ResMed Inc. — Form 10-Q summary
Business context and period. ResMed designs and sells devices and software for sleep-disordered breathing and other respiratory disorders, and provides software-as-a-service (SaaS) to out-of-hospital healthcare providers. This unaudited report covers the three months ended September 30, 2019 (fiscal 2020 first quarter), compared with the three months ended September 30, 2018. Amounts below are in U.S. dollars.
Financial performance
| Metric | Quarter ended Sep. 30, 2019 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $681.1 million | $588.3 million | +16% reported; +17% constant currency |
| Gross profit / margin | $405.1 million / 59.5% | $343.1 million / 58.3% | Margin +1.2 percentage points |
| Operating income | $171.1 million | $144.1 million | +19% |
| Net income | $120.1 million | $105.7 million | +14% |
| Diluted EPS | $0.83 | $0.73 | +14% |
| Operating cash flow | $162.4 million | $48.1 million | Increase largely reflected lower income-tax payments |
Sleep and Respiratory Care revenue was $594.2 million, up 10% reported and 11% constant currency. Devices revenue grew 5%; masks and other revenue grew 18%. SaaS revenue was $86.9 million, up 83%, largely reflecting $34.8 million of MatrixCare revenue following its November 2018 acquisition. The filing reports segment operating profit of $198.2 million for Sleep and Respiratory Care and $23.8 million for SaaS.
Liquidity, debt and cash flows
- Cash and cash equivalents were $172.2 million at September 30, 2019, versus $147.1 million at June 30, 2019. Working capital was $610.6 million.
- Total debt outstanding was approximately $1.225 billion; balance-sheet debt, net of borrowing costs, was $1.220 billion. Debt declined from $1.271 billion at June 30. The company issued $500 million of senior notes in July and used the net proceeds to repay revolving-credit borrowings.
- ResMed reported compliance with debt covenants. The revolving and term facilities had a 3.2% interest rate at quarter-end; the senior notes carry fixed rates of 3.24% and 3.45%, due in 2026 and 2029.
- Cash from operations was $162.4 million; capital expenditures were $22.7 million. Cash dividends paid were $56.1 million. The company temporarily suspended share repurchases following recent acquisitions.
Material changes and management commentary
- Management attributed higher gross margin to manufacturing and procurement efficiencies, favorable product mix, and the MatrixCare acquisition.
- Operating expenses increased: SG&A rose 14% and R&D rose 24%, with acquisition-related costs a principal factor. R&D spending was $48.0 million.
- Other expense increased to $20.5 million from $5.3 million, including $11.0 million of interest expense and a $6.9 million loss from equity-method investments, related to the Verily joint venture.
- The effective tax rate fell to 20.2% from 23.9%, primarily due to the geographic mix of earnings.
- Adoption of lease accounting on July 1, 2019 added operating lease right-of-use assets of $77.6 million and lease liabilities of $81.3 million at adoption. At quarter-end, lease liabilities were $85.4 million. The filing says adoption did not materially affect the income statement.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings, or margin guidance. Management says it expects to meet liquidity and long-term debt needs using cash on hand, operating cash flow, and debt facilities, and identifies ongoing investment, product development, connected-care software, and acquisitions as elements of its growth strategy.
- Australian tax dispute: The Australian Taxation Office asserted $151.7 million of additional tax, $38.4 million of interest, and $75.9 million of penalties for tax years 2009–2013. ResMed disputes the assessments, expects a refund of the $75.9 million paid, and believes it is more likely than not to prevail. The ATO is auditing 2014–2017 and intends to audit 2018.
- Government investigations: ResMed is cooperating with U.S. government inquiries concerning industry practices and promotional programs. The company has tentatively agreed to a civil resolution for $39.5 million and recorded a $41.2 million reserve in fiscal 2019; negotiations were not complete, and potential ongoing obligations could apply.
- Management says ordinary-course litigation is not expected to have a material adverse effect. It reported no material change to the risk factors in its fiscal 2019 Form 10-K. Foreign exchange movements reduced quarterly revenue by about $9.1 million and cash by $4.0 million; the company uses currency hedges and does not use derivatives for speculation.
Most important facts for investors to verify
- Whether sales momentum in devices and masks, and SaaS growth after the MatrixCare acquisition, persists; distinguish organic growth from acquisition-driven growth.
- Whether gross-margin improvement continues and how acquisition-related operating costs and acquired-intangible amortization affect earnings.
- Cash-flow sustainability: this quarter’s year-over-year operating cash-flow increase was substantially affected by income-tax payments falling to $30.9 million from $125.0 million.
- Debt, variable-rate exposure, covenant headroom, and the effect of acquisition integration on leverage and capital allocation.
- Final outcomes and financial or compliance implications of the ATO dispute and U.S. government investigation; settlement terms were not final in this filing.