ResMed Inc. — Form 10-Q Summary
Business and period: ResMed designs and sells sleep and respiratory-care devices and operates software-as-a-service (SaaS) businesses for out-of-hospital healthcare providers. This filing covers the fiscal second quarter and six months ended December 31, 2020; comparisons are with the same periods in 2019. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2020 |
|---|---|---|
| Revenue | $800.0 million, up 9% (7% constant currency) | $1,552.0 million, up 10% (8% constant currency) |
| Gross profit and margin | $462.5 million; 57.8% (58.0% prior year) | $901.1 million; 58.1% (57.8% prior year) |
| Operating income | $221.7 million, versus $197.8 million | $438.6 million, versus $368.9 million |
| Net income | $179.5 million, up 12% | $357.9 million, up 27% |
| Diluted EPS | $1.23, versus $1.10 | $2.45, versus $1.93 |
| Operating cash flow | Not separately reported for the quarter | $313.9 million, versus $232.3 million |
Quarterly revenue comprised $708.2 million from Sleep and Respiratory Care, up 9%, and $91.8 million from SaaS, up 6%. Device revenue grew 7% and masks and other revenue grew 11%. SaaS growth was attributed primarily to resupply service offerings. The quarterly gross margin decline reflected the Portable Oxygen Concentrator (POC) business closure inventory write-down, partly offset by product mix, currency movements and lower acquired-intangible amortization.
Financial position and liquidity
- At December 31, 2020, cash and cash equivalents were $255.9 million, compared with $463.2 million at June 30, 2020. Working capital was $874.2 million, down from $920.7 million.
- Total debt was $825.7 million net on the balance sheet; the filing reports $829.0 million of principal outstanding across the credit facilities and senior notes, down from $1.2 billion at June 30. The company had $1.4 billion available under its revolving facility and reported $1.7 billion in combined cash and available revolver liquidity.
- Management said operating cash flow and available borrowings should be sufficient to fund operations and expected capital expenditures for the next 12 months and beyond. Debt covenants were met at quarter-end.
- Six-month investing cash outflow was $51.8 million; financing cash outflow was $492.1 million, including $406.0 million of debt repayments and $113.2 million of dividends paid. Capital expenditures were $48.4 million.
- Inventories rose 14% from June 30 to $474.8 million, which the company attributed to revenue growth and supply-chain complexity and elongation related to COVID-19.
Changes, outlook and risks
- COVID-19: The company reported minimal incremental pandemic-related demand for ventilators and masks in the quarter and expected minimal COVID-generated ventilator demand in the second half of fiscal 2021. Disruption to sleep-apnea diagnostic and prescription pathways continued to weigh on demand from new patients; management said mask resupply demand had not been significantly affected. SaaS customer acquisition and expansion were also adversely affected by customer caution. The duration and extent of these effects remained uncertain.
- POC exit: ResMed closed its POC business in November 2020. It recognized $13.9 million in related costs, including a $5.2 million inventory write-down, $5.1 million of accelerated amortization, $2.3 million of asset impairments, employee costs and contract cancellations. A $2.6 million unpaid balance remained; management did not expect further costs from the closure.
- Costs and investment: Six-month SG&A declined 3% year over year, while R&D rose 12% to $109.5 million, reflecting increased personnel for product development. Six-month diluted EPS growth also benefited from lower interest expense and equity-method investment losses, and a gain on marketable securities.
- Tax contingency: The Australian Tax Office asserted $151.7 million of additional tax, $38.4 million of interest and $75.9 million of penalties concerning 2009–2013 tax years. ResMed disputes the assessments and believes it is more likely than not to prevail. It recorded a receivable for $75.9 million previously paid; an adverse outcome could require additional payments and tax expense.
- Other risks: The filing identifies foreign-exchange exposure, variable-rate debt, supply-chain and pandemic uncertainty, and ordinary-course legal matters. Management did not expect routine litigation to have a material adverse effect. No material changes to the previously reported risk factors were identified.
- Capital returns: The share-repurchase program remained suspended; no shares were repurchased in the quarter. The quarterly dividend declared was $0.39 per share.
Investor verification priorities
- Check whether device and mask growth, especially outside the Americas, persists excluding favorable currency effects.
- Track the continuing impact of COVID-19 on new-patient diagnosis, resupply, SaaS customer activity and ventilator demand.
- Monitor inventory growth, supply-chain conditions and the company’s ability to convert earnings into operating cash flow.
- Review debt repayment, liquidity and covenant headroom, alongside the suspended repurchase program and dividend payments.
- Follow developments in the Australian tax dispute and verify the potential financial exposure if the company’s position is not sustained.