Inogen, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unless noted, dollar amounts below are in millions. Inogen develops, manufactures and sells portable oxygen concentrators and also rents oxygen equipment to patients.
Financial performance
- Q2 revenue: $103.4, up 1.8% year over year. Sales revenue was $89.3, down 1.1%; rental revenue was $14.1, up 25.1%.
- Q2 profitability: Gross profit was $46.3, with a 44.7% gross margin versus $50.3 and 49.6% a year earlier. Operating loss was $2.9 versus operating income of $11.7; net loss was $3.4 versus net income of $5.1. Diluted loss per share was $0.15 versus diluted earnings per share of $0.22.
- First-half revenue: $183.8, down 2.5%. Sales revenue fell 6.4% to $156.7, while rental revenue rose 28.2% to $27.1.
- First-half profitability: Gross profit was $81.3, with a 44.2% margin versus $90.2 and 47.9% a year earlier. Operating loss was $16.5 versus operating income of $9.5; net loss was $17.7 versus net income of $4.4. Diluted loss per share was $0.77 versus earnings per share of $0.19.
- Cash flow and liquidity: First-half operating cash use was $12.6, compared with $20.1 of operating cash provided in the prior-year period. Cash and cash equivalents were $223.6 at June 30; working capital was $256.1. Capital expenditures, including rental equipment, were approximately $9.3.
- Debt and obligations: The balance sheet reports no borrowings. Operating lease liabilities totaled $25.2. The New Aera earnout liability was $14.6, with potential cash earnout payments capped at $31.4. Outstanding supplier purchase orders due within one year were approximately $116.5.
Material changes and drivers
- System sales fell to approximately 42,400 in Q2 from 52,400, and to 72,800 in the first half from 101,800. Management attributed the declines chiefly to semiconductor shortages and a temporary production suspension in January and February 2022.
- Domestic business-to-business sales declined sharply: 59.3% in Q2 and 72.0% in the first half. International business-to-business sales increased 71.6% and 74.2%, respectively, partly reflecting higher average selling prices and a focus on European orders before existing EU certificates expired.
- Sales gross margin fell to 43.3% in Q2 from 48.4%, and to 42.5% for the first half from 46.7%. Management cited higher material, warranty, labor and overhead costs. Open-market semiconductor purchases added $8.0 of material costs in Q2 and $11.5 in the first half.
- Rental revenue increased with more patients on service and higher Medicare reimbursement rates. Rental gross margin nevertheless declined to 54.2% in Q2 from 58.6%, and to 54.4% for the first half from 57.0%, amid higher servicing and rental-equipment depreciation costs.
- Operating expenses increased. First-half R&D rose 40.4% to $11.4 and sales and marketing rose 6.6% to $58.4. G&A rose 57.3% to $27.9, primarily because the favorable noncash change in the earnout liability was smaller than in the prior-year period, alongside higher personnel costs.
Outlook, risks and unusual items
- Outlook: No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management expects existing cash and anticipated sales and rental cash generation to cover projected operating and investing needs for at least 12 months. It expects rental revenue to grow, while warning that supply constraints may prevent it from meeting all product demand.
- Supply chain and costs: Management expected semiconductor availability problems and cost inflation to persist through the remainder of 2022 and into 2023, with possible further production interruptions. It also cited other component constraints, the war in Ukraine, and hiring and wage pressures.
- European regulatory exposure: Existing EU Medical Device Directive certificates expired May 18, 2022; the company’s MDR submission remained under review. France granted temporary permission for G4 and G5 sales through October 2022. Management expected EU sales to be negatively affected until necessary approvals are obtained.
- Government investigation: In June 2022, the company received a civil investigative demand from the U.S. Attorney’s Office for the Northern District of Iowa in a False Claims Act investigation concerning alleged improper kickbacks in the portable oxygen concentrator industry. The inquiry concerns customer financing arrangements and a customer agreement involving marketing, exclusivity, discounts and financing terms. Inogen said it is cooperating and cannot predict the outcome or whether litigation is probable.
- Other exposures: Medicare represented 78.5% of rental revenue in the first half. The company also relies on a limited number of suppliers; three vendors accounted for 24.4%, 22.3% and 8.8% of first-half raw-material purchases. The company maintained a valuation allowance against deferred tax assets. Its statements are subject to foreign-currency effects and estimates, including warranty and receivable reserves.
Important facts for investors to verify
- Whether semiconductor supply and production capacity recover, and how much elevated component costs continue to affect unit sales and gross margins.
- Progress and timing of EU MDR approval, country-specific permissions, and the resulting impact on European sales.
- Developments in the False Claims Act investigation, including potential costs, settlements or operational consequences.
- Rental patient growth, reimbursement rates after COVID-19 public-health-emergency measures, and the return of Medicare sequestration reductions.
- Cash burn, working-capital needs, supplier purchase commitments and the ability to fund planned operations from available liquidity.