ResMed Inc. — Form 10-Q Summary
Business context and reporting period
ResMed designs, manufactures and markets equipment for sleep-disordered breathing and other respiratory disorders, and provides business-management software-as-a-service (SaaS) to out-of-hospital healthcare providers. This filing covers the fiscal second quarter and six months ended December 31, 2019; comparisons are with the corresponding periods ended December 31, 2018. Financial statement amounts below are in U.S. dollars.
Financial performance
| Metric | Three months 2019 | Three months 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $736.2 million | $651.1 million | $1,417.2 million | $1,239.4 million |
| Gross profit | $427.1 million | $374.5 million | $818.7 million | $710.7 million |
| Gross margin | 58.0% | 57.5% | 57.8% | 57.3% |
| Operating income | $197.8 million | $157.1 million | $368.9 million | $301.2 million |
| Net income | $160.6 million | $124.6 million | $280.7 million | $230.4 million |
| Diluted EPS | $1.10 | $0.86 | $1.93 | $1.60 |
Quarterly revenue grew 13% (14% at constant currency); net income rose 29%. For the six months, revenue grew 14% (15% at constant currency) and net income rose 22%. Management attributed higher gross margin primarily to product mix, manufacturing and procurement efficiencies, and MatrixCare, partly offset by lower average selling prices.
- Segment revenue, quarter: Sleep and Respiratory Care was $649.5 million, up 10% reported (11% constant currency); SaaS was $86.7 million, up 37%, predominantly reflecting the MatrixCare acquisition.
- Segment revenue, six months: Sleep and Respiratory Care was $1,243.6 million, up 10% reported (11% constant currency); SaaS was $173.6 million, up 57%, predominantly reflecting MatrixCare.
- Cash flow, six months: Operating cash flow was $232.3 million versus $177.6 million. Capital expenditures were $47.8 million versus $31.4 million. Cash and cash equivalents increased to $204.1 million at December 31 from $147.1 million at June 30, 2019.
- Liquidity and debt: Working capital was $800.4 million, compared with $589.4 million at June 30. Total debt principal was $1.304 billion; ResMed reported covenant compliance. The balance sheet includes $99.5 million of operating lease liabilities following adoption of the new lease standard.
Material changes and unusual items
- Sleep and Respiratory Care growth was supported by higher device and mask sales. Mask and other revenue rose 16% in the quarter; device revenue rose 7%.
- Selling, general and administrative expenses increased 6% in the quarter and R&D increased 16%, with acquisition-related costs contributing to both. Acquired-intangible amortization increased to $20.6 million for the quarter from $15.8 million.
- Interest expense and losses from equity-method investments increased. The latter included ResMed’s share of losses from its Verily joint venture: $6.9 million for the quarter and $13.8 million for the six months.
- The effective tax rate fell to 10.2% for the quarter and 14.8% for the six months, partly due to tax benefits from vesting or settlement of employee share-based awards.
- ResMed paid $40.6 million in December 2019 to settle federal and state False Claims Act-related claims, below its $41.2 million reserve. It denied wrongdoing; the settlement made no determination of liability.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management expects to meet liquidity and long-term debt requirements using cash on hand, operating cash flow and debt facilities. It describes ongoing investment in R&D and a product pipeline as supporting future growth, but cautions that interim results are not necessarily indicative of the full fiscal year.
- The settlement includes a corporate integrity agreement requiring compliance, documentation, review and monitoring measures. ResMed cautions that related compliance costs, operational changes or reputational harm could adversely affect results and U.S. operations.
- The Australian Taxation Office disputes ResMed’s tax treatment for 2009–2013 and asserted $151.7 million of additional tax, $38.4 million of interest and $75.9 million of penalties. ResMed had paid $75.9 million and recorded it as a receivable, expects a refund, and says it is more likely than not to prevail. The ATO is also auditing 2014–2018.
- ResMed identified an administrative oversight in a prior U.S. tax filing and sought IRS relief; it had not recorded a reserve, believing relief more likely than not. An unsuccessful outcome could affect tax expense.
- Foreign currency exposure is partly hedged; variable-rate debt creates interest-rate exposure. Management said a hypothetical 10% interest-rate change would not have materially affected pretax income for the reported periods. No interest-rate hedges were in place.
- Other risks include healthcare, regulatory and market changes, competition, execution of growth strategy, and product warranty estimates. The company reported no material changes to the risk factors in its 2019 Form 10-K.
Important facts for investors to verify
- How much of SaaS growth reflects acquired businesses, particularly MatrixCare, versus underlying organic growth.
- Progress and potential financial or operational effects of the corporate integrity agreement and the settled claims.
- Developments in the Australian tax dispute and the pending IRS relief request, including any change to recorded receivables or reserves.
- Debt levels, covenant headroom, interest costs and repayment obligations, including the 2023 credit-facility maturity and senior notes due in 2026 and 2029.
- Whether margin improvement, cash generation and device and mask sales growth continue as product mix, pricing, currency and acquisition effects change.