ResMed Inc. — Form 10-Q summary
Reporting period: The filing is for the quarter ended March 31, 2019, and covers the first nine months of fiscal 2019. This differs from the “2018 Q3” period in the request metadata. Amounts are U.S. dollars; financial statements are unaudited.
Business context and performance
ResMed designs, manufactures and markets devices and software for sleep-disordered breathing and other respiratory disorders, and provides business-management software-as-a-service (SaaS) to out-of-hospital healthcare providers. Following acquisitions, it reports Sleep and Respiratory Care and SaaS as operating segments.
| Metric | Three months ended Mar. 31, 2019 | Year-over-year | Nine months ended Mar. 31, 2019 | Year-over-year |
|---|---|---|---|---|
| Revenue | $662.2 million | +12% (+15% constant currency) | $1,901.6 million | +11% (+12% constant currency) |
| Gross profit / margin | $391.9 million / 59.2% | Margin: 58.2% prior year | $1,118.7 million / 58.8% | Margin: 58.2% prior year |
| Operating income | $157.0 million | +$20.6 million | $458.2 million | +$63.2 million |
| Net income | $105.4 million | −4% | $335.8 million | +63% |
| Diluted EPS | $0.73 | $0.76 prior year | $2.33 | $1.43 prior year |
| Cash from operations | Not separately stated here | — | $317.2 million | $375.6 million prior year |
Quarterly operating margin was approximately 23.7%, versus 23.1% a year earlier; nine-month operating margin was approximately 24.1%, versus 23.0%. Gross-margin improvement reflected manufacturing and procurement efficiencies, favorable product mix and the MatrixCare acquisition, partly offset by lower average selling prices.
Revenue mix and material changes
- Quarterly Sleep and Respiratory Care revenue was $582.3 million, up 6% reported and 9% constant currency. Global devices revenue rose 3% reported; masks and other revenue rose 10%.
- Quarterly SaaS revenue was $79.9 million, up 101%, primarily reflecting acquisitions. MatrixCare contributed $37.3 million in the quarter. For the nine-month period, SaaS revenue was $190.6 million, up 63%.
- U.S., Canada and Latin America quarterly Sleep and Respiratory Care revenue grew 10%, mainly from higher unit sales, partly offset by lower average selling prices. Europe, Asia and other markets declined 1% reported but rose 6% constant currency.
- Acquisition-related amortization rose to $22.8 million for the quarter from $11.7 million, and to $51.5 million for nine months from $34.8 million. Nine-month acquisition-related expenses were $6.1 million; none were reported for the quarter.
Cash, debt and liquidity
- At March 31, 2019, cash and equivalents were $146.5 million, down from $188.7 million at June 30, 2018. Working capital was $639.7 million, versus $554.5 million; current assets were $1.103 billion and current liabilities $463.0 million.
- Nine-month operating cash flow was $317.2 million. Capital expenditures were $46.5 million, implying operating cash flow less capital expenditures of approximately $270.7 million. Operating cash flow declined largely because income-tax payments increased to $211.8 million from $75.1 million.
- Investing cash outflow was $1.032 billion, including $951.6 million for acquisitions. Financing cash inflow was $678.2 million, principally reflecting net borrowing proceeds.
- Balance-sheet debt, net of borrowing costs, was $1.336 billion, compared with $281.5 million at June 30, 2018. The company reported $1.339 billion outstanding under its revolving and term facilities. The revolving facility was increased to $1.6 billion in November 2018; loans were variable-rate, at 3.6% on March 31, 2019, and mature in April 2023. ResMed said it was in covenant compliance.
- Inventory increased 19% to $319.9 million, which management attributed to supporting revenue growth. Accounts receivable rose 6% to $511.4 million, primarily due to acquisitions; receivable days remained 69.
Outlook, risks and unusual items
- The filing gives no specific numerical revenue, earnings or margin guidance. Management said it expects to meet liquidity and long-term debt needs through cash on hand, operating cash generation and debt facilities.
- ResMed completed several acquisitions, including MatrixCare (November 2018), HealthcareFirst and Propeller Health, and smaller transactions. Purchase-price allocations were preliminary; the company expected to complete them by the quarter ending June 30, 2019. MatrixCare’s reported results included acquisition-related amortization and deferred-revenue purchase-accounting adjustments.
- The nine-month net-income comparison benefited from much lower tax expense: $87.3 million versus $174.6 million, with the prior-year period including $132.2 million of additional expense related to U.S. tax legislation. Quarterly tax expense was $32.5 million versus $20.0 million.
- ResMed disputes Australian Taxation Office assessments for 2009–2013 asserting $151.7 million of additional tax, $38.4 million of interest and $75.9 million of penalties. It had paid $75.9 million and recorded that amount as a receivable, stating it expects a refund and believes it is more likely than not to prevail. It is also under ATO audit for 2014–2017.
- The U.S. Department of Justice issued a Civil Investigative Demand in February 2019, following earlier subpoenas, concerning industry offerings and other practices. The company is cooperating; potential outcomes could include litigation, penalties, settlements or operational requirements. The filing does not quantify an expected loss.
- Other notable items include $18.2 million of nine-month losses and investment impairments associated with equity investments, including the Verily joint venture, and the temporary suspension of share repurchases following acquisitions. The Fisher & Paykel patent disputes were settled without payment or admission of liability; certain administrative proceedings continued.
- Foreign exchange movements reduced reported revenue growth and affected cash. Debt is variable-rate and ResMed reported no interest-rate hedges. Management identified risks including healthcare reform, competition, regulation, suppliers, customers and execution of its growth strategy.
Most important facts for investors to verify
- Whether acquired SaaS businesses deliver sustained organic growth and profitability after purchase-accounting adjustments and integration costs.
- How operating cash generation, working capital and inventory evolve as acquisition-related borrowing is serviced.
- The outcome, timing and potential financial exposure from the ATO dispute and ongoing U.S. government investigation.
- Whether the improved gross margin persists despite pricing pressure, foreign-exchange effects and product mix changes.
- Final acquisition purchase-price allocations, related amortization, and the company’s debt and covenant position.