Business context and reporting period
ResMed Inc. designs, manufactures and sells products for sleep-disordered breathing and other respiratory disorders. The filing covers the quarter and nine months ended March 31, 2016 (fiscal 2016 third quarter); this differs from the request metadata’s “2015 Q3.” Figures are unaudited and in U.S. dollars.
Financial performance and liquidity
| Metric | Three months ended March 31, 2016 | Year-over-year | Nine months ended March 31, 2016 | Year-over-year |
|---|---|---|---|---|
| Revenue | $453.9 million | +7% reported; +9% constant currency | $1,320.1 million | +8% reported; +12% constant currency |
| Gross profit / margin | $259.9 million / 57.3% | Margin down from 59.5% | $765.0 million / 58.0% | Margin down from 61.3% |
| Operating income | $104.3 million | Down from $105.9 million | $310.3 million | Up slightly from $309.7 million |
| Net income | $88.5 million | Down 3% | $259.4 million | Down 2% |
| Diluted EPS | $0.63 | Compared with $0.64 | $1.83 | Compared with $1.86 |
For the nine-month period, operating cash flow was $391.7 million, versus $283.5 million. Capital expenditures were $44.1 million. Cash and equivalents were $718.5 million at March 31, 2016; working capital was approximately $1.1 billion. About $680.1 million of cash was held by non-U.S. subsidiaries and would be subject to U.S. tax if repatriated.
Total debt was $435.6 million, including $435.0 million outstanding on the revolving credit facility, at a 1.4% interest rate. The company reported compliance with debt covenants. Total assets were $2.44 billion and stockholders’ equity was $1.67 billion.
Material changes versus the prior comparable period
- Quarterly revenue growth was driven by higher unit sales of devices, masks and accessories and acquisition contributions, partly offset by lower average selling prices. North and Latin American quarterly revenue rose 12%; revenue outside that region was essentially flat reported, but up 3% in constant currency.
- Gross margin declined in both the quarter and nine-month period. Management attributed the decline to product and geographic mix, lower average selling prices and higher warranty costs.
- Foreign exchange reduced revenue by approximately $6.3 million in the quarter and $54.8 million over nine months. Nine-month foreign currency translation reduced other comprehensive income by $7.3 million, versus a $351.1 million loss in the prior-year period.
- Cash from operations increased year over year, partly reflecting improved working-capital movements, including inventory cash flow.
- ResMed completed acquisitions of Curative Medical Technology, Maribo Medico, Bennett Precision Tooling and Inova Labs during the period. Acquisition spending, net of cash acquired, was $242.6 million; goodwill increased to $458.3 million, largely reflecting acquisitions.
Outlook, commentary, risks and unusual items
- No quantified revenue or earnings guidance was provided. Management described an active product release schedule and continued investment in research and development, and said it expects to meet liquidity needs through cash on hand, operating cash flow and debt facilities.
- On April 4, 2016, after quarter-end, ResMed acquired Brightree for $800 million, subject to post-closing adjustments. The company amended its revolving facility to $1.0 billion and entered a $300 million, one-year unsecured term loan. The filing said consolidated debt after the transaction was expected to be approximately $1.2 billion.
- Quarterly gross margin pressure and price, product-mix, geographic-mix and foreign-exchange exposure remain important risks. Most cash is offshore; management intends to keep it permanently reinvested outside the United States.
- Other risks include debt service and covenant obligations, currency and interest-rate exposure, and uncertainty around patent litigation and a distributor’s antitrust claims. Management did not expect routine litigation to have a material adverse effect, but outcomes are uncertain.
- Unusual items included $6.9 million of restructuring expense for the nine months, $2.8 million of long-lived-asset impairment, and $0.8 million of cost-method investment impairment. The company recorded $3.6 million of acquisition-related expenses in the quarter, including Brightree-related costs.
- The share repurchase program was temporarily suspended because of acquisitions. ResMed declared dividends of $0.30 per share for the quarter, versus $0.28 a year earlier.
Important facts for investors to verify
- Confirm the reporting period: the filing is for the quarter ended March 31, 2016, notwithstanding the “2015 Q3” request metadata.
- Track whether revenue growth converts into improved gross margins, particularly given pricing, mix and warranty-cost pressures.
- Review Brightree’s final purchase-price allocation, integration progress and contribution to revenue, cash flow and earnings.
- Assess post-acquisition leverage, refinancing and debt-service needs, covenant headroom, and the availability and cost of credit.
- Monitor offshore cash and potential repatriation taxes, foreign-exchange effects, and the outcome of material patent and antitrust proceedings.