Inogen, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; comparisons are to the same 2016 periods. Financial statement amounts are in millions of dollars unless noted. Inogen develops, manufactures, sells and rents portable oxygen concentrators, including through direct-to-consumer and business-to-business channels.
Financial performance
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $69.0 | $54.4 | $185.7 | $152.0 |
| Sales revenue | $63.1 | $47.2 | $167.1 | $125.6 |
| Rental revenue | $5.9 | $7.2 | $18.5 | $26.4 |
| Gross profit / margin | $33.2 / 48.1% | $25.1 / 46.2% | $90.5 / 48.7% | $72.6 / 47.8% |
| Operating income | $8.3 | $5.4 | $22.4 | $16.7 |
| Net income / diluted EPS | $7.3 / $0.33 | $5.2 / $0.25 | $21.6 / $0.99 | $15.3 / $0.73 |
| Operating cash flow | — | — | $47.5 | $25.9 |
Quarterly revenue rose 26.8% and nine-month revenue rose 22.2%. Sales growth reflected higher system volumes: approximately 36,000 systems sold in Q3 versus 26,600, and 94,000 for the nine months versus 68,700. Sales gross margin improved, supported by lower unit costs and a greater mix of higher-margin domestic direct-to-consumer sales. Rental revenue fell as reimbursement rates and rental patients declined, while the company emphasized sales over rentals. Rental gross margin weakened to 24.3% in Q3 from 30.7%, and to 25.1% for nine months from 41.2%.
Operating expenses were $24.8 million in Q3, up 25.9%, and $68.1 million for nine months, up 21.7%. Sales and marketing drove much of the increase, including higher advertising, expanded sales staffing and implementation costs for a new CRM system. General and administrative costs included patent litigation expenses and the SDGIP settlement accrual.
Cash, liquidity and debt
At September 30, 2017, cash and cash equivalents were $129.7 million, marketable securities were $33.4 million, and working capital was $184.3 million. Nine-month cash flow was $47.5 million provided by operations, $21.4 million used in investing and $10.7 million provided by financing; cash increased $36.8 million. Investing included the MedSupport acquisition and purchases of rental equipment and other fixed assets. The company reported no outstanding borrowings. Its unused $15 million revolving credit facility expired November 7, 2017, and Inogen said it did not plan to renew it. Management expected available liquidity and operating cash generation to fund projected operating and investing needs for at least twelve months.
Outlook, developments and key risks
- Management expected rental revenue to decline approximately 32% in 2017 versus 2016, primarily due to reimbursement reductions and a sales-over-rentals strategy. It expected rental revenue to be relatively flat in 2018, assuming no known Medicare reimbursement declines. No overall revenue or earnings guidance was provided in the supplied filing text.
- Medicare reimbursement reductions and competitive bidding remain important risks; private-payor rates may also respond to lower Medicare rates. The company reported approximately 31,600 rental patients at quarter-end, down from 33,700 a year earlier, and capped-rental patients were 17.1% of patients on service versus 16.0% a year earlier.
- Inogen acquired Dutch distributor MedSupport in May for approximately $5.8 million, net of estimated working-capital adjustments. The acquisition added European distribution, customer support and repair capabilities; purchase accounting remained preliminary.
- The SDGIP patent and trade-secret lawsuit was settled after quarter-end. Inogen accrued $0.6 million for alleged past damages in Q3, paid $3.0 million in November, and expected to record a $2.4 million intangible asset for future patent-use rights in Q4. The company stated the settlement was not an admission of wrongdoing. A separate CAIRE patent lawsuit remained pending; Inogen denied the allegations and sought inter partes review.
- Other exposures include reliance on a limited set of component suppliers and major customers, reimbursement and healthcare regulation, product and regulatory compliance, foreign-exchange movements, and execution risks from growth and European contract manufacturing. One customer represented more than 10% of nine-month revenue; one business-to-business receivable was $11.8 million and had extended payment terms, with credit insurance coverage described in the filing.
- Inogen planned to adopt the new revenue recognition standard on January 1, 2018 using the modified retrospective method; its impact was still being assessed. Management reported disclosure controls and procedures were effective as of September 30, 2017.
Investor verification points
- Verify the sustainability and profitability of system-sales growth, including sales-channel mix, unit volumes, average selling prices and customer concentration.
- Track Medicare and private-payor reimbursement changes, rental patient counts, capped-rental exposure and collection/adjustment trends.
- Review the CAIRE litigation and any subsequent developments, and confirm the accounting and cash effects of the SDGIP settlement.
- Assess MedSupport integration, European demand and contract-manufacturing ramp-up, as well as single-source supplier capacity and the status of credit facilities after expiration.
- Check the impact of adopting the revenue recognition standard and whether operating cash flow continues to support planned growth and investment.