ResMed Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2013, ResMed’s fiscal first quarter of fiscal 2014. The filing is unaudited; comparisons are with the three months ended September 30, 2012 unless otherwise noted. ResMed designs, manufactures and markets equipment for sleep-disordered breathing and other respiratory disorders.
Financial performance
| Metric | Quarter | Prior-year quarter | Change / note |
|---|---|---|---|
| Net revenue | $357.7 million | $339.7 million | Up 5%; up 4% on a constant-currency basis |
| Gross profit / margin | $228.0 million / 63.7% | $208.6 million / 61.4% | Margin improved 2.3 percentage points |
| Operating income | $96.9 million | $80.5 million | Higher year over year |
| Net income | $80.9 million | $71.3 million | Up 14% |
| Diluted EPS | $0.56 | $0.49 | Up 14% |
| Operating cash flow | $90.4 million | $78.3 million | Up $12.2 million |
| Cash and cash equivalents | $976.6 million | $876.0 million at June 30, 2013 | Quarter-end balance |
| Total debt | $360.8 million | $300.8 million at June 30, 2013 | Primarily current debt |
| Working capital | $946.9 million | $874.8 million at June 30, 2013 | Increased |
Revenue growth reflected higher unit sales of flow generators, masks and accessories. Flow-generator revenue rose 6% to $191.8 million; masks and accessories rose 5% to $165.9 million. North and Latin America revenue increased 4%, and revenue elsewhere increased 7%. Foreign-exchange movements added approximately $3.6 million to reported revenue.
Gross-margin improvement was attributed to favorable product mix, Australian-dollar depreciation and manufacturing and supply-chain efficiencies, partly offset by lower average selling prices. Selling, general and administrative expense rose 3% to $101.3 million; research and development expense was $27.4 million, approximately flat. Other income, net, fell to $5.2 million from $10.4 million, mainly because of foreign-currency transaction losses and lower interest income. The effective tax rate was approximately 20.7%, versus 21.6%.
Cash from operations was supported by collections, including a $40.3 million decrease in accounts receivable, partly offset by higher inventory and other working-capital outflows. Investing cash use was $21.6 million, including $16.8 million of property and equipment purchases. Financing cash provided $10.0 million; the company paid $35.5 million in dividends and repurchased $21.1 million of shares. Foreign-exchange effects increased reported cash by $21.7 million.
Material changes and financial position
- Total assets were $2.33 billion and stockholders’ equity was $1.69 billion at September 30, 2013. Cash was substantially greater than reported debt, although most cash was held outside the United States.
- Cash held by non-U.S. subsidiaries was $948.5 million and would be subject to U.S. tax if repatriated. Management stated its intent to keep these funds permanently invested outside the United States.
- Inventory was $175.4 million, up from $145.8 million at June 30, 2013, but below the $193.2 million reported at September 30, 2012. The company cited improved inventory management for the year-over-year decline.
- The allowance for doubtful accounts rose to 4.2% of receivables from 3.0% at June 30, 2013, largely due to an additional provision for one customer account.
- The company repurchased 431,695 shares during the quarter, with 4.1 million additional shares authorized for repurchase at quarter-end. Dividends declared were $0.25 per share, compared with $0.17 a year earlier.
Outlook, risks and contingencies
- Management expected future SG&A expense to be approximately 28% of revenue and R&D expense approximately 8%. The filing provides no specific revenue or earnings guidance.
- The $400 million revolving credit facility, with $360.0 million outstanding, was scheduled to mature February 10, 2014. The company said it was finalizing a replacement facility and expected similar or more favorable terms before expiry. It reported compliance with debt covenants at September 30, 2013.
- Management expects liquidity needs to be met through cash on hand, operating cash generation and debt facilities. Debt covenants include leverage, interest-coverage and capital-expenditure requirements.
- Foreign-currency exposure is managed with options and forward contracts; these instruments are not designated as accounting hedges, and fair-value movements are recorded in other income. The company reported a $3.2 million loss on hedging instruments for the quarter. Derivative notional amounts totaled $391.4 million.
- Singapore and Malaysia manufacturing operations benefit from tax holidays and incentives that expire in whole or in part at various dates through June 30, 2020. The company had not provided for U.S. tax on foreign subsidiary earnings intended to remain permanently invested abroad.
- Patent disputes involving APEX and BMC were ongoing. ResMed stated it did not expect these matters to have a material adverse effect on its consolidated financial statements. It also described routine litigation as not expected to be materially adverse.
- Management highlighted risks including healthcare reform and regulatory changes, competition, execution of growth strategy, market and economic conditions, and actions of third parties. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether ResMed completed the replacement financing facility before the February 2014 maturity, and on what terms.
- Whether revenue and gross-margin growth persisted, including the relative contribution of unit volume, product mix, pricing and foreign exchange.
- The status and collectability of the customer account that prompted the higher doubtful-account allowance.
- Whether offshore cash remains unavailable for U.S. use without tax cost, and how that affects capital allocation and liquidity planning.
- Developments in the APEX and BMC patent matters, including the effects of proceedings and any product redesigns.
- The sustainability of buybacks and dividend increases relative to operating cash flow, debt obligations and investment needs.