ResMed Inc. — Fiscal 2022 Q1 Form 10-Q
Reporting period: Three months ended September 30, 2021; comparable period is the three months ended September 30, 2020. Amounts below are in U.S. dollars unless noted.
Business context and results
ResMed develops and sells sleep and respiratory care products and provides software-as-a-service (SaaS) to out-of-hospital healthcare providers. It reports two segments: Sleep and Respiratory Care, and SaaS.
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net revenue | $904.0 million | $751.9 million | +20% (+19% constant currency) |
| Gross profit / gross margin | $506.3 million / 56.0% | $438.7 million / 58.3% | Profit +15%; margin -2.3 pts |
| Income from operations | $261.9 million | $216.9 million | +21% |
| Net income | $203.6 million | $178.4 million | +14% |
| Diluted EPS | $1.39 | $1.22 | +14% |
| Operating cash flow | $(65.7) million | $144.0 million | Decrease of $209.7 million |
| Cash and cash equivalents at quarter-end | $276.1 million | $421.4 million | Down from $295.3 million at June 30, 2021 |
| Total debt, net | $805.7 million | $655.4 million at June 30, 2021 | Increased during the quarter |
Revenue drivers and material changes
- Sleep and Respiratory Care revenue rose 22% to $806.5 million (21% constant currency). Device revenue increased 32% globally; masks and other revenue increased 9%.
- SaaS revenue grew 6% to $97.5 million, attributed mainly to resupply service growth and stabilizing patient flow in out-of-hospital care settings.
- Management attributed Sleep and Respiratory Care growth to recovering sleep-patient flow and increased demand following a competitor’s product recall, partly offset by lower COVID-19-related ventilator demand.
- Gross margin declined mainly because of higher manufacturing and logistics costs and lower average selling prices. SG&A rose 11% in dollars but declined to 19.5% of revenue from 21.1%; R&D rose 10% to $60.0 million.
- Income tax expense was $55.2 million and the effective tax rate was 21.3%, versus 17.4% in the prior-year quarter; management cited changes in geographic earnings mix.
Cash, debt and liquidity
- Operating cash outflow primarily reflected the $284.8 million final cash payment to the Australian Taxation Office (ATO) to settle a transfer-pricing dispute. Investing cash outflow was $41.9 million; financing cash inflow was $93.0 million, including $150.0 million of net borrowings.
- At September 30, 2021, ResMed reported $1.5 billion available under its revolving credit facility and $1.7 billion of cash plus available revolver capacity. Management said existing liquidity was sufficient for operations and expected capital expenditures for the next 12 months and beyond.
- Debt principal outstanding under the revolving and term facilities and senior notes was $808.0 million; the balance-sheet carrying amount, net of borrowing costs, was $805.7 million. The company reported covenant compliance and a 0.9% rate on outstanding credit-facility borrowings.
- The quarterly dividend was $0.42 per share, totaling $61.2 million paid. A further $0.42 dividend was declared for payment December 16, 2021. Share repurchases remained suspended; 12.9 million shares remained authorized for repurchase.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided in the supplied filing text. Management said it did not expect material COVID-19-generated ventilator demand for the remainder of FY2022. It noted continuing uncertainty around sleep-apnea diagnostic and prescription pathways, while mask resupply demand had not been significantly adversely affected.
- The ATO settlement resolved the dispute for tax years 2009–2018, with no admission of liability. The stated net impact was $238.7 million, comprising a gross amount of $381.7 million, including $48.1 million of interest and penalties, less $143.0 million in credits and deductions. The final payment was $284.8 million after prior remittances. ResMed reversed its previously recorded uncertain tax position; it also recorded a $4.1 million reduction in tax credits through income tax expense and a $14.1 million benefit in other comprehensive income related to the settlement and currency movements.
- ResMed continued the AirSense 11 launch, featuring a touchscreen, therapy algorithms, digital enhancements and over-the-air updates.
- Risks discussed include COVID-19 effects on patient pathways and SaaS customer activity, manufacturing and logistics costs, foreign-currency exposure, and litigation. A New York University patent case involving AirSense 10 AutoSet and AutoRamp features was pending; ResMed’s motion to dismiss was pending. The filing said it could not reasonably estimate any loss, if any, from Philips-related proceedings concerning communications modules used in some products.
- Management stated that routine litigation was not expected to have a material adverse effect on the consolidated financial statements. No material change to the risk factors in the FY2021 Form 10-K was reported.
Important facts for investors to verify
- Whether device and mask growth, including demand associated with a competitor’s recall, is sustained as patient flow normalizes.
- Whether higher manufacturing and logistics costs and lower average selling prices continue to pressure gross margin.
- How the ATO settlement affects subsequent cash flows, tax expense and tax-credit balances; the settlement’s cash payment and accounting impact are not the same amount.
- Whether operating cash flow rebounds after the settlement payment and working-capital movements.
- Developments in the NYU patent litigation and any indirect exposure from Philips-related proceedings involving modules used in ResMed products.
- Future liquidity, borrowing and covenant position, including repayment or refinancing needs as credit facilities mature in April 2023.