ResMed Inc. — Form 10-Q summary
Period: The filing covers the quarter and nine months ended March 31, 2015, compared with the same periods in 2014. This is fiscal 2015 Q3; the request metadata’s “2014 Q3” does not match the filing period. Amounts are US dollars.
Business context and results
ResMed develops, manufactures and sells equipment and related software for sleep-disordered breathing and other respiratory disorders. Management cited product launches, market-development efforts, and investment in research and development. The company launched its AirCurve 10 bilevel devices in Europe and expanded AirView integration with Brightree.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $422.5 million, up 6% (13% constant currency) | $1,225.8 million, up 8% (11% constant currency) |
| Gross profit / gross margin | $251.4 million / 59.5%, versus $251.8 million / 63.3% | $752.0 million / 61.3%, versus $728.5 million / 63.9% |
| Operating income | $105.9 million, versus $104.7 million | $309.7 million, versus $306.6 million |
| Net income | $91.0 million, versus $90.0 million | $265.4 million, versus $257.5 million |
| Diluted EPS | $0.64, versus $0.63 | $1.86, versus $1.78 |
| Operating cash flow | Nine-month total: $283.5 million, versus $275.7 million |
Financial position, cash flow and liquidity
- At March 31, 2015, cash and cash equivalents were $866.3 million, total assets $2.28 billion, and stockholders’ equity $1.54 billion. Working capital was $1.3 billion.
- Cash declined $39.4 million from June 30, 2014. The reported exchange-rate effect reduced cash by $184.1 million; operating cash flow was $283.5 million.
- Nine-month investing cash outflow was $119.6 million, including $50.3 million in capital expenditures and $27.0 million for acquisitions. Financing cash outflow was $19.2 million, including $117.9 million of dividends and $103.3 million of treasury-stock purchases, partly offset by $160.0 million of net borrowings.
- Long-term debt was $460.6 million, including $460.0 million outstanding under a $700 million unsecured revolving facility; the balance-sheet amount was $300.8 million at June 30, 2014. The outstanding facility rate was 1.2%. The company reported compliance with debt covenants.
- Inventory rose to $225.2 million from $165.4 million at June 30, 2014; management attributed the increase mainly to new product introductions and support for higher unit sales. Cash held outside the U.S. was $835.6 million and would be subject to U.S. tax if repatriated; management intended to keep it invested abroad.
Material changes and management commentary
- Quarterly revenue growth was led by flow generators, whose sales increased 17%; mask and accessory sales declined 6%. North and Latin America revenue rose 16%, while international revenue fell 6% in reported dollars but increased 9% on a constant-currency basis.
- Foreign exchange movements reduced quarterly revenue by approximately $28.5 million and nine-month revenue by approximately $41.9 million. Lower gross margin reflected lower average selling prices, product and geographic mix, and currency effects.
- Management reported no numerical financial guidance. It said liquidity needs are expected to be met through cash on hand, operating cash generation and debt facilities. Management described the product-release schedule as active and cited continued investment in R&D and healthcare informatics.
- The company acquired four distributors in Australia and New Zealand and software provider Jaysec during the nine-month period. The acquisitions were described as not material; purchase accounting included $19.1 million of goodwill.
Risks, contingencies and unusual items
- Currency is a significant exposure. The company uses options and forward contracts for economic hedging, but does not designate them as accounting hedges; fair-value movements are recorded in other income. Nine-month derivative losses were offset by gains on other foreign-currency transactions. The company also reported a $351.1 million nine-month foreign-currency translation loss in other comprehensive income.
- ResMed faces patent litigation involving BMC Medical in the U.S. and Germany, including appeals of International Trade Commission rulings. BMC’s U.S. distributor, 3B Medical, separately sued ResMed alleging antitrust violations; ResMed denied the allegations. Management did not expect routine litigation to have a material adverse effect overall, but outcomes are uncertain.
- Other exposures include customer-financing recourse provisions, operating leases, purchase obligations, and credit-facility covenants. The filing reported $163.3 million in purchase obligations and $59.8 million in operating lease commitments. Management said no significant off-balance-sheet arrangements existed.
- Tax incentives for manufacturing operations in Singapore and Malaysia expire in whole or in part through June 30, 2020. The company had not provided U.S. income taxes on foreign earnings it intended to permanently reinvest abroad.
- The company was evaluating the effect and transition method for the new revenue-recognition standard, which it expected to adopt beginning in fiscal 2018.
Important facts for investors to verify
- Whether reported growth translates into sustained underlying demand, given the gap between reported and constant-currency growth and declines in masks and accessories.
- Whether gross-margin pressure from pricing, product mix, geography and currency persists.
- Inventory growth, cash conversion, and the effect of foreign-exchange movements on cash and reported results.
- Debt-facility terms, covenant headroom, and the availability of offshore cash for U.S. needs after potential repatriation taxes.
- Developments and potential financial effects of the BMC patent disputes and 3B Medical antitrust suit.