Business context and reporting period
Inogen, Inc. develops, manufactures and sells or rents portable oxygen concentrators and related respiratory products. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; financial statement amounts below are in U.S. dollars. Inogen acquired New Aera, a developer of portable non-invasive ventilators, on August 9, 2019.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $91.8m | $95.3m | $283.0m | $271.6m |
| Gross profit / margin | $43.3m / 47.2% | $48.8m / 51.2% | $137.9m / 48.7% | $135.0m / 49.7% |
| Operating income | $8.1m | $10.4m | $25.1m | $33.1m |
| Net income | $6.9m | $16.4m | $22.3m | $41.8m |
| Diluted EPS | $0.31 | $0.73 | $1.00 | $1.86 |
| Adjusted EBITDA (non-GAAP) | $12.8m | $16.3m | $40.8m | $50.8m |
Q3 sales revenue was $86.4m, down 3.7%; rental revenue was $5.4m, down 3.8%. For the nine months, sales revenue rose 4.6% to $267.1m while rental revenue declined 2.1% to $16.0m. Q3 sales gross margin fell to 48.2% from 52.3%; nine-month sales gross margin was 49.8% versus 51.1%. Management cited lower selling prices, sales-channel and product mix, higher G5 unit costs and inventory reserves as pressures. Q3 net income also reflected a less favorable tax comparison: Q3 2018 included $8.1m of excess tax benefits from stock compensation, versus a $0.1m tax deficiency in Q3 2019.
For the nine months, operating cash flow was $31.2m, compared with $47.6m a year earlier. Investing cash outflow was $75.5m, including $70.4m paid for New Aera net of cash acquired; financing cash inflow was $3.9m. Cash and cash equivalents were $156.1m and marketable securities $44.5m at September 30, 2019, together $200.6m. Net working capital was $239.8m. The balance sheet reports no borrowing balance; operating lease liabilities totaled $7.3m. Inogen stated its available resources and expected operating cash generation should fund projected operating and investing needs for at least 12 months.
Material changes, outlook and risks
- Q3 revenue declined mainly because international business-to-business sales fell 12.5%, particularly in Europe. Nine-month growth was driven by U.S. direct-to-consumer sales, up 14.3%; domestic business-to-business sales declined 5.9%. A large national provider’s revenue through the private-label partner fell to $2.3m for the nine months from $20.9m.
- System sales were approximately 51,600 in Q3, down from 52,400; nine-month unit sales increased to approximately 158,500 from 152,500. Management reported sales-representative headcount down substantially and expected slower direct-to-consumer growth in 2019 and the first half of 2020.
- Management expected rental revenue to decline modestly in 2019 and increase modestly in 2020 as rental-intake capacity expands. It expected additional marketing investment, lower sales-representative headcount at year-end 2019 than year-end 2018, and continued uncertainty in HME and reseller demand. No specific company-wide revenue or earnings guidance range is provided.
- Medicare reimbursement rates were reduced 3.9% effective January 1, 2019. Round 2021 bidding had closed; pricing and contracts were expected in 2020. Inogen estimated a potential approximately 42% reduction in E1392 rates and approximately 15% reduction in combined E1390/E1392 reimbursement under the lead-item methodology, but outcomes remained uncertain.
- The New Aera transaction included $70.5m cash at closing and up to $31.4m in earnout payments subject to performance targets. The reported earnout liability was $25.7m; purchase-price allocation was preliminary. New Aera added $77.7m of acquired technology intangibles and $31.1m of goodwill. Inogen targeted a combined ventilation-and-oxygen product launch in 2021.
- Reimbursement coding for New Aera’s SideKick TAV was disputed: after initial confirmation of code E0466, the coding contractor revised its communication to E1390 and E1352. Inogen appealed to CMS and had not received a response; management warned that the coding could constrain provider adoption and rentals.
- Inogen disclosed corrective actions affecting approximately 8,000 Inogen One G3/OxyGo units for a software-related operating condition and replacement or field service for approximately 500 G5 units with a motherboard component issue. The company said the units remained functional, but remediation could raise costs; regulatory response and reputational effects were uncertain.
- A securities class action and multiple derivative suits allege, among other things, misleading market-size statements and sales practices. The company denies the allegations and intends to defend itself; the class-action motion to dismiss hearing was scheduled for November 21, 2019. Damages sought were unspecified.
- Other material exposures include customer concentration in receivables, reliance on a limited number of component suppliers, foreign-exchange and reimbursement risks, $61.7m of outstanding supplier purchase orders, and future long-term facility leases. The filing also notes litigation and regulatory risks; it does not provide a clear estimate of potential losses for the shareholder suits.
Most important facts for investors to verify
- Whether direct-to-consumer sales productivity and staffing recover as management expects, and whether marketing spending translates into profitable growth.
- Actual Round 2021 oxygen reimbursement rates and contract awards, and CMS’s final coding decision for SideKick TAV.
- G5 and G3/OxyGo corrective-action costs, completion, and any regulatory or customer consequences.
- New Aera integration progress, commercialization and reimbursement prospects for TAV, and final purchase-price allocation and earnout exposure.
- Cash conversion and working-capital trends, including receivables from concentrated customers and the effect of acquisition and lease commitments.
- Developments in the securities and derivative litigation, including any change in the company’s assessment of potential exposure.