ResMed Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2011. Financial statements are unaudited; amounts below are in U.S. dollars.
Business context and performance
ResMed develops, manufactures and distributes medical equipment for sleep-disordered breathing and other respiratory disorders. Management cited continued market development, product launches and investment in research and development.
- Quarter revenue: $332.7 million, up 9% year over year. Masks and accessories grew 16%; flow generators grew 3%. North and Latin America revenue rose 12%, and international revenue rose 5%.
- Six-month revenue: $647.5 million, up 10% reported and 8% at constant currency. Masks, motors and accessories grew 18%; flow generators grew 4%.
- Quarter profit: Gross profit was $198.7 million; operating income $67.3 million; net income $62.9 million; diluted EPS $0.42. Net income increased 8% and diluted EPS increased from $0.37.
- Six-month profit: Gross profit was $383.8 million; operating income $128.1 million; net income $113.4 million; diluted EPS $0.75. Net income declined 2%, while diluted EPS increased from $0.73.
Margins, cash flow and liquidity
- Gross margin was 59.7% for the quarter versus 60.8% a year earlier, and 59.3% for the six months versus 61.2%. Management attributed the declines primarily to adverse currency movements—especially the Australian dollar—and lower average selling prices; product mix and manufacturing and supply-chain savings partly offset these pressures.
- Operating income declined 4% for the quarter and 6% for the six months despite higher revenue, reflecting higher operating expenses. Research and development spending rose 24% for the quarter and 28% for the six months.
- Six-month operating cash flow was $200.2 million, compared with $127.5 million. Investing used $87.7 million, including $51.9 million for acquisitions; financing used $94.2 million, including $236.0 million for treasury-share purchases, partly offset by borrowings.
- Cash and equivalents were $723.2 million at December 31, compared with $735.3 million at June 30. Working capital was $1.0 billion. Approximately $672.1 million of cash was held by non-U.S. subsidiaries and described as indefinitely invested outside the United States; repatriation would require an income-tax adjustment.
- Total debt was $226.5 million, versus $100.2 million at June 30; $225.0 million was outstanding on the revolving facility. The company reported compliance with debt covenants. Cash exceeded debt by approximately $496.8 million.
Changes, outlook and items to monitor
- Other income helped quarterly earnings: it was $15.7 million, versus $9.0 million, with management citing foreign-currency and hedging gains and higher interest income. Six-month other income included a $2.1 million gain on remeasurement of a previously held BiancaMed interest; the company also recorded a $2.3 million impairment of cost-method investments.
- ResMed acquired BiancaMed and Gruendler GmbH for total consideration of $64.5 million. Gruendler’s purchase agreement may require up to €5.5 million in additional milestone payments. Acquisitions added $51.8 million of goodwill.
- The company repurchased 8.5 million shares for approximately $235.2 million during the six months; 14.0 million shares remained authorized for repurchase at December 31.
- Management expected future SG&A expense to be approximately 30% of revenue and R&D expense approximately 8%. The filing provides no specific revenue or earnings guidance and cautions that interim results are not necessarily indicative of full-year results.
- Key risks include foreign-exchange exposure, healthcare and regulatory changes, competition and execution of growth plans. The company uses currency derivatives for economic hedging, not speculation; their fair-value movements are recorded in earnings. Variable-rate debt creates interest-rate exposure.
- The University of Sydney litigation remains ongoing. The company said a potential loss range could not be reasonably estimated, but did not expect a material adverse effect. It also reported up to $4.5 million of potential recourse exposure on customer receivables sold to leasing companies, with $0.6 million recognized.
- On January 25, 2012, after quarter-end, the revolving-credit-facility maximum was increased from $300 million to $400 million, subject to customary conditions.
Investor verification priorities
- Check whether revenue growth and product-category trends continued, and whether gross-margin pressure from currencies and pricing persisted.
- Assess how much of earnings depended on foreign-currency and hedging gains, and the effect of currency movements on manufacturing costs and reported results.
- Review share repurchases, acquisition performance and any Gruendler milestone payments alongside cash generation and debt levels.
- Monitor the University of Sydney case, debt covenant compliance, and the tax implications of any repatriation of foreign-held cash.