Inogen, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Financial statement amounts below are in millions of dollars unless stated otherwise. The financial statements are unaudited.
Business context
Inogen develops, manufactures, and sells or rents portable oxygen concentrators and related products for long-term oxygen therapy. It operates as one reportable segment. Sales are made through direct-to-consumer and business-to-business channels; rental revenue is primarily reimbursed by Medicare and other payors.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $101.1 | $97.2 | $191.3 | $176.3 |
| Gross profit | $50.2 | $48.5 | $94.6 | $86.2 |
| Gross margin | 49.7% | 49.8% | 49.5% | 48.9% |
| Operating income | $12.1 | $14.0 | $17.0 | $22.7 |
| Net income | $10.2 | $14.6 | $15.5 | $25.4 |
| Diluted EPS | $0.45 | $0.65 | $0.69 | $1.13 |
| Adjusted EBITDA (non-GAAP) | $16.8 | $19.0 | $27.9 | $34.5 |
For Q2, sales revenue rose 4.2% to $95.9 million while rental revenue slipped 1.0% to $5.2 million. Sales gross margin was 50.7%, down from 51.1%; rental gross margin improved to 30.4% from 27.6%. For the first half, sales revenue rose 9.1% and rental revenue declined 1.3%. Operating expenses increased, particularly sales and marketing: $27.8 million in Q2, up 20.7%, including $11.6 million of media and advertising expense versus $6.3 million a year earlier. Management attributed lower net income in both periods primarily to higher operating expenses and a higher effective tax rate; the prior-year periods included substantial excess tax benefits from stock-based compensation.
Six-month operating cash flow was $16.6 million, down from $33.3 million. Management cited a $24.6 million net cash use from changes in operating assets and liabilities, including higher receivables. Investing activities used $1.8 million and financing activities provided $2.6 million. At June 30, cash and cash equivalents were $213.9 million, with $42.2 million in marketable securities; net working capital was $294.4 million. The balance sheet reports no borrowings or other debt.
Total assets were $403.8 million and total liabilities were $70.0 million at June 30. Accounts receivable, net, was $46.7 million, compared with $37.0 million at year-end 2018. One business-to-business customer represented $19.0 million of gross receivables; the company reported credit insurance coverage of up to $20.0 million for that customer, subject to a deductible and retention.
Material changes versus the prior comparable period
- Q2 revenue increased 3.9%, but operating income declined 13.4% and net income declined 30.5%. First-half revenue rose 8.5%, while operating income fell 25.2% and net income fell 39.0%.
- Domestic direct-to-consumer sales grew 14.0% in Q2 and 23.4% in the first half. Domestic business-to-business sales fell 10.0% and 8.6%, respectively; international business-to-business sales grew 8.7% and 12.5%.
- A national provider customer of the private-label partner accounted for $0.7 million of Q2 2019 revenue versus $8.3 million in Q2 2018, and $1.4 million in first-half 2019 versus $17.6 million in first-half 2018.
- Oxygen systems sold increased to approximately 56,500 in Q2 from 54,700, and to 106,900 in the first half from 100,100. Rental patients on service declined 9.1% year over year; the company had approximately 25,900 at June 30, 2019 versus 28,500 a year earlier.
- Cash and cash equivalents increased $17.3 million from year-end, but first-half operating cash flow was about half the prior-year level. The company adopted lease accounting on January 1, 2019, recognizing operating lease assets and liabilities; adoption did not materially affect results.
Outlook, commentary, and key risks
- Management expected rental revenue to decline modestly in 2019, citing lower sales capacity and rental setups, a 3.9% Medicare reimbursement reduction effective January 1, 2019, and an accounting reclassification of rental bad-debt expense. It expected rental patients and rental revenue to increase in 2020, while noting that the benefit of additional setups takes time to accrue.
- Management reported higher-than-expected sales-representative attrition and expected year-end 2019 sales headcount to remain significantly below year-end 2018 levels. It restarted hiring at a more controlled pace, anticipated direct-to-consumer growth headwinds in 2019, and expected increased marketing spending.
- The Inogen One G5 launched in the U.S. direct-to-consumer channel in April 2019; launches in domestic business-to-business and international channels were planned, subject to clearances. Management expected G5 to become its lowest-cost product at volume.
- Medicare competitive bidding Round 2021 creates reimbursement uncertainty. The company estimated that proposed lead-item pricing could reduce E1392 reimbursement by about 42% and combined E1390/E1392 reimbursement by about 15%; bidding began in July 2019, with contract pricing expected in 2020. Stationary oxygen code E1390 was also again placed on CMS’s list of items that could potentially require prior authorization.
- On August 6, 2019, the company entered into a definitive agreement to acquire New Aera for approximately $70.4 million in cash plus up to $31.4 million in contingent earn-outs. The transaction was expected to close in August and would use existing cash and marketable securities. Integration, regulatory clearances, commercialization, and potential acquired intellectual-property issues are risks.
- The filing describes product corrective actions initiated in July 2019: a software change for approximately 8,000 Inogen One G3 and OxyGo units and replacement or field servicing of approximately 3,000 Inogen One G5 units after a motherboard component issue. The company warned of possible higher costs and regulatory or reputational effects.
- Two securities class actions were consolidated; an amended complaint alleged, among other things, market-size and sales-practice misstatements. A shareholder derivative action making similar allegations was stayed pending the class-action motion-to-dismiss stage. The company said it would vigorously defend both matters; potential damages were unspecified.
- Other exposures include tariffs on imported components, dependence on a limited number of suppliers, customer credit concentration, foreign-exchange movements, reimbursement and regulatory changes, and a new headquarters lease commencing in 2020. Outstanding supplier purchase orders were approximately $61.7 million at June 30.
Important facts for investors to verify
- Whether direct-to-consumer sales productivity and marketing returns offset lower sales-representative headcount and weakness in domestic business-to-business demand.
- Trends in rental patient additions, capped patients (20.2% of patients on service versus 17.7% a year earlier), reimbursement rates, and the outcome of Round 2021 bidding and potential prior authorization.
- Receivables collection and customer concentration, particularly the large business-to-business balance, and the factors behind the year-over-year decline in operating cash flow.
- Costs, regulatory handling, and customer impact of the G3/OxyGo and G5 corrective actions, along with G5 launch progress and manufacturing economics.
- New Aera closing, cash consideration and earn-out conditions, integration costs, regulatory clearances, commercialization prospects, and any intellectual-property claims.
- Developments in the securities and derivative lawsuits and any resulting costs or effects on management resources.