Tactile Systems Technology, Inc. (TCMD) — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context and reporting period
Tactile Medical develops and sells home-use medical devices for lymphedema and chronic venous conditions. Its Flexitouch system generated 90% of revenue in the first nine months of 2019. The company sells and rents products, primarily in the United States, and relies on third-party payers for reimbursement. Results are seasonal: commercial-insurance demand is generally lower in Q1 and higher in Q3 and Q4.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $49.6 | $36.3 | $132.4 | $97.3 |
| Gross profit | $35.4 | $26.2 | $93.1 | $70.2 |
| Gross margin | 71% | 72% | 70% | 72% |
| Operating income | $3.2 | $1.4 | $4.4 | $0.9 |
| Net income | $2.4 | $1.7 | $6.7 | $4.3 |
| Diluted EPS | $0.12 | $0.09 | $0.34 | $0.22 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $2.4 | $3.7 |
- Revenue growth: Q3 revenue rose 37%; nine-month revenue rose 36%. Sales revenue increased 30% and 28%, respectively, while rental revenue increased 101% and 108%. Adoption of ASC 842 contributed approximately 3 percentage points to Q3 and 5 percentage points to nine-month revenue growth.
- Profitability: Q3 operating margin improved to approximately 6% from 4%. Nine-month operating margin was approximately 3%, versus 1%. Sales gross margin was 71% in Q3 and 70% for nine months, compared with 72% in both prior-year periods; rental gross margin was 70% versus 71%.
- Cash and liquidity: At September 30, cash and cash equivalents were $19.8, marketable securities $24.9, and net accounts receivable $27.7. Current assets were $102.7 and current liabilities $24.1. Operating cash flow was $2.4 for nine months, with cash declining $0.3 to $19.8.
- Debt and leases: No borrowings were outstanding under the $10.0 revolving credit facility, which expires in August 2021; the company reported compliance with its financial covenants. Operating lease liabilities totaled $15.4, including $2.0 current. The company also disclosed $5.2 of additional commitments for the planned second phase of its headquarters lease, not yet recognized as an operating lease liability.
Material changes versus prior comparable periods
- Growth was primarily driven by Flexitouch sales and rentals, up 34% in both comparison periods, supported by salesforce expansion, greater clinician and patient awareness, payer coverage, and Medicare growth. Entre/Actitouch revenue increased 64% in Q3 and 57% for nine months.
- Operating expenses rose 30% in Q3 and 28% for nine months, principally from continued salesforce, patient-training, reimbursement, and corporate-function investment. Sales and marketing expenses increased 33% in both periods.
- Gross margin declined year over year. Management cited payer and product mix, the pricing effect of a large private-insurer contract effective July 2018, and amortization related to licensed assets.
- Operating cash flow decreased from $3.7 to $2.4 for nine months, as growth in lease investments, inventory, receivables and income taxes receivable used cash. Inventory increased to $16.9 from $11.2 at year-end 2018.
- ASC 842 adoption changed lease accounting and presentation: qualifying new rental arrangements are treated as sales-type leases, with revenue and cost recognized at lease commencement. Prior-year periods were not restated.
Outlook, commentary, risks, contingencies, and unusual items
- Outlook: The filing provides no quantified revenue or earnings guidance. Management said available cash, marketable securities, operating cash flows, and the credit facility should fund working capital and capital needs for at least the next 12 months.
- Products: Management planned to discontinue the Actitouch product line in Q4 2019, following a 2018 impairment of related inventory and intangible assets. The company planned to begin selling the licensed Airwear wrap in Q1 2020.
- Risks and dependencies: Key exposures include payer reimbursement and coverage, competition, regulatory changes, supplier dependence, product and technology risks, and the ability to execute growth or acquisition plans. Two vendors accounted for 42% of purchases in Q3 2019 and 37% for the nine-month period. Purchase orders totaled $35.1, expected to be received within one year.
- Legal contingency: A competitor’s qui tam complaint alleges violations involving Medicare and Medicaid claims and alleged retaliation. The United States declined to intervene; the company’s motion to dismiss was pending. Tactile said it considers the allegations meritless and intends to defend the case. The filing does not provide a clear estimate of potential loss.
- Tax and equity items: Q3 tax expense was $0.9, versus a $0.2 benefit in Q3 2018. For nine months, the company recorded a $1.8 tax benefit, mainly reflecting tax benefits related to share-based compensation; a $0.7 stock-compensation charge reflected an estimated PSU payout increased to 150% of target.
- Seasonality and controls: Q3 and Q4 typically benefit from patients having met commercial insurance deductibles and year-end flexible-spending-account use. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether revenue growth and payer access continue, particularly for Flexitouch and Medicare, and how much reported growth reflects ASC 842 presentation.
- Whether gross margins stabilize amid payer mix and contract pricing pressure, and whether operating-expense growth converts into sustained operating leverage.
- Whether operating cash generation improves as lease investments, inventory, and receivables expand; review inventory levels and collections.
- Progress on the Actitouch discontinuation and Airwear launch, including any related costs or revenue contribution.
- Developments in the qui tam litigation and any material change in the company’s assessment of exposure.
- Execution of the new headquarters leases, $35.1 of purchase commitments, and continued compliance with credit-facility covenants.