Business context and reporting period
ResMed Inc. filed this Form 10-K for the fiscal year ended June 30, 2013. The company develops, manufactures and sells equipment for diagnosing and treating sleep-disordered breathing and other respiratory disorders, including airflow generators, masks, diagnostic products and accessories. It operates as one segment and sells in approximately 100 countries.
The filing also reports fourth-quarter results for the three months ended June 30, 2013. This is a fiscal-year 2013 filing, not a filing for calendar-year 2012.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $1,514.5 million | $1,368.5 million | +11% |
| Gross profit / margin | $940.7 million / 62.1% | $820.7 million / 60.0% | Margin +2.1 percentage points |
| Operating income | $354.8 million | $294.4 million | +21% |
| Net income | $307.1 million | $254.9 million | +21% |
| Diluted EPS | $2.10 | $1.71 | +23% |
| Cash from operations | $402.8 million | $383.2 million | +$19.7 million |
| Cash and cash equivalents at year-end | $876.0 million | $809.5 million | +$66.5 million |
| Total debt at year-end | $300.8 million | $250.8 million | +$50.0 million |
| Working capital | $874.8 million | $1,108.3 million | -$233.5 million |
For Q4 FY 2013, revenue was $414.6 million versus $371.9 million in Q4 FY 2012; gross profit was $259.8 million versus $226.5 million; net income was $73.0 million versus $76.8 million; and diluted EPS was $0.50 versus $0.53.
Revenue growth reflected higher unit sales. North and Latin American revenue rose 14%; international revenue rose 7% as reported, or 9% in constant currency. Flow-generator revenue increased 12%, and masks, motors and accessories increased 9%. Currency movements reduced reported revenue by approximately $15.1 million.
Gross-margin improvement was attributed to manufacturing and supply-chain savings and favorable product mix, partly offset by lower average selling prices. The effective tax rate declined to 20.2% from 23.2%. The company reported that Singapore and Malaysia tax incentives increased FY 2013 net earnings by $24.3 million, or $0.17 per diluted share.
Material changes, outlook and unusual items
- ResMed recorded a $24.8 million education, research and settlement charge related to an agreement with the University of Sydney. The agreement funded academic chairs and research and settled litigation, including prior-period royalties. The charge reduced net earnings by $17.7 million after tax.
- Working capital fell primarily because $300.0 million of revolving debt was classified as current: the credit facility was due to terminate in February 2014. ResMed said it was negotiating a replacement facility and expected similar terms, but completion was not assured in the filing.
- Management expected future SG&A to be approximately 28% of revenue and R&D to be 7%–8% of revenue. The filing provides no formal revenue or earnings guidance.
- Management cited continued market growth, product launches and market-share gains, particularly in APAP and bilevel devices, as growth drivers. R&D spending was $120.1 million, approximately 8% of revenue.
- The board declared a post-year-end quarterly dividend increase from $0.17 to $0.25 per share. FY 2013 dividends paid totaled $97.2 million; the announced increase is not a FY 2013 payment.
- Medicare competitive bidding reductions for CPAP and respiratory devices averaged approximately 47% in the second round, effective July 1, 2013. The company noted uncertainty about the ultimate effects of reimbursement changes and healthcare reform.
- Foreign subsidiaries held $837.8 million of year-end cash, described as indefinitely invested outside the U.S. Approximately $1.6 billion of undistributed foreign earnings was treated as permanently reinvested; the company estimated that recognizing related deferred taxes would have required approximately $409 million.
- Foreign exchange reduced cash balances by $104.4 million during FY 2013. ResMed reported foreign-currency transaction and hedging losses within other income, net, and uses options and forwards to manage exposures.
- The University of Sydney litigation was dismissed following settlement. Separate patent matters involving APEX Medical and BMC Medical remained ongoing; ResMed did not expect them to materially affect the consolidated financial statements.
Most important facts for investors to verify
- Whether the replacement credit facility was completed before the February 2014 maturity, and its final size, pricing, covenants and repayment terms.
- The actual impact of Medicare bidding reductions and other reimbursement or pricing pressure on customer demand, selling prices and margins.
- Whether operating cash flow and growth continued to support dividends, buybacks and investment, given the significant overseas concentration of cash.
- The sustainability of gross-margin gains, geographic growth and the tax benefits from Singapore and Malaysia incentives.
- The subsequent progress and financial implications, if any, of the APEX and BMC patent proceedings.