ResMed Inc. — Form 10-Q summary
Business context and period: Global medical-device and cloud-software company focused on sleep-disordered breathing and other respiratory disorders. This unaudited report covers the three months ended September 30, 2016, ResMed’s first quarter of fiscal 2017, compared with the three months ended September 30, 2015. Amounts below are in US dollars.
Key financial metrics
| Metric | Q1 FY2017 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $465.5 million | $411.6 million | +13% |
| Gross profit / margin | $269.2 million / 57.8% | $238.6 million / 58.0% | Margin down 0.2 percentage points |
| Operating income | $94.1 million | $98.0 million | Down 4% |
| Net income | $76.1 million | $82.9 million | Down 8% |
| Diluted EPS | $0.54 | $0.58 | Down 7% |
| Cash from operations | $86.2 million | $124.6 million | Down $38.4 million |
| Capital expenditures | $14.6 million | $16.4 million | Down $1.8 million |
| Dividend declared per share | $0.33 | $0.30 | Up $0.03 |
Margins and operating drivers: Gross margin excluding the $5.1 million Astral ventilation-device field safety notification expense was 58.9%, versus 58.0% a year earlier. Management attributed the underlying improvement to manufacturing and procurement efficiencies and Brightree, partly offset by product mix and lower average selling prices. Operating expenses rose, including acquired-intangible amortization of $11.7 million versus $2.3 million; operating income consequently declined despite revenue growth.
Cash, liquidity and debt: September 30 cash and cash equivalents were $781.7 million, current assets $1.475 billion, current liabilities $620.6 million, and working capital $854.3 million. Cash increased $50.2 million during the quarter. Gross borrowings were $1.175 billion: $875 million under the revolving facility and $300 million under a one-year term loan. Both carried a 2.0% interest rate at quarter-end; the term loan matures April 3, 2017, and the revolver terminates October 31, 2018. The company said it planned to refinance the term loan before maturity and was compliant with debt covenants. Most cash—$749.9 million—was held by non-U.S. subsidiaries and would be subject to U.S. tax if repatriated.
Material changes versus the prior comparable period
- Revenue increased 13%, including $33.1 million from Brightree. Excluding Brightree, revenue increased 5% (also 5% on a constant-currency basis).
- Devices revenue rose 8%; masks and accessories revenue rose 1%. Management cited higher unit sales, partly offset by lower average selling prices.
- Revenue in North and Latin America increased 18%, or 5% excluding Brightree. Revenue outside that region rose 4% reported and 5% on a constant-currency basis.
- Operating cash flow fell, mainly due to higher inventories and timing of corporate tax payments. Inventory increased 13% from June 30 to $253.8 million.
- Interest expense increased following acquisition-related borrowing; total other expense was $1.2 million versus $1.4 million of other income in the prior-year quarter.
- The declared quarterly dividend increased to $0.33 per share from $0.30. Share repurchases were suspended following recent acquisitions; none occurred during the quarter.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific revenue, earnings or margin guidance. Management said it expected to meet liquidity needs through cash on hand, operating cash flow and debt facilities, and planned to refinance the term loan before its April 2017 maturity. Interim results are not necessarily indicative of full-year results.
- Brightree acquisition: Acquired April 4, 2016 for approximately $804 million. Brightree contributed $33.1 million of quarterly revenue. The purchase-price allocation remained preliminary, with completion expected in the quarter ending December 31, 2016.
- Safety notification: A $5.1 million expense related to replacing a potentially faulty battery in the Astral ventilation device reduced reported gross margin.
- Legal and regulatory matters: The company described patent disputes involving BMC/3B and Fisher & Paykel Healthcare, including pending U.S. and international proceedings. It also received a July 2016 federal OIG subpoena concerning patient resupply software offerings to home medical equipment providers and said it was cooperating. Management did not expect routine litigation, considered as a whole, to materially adversely affect the financial statements, but litigation outcomes are uncertain.
- Other risks: Foreign-exchange exposure is managed with derivatives, which are not designated as accounting hedges; gains and losses are recorded in other income. The company also cited healthcare reform, competition, regulatory and market changes, acquisition execution and other risks. It reported no material change to the risk factors in its FY2016 Form 10-K.
- Tax: The effective tax rate was approximately 18.1%, versus 16.6%. Tax holidays and incentives for Singapore and Malaysia operations expire in whole or in part through June 30, 2020. Foreign earnings were intended to remain permanently invested outside the United States.
Important facts for investors to verify
- Whether revenue growth excluding Brightree can continue, and whether unit growth offsets pricing and product-mix pressure.
- How the Astral battery replacement matter develops, including any further costs or operational effects.
- Progress on Brightree integration, its contribution to results, and the final purchase-price allocation.
- How the $300 million term loan will be refinanced or repaid by April 3, 2017, and the company’s covenant and leverage position.
- Developments in the OIG inquiry and patent and antitrust disputes, including potential financial or commercial consequences.
- Cash conversion and working-capital trends, particularly inventory levels and the concentration of cash in foreign subsidiaries.