ResMed Inc. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2017. The filing also reports fiscal Q4 results; this is not a calendar-year 2016 Q4 filing. ResMed develops and sells medical devices and cloud-based software for sleep-disordered breathing and other respiratory disorders, operating primarily as one reporting segment and selling in approximately 120 countries.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $2,066.7 million | $1,838.7 million |
| Gross profit / margin | $1,201.7 million / 58.1% | $1,066.5 million / 58.0% |
| Operating income / margin | $425.8 million / 20.6% | $429.0 million / 23.3% |
| Net income | $342.3 million | $352.4 million |
| Diluted EPS | $2.40 | $2.49 |
| Cash from operations | $414.1 million | $547.9 million |
| Cash and cash equivalents at year-end | $821.9 million | $731.4 million |
| Working capital | $1,283.9 million | $781.7 million |
| Total debt | $1,078.6 million | $1,172.8 million |
- Revenue rose 12% reported, or 13% on a constant-currency basis. Brightree contributed $138.1 million; excluding Brightree, revenue increased 7% reported and 8% constant currency. Device revenue increased 9%; masks and accessories increased 3%.
- Gross margin was broadly stable. Operating income declined despite higher revenue as operating expenses increased, including acquired-intangible amortization, R&D, restructuring, legal and acquisition-related costs. Net interest expense also rose materially.
- Accounts receivable increased 18% to $450.5 million, and days sales outstanding rose to 68 from 63. Inventory increased 20% to $268.3 million. Management attributed lower operating cash flow mainly to receivables growth and income-tax payments.
- Quarterly fiscal Q4 revenue was $556.7 million versus $518.6 million a year earlier; gross profit was $323.8 million versus $301.5 million, and net income was $101.6 million versus $83.1 million. Diluted EPS was $0.71 versus $0.59.
Material changes versus the prior comparable period
- Brightree, acquired in April 2016, contributed to year-over-year revenue and operating expense growth; it represented approximately 7% of FY2017 net revenue.
- Gross margin edged up from 58.0% to 58.1%, with manufacturing and procurement efficiencies and Brightree contribution offset by lower average selling prices and less favorable product mix.
- Operating income fell about 1% and net income fell about 3%; diluted EPS declined about 4%. Interest expense increased to $28.2 million from $11.2 million.
- Cash from operations decreased by $133.9 million. Debt fell from the prior year, partly reflecting repayment of the $300 million Brightree term loan using revolving-credit borrowings.
- FY2017 included $12.4 million of restructuring expense, $8.5 million of litigation settlement expense and $10.1 million of acquisition-related expense. Research and development spending rose 22% to $144.5 million.
Outlook, commentary, risks and unusual items
- Management emphasized continued investment in product development, connected-care software, respiratory care and geographic expansion. It identified underdiagnosed sleep apnea, COPD care and digital health as growth opportunities, but the filing provides no specific revenue or earnings guidance.
- The company increased its quarterly dividend from $0.33 to $0.35 per share after year-end; FY2017 dividends paid totaled $186.3 million. Management expected to resume share repurchases in FY2018.
- At June 30, 2017, $1.08 billion was outstanding on a $1.3 billion revolving facility, bearing 2.7% interest then and maturing October 31, 2018. The company was in covenant compliance. Cash was predominantly held by foreign subsidiaries; $798.7 million was held outside the U.S. and designated permanently reinvested. A hypothetical repatriation of accumulated foreign earnings could entail approximately $358 million of deferred taxes.
- Medicare competitive-bidding and related reimbursement changes have pressured customer reimbursement and pricing. The U.S. medical-device excise tax was suspended for 2016–2017 but was scheduled to resume in 2018 absent further action.
- ResMed disclosed two HHS OIG administrative subpoenas received in 2016 concerning patient-resupply software offerings and other promotional programs; it stated it was cooperating. Fisher & Paykel patent disputes remained pending in several jurisdictions. Management did not expect the legal matters, taken as a whole, to materially affect the consolidated financial statements.
- The SERVE-HF study identified a statistically significant 2.5% absolute increase in cardiovascular mortality for a specific heart-failure population receiving ASV therapy. ResMed revised ASV labeling and instructions with regulators; this remains a product-safety and market risk.
- Other principal risks include competition and pricing pressure, reimbursement uncertainty, acquisition integration and goodwill impairment, dependence on some single-source suppliers, foreign-exchange exposure, data privacy and cybersecurity, regulatory compliance, and tax audits. The Australian tax authority was auditing tax years 2009–2013.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective as of June 30, 2017.
Important facts for investors to verify
- Whether core device and mask growth continues, and how much revenue growth depends on Brightree and other acquisitions.
- Whether receivables, inventory and days sales outstanding improve, supporting operating cash flow conversion.
- Debt refinancing or repayment plans ahead of the October 2018 revolving-facility maturity, including the location and availability of cash held overseas.
- Developments in reimbursement policy, device-tax treatment, the OIG subpoenas, patent litigation and the ASV safety evidence or labeling.
- Whether management’s planned FY2018 repurchases and higher dividend remain consistent with investment needs and leverage.