Business context and reporting period
ResMed Inc. filed this Form 10-K for the fiscal year ended June 30, 2018. The filing also reports fiscal Q4 results. ResMed develops and sells devices and cloud-based software for sleep-disordered breathing and other respiratory conditions, including CPAP and ventilation devices, masks, oxygen concentrators, and provider software. It operates predominantly as one segment and sells in approximately 120 countries.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $2,340.2 million | $2,066.7 million |
| Gross profit / margin | $1,362.2 million / 58.2% | $1,201.7 million / 58.1% |
| Operating income / margin | $541.8 million / 23.2% | $425.8 million / 20.6% |
| Net income / diluted EPS | $315.6 million / $2.19 | $342.3 million / $2.40 |
| Cash from operations | $505.0 million | $414.1 million |
| Cash and cash equivalents (June 30) | $188.7 million | $821.9 million |
| Total debt (June 30) | $281.5 million | $1,078.6 million |
| Working capital (June 30) | $554.5 million | $1,283.9 million |
Revenue rose 13% reported and 10% in constant currency; growth reflected higher device, mask, and accessory unit sales, partly offset by lower average selling prices. SaaS revenue was $157.0 million. Devices generated $1,303.6 million and masks/accessories $879.6 million. U.S., Canada, and Latin America revenue grew 10%; Europe, Asia, and other markets grew 18% reported, or 11% in constant currency.
Gross margin edged up, which management attributed mainly to manufacturing and procurement efficiencies, partly offset by pricing pressure. SG&A was $600.4 million, or 25.7% of revenue versus 26.8%; R&D was $155.1 million, or 6.6% of revenue. Operating cash flow increased, while cash balances and working capital fell substantially, primarily following $796.2 million of net debt repayment. Capital expenditure was $62.6 million. Dividends paid were $199.5 million; share repurchases totaled $53.8 million.
Fiscal Q4 revenue was $623.6 million versus $556.7 million a year earlier; net income was $109.8 million versus $101.6 million, and diluted EPS was $0.76 versus $0.71.
Material changes versus the prior comparable period
- Net income declined 8% and diluted EPS declined 9%, despite revenue growth, primarily because income tax expense increased to $205.7 million from $76.5 million.
- The U.S. Tax Act generated $138.0 million of additional, provisional tax expense: $126.9 million transition tax on accumulated foreign earnings and $11.1 million related to deferred tax assets. The transition tax is payable over eight years.
- Debt fell by about $797 million; cash fell by about $633 million. ResMed entered new credit arrangements in April 2018: an $800 million revolving facility and a $200 million term facility, both maturing in 2023. It reported covenant compliance and a 3.0% interest rate on borrowings at year-end.
- Restructuring expense rose to $18.4 million from $12.4 million, relating to a global workforce review and closure of the Paris site. Cost-method investment impairments increased to $11.6 million from $2.0 million.
- Accounts receivable increased 7% to $483.7 million; the allowance for doubtful accounts rose to $19.3 million from $11.2 million.
Outlook, risks, contingencies, and unusual items
The filing gives no numerical revenue or earnings guidance. Management described growth opportunities in connected care, sleep apnea treatment, home ventilation for COPD, portable oxygen, geographic expansion, and software. It expects to fund dividends and liquidity needs through operating cash flow and available credit facilities. The quarterly dividend was increased after year-end from $0.35 to $0.37 per share.
- Tax dispute: The Australian Taxation Office asserts $151.7 million of additional tax and $38.4 million of interest for 2009–2013, and claims penalties of $75.9 million. ResMed paid $75.9 million under an arrangement, recorded it as a receivable, disputes the assessments, and says remaining amounts are payable only if it loses. The ATO also intends to audit 2014–2017. A loss could result in substantial additional expense and no refund of the payment.
- Government investigation: ResMed disclosed two 2016 HHS Office of Inspector General subpoenas and a third received in August 2018, concerning patient resupply software, discounts/leasing and promotional programs, and diagnostic devices, masks, and auto-scoring. The company says it is cooperating; outcomes and potential costs are uncertain.
- Patent litigation: Disputes with Fisher & Paykel Healthcare are pending in the U.S., New Zealand, Germany, and Australia. Adverse outcomes could entail damages, royalties, product restrictions, or redesigns. Management says ordinary-course proceedings are not expected to materially affect the consolidated financial statements overall.
- Market and operating risks: Medicare competitive bidding and reimbursement changes may pressure customer economics, prices, and sales. Other risks include competition, foreign exchange exposure, single-source suppliers, product regulation and safety, privacy/cybersecurity, and international tax changes. The 2.3% U.S. medical-device excise tax was suspended through 2019 and was scheduled to resume in 2020 absent further action.
- Other items: A 2015 clinical-trial safety signal associated ASV therapy with increased cardiovascular mortality in a specific heart-failure population; device labeling was revised. The filing reports no goodwill impairment and no significant off-balance-sheet arrangements.
Most important facts to verify
- Whether the provisional $138.0 million U.S. Tax Act estimate was finalized by the stated December 22, 2018 deadline, and its ultimate cash-tax effects.
- Developments and potential financial exposure in the ATO dispute, including the tax audit of 2014–2017.
- Progress and any material consequences of the OIG investigation and subpoenas.
- Outcomes, costs, and any product or royalty implications of Fisher & Paykel litigation.
- Whether revenue growth, margins, operating cash flow, receivables quality, and debt reduction continue amid pricing and reimbursement pressure.