ResMed Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended December 31, 2018; filed January 31, 2019. Amounts are in U.S. dollars unless otherwise noted. Comparisons are with the corresponding 2017 periods.
Business context
ResMed designs, manufactures and markets equipment and cloud-based software for sleep-disordered breathing and other respiratory conditions. It reports Sleep and Respiratory Care and SaaS as reportable segments; SaaS became material following recent acquisitions.
Financial performance and changes
| Metric | Three months ended Dec. 31 | Six months ended Dec. 31 |
|---|---|---|
| Revenue | $651.1 million, up 8% (9% constant currency) | $1,239.4 million, up 10% (11% constant currency) |
| Gross profit / margin | $383.7 million / 58.9%, versus 58.2% | $726.8 million / 58.6%, versus 58.3% |
| Operating income | $157.1 million, versus $146.0 million | $301.2 million, versus $258.6 million |
| Net income | $124.6 million, versus $9.5 million | $230.4 million, versus $95.7 million |
| Diluted EPS | $0.86, versus $0.07 | $1.60, versus $0.67 |
| Operating cash flow | Six-month cash from operations was $177.6 million, versus $226.5 million |
Revenue growth reflected stronger Sleep and Respiratory Care sales and a sharp increase in SaaS revenue, largely from acquisitions. In the quarter, Sleep and Respiratory Care revenue was $587.9 million, up 4% (6% constant currency); SaaS revenue was $63.2 million, up 63%, including $22.4 million from MatrixCare and HealthcareFirst. Management attributed improved gross margin to manufacturing efficiencies and favorable product mix, partly offset by lower average selling prices. International currency movements reduced quarterly revenue by about $7.1 million and six-month revenue by about $11.9 million.
The year-over-year increase in net income chiefly reflects the prior-year comparison: 2017 results included unusually high tax expense following U.S. tax legislation. Effective tax rates were 14.5% for the quarter and 19.0% for the six months, compared with 93.3% and 61.8%, respectively, in 2017. Six-month operating cash flow declined primarily because income tax payments rose to $192.5 million from $51.5 million, partly offset by improved working-capital management.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $149.5 million at December 31, 2018, down from $188.7 million at June 30, 2018. Working capital was $627.1 million, up from $554.5 million.
- Total debt was approximately $1.20 billion, versus $281.5 million at June 30, 2018. The increase primarily financed acquisitions. The company reported covenant compliance and a 3.3% interest rate on outstanding facility borrowings at period-end.
- The revolving credit facility was increased to $1.6 billion in November 2018, with an uncommitted option for a further $300 million. Management expects to meet liquidity and debt needs using cash on hand, operating cash flow and debt facilities.
- Six-month capital expenditures were $31.4 million. Dividends paid were $105.6 million. ResMed repurchased $22.8 million of shares in the first fiscal quarter, then suspended repurchases during the second quarter following acquisitions.
Acquisitions, outlook and notable items
- ResMed acquired MatrixCare on November 13, 2018, for $750 million base consideration; it also acquired HealthcareFirst, HB Healthcare, Interactive Health Network and Apacheta during the six-month period. Purchase price allocations remained preliminary. MatrixCare contributed approximately $15.4 million in reported revenue and a $1.0 million operating loss during the period, including acquisition-related accounting effects.
- On January 7, 2019, after quarter-end, ResMed completed the acquisition of Propeller Health for $225 million.
- The filing provides no specific quantified revenue or earnings guidance. Management describes ongoing investment in product development and connected-care solutions, but cautions that interim results are not necessarily indicative of full-year results.
- Risks include uncertainty around integrating and realizing expected benefits from acquisitions, foreign-exchange exposure, and variable-rate debt. ResMed is contesting Australian Taxation Office assessments for 2009–2013: the ATO asserts $151.7 million in additional tax, $38.4 million in interest and $75.9 million in penalties. ResMed disputes the assessments and recorded the $75.9 million already paid as a receivable; an adverse outcome could require further payment.
- Other material matters include ongoing patent disputes with Fisher & Paykel Healthcare and U.S. government investigations involving sales, promotional programs, diagnostic devices and related practices. The company says these matters could result in substantial costs or other adverse consequences, though it does not expect ordinary-course litigation overall to materially affect consolidated financial statements.
Important facts for investors to verify
- Whether acquisition integration, preliminary purchase accounting and goodwill valuations affect future SaaS growth, margins or impairment risk.
- How the approximately $1.20 billion debt balance, borrowing costs and covenant headroom evolve after the acquisitions.
- Whether operating cash generation improves as elevated tax payments and acquisition-related cash needs normalize.
- Developments in the ATO tax dispute, Fisher & Paykel litigation and government investigations, including any changes to recorded exposures or company disclosures.
- The extent to which reported earnings growth reflects underlying operations versus the unusually high prior-year tax expense.