ResMed Inc. Form 10-Q Summary
Reporting period: Quarter ended December 31, 2022, ResMed’s fiscal 2023 second quarter, with six-month results compared with the six months ended December 31, 2021. The filing is unaudited.
Business context and financial performance
ResMed develops and sells sleep and respiratory care devices, masks and related products, and provides software-as-a-service (SaaS) solutions for out-of-hospital care providers.
| Metric | Three months ended Dec. 31, 2022 | Change vs. prior year | Six months ended Dec. 31, 2022 | Change vs. prior year |
|---|---|---|---|---|
| Revenue | $1,033.7 million | +16% reported; +20% constant currency | $1,984.0 million | +10% reported; +14% constant currency |
| Gross profit / margin | $579.7 million / 56.1% | Margin down 0.3 percentage points | $1,120.5 million / 56.5% | Margin up 0.3 percentage points |
| Operating income | $280.2 million | Up from $248.7 million | $555.9 million | Up from $510.6 million |
| Net income | $224.9 million | Up 11% | $435.4 million | Up 7% |
| Diluted EPS | $1.53 | Up from $1.37 | $2.95 | Up from $2.76 |
| Operating cash flow | Not separately provided for the quarter | $173.3 million | Up from $154.2 million |
Segments, changes and notable items
- Sleep and Respiratory Care: Quarterly revenue was $917.0 million, up 15% reported and 20% constant currency. Growth was attributed mainly to higher device and mask unit sales; U.S., Canada and Latin America revenue rose 26%. Foreign exchange reduced segment revenue by about $35.8 million for the quarter.
- SaaS: Quarterly revenue was $116.8 million, up 18%. Growth reflected MEDIFOX DAN, acquired November 21, 2022, and continued growth in the home medical equipment vertical.
- Margins: Quarterly gross margin declined due primarily to product mix, distribution and warehouse costs, and foreign exchange, partly offset by higher average selling prices and lower acquired-intangible amortization. Six-month margin improved on pricing and lower amortization, partly offset by mix and distribution costs.
- Acquisition: ResMed acquired MEDIFOX DAN, a German out-of-hospital care software provider, for approximately $997.5 million. The preliminary allocation included $780.7 million of goodwill, assigned to SaaS and not deductible for tax purposes. Purchase accounting remained subject to finalization; the company expected to complete it by the quarter ending June 30, 2023. Acquisition-related expenses were $8.4 million for the quarter and $9.2 million for the six months.
- Other income and expenses: Quarterly interest expense, net, increased to $10.3 million from $5.9 million, principally due to acquisition borrowing. A $8.4 million quarterly gain on equity investments partly offset other losses; investment gains and losses can vary by period.
Cash, debt and liquidity
- Cash and cash equivalents were $253.2 million at December 31, 2022, down from $273.7 million at June 30, 2022.
- Six-month investing cash outflow was $1,085.2 million, primarily reflecting the MEDIFOX DAN acquisition. Financing provided $891.0 million, largely from borrowings used to fund the acquisition; cash declined by $20.5 million over the period.
- Total debt was $1,805.0 million, compared with $775.0 million of principal debt at June 30, 2022. The increase primarily reflects borrowing to fund MEDIFOX DAN. Variable-rate revolving and term borrowings carried an interest rate of 5.2% at December 31; $390.0 million remained available under the revolving facility. The company reported compliance with debt covenants.
- Management stated that cash, operating cash generation and available debt facilities should be sufficient to fund operations and expected capital expenditures for the next 12 months and beyond. No specific revenue or earnings guidance was provided in the filing.
Outlook, risks and contingencies
- Management cited supply-chain disruption, including semiconductor shortages, and described Card-to-Cloud versions of AirSense 10 and AirCurve 10 as a response to the backlog of patients awaiting therapy devices. It continued the AirSense 11 launch.
- Risks discussed include foreign exchange, inflation and cost pressures, supply-chain constraints, competition, reimbursement and regulatory changes, and uncertainty around acquisitions and future growth. Management cautioned that interim results are not necessarily indicative of full-year results.
- Patent litigation includes NYU claims concerning AirSense 10 AutoSet or AutoRamp features; the PTAB agreed to review asserted patent claims, with final written decisions expected by December 2023. Cleveland Medical also asserted patent claims involving connected devices and software. ResMed said it could not reasonably estimate potential losses for open matters; it did not expect routine litigation outcomes to materially adversely affect consolidated financial statements as a whole.
- The company reported no material changes to previously disclosed risk factors and no significant off-balance-sheet arrangements. Disclosure controls were assessed as effective at the reasonable assurance level.
Important facts for investors to verify
- Whether device and mask volume growth, particularly outside the Americas, persists after considering currency movements and the effect of Card-to-Cloud sales.
- MEDIFOX DAN’s contribution to SaaS growth, integration costs, final purchase accounting and goodwill-related impairment risk.
- Cash conversion and working-capital trends: six-month inventory increased to $989.0 million from $743.9 million at fiscal year-end, and operating cash flow remained below net income.
- Debt levels, variable interest costs, covenant headroom and remaining revolver availability following the acquisition.
- Developments in the NYU and Cleveland Medical patent cases, and the potential effect of supply, inflation and foreign-exchange risks on margins.