and new headquarters lease.
- Developments in the pending lawsuit, payer reimbursement and coverage, and dependence on major suppliers.