ResMed Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2015; comparison is with the three months ended September 30, 2014 unless otherwise noted. ResMed designs, manufactures and markets devices and related products for sleep-disordered breathing and other respiratory disorders. Financial statements are unaudited.
Financial performance and position
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net revenue | $411.6 million | $380.4 million |
| Gross profit / gross margin | $238.6 million / 58.0% | $237.3 million / 62.4% |
| Operating income | $98.0 million | $94.7 million |
| Net income | $80.4 million | $83.3 million |
| Diluted EPS | $0.57 | $0.58 |
| Operating cash flow | $122.1 million | $86.5 million |
- Revenue increased 8% as reported and 15% on a constant-currency basis. Foreign-exchange movements reduced reported revenue by approximately $26.8 million.
- North and Latin America revenue grew 23% to $254.1 million; revenue outside those markets declined 9% as reported but increased 5% in constant currency.
- Flow-generator revenue rose 12% to $239.6 million; masks and accessories rose 4% to $172.0 million. Unit growth was partly offset by lower average selling prices.
- Gross margin fell 4.4 percentage points, primarily due to product and geographic mix and lower average selling prices. SG&A was $111.1 million, up 1% reported; R&D was $27.2 million, down 9% reported. Management said both expense comparisons benefited from currency translation.
- Other income, net declined to $1.4 million from $7.3 million, including foreign-currency hedge losses and lower interest income. The effective tax rate was 19.1%, versus 18.3%.
- Cash and cash equivalents were $822.1 million at September 30, up from $717.2 million at June 30, 2015; working capital was $1.3 billion. Approximately $790.0 million of cash was held by non-U.S. subsidiaries and would be subject to U.S. tax if repatriated; the company intends to keep these funds abroad.
- Operating cash flow was $122.1 million. Investing cash outflow was $62.7 million, including $16.4 million of capital expenditures and $39.3 million of payments on maturity of foreign-currency contracts. Financing cash inflow was $106.9 million, including $200.0 million of net borrowings; the company also repurchased $57.9 million of shares and paid $42.1 million in dividends. Currency movements reduced cash by $61.5 million.
- Total assets were $2.25 billion and stockholders’ equity was $1.46 billion. Long-term debt was $500.6 million, including $500.0 million drawn under a $700 million revolving facility; the reported interest rate was 1.2%. The company reported compliance with debt covenants.
Material changes and management commentary
- Revenue growth was led by North and Latin America, where flow-generator revenue increased 39%. International performance was weaker in reported dollars, although constant-currency revenue increased.
- Management attributed lower gross margin to a greater proportion of lower-margin products and geographies, as well as pricing pressure. It highlighted continued investment in product development and reported more than one million cloud-connected devices on its Air Solutions Platform.
- ResMed completed its acquisition of China-based Curative Medical Technology on October 2, 2015, after quarter-end. The company described the transaction as not material, funded with cash on hand; purchase-price allocation remained preliminary.
- At quarter-end, 14.3 million additional shares remained available under the approved repurchase program. The quarterly dividend declared was $0.30 per share, up from $0.28 a year earlier.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or margin guidance. Management expected to meet liquidity requirements through cash on hand, operating cash flow and debt facilities.
- Foreign-exchange exposure is significant because of international sales and Australian and Singapore manufacturing. Derivatives are used for economic risk management, but are not designated as accounting hedges; fair-value movements are recorded in other income. The quarter included a $39.4 million derivative loss, partly offset by gains on other foreign-currency transactions.
- Key risks include healthcare, market and regulatory changes; competition and execution of growth strategy; foreign-exchange fluctuations; and the potential impact of tax incentives that expire in whole or in part through June 30, 2020. Most foreign cash is intended to remain permanently reinvested outside the U.S.
- ResMed reported ongoing patent litigation involving BMC and a related antitrust suit filed by BMC’s U.S. distributor, 3B Medical. Management did not expect routine litigation to have a material adverse effect, but outcomes are uncertain. The filing also added risk concerning laws governing telemarketing and automated consumer contacts, which could result in restrictions, fines or liabilities.
- Foreign-currency translation produced a $122.1 million other comprehensive loss for the quarter, resulting in comprehensive loss of $41.7 million despite positive net income.
Important facts for investors to verify
- Whether underlying constant-currency growth can continue and whether international reported revenue recovers.
- Whether lower gross margin persists as product, geographic mix and selling prices change.
- How the Curative acquisition performs and what final purchase accounting reports.
- The effect of foreign-currency movements, derivative results and the tax cost of any future repatriation of foreign cash.
- Debt-facility terms, covenant headroom and the company’s continuing share repurchases and dividend payments.
- Developments in the BMC/3B Medical litigation and exposure under consumer-contact laws.