ResMed Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2011—fiscal 2011 third quarter, despite the request metadata specifying 2010 Q3. Comparisons below are with the periods ended March 31, 2010. Amounts are in U.S. dollars.
Business context and performance
ResMed designs, manufactures and sells equipment for diagnosing and treating sleep-disordered breathing and other respiratory disorders. Management cited market growth, product introductions and efforts to raise awareness of sleep-disordered breathing as contributors to performance.
Key financial metrics
| Metric | Quarter ended March 31, 2011 | Quarter ended March 31, 2010 | Nine months ended March 31, 2011 | Nine months ended March 31, 2010 |
|---|---|---|---|---|
| Revenue | $313.3 million | $278.7 million | $901.3 million | $800.8 million |
| Gross profit | $182.5 million | $166.6 million | $542.5 million | $481.0 million |
| Gross margin | 58.3% | 59.8% | 60.2% | 60.1% |
| Operating income | $64.0 million | $61.2 million | $200.2 million | $171.8 million |
| Net income | $53.4 million | $48.8 million | $168.5 million | $136.9 million |
| Diluted EPS | $0.34 | $0.31 | $1.07 | $0.89 |
- Quarterly revenue rose 12%; management attributed growth mainly to higher unit sales of flow generators, masks and accessories. Masks and accessories grew 22%, while flow generators grew 6%. International revenue increased 16% reported and 15% in constant currency.
- Nine-month revenue increased 13% reported and 14% in constant currency. Currency movements reduced nine-month revenue by approximately $12.6 million; they increased quarterly revenue by about $1.6 million.
- Quarterly gross margin declined 1.5 percentage points, which management attributed mainly to unfavorable currency movements—particularly the Australian dollar—and lower average selling prices. Nine-month gross margin was broadly stable.
- Quarterly SG&A increased 10% to $92.5 million; R&D increased 28% to $23.3 million. For nine months, SG&A increased 10% to $268.9 million and R&D increased 18% to $65.0 million.
- Nine-month operating cash flow was $208.9 million, versus $129.3 million. Investing activities used $61.4 million, including $49.2 million for property and equipment and $22.5 million for acquisitions, partly offset by derivative proceeds. Financing activities used $59.8 million, including $100.9 million of treasury-share purchases.
- Cash and cash equivalents were $671.7 million at March 31, 2011, versus $488.8 million at June 30, 2010; the reported $182.9 million increase included a $95.2 million favorable exchange-rate effect. Working capital was approximately $1.01 billion.
- Total debt was $80.2 million, down from $121.7 million at June 30, 2010. The company had $80.0 million drawn under a new $300 million revolving facility maturing in February 2014 and reported compliance with its covenants. Cash exceeded debt by approximately $591.5 million.
Changes, outlook and risks
- Management expects SG&A to remain 29%–30% of revenue and R&D to remain 7%–8% of revenue. The filing provides no specific revenue or earnings guidance and cautions that interim results are not necessarily indicative of full-year results.
- Newly introduced products included the Stellar ventilation device, S9 VPAP bilevel devices, and Swift FX for Her, Mirage FX and Quattro FX masks. In August 2010, ResMed acquired assets of its headgear supplier, citing supply, cost and technology benefits.
- The company repurchased 2.8 million shares for $96.1 million during the nine-month period; 11.7 million additional shares remained authorized for repurchase. A two-for-one stock split was effected in August 2010.
- Unusual items included a $2.3 million long-lived-asset impairment charge for the nine months, compared with none in the prior-year period, and a $1.0 million Foundation donation versus $3.0 million in the prior-year period.
- Key exposures include foreign-exchange movements, variable-rate debt and healthcare reimbursement and regulatory changes. The filing highlights a U.S. medical-device excise tax of 2.3% scheduled to begin in 2013, competitive bidding and potential changes to FDA 510(k) requirements.
- Legal matters include a University of Sydney intellectual-property and license dispute and a March 2011 suit by former customer SMRT LLC. The company said it could not estimate possible losses but did not expect either matter to have a material adverse effect. It also disclosed a German tax assessment appeal, which it characterized as immaterial.
- Management reported disclosure controls were effective at March 31, 2011 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth, especially mask and accessory growth, continues and whether flow-generator sales in North and Latin America recover.
- Whether gross-margin pressure from currency and pricing persists, and how exchange rates affect reported results and cash.
- Cash-flow quality, including the sizeable exchange-rate contribution to the increase in cash, and planned capital spending, acquisitions and share repurchases.
- Terms, covenant headroom and refinancing or repayment needs for the variable-rate credit facility, including its 2014 maturity.
- Potential effects of the medical-device tax, reimbursement and competitive-bidding changes, FDA requirements, and the outcomes of the disclosed legal matters.