ResMed Inc. — Form 10-Q Summary
Business and period: ResMed designs, manufactures and markets equipment for diagnosing and treating sleep-disordered breathing and other respiratory disorders. This unaudited filing covers the quarter and six months ended December 31, 2014 (fiscal 2015 Q2), compared with the same periods in 2013. Unless noted otherwise, amounts below are in U.S. dollars.
Key financial results
| Metric | Three months ended Dec. 31, 2014 | Year-over-year change | Six months ended Dec. 31, 2014 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $423.0 million | +10% reported; +14% constant currency | $803.4 million | +8% reported; +10% constant currency |
| Gross profit / margin | $263.2 million / 62.2% | Profit +6%; margin down from 64.7% | $500.5 million / about 62.3% | Profit +5%; prior-period margin about 64.3% |
| Operating income | $109.1 million | +4% | $203.8 million | +1% |
| Net income | $91.2 million | +5% | $174.4 million | +4% |
| Diluted EPS | $0.64 | Up from $0.60 | $1.22 | Up from $1.15 |
| Operating cash flow | Not separately reported for the quarter | — | $192.5 million | Up from $174.6 million |
- Revenue drivers: Quarterly flow-generator revenue rose 16%, while masks and accessories rose 3%. Higher unit sales drove growth, partly offset by lower average selling prices. Foreign exchange reduced quarterly revenue by about $13.8 million and six-month revenue by about $13.4 million.
- Margins and expenses: Management attributed the lower quarterly gross margin primarily to lower selling prices and unfavorable product mix, partly offset by manufacturing and supply-chain improvements. Six-month SG&A rose 9% reported, and R&D rose 4%; management cited commercial staffing and marketing, acquisitions, informatics development and heart-failure clinical trials.
- Cash, liquidity and debt: Cash and equivalents were $880.7 million at December 31, versus $905.7 million at June 30, 2014; working capital was about $1.3 billion. The company reported $449.7 million of long-term debt, including $449.0 million drawn on its $700 million unsecured revolving facility, at a 1.2% interest rate. It reported compliance with debt covenants and expects liquidity needs to be met through cash, operating cash flow and debt facilities.
- Cash uses and working capital: Six-month investing cash outflow was $100.6 million, including $39.7 million in capital expenditures, $17.8 million for acquisitions and $10.5 million for cost-method investments. Financing included $76.4 million of share repurchases and $78.5 million of dividends. Inventories rose to $218.1 million from $165.4 million at June 30; management linked the increase to new product launches. Receivables days were 73, up from 70 a year earlier.
Material changes and notable items
- The company launched its AirCurve 10 bilevel product series and continued the global rollout of its Astral life-support ventilation platform.
- Net income benefited from a $3.2 million tax benefit following final resolution of a German tax audit. Excluding it, the six-month effective tax rate would have been 21.3%, versus 19.8% reported.
- Foreign-currency translation adjustments were a substantial drag on comprehensive income: six-month comprehensive loss was $58.6 million despite net income of $174.4 million. Exchange-rate effects reduced cash by $123.8 million during the six months.
- Four Australian and New Zealand distributors were acquired during the six months. Preliminary purchase accounting included $12.3 million of goodwill; the acquisitions were funded with cash on hand.
- Share repurchases reduced the share count; 16.8 million additional shares remained authorized for repurchase at December 31. The dividend declared was $0.28 per share for the quarter, versus $0.25 a year earlier.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings or margin guidance. Management described an active product-release schedule and continued investment in research and development and market awareness, but cautioned that interim results are not necessarily indicative of full-year results.
- Key disclosed risks include foreign-currency exposure, healthcare reform and regulatory or market changes, competition, execution of growth strategies, and product development and approval. The company uses currency options and forwards for economic hedging; these are not designated as accounting hedges. It reported $435.2 million of hedge notional at December 31.
- The company reported routine litigation and did not expect the matters, individually or in aggregate, to materially adversely affect its financial statements. In December 2014, the U.S. International Trade Commission ruled certain BMC masks infringed ResMed patents and ordered exclusion; BMC said it had discontinued affected U.S. sales. The Commission declined to exclude BMC humidifiers after finding the asserted patent claim anticipated by prior art; the ruling was subject to appeal. German proceedings continued, including ResMed’s appeal of the dissolution of an injunction against BMC flow generators.
- About $830.1 million of cash was held by non-U.S. subsidiaries and, if repatriated, would be subject to U.S. tax; management intends to keep these funds invested outside the United States. The filing also reports $119.3 million in purchase obligations and $61.9 million in operating lease commitments.
Important facts for investors to verify
- Whether revenue growth continues to translate into earnings as pricing and product mix pressure gross margins.
- How foreign exchange affects reported revenue, cash and comprehensive income, and whether hedging offsets remain effective economically.
- Whether inventory growth and longer customer payment terms convert into sales and cash collection without higher obsolescence or credit losses.
- Debt-facility utilization, covenant compliance, and the amount and location of cash available for U.S. operations.
- Developments in the BMC patent litigation and the commercial rollout and performance of new products.