Inogen, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This annual report also presents fourth-quarter results. Inogen develops, manufactures, and sells portable oxygen concentrators, with U.S. direct-to-consumer sales and rentals and international and domestic business-to-business sales.
Financial performance
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $249.4 million | $202.8 million |
| Sales revenue | $225.5 million | $168.2 million |
| Rental revenue | $23.9 million | $34.7 million |
| Gross profit / gross margin | $121.2 million / 48.6% | $97.3 million / 48.0% |
| Operating income | $27.6 million | $22.9 million |
| Net income | $21.0 million | $20.5 million |
| Diluted EPS | $0.96 | $0.97 |
| Cash from operating activities | $60.5 million | $31.0 million |
Sales gross margin rose to 51.1% from 49.4%; rental gross margin fell to 24.7% from 41.2%. Adjusted EBITDA, a non-GAAP measure, was $50.8 million versus $43.4 million. The company ended the year with $143.0 million in cash and cash equivalents and $31.0 million in marketable securities; working capital was $194.6 million. It reported no debt at year-end. The former $15 million revolving credit facility expired in November 2017 and was not replaced.
Fourth quarter: Revenue was $63.8 million, compared with $50.9 million in Q4 2016 and $69.0 million in Q3 2017. The company reported a net loss of $0.6 million, versus net income of $5.3 million in Q4 2016. Q4 2017 included a $6.4 million income tax provision, primarily reflecting tax-reform impacts.
Material changes versus prior year
- Total revenue grew 23.0%, led by sales revenue growth of 34.1%. Systems sold increased to approximately 128,000 from 92,000.
- Rental revenue declined 30.9%, reflecting fewer rental patients on service and lower Medicare and private-payor reimbursement. Rentals fell to 9.6% of total revenue from 17.1%.
- Sales gross margin improved with higher direct-to-consumer mix and lower unit costs. Overall gross margin increased modestly, as the sales improvement offset weaker rental margins.
- Sales and marketing expense increased 35.2% to $50.8 million, mainly due to sales-force expansion and higher advertising. General and administrative expense rose 18.2% to $37.6 million.
- Net income was nearly flat despite higher revenue and operating income, in part because of a provisional $7.6 million non-cash tax charge from the Tax Cuts and Jobs Act. Stock-based compensation tax benefits reduced 2017 tax expense by $9.9 million, making the effective tax rate sensitive to share-price-related tax deductions.
- Operating cash flow increased to $60.5 million. Investing activities used $24.4 million, including a $4.5 million net cash payment for the MedSupport acquisition and investment in equipment and other assets.
Outlook, commentary, and risks
- Management expected 2018 rental revenue to be approximately flat with 2017, defined as within plus or minus 5%, while continuing to prioritize sales over rentals. It expected rental gross margin to improve, citing lower rental cost per patient and limited reimbursement reductions.
- Management planned further investment in sales, marketing, product development, and facilities. It was developing the next-generation Inogen One G5 and expected its European contract manufacturer to ramp production in 2018. No specific sales or earnings guidance was provided.
- Medicare competitive bidding and reimbursement reductions remain central risks. Medicare programs accounted for 73.0% of rental revenue but 7.0% of total revenue in 2017. Further rate cuts, changes to bidding rules, or reduced private-payor reimbursement could pressure rental revenue and profitability.
- Customer concentration is material: one customer represented more than 10% of revenue in both 2017 and 2016, and the top 10 customers represented 40.1% of 2017 total revenue. Two customers each exceeded 10% of year-end net receivables; one large business-to-business receivable was supported by credit insurance subject to a deductible and retention.
- Other risks include dependence on single-source components, production and quality risks with the new European contract manufacturer, competition, reimbursement and billing audits, medical-device regulation, product liability, foreign exchange, and execution of growth plans. The company also disclosed $51.1 million of purchase obligations due within one year.
- Two patent disputes were settled: the SDGIP settlement cost $3.0 million, including $0.6 million recognized as past-damages expense and $2.4 million recorded as an intangible asset; the CAIRE settlement cost $1.0 million, with $0.1 million recognized as expense and $0.9 million recorded as an intangible asset. The company denied wrongdoing in both matters.
- The company acquired European distributor MedSupport in May 2017 for approximately $5.8 million gross consideration and recorded $2.4 million of goodwill at year-end. Management said existing capital resources and expected operating cash generation should cover projected needs for at least 12 months.
Key facts for investors to verify
- Whether sales growth and improving sales margins can continue as sales-force, advertising, and other operating costs rise.
- Whether rental revenue stabilizes as expected and how future Medicare and private-payor rate or bidding changes affect rental economics.
- The sustainability of reported earnings and cash generation after considering the tax-reform charge, stock-based compensation tax benefits, and other non-cash adjustments.
- Collection and credit exposure for concentrated business-to-business receivables, including the terms and adequacy of credit insurance.
- Progress on the G5, European manufacturing ramp, and MedSupport integration, including any impact on costs, quality, and customer service.
Deloitte issued unqualified opinions on the 2017 consolidated financial statements and internal control over financial reporting. Management also concluded that disclosure controls and internal controls were effective as of December 31, 2017.