Inogen, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also presents unaudited quarterly results, including fourth-quarter 2018. Financial amounts below are in U.S. dollars; annual figures are in millions unless stated otherwise.
Business context and results
Inogen develops, manufactures and markets portable oxygen concentrators and stationary oxygen systems for long-term oxygen therapy. It sells through direct-to-consumer and business-to-business channels and also rents equipment directly to patients, primarily for insurance reimbursement. Sales accounted for 93.8% of 2018 revenue; rentals accounted for 6.2%.
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $358.1 | $249.4 | +43.6% |
| Sales revenue | $336.0 | $225.5 | +49.0% |
| Rental revenue | $22.1 | $23.9 | -7.7% |
| Gross profit / gross margin | $178.6 / 49.9% | $121.2 / 48.6% | +47.3% / +1.3 pp |
| Operating income / operating margin | $37.9 / 10.6% | $27.6 / 11.1% | +37.3% / -0.5 pp |
| Net income / diluted EPS | $51.8 / $2.30 | $21.0 / $0.96 | +146.9% / +139.6% |
| Operating cash flow | $60.0 | $60.5 | -0.9% |
| Capital expenditures and rental equipment purchases | $12.6 | $6.9 | Increased |
Sales growth reflected approximately 198,600 systems sold, up from 128,000 in 2017, with expansion in U.S. direct-to-consumer sales and domestic and international business-to-business sales. International revenue was $77.3 million, or 21.6% of total revenue. Sales gross margin was 51.2%, versus 51.1%; rental gross margin improved to 29.7% from 24.7%.
For Q4 2018, revenue was $86.5 million and net income was $10.0 million (diluted EPS $0.44), compared with Q4 2017 revenue of $63.8 million and a net loss of $0.6 million (diluted loss per share $0.03). Q4 2018 revenue and net income were below Q3 2018 levels of $95.3 million and $16.4 million, respectively.
Liquidity, debt and financial position
At year-end, cash and cash equivalents were $196.6 million and marketable securities were $43.7 million. Working capital was $268.0 million, compared with $194.6 million a year earlier. Total debt was zero; the company reported no credit facility. Operating cash flow was $60.0 million, investing cash outflow was $25.0 million, and financing cash inflow was $18.3 million. Management said existing resources and expected cash generation should fund projected operating and investing needs for at least 12 months. Total liabilities were $65.5 million and stockholders’ equity was $310.4 million.
Material changes, outlook and risks
- Sales and marketing expense rose 88.4% to $95.6 million, primarily from increased sales headcount and advertising. Advertising expense was $30.8 million, versus $12.5 million in 2017. Operating income grew more slowly than revenue as the company invested in expansion.
- Net income benefited significantly from tax items: the company recorded an income tax benefit of $11.4 million and said excess stock-based-compensation tax benefits reduced tax expense by $21.2 million and the effective tax rate by 52.5 percentage points. The reported effective tax rate was -28.2%; net income growth should therefore be considered in light of these items.
- Management expected rental revenue to increase modestly in 2019 despite a further 3.9% Medicare reimbursement reduction effective January 1, 2019. It expected rental gross margin to improve. The filing provides no specific 2019 total revenue or earnings guidance.
- Management expected to launch the Inogen One G5 in the first half of 2019, initially through direct-to-consumer sales, and expected it to offer greater oxygen capacity, smaller size and longer battery life than the G3. The company also launched Inogen Connect in late 2018 and launched Inogen Capital, a third-party-financed program for HME customers.
- Reimbursement remains a key uncertainty. Medicare rental revenue was 6.2% of total revenue, and 19.1% of rental patients were in the capped period, up from 17.0%. New competitive-bidding contracts were not expected until 2021; future pricing effects were unclear.
- Other notable risks include reliance on a private-label customer that contributed more than 10% of revenue; three suppliers representing 42.1% of raw-material purchases; foreign-exchange exposure; and manufacturing dependence on single-source components and a Czech contract manufacturer for most European G3 production. The company estimated U.S. tariffs could increase average unit cost by a low-single-digit percentage beginning March 2019.
- In April 2018, Inogen disclosed unauthorized access to an employee email account, potentially affecting personal information of approximately 30,000 current and former rental customers. It reported notification, remediation and security measures; related costs and potential claims remain relevant to monitor.
- The company reported no accrual for lawsuits, claims or investigations and did not anticipate a material adverse effect from pending proceedings. Deloitte issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective at year-end.
Most important facts for investors to verify
- Whether higher system volumes and expanded sales staffing convert into sustained revenue and operating-profit growth, given sharply higher sales and marketing spending.
- How the 2019 Medicare rate changes and the next competitive-bidding round affect rental economics, capped-patient servicing costs and patient additions.
- Whether the G5 launch, European expansion and Inogen Capital program meet management’s timing and adoption expectations.
- Customer concentration, collection risk and the credit exposure associated with large business-to-business receivables; one customer’s year-end receivable was $16.2 million.
- The recurring impact of stock-based-compensation tax benefits on reported earnings and the sustainability of cash generation as inventory and receivables grow.
- Any further costs, claims or regulatory consequences related to the customer data incident, tariffs, supplier concentration or medical-device compliance.