ResMed Inc. — Q2 FY2017 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2016. Unaudited U.S. GAAP interim results; amounts below are U.S. dollars. ResMed designs, manufactures and markets devices and software for sleep-disordered breathing and other respiratory disorders, including cloud-based care-management solutions.
Financial highlights
| Metric | Three months ended Dec. 31, 2016 | Prior-year quarter | Six months ended Dec. 31, 2016 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $530.4 million | $454.5 million | $995.8 million | $866.2 million |
| Gross profit / margin | $309.1 million / 58.3% | $266.5 million / 58.6% | $578.3 million / 58.1% | $505.1 million / 58.3% |
| Operating income | $96.9 million | $108.0 million | $191.0 million | $206.0 million |
| Net income | $76.7 million | $95.6 million | $152.8 million | $178.5 million |
| Diluted EPS | $0.54 | $0.68 | $1.08 | $1.26 |
- Quarterly revenue rose 17% reported and 18% at constant currency. It included $33.8 million from Brightree; excluding Brightree, revenue increased 9% reported and 10% at constant currency.
- For the six months, reported revenue increased 15%; currency movements reduced revenue by approximately $7.1 million. The filing’s six-month growth table excludes Brightree and reports 7% growth, or 8% at constant currency.
- Quarterly net income declined 20%; six-month net income declined 14%. Quarterly diluted EPS fell from $0.68 to $0.54.
- Quarterly operating margin was approximately 18.3%, versus 23.8% a year earlier; net margin was approximately 14.5%, versus 21.0%. These margins are calculated from reported figures.
- Operating cash flow for the six months was $206.1 million, down from $280.2 million. Capital expenditures were $29.2 million. Management attributed lower operating cash flow mainly to higher inventory and timing of income-tax payments.
Balance sheet, debt and liquidity
- At December 31, cash and cash equivalents were $788.1 million, current assets $1.52 billion, current liabilities $682.4 million, and working capital $837.9 million. Total assets were $3.32 billion and stockholders’ equity $1.71 billion.
- Carrying value of total debt was $1.17 billion: $300 million short-term term-loan debt and $870 million drawn on the revolving facility. Approximate net debt, calculated as carrying debt less cash, was $380 million.
- The $300 million term loan matures April 3, 2017. On January 9, 2017, after quarter-end, ResMed amended its revolving facility, increasing its capacity from $1.0 billion to $1.3 billion, with a further uncommitted $300 million increase option. Management expected available funds to repay the term loan at maturity. The company reported compliance with debt covenants at December 31.
- Cash held by non-U.S. subsidiaries was $747.8 million and would be subject to U.S. tax if repatriated; management intended to keep it permanently invested abroad. The quarterly dividend declared was $0.33 per share. Share repurchases remained suspended following recent acquisitions.
Material changes, commentary and risks
- Quarterly device revenue increased 16%; masks and accessories increased 1%. Unit growth was partly offset by lower average selling prices. International currency movements reduced quarterly revenue by approximately $5.4 million.
- Gross margin declined modestly year over year. Management cited unfavorable product mix and lower average selling prices, partly offset by manufacturing and procurement efficiencies and Brightree’s contribution.
- SG&A and R&D expenses increased, reflecting acquisition-related costs, added commercial and R&D staffing, legal expenses, and product-development materials and tooling. Amortization of acquired intangibles also rose substantially following acquisitions.
- Reported quarterly charges included $8.5 million for the BMC Medical/3B litigation settlement and $10.1 million of additional contingent consideration for Curative Medical after performance milestones exceeded earlier expectations. Restructuring expense was $4.4 million, primarily severance and project-cancellation costs in German R&D operations.
- The January 2017 BMC/3B settlement resolved outstanding disputes. ResMed agreed to pay $8.5 million and not to initiate certain patent suits for five years; BMC agreed to pay royalties on U.S. sales of specified products. The charge was recognized in the December quarter because the matter existed at period-end.
- Other disclosed legal matters include two federal OIG subpoenas concerning patient-resupply software and promotional programs, and patent disputes with Fisher & Paykel Healthcare. ResMed said it was cooperating with the OIG; the Fisher & Paykel disputes remained ongoing.
- Foreign-currency exposure is significant; derivatives had a net fair-value liability of $22.0 million at December 31. Total debt carried variable interest rates. Management cited healthcare, regulatory, competitive, execution and economic uncertainties. No numerical earnings or revenue guidance was provided in the supplied filing text.
Important facts for investors to verify
- Whether device-volume growth can continue and offset lower selling prices, mix pressure and currency effects.
- Brightree’s contribution to revenue and profitability, and completion of its preliminary purchase-price allocation; the filing expected completion in the quarter ending March 31, 2017.
- Repayment of the April 2017 term loan using the expanded revolving facility, together with ongoing covenant compliance and interest costs.
- Cash availability for U.S. needs given that most cash is held overseas and intended to remain permanently invested abroad.
- Developments in the OIG inquiry and Fisher & Paykel patent litigation, and the financial effect of the BMC/3B settlement and royalties.
- Inventory growth, operating cash-flow conversion, and the sustainability of margins and dividends amid acquisition-related spending.