ResMed Inc. — FY2016 Form 10-K summary
Reporting period: Fiscal year ended June 30, 2016, with FY2015 comparisons. The request metadata says “2015 Q4,” but the supplied filing is the FY2016 annual report; its fourth-quarter figures are included below.
Business context
ResMed develops, manufactures, and sells medical devices and cloud-based software for sleep-disordered breathing and other respiratory disorders. Its products include positive airway pressure devices, ventilators, masks, accessories, oxygen concentrators, and patient-management software. It operates predominantly as one segment and sells in approximately 100 countries.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net revenue | $1,838.7 million | $1,678.9 million |
| Gross profit / gross margin | $1,066.5 million / 58.0% | $1,011.4 million / 60.2% |
| Operating income | $429.0 million | $409.2 million |
| Net income | $352.4 million | $352.9 million |
| Diluted earnings per share | $2.49 | $2.47 |
| Cash from operations | $547.9 million | $383.2 million |
| Cash and cash equivalents at year-end | $731.4 million | $717.2 million |
| Working capital at year-end | $781.2 million | $1,141.4 million |
| Total debt at year-end | $1,175.0 million | $300.6 million |
- Revenue rose 10% as reported, or 13% in constant currency. Excluding Brightree, revenue grew 8% as reported and 11% in constant currency. Currency movements reduced reported revenue by approximately $55.6 million.
- North and Latin America revenue increased 17% to $1,130.4 million, including Brightree; revenue outside those markets fell 1% as reported but rose 6% in constant currency.
- Device revenue grew 9% to $1,064.2 million; masks and accessories grew 6% to $745.6 million. Unit growth was partly offset by lower average selling prices.
- Gross margin fell 2.2 percentage points, attributed to product and geographic mix and lower average selling prices. Net income was essentially flat; diluted EPS increased slightly, aided by a lower share count.
- Operating cash flow increased by $164.8 million, primarily reflecting lower inventories and higher accounts payable, as well as a $14.5 million operating-cash-flow benefit from adopting a share-based-payment accounting standard.
- Reported working capital declined by $360.2 million. Year-end current assets were $1,419.7 million and current liabilities $638.6 million; current liabilities included a $300 million term loan due in April 2017.
- Operating cash flow funded dividends of $168.1 million and share repurchases of $102.1 million, while acquisitions drove $1,041.9 million of investing cash outflow. ResMed held $690.5 million of cash outside the U.S. and treated approximately $1.2 billion of foreign earnings as permanently reinvested.
- For FY2016 fourth quarter, revenue was $518.6 million versus $453.1 million a year earlier; net income was $83.1 million versus $87.5 million, and diluted EPS was $0.59 versus $0.61.
Material changes and unusual items
- ResMed acquired Brightree for approximately $802 million in April 2016, adding post-acute-care software; it contributed $28.9 million of reported FY2016 revenue after closing. Other acquisitions included Curative Medical, Inova Labs, Maribo Medico, and Bennett Precision Tooling.
- Acquisition financing increased debt to $1.175 billion: $875 million drawn on a revolving facility and a $300 million one-year term loan. The term loan matured in April 2017; management said it planned to refinance before maturity. The company reported compliance with debt covenants.
- Acquired-intangible amortization rose to $23.9 million from $8.7 million. Restructuring expense was $6.9 million, mainly severance and a legacy-facility write-down. Goodwill rose to $1.059 billion; the annual impairment review found no impairment.
- Early adoption of ASU 2016-09 generated an $11.2 million income-tax benefit. The effective tax rate was 19.8%, versus 19.0%; the filing also notes tax holidays and incentives in Singapore and Malaysia that expire in whole or in part through June 2020.
- On July 28, 2016, ResMed announced an increase in its quarterly dividend from $0.30 to $0.33 per share. This was after the fiscal year-end.
Outlook, risks, and contingencies
- The filing gives no specific revenue, earnings, or margin guidance. Management describes growth opportunities in connected care, sleep apnea, respiratory failure/COPD, China and other emerging markets, and adjacent clinical applications; these are strategic aims, not quantified forecasts.
- Medicare competitive bidding and related reimbursement adjustments put pressure on customer reimbursement and pricing. Lower prices, product mix, and geographic mix already weighed on gross margin. The U.S. medical-device excise tax was suspended for 2016 and 2017 calendar years and was scheduled to return in 2018 absent further action.
- In July 2016, ResMed received an HHS Office of Inspector General administrative subpoena seeking materials primarily concerning patient resupply software offerings in the industry. The company said it was cooperating; the filing does not quantify any potential financial exposure.
- The SERVE-HF trial identified a statistically significant 2.5% absolute increase in cardiovascular mortality among a specified group of heart-failure patients receiving ASV therapy. ResMed revised device labeling and instructions and completed related field-safety notification activities in FY2016.
- Patent disputes with BMC and 3B Medical remain ongoing in the U.S. and China, alongside a 3B antitrust suit. Management did not expect the outcome of legal proceedings, taken as a whole, to materially adversely affect the consolidated financial statements, but litigation outcomes are uncertain.
- Other notable risks include acquisition integration and goodwill realization, variable-rate debt and refinancing, foreign-exchange exposure, reimbursement changes, competition, single-source suppliers, medical-device regulation, and privacy and cybersecurity risks for connected software. Management reported effective disclosure controls and internal control over financial reporting; Brightree was excluded from the 2016 internal-control assessment.
Most important facts for investors to verify
- Whether revenue growth and unit momentum continue to offset currency pressure, lower selling prices, and margin compression.
- Progress integrating Brightree and the other acquisitions, including realized growth, software profitability, and final purchase-price allocations.
- Debt refinancing and repayment plans for the $300 million term loan, covenant headroom, and the effect of leverage on dividends and investment.
- Developments from the OIG subpoena, BMC/3B litigation, and any resulting costs, restrictions, or settlements.
- Clinical, regulatory, and commercial consequences of SERVE-HF, plus the impact of reimbursement changes and the scheduled medical-device tax reinstatement.
- Availability of overseas cash for U.S. obligations, foreign repatriation taxes, and the sustainability of cash flow, dividends, and share repurchases.