Inogen, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; financial statements are unaudited. Unless stated otherwise, dollar amounts are in millions.
Business context
Inogen develops, manufactures, sells, and rents portable oxygen concentrators. It operates as one reportable segment. Growth strategy centers on expanding direct-to-consumer and business-to-business sales, international reach, and product offerings. On May 4, 2017, Inogen acquired Dutch distributor MedSupport Systems B.V. to establish European customer support and repair operations; the purchase price was approximately $5.9 million, and purchase-price allocation remained preliminary.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $64.1 | $54.6 | $116.6 | $97.6 |
| Sales revenue | $58.0 | $45.6 | $104.0 | $78.4 |
| Rental revenue | $6.1 | $9.0 | $12.6 | $19.2 |
| Gross profit | $31.6 | $26.2 | $57.3 | $47.5 |
| Income from operations | $8.5 | $8.0 | $14.1 | $11.3 |
| Net income | $8.3 | $7.5 | $14.3 | $10.0 |
| Diluted EPS | $0.38 | $0.36 | $0.66 | $0.48 |
| Adjusted EBITDA (non-GAAP) | $14.4 | $13.6 | $25.2 | $21.7 |
Q2 total gross margin was 49.2%, versus 48.0%; sales gross margin improved to 51.8% from 49.4%, while rental gross margin fell to 25.0% from 41.0%. For the first half, total gross margin was 49.1% versus 48.7%; sales margin was 52.0% versus 49.5%, and rental margin was 25.5% versus 45.2%.
- Cash flow: Six-month operating cash flow was $30.1 million, compared with $16.8 million in 2016. Investing used $15.6 million, including $4.4 million net cash for the acquisition; financing provided $7.3 million, mainly from stock-option exercises and employee stock purchases. Cash and cash equivalents increased $21.9 million.
- Liquidity: At June 30, cash and cash equivalents were $114.7 million and marketable securities were $29.5 million. Working capital was $166.7 million. Current assets were $198.8 million and current liabilities were $32.2 million.
- Debt: No credit-facility borrowings or patent-licensing debt were outstanding. The company had $15.0 million available under its revolving credit facility and reported covenant EBITDA of $47.3 million versus a $12.5 million minimum, and tangible net worth of $203.8 million versus a $90.0 million minimum.
Changes versus comparable periods
- Q2 revenue rose 17.5% year over year; first-half revenue rose 19.5%. Sales growth reflected higher system volume: about 32,400 units in Q2 versus 25,100, and 58,000 for the first half versus 42,100.
- Sales revenue increased 27.3% in Q2 and 32.7% for the first half, supported by direct-to-consumer and business-to-business demand. Rental revenue declined 32.3% in Q2 and 34.2% for the first half, primarily due to lower Medicare and private-payor reimbursement and a strategic shift toward sales.
- Operating expenses increased: Q2 sales and marketing rose 24.7% and general and administrative rose 36.2%; first-half increases were 21.2% and 20.5%, respectively. Factors included sales-force and advertising investment, bad debt, patent defense, and acquisition-related costs.
- First-half net income increased 42.5%, reflecting higher revenue and gross profit and a lower effective tax rate. The six-month effective tax rate was 5.2%, with $4.7 million of excess stock-based-compensation tax benefits reducing tax expense; the company cautioned that the rate may vary with share-price effects.
Outlook, commentary, and risks
- Management expected total rental revenue to decline approximately 30% in 2017 versus 2016, citing reimbursement cuts, capped rental patients, and emphasis on sales. Capped patients were 17.9% of rental patients at June 30, 2017, up from 13.8% a year earlier; rental patients fell to approximately 32,300 from 33,600.
- Management expected higher direct-to-consumer sales in the second half of 2017 than in the first half, while noting near-term productivity disruption from the CRM system implemented in Q2 and planned Cleveland facility opening and hiring. The filing gives no clear numerical full-year sales or earnings guidance.
- The 21st Century Cures Act generated $0.2 million of rental revenue in Q1 2017; additional reimbursement was expected to be processed in Q3 and Q4. The company also identified seasonality, competition, foreign-exchange movements, and reimbursement policy changes as factors that could affect results.
- Material risks include dependence on Medicare and other payors, future reimbursement reductions and competitive bidding, customer credit and collection exposure, and reliance on a limited number of suppliers. One business-to-business customer represented more than 10% of net receivables ($11.1 million); the company had credit insurance coverage of up to $12.0 million, subject to a deductible and retention.
- Two intellectual-property lawsuits remained pending: Separation Design Group’s patent, trade-secret, and contract claims (PTAB review was instituted for both asserted patents) and CAIRE’s patent-infringement suit. Inogen denied the allegations and intended to contest them; outcomes and potential exposure were not quantified in the filing.
- Outstanding vendor purchase orders were approximately $36.6 million; minimum lease and specified contractual payments totaled $8.3 million. Management stated existing resources should cover projected operating and investing needs for at least 12 months, while noting liquidity assumptions could prove incorrect.
Important facts for investors to verify
- Whether sales growth and improved sales margins continue to offset the sharp decline in rental revenue and rental margins.
- Actual timing and amount of Cures Act reimbursement, and the progression of Medicare rates, capped patients, and rental-patient counts.
- Collection and credit risk for the large business-to-business receivable, alongside the adequacy and terms of its insurance coverage.
- Costs, liabilities, and business effects of the pending patent litigation and the MedSupport integration.
- Execution of the CRM transition, Cleveland facility expansion, and planned staffing, including their effect on productivity and operating expenses.