ResMed Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended December 31, 2015. Comparisons are with the corresponding periods ended December 31, 2014, except balance-sheet comparisons, which are with June 30, 2015. Amounts are in U.S. dollars.
Business context and results
ResMed designs, manufactures, and markets equipment for diagnosing and treating sleep-disordered breathing and other respiratory disorders. Its products include flow generators, masks, accessories, and respiratory devices.
| Metric | Three months ended Dec. 31, 2015 | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2015 | Six months ended Dec. 31, 2014 |
|---|---|---|---|---|
| Revenue | $454.5m | $423.0m | $866.2m | $803.4m |
| Gross profit | $266.5m | $263.2m | $505.1m | $500.5m |
| Gross margin | 58.6% | 62.2% | 58.3% | 62.3% |
| Operating income | $108.0m | $109.1m | $206.0m | $203.8m |
| Net income | $90.5m | $91.2m | $170.9m | $174.4m |
| Diluted EPS | $0.64 | $0.64 | $1.21 | $1.22 |
Financial condition and cash flow
- Six-month operating cash flow was $269.5m, up from $192.5m. Capital expenditures were $30.9m; operating cash flow less capital expenditures was $238.6m, a derived measure.
- Cash and equivalents were $658.8m, down from $717.2m at June 30. Working capital was $1.1bn. The filing says $625.5m of cash was held by non-U.S. subsidiaries and would be subject to U.S. tax if repatriated; management intends to keep these funds abroad.
- Total debt was $401.6m, including $400.0m drawn on the revolving credit facility. The facility had a 1.4% interest rate at period-end and matures in 2018. ResMed reported compliance with its debt covenants.
- Six-month investing cash outflow was $223.9m, including $152.1m for acquisitions. Financing cash outflow was $68.6m, including $102.1m of share repurchases and $84.1m of dividends; the company also borrowed $200.0m and repaid $100.2m.
- Foreign-exchange movements reduced cash by $35.5m during the six months. The accumulated other comprehensive loss on the balance sheet was $260.9m at December 31.
Changes versus prior comparable periods
- Quarterly revenue rose 7% as reported (13% in constant currency); six-month revenue rose 8% as reported (14% in constant currency). Management attributed growth mainly to higher unit sales of flow generators, masks, and accessories, partly offset by lower average selling prices.
- North and Latin America revenue increased 17% for the quarter and 20% for the six months. Revenue outside those markets fell 4% and 6%, respectively, as reported; constant-currency growth was 7% and 6%.
- Gross margin declined by 3.6 percentage points for the quarter and 4.0 points for the six months. Management cited product and geographic mix, lower average selling prices, and a greater share of lower-margin products.
- Net income declined 1% for the quarter and 2% for the six months. Quarterly diluted EPS was unchanged; six-month diluted EPS decreased from $1.22 to $1.21.
- SG&A and R&D expenses decreased in reported dollars, but increased in constant currency, reflecting commercial and R&D staffing, legal costs, tooling and materials, and recent acquisitions. Currency movements also reduced reported revenue.
Outlook, unusual items, and risks
- The filing provides no quantified revenue or earnings guidance. Management described an active product-release schedule and ongoing investment in R&D, and said liquidity needs are expected to be met through cash, operating cash flow, and debt facilities.
- ResMed acquired Curative Medical Technology, Maribo Medico, and Bennett Precision Tooling during the period. The preliminary purchase-price allocation included $114.7m of goodwill; allocations were not final. A definitive agreement to acquire Inova Labs, a portable oxygen concentrator company, was announced after quarter-end; completion was expected in the quarter ending March 31, 2016 and was to be funded through the credit facility.
- The company recorded $6.9m of restructuring expense for changes to European R&D operations and manufacturing, principally severance and a legacy-facility asset write-down. It also recorded $0.8m of impairment losses on cost-method investments.
- ResMed disclosed a cardiovascular mortality safety signal associated with ASV therapy in the SERVE-HF trial for a defined group of patients with central sleep apnea and symptomatic chronic heart failure with reduced ejection fraction. The company said it was working with regulators on device labeling and instructions and notifying healthcare providers, physicians, and patients. The filing warns that clinical-trial results and regulatory responses could adversely affect products and business.
- Patent litigation with BMC and related proceedings remained ongoing; the filing also describes an antitrust suit brought by BMC’s U.S. distributor. Management did not expect routine litigation, individually or collectively, to materially adversely affect the consolidated financial statements, but outcomes are uncertain.
- Other disclosed exposures include foreign-currency movements, variable-rate debt, customer-financing recourse arrangements, and tax holidays in Singapore and Malaysia that expire in whole or in part through June 30, 2020. The filing added risks concerning laws regulating consumer contacts and unfavorable clinical-trial results.
Important facts for investors to verify
- Whether reported revenue growth can continue and whether international performance improves after separating currency effects.
- Whether gross margins stabilize, given the stated pricing and product/geographic mix pressures.
- Final purchase accounting and integration outcomes for the three completed acquisitions, and the completion, funding, and impact of the planned Inova Labs acquisition.
- Regulatory, clinical, and commercial developments related to the SERVE-HF safety signal and ASV product labeling.
- Cash availability and repatriation constraints, debt usage and covenant headroom, and the effect of buybacks and dividends on liquidity.
- Developments in the BMC patent and distributor antitrust litigation and other legal contingencies.