ResMed Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2013, with nine-month comparisons to March 31, 2012. The request metadata says “2012 Q3,” but the filing is for fiscal 2013 Q3.
Business context
ResMed designs, manufactures and sells equipment and services for sleep-disordered breathing and other respiratory disorders. Its products include flow generators, masks, diagnostic products and related accessories.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $383.6m vs. $349.1m; up 10% | $1,099.9m vs. $996.6m; up 10% |
| Gross profit / margin | $239.4m; 62.4% vs. 60.3% | $680.8m; 61.9% vs. 59.6% |
| Operating income | $96.1m vs. $76.5m | $268.7m vs. $204.7m |
| Net income | $84.9m vs. $64.6m; up 31% | $234.1m vs. $178.0m; up 32% |
| Diluted EPS | $0.58 vs. $0.44 | $1.60 vs. $1.18 |
| Operating cash flow | Not reported for the quarter | $278.9m vs. $286.2m |
All amounts are U.S. dollars. For the nine months, capital expenditures were $47.6m, compared with $35.1m in the prior period. Cash and cash equivalents were $1,012.7m at March 31, 2013, versus $809.5m at June 30, 2012. Working capital was approximately $1.0bn, down from $1.1bn, largely because debt due in 2014 was reclassified as current.
Total debt was $340.8m, of which $340.1m was current and $0.8m non-current. Stockholders’ equity was $1.77bn. The company reported compliance with debt covenants. Approximately $981.4m of cash was held by non-U.S. subsidiaries and treated as indefinitely invested outside the United States; repatriation could result in additional tax expense.
Material changes and drivers
- Quarterly revenue growth reflected higher unit sales of S9 autoset and bilevel flow generators, masks and accessories. North and Latin America revenue rose 13%; international revenue rose 6%.
- Nine-month revenue increased 10% as flow-generator and mask/accessory sales grew. Foreign exchange reduced reported nine-month revenue by approximately $16.6m; constant-currency growth was 12%.
- Gross-margin expansion was attributed to manufacturing and supply-chain improvements and a more favorable product mix, partly offset by lower average selling prices.
- SG&A increased 8% for the quarter and 6% for the nine months, while declining as a share of revenue. R&D increased 10% and 8%, respectively, as the company added personnel and invested in product development.
- The effective tax rate declined to 21.4% for the quarter and 21.2% for the nine months, mainly due to geographic income mix, including Singapore tax rates and incentives.
- ResMed paid $72.9m in dividends during the nine months and repurchased 2.8m shares for $115.3m. It acquired Umbian Inc. for an initial $5.6m, with potential earn-out payments of up to $35.4m; $12.2m was recognized as a liability.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expected future SG&A to be approximately 29% of revenue and R&D approximately 8%.
- The existing revolving credit facility, with $340.0m outstanding, terminates February 10, 2014. ResMed had begun negotiating a replacement facility and expected it to be in place before expiration.
- Medicare competitive bidding reductions for CPAP and respiratory devices in the second round averaged approximately 47% on a weighted basis, effective July 1, 2013. The company said the business impact was uncertain. Reimbursement reductions or coverage limits more broadly could pressure customer economics, sales, pricing and receivable collectability.
- Legal matters include an ongoing University of Sydney dispute concerning a license agreement and intellectual property, for which the company could not estimate a loss range, and patent infringement actions filed against APEX Medical and its U.S. distributor. Management did not expect these matters to materially affect consolidated financial statements.
- Foreign-currency exposure remains significant. The company uses options and forwards for economic risk management but does not designate them as accounting hedges; fair-value movements flow through other income. Nine-month other income was $28.6m, versus $28.8m, with currency and hedging gains among the main drivers.
- Other notable items: cost-method investment impairment was $0.2m for the nine months, compared with $2.3m in the prior period. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Key investor verification points
- Confirm the period being analyzed: this filing covers fiscal 2013 Q3, not 2012 Q3.
- Track the effect of Medicare competitive bidding price reductions and other reimbursement changes on sales, pricing and customers.
- Monitor refinancing of the $340m revolving facility before its February 2014 maturity and the terms of any replacement facility.
- Assess the sustainability of margin expansion and earnings growth, including product mix, manufacturing improvements, pricing and currency effects.
- Evaluate the availability and tax consequences of offshore cash, alongside the company’s dividend and share-repurchase spending.
- Follow developments in the University of Sydney litigation, the APEX patent cases and Umbian’s contingent earn-out obligations.