RESMED INC quarterly report, Q3 FY2014

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ResMed Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended March 31, 2014; the quarter is ResMed’s fiscal 2014 third quarter. The request metadata says “2013 Q3,” but the filing itself reports 2014 Q3. All amounts below are U.S. dollars.

Business context and performance

ResMed designs, manufactures and markets equipment for diagnosing and treating sleep-disordered breathing and other respiratory disorders. It reported continued sales growth, driven by higher unit sales of flow generators, masks and accessories, while average selling prices declined.

  • Quarter: Revenue was $397.8 million, up 4% year over year (3% at constant currency). Net income was $90.0 million, up 6%; diluted EPS was $0.63 versus $0.58. Gross margin was 63.3%, versus 62.4%.
  • Nine months: Revenue was $1,139.8 million, up 4% (3% at constant currency). Net income was $257.5 million, up 10%; diluted EPS was $1.78 versus $1.60. Gross margin was 63.9%, versus 61.9%.
  • Quarterly flow-generator revenue increased 1%; masks and accessories increased 7%. International revenue rose 8% in the quarter, while North and Latin America was approximately flat.

Financial position and cash flow

  • Cash and cash equivalents were $938.6 million at March 31, 2014, compared with $876.0 million at June 30, 2013. Working capital was $1.3 billion, compared with $874.8 million.
  • Total debt was $395.8 million, including $395.0 million drawn on a new $700 million, five-year unsecured revolving facility. The facility matures October 31, 2018; its outstanding balance carried a 1.2% interest rate. ResMed said it was in compliance with debt covenants.
  • Nine-month operating cash flow was $275.7 million, compared with $278.9 million. Capital expenditures were $54.2 million, versus $47.6 million.
  • Cash increased by $62.5 million over the nine months. Financing uses included $167.6 million for share repurchases and $106.4 million for dividends; net borrowings contributed $92.8 million.
  • Approximately $921.8 million of cash was held by non-U.S. subsidiaries and would be subject to U.S. tax if repatriated. The company said it intended to keep these funds permanently invested outside the United States.

Material changes and management commentary

  • Gross-margin improvement reflected manufacturing and supply-chain improvements, favorable product and geographic mix, and currency effects, partly offset by lower average selling prices.
  • Operating income increased to $104.7 million for the quarter from $96.1 million, and to $306.6 million for nine months from $268.7 million. SG&A rose 5% in both periods; R&D declined in reported dollars but increased 7% at constant currency.
  • Other income declined year over year, mainly due to foreign-currency transaction losses and lower interest income. Currency movements favorably affected revenue by about $3.0 million in the quarter and $10.8 million over nine months.
  • The board authorized a new repurchase program for up to 20 million shares on February 21, 2014. ResMed repurchased 3.6 million shares during the nine months; 19.1 million remained authorized at March 31. The quarterly dividend declared was $0.25 per share, versus $0.17 a year earlier.

Outlook, risks and contingencies

  • Management expected SG&A to be approximately 29% of revenue and R&D approximately 8% of revenue for the year ending June 30, 2014. It provided no specific revenue or earnings forecast in the supplied filing text.
  • Management expected liquidity needs to be met through cash on hand, operating cash generation and unused credit capacity. Results remain exposed to foreign exchange, healthcare and regulatory changes, competition, execution risks and other factors described in the company’s prior annual report.
  • Patent disputes involving APEX and BMC were ongoing in the United States and Germany. ResMed said it did not expect the outcomes to materially adversely affect its consolidated financial statements; proceedings and administrative decisions remained pending.
  • Foreign-exchange derivatives had a net liability fair value of $5.3 million and a notional amount of $465.6 million. The program is not designated for hedge accounting, so fair-value movements are recorded in other income. The company reported no significant off-balance-sheet arrangements.
  • Accounts receivable were $337.6 million; days sales outstanding rose to 73 from 67 a year earlier. This merits monitoring alongside the increase in receivables.

Key facts for investors to verify

  • Confirm the period: the filing covers the quarter ended March 31, 2014, not 2013 Q3.
  • Assess whether reported growth and margin gains persist after currency effects and the impact of declining selling prices.
  • Review the concentration and potential tax cost of offshore cash, and the terms and covenant headroom of the revolving credit facility.
  • Track receivables and days sales outstanding, continued repurchases and dividends, and cash available after capital spending.
  • Monitor developments in the APEX and BMC patent proceedings and the effect of foreign-exchange exposures on reported earnings.