ResMed Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2014; comparisons are with the three months ended September 30, 2013 unless stated otherwise. Balance-sheet comparisons are with June 30, 2014. Amounts are US dollars.
Business context
ResMed designs, manufactures and markets equipment for diagnosing and treating sleep-disordered breathing and other respiratory disorders. Management highlighted continued product launches, education to increase awareness of sleep-disordered breathing, and investment in research and development, including healthcare informatics and heart-failure clinical work.
Financial results and liquidity
| Metric | Quarter ended Sep. 30, 2014 | Prior comparable quarter |
|---|---|---|
| Revenue | $380.4 million | $357.7 million |
| Gross profit / gross margin | $237.3 million / 62.4% | $228.0 million / 63.7% |
| Operating income | $94.7 million | $96.9 million |
| Net income | $83.3 million | $80.9 million |
| Diluted EPS | $0.58 | $0.56 |
| Operating cash flow | $86.5 million | $90.4 million |
| Capital expenditures | $20.7 million | $16.8 million |
- Revenue increased 6% both as reported and in constant currency. Flow-generator revenue rose 12% to $214.3 million; masks and accessories were essentially flat at $166.1 million.
- North and Latin America revenue grew 3% to $207.2 million; revenue outside those markets grew 11% to $173.2 million. Unit growth was partly offset by lower average selling prices.
- SG&A rose 9% to $110.5 million, and R&D rose 10% to $30.0 million. Operating income decreased about 2% despite higher revenue. Net income rose 3% and diluted EPS rose 4%, aided in part by a lower share count from repurchases.
- Cash and equivalents were $881.7 million at quarter-end, down from $905.7 million at June 30. The company reported $1.3 billion of working capital. Cash held outside the U.S. was $843.9 million and could incur U.S. tax if repatriated; management said it intended to keep those funds permanently invested abroad.
- Total debt was $375.7 million, including $375.0 million outstanding under the revolving credit facility, versus $300.8 million at June 30. The facility bears a 1.2% interest rate at quarter-end; the company reported compliance with its debt covenants. Cash exceeded debt by approximately $506 million.
- Cash from operations was lower year over year; inventory growth was a use of cash. Foreign-exchange movements reduced reported cash by $65.0 million. The quarter also included $42.9 million of share repurchases and $39.2 million of dividends.
Material changes, outlook and risks
- Gross margin fell 1.3 percentage points, primarily from lower selling prices and a less favorable product mix, partly offset by manufacturing and supply-chain improvements.
- SG&A increases reflected additional commercial personnel, product-launch marketing and higher variable compensation. R&D spending increased mainly for healthcare informatics development and heart-failure clinical trials.
- The effective tax rate was 18.3%, versus 20.7% a year earlier. A $3.2 million benefit from resolution of a German tax audit reduced the reported rate; excluding it, management said the rate would have been 21.5%.
- Foreign-currency translation produced a $125.1 million loss in other comprehensive income, leaving comprehensive income at negative $41.8 million despite positive net income. The company uses currency options and forwards to manage exposures, but does not designate them as accounting hedges.
- ResMed acquired two Australian distributors during the quarter for a purchase price of $7.3 million, excluding contingent consideration. The preliminary allocation included $6.0 million of customer-relationship intangibles and $6.5 million of goodwill.
- No numerical earnings or revenue guidance was provided in the filing. Management stated it expected to meet liquidity needs through cash on hand, operating cash flow and debt facilities. Interim results were cautioned not to necessarily indicate full-year results.
- Legal matters included a confidential September 2014 settlement resolving patent disputes with APEX; related challenges were dismissed except for one European patent-office proceeding. A separate BMC patent matter remained pending, including an initial U.S. trade commission determination that certain products infringed ResMed patents, but no final determination had been made. Management reported no material changes to the risks in its 2014 Form 10-K.
- Other items to monitor include longer domestic customer payment terms (receivable days rose to 78 from 69 year over year), foreign-currency exposure, and tax incentives for Singapore and Malaysia operations that expire in whole or part at various dates through June 30, 2020. The company said it had no significant off-balance-sheet arrangements.
Important facts for investors to verify
- Whether flow-generator growth and international revenue growth continue, and whether mask and accessory sales recover.
- Whether pricing and product mix continue to pressure gross margin, and whether higher commercial and R&D spending converts into sustained growth.
- Receivables, customer payment terms and inventory levels, given higher DSO and inventory growth.
- Cash and debt trends, covenant compliance, and the implications of holding most cash outside the United States.
- Foreign-exchange effects on cash, reported earnings and accumulated other comprehensive income.
- Resolution of the BMC proceedings and the remaining European patent-office matter, as well as the final purchase accounting for the acquisitions.
- The eventual impact and transition approach for the new revenue-recognition standard, effective for ResMed beginning fiscal Q1 2018.