Business context and reporting period
ResMed Inc. designs and sells sleep and respiratory care devices and operates out-of-hospital healthcare software platforms. This Form 10-Q reports the fiscal first quarter ended September 30, 2020, compared with the three months ended September 30, 2019. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Quarter ended Sep. 30, 2020 | Prior-year quarter | Change |
|---|---|---|---|
| Net revenue | $751.9 million | $681.1 million | +10% (+9% constant currency) |
| Sleep and Respiratory Care revenue | $659.8 million | $594.2 million | +11% (+9% constant currency) |
| SaaS revenue | $92.1 million | $86.9 million | +6% |
| Gross profit / margin | $438.7 million / 58.3% | $391.6 million / 57.5% | Margin +0.8 percentage points |
| Income from operations | $216.9 million | $171.1 million | +27% |
| Net income | $178.4 million | $120.1 million | +48% |
| Diluted EPS | $1.22 | $0.83 | +47% |
| Operating cash flow | $144.0 million | $162.4 million | Down $18.4 million |
Gross margin improvement reflected favorable product mix and foreign exchange, partly offset by higher COVID-related procurement and logistics costs. SG&A fell 5% to $159.0 million, while R&D rose 14% to $54.5 million. The effective tax rate was 17.4%, versus 20.2% a year earlier.
At quarter-end, cash and cash equivalents were $421.4 million, working capital was $932.7 million, total debt was approximately $1.06 billion, and stockholders’ equity was $2.68 billion. The company reported $1.2 billion available under its revolving facility and $1.6 billion of combined cash and revolver availability. Debt covenants were met. Inventories rose 15% from June 30 to $478.0 million, primarily to support growth and address COVID-related supply-chain complexity. Cash decreased $41.7 million during the quarter; the company paid $56.5 million in dividends and made no share repurchases.
Material changes and unusual items
- Device revenue increased 10% and masks and other revenue increased 12%. Management attributed growth in part to greater ventilator demand related to COVID-19; currency movements added approximately $9.4 million to Sleep and Respiratory Care revenue.
- Other expense improved substantially year over year, including lower interest expense and lower equity-method investment losses. A portfolio company’s IPO generated an $8.5 million unrealized investment gain; excluding that gain, non-GAAP diluted EPS was $1.27, compared with GAAP diluted EPS of $1.22.
- A $2.8 million operating lease right-of-use asset impairment was recorded. The company adopted the expected-credit-loss accounting standard, reducing opening retained earnings by $1.1 million net of tax; management said adoption had no material overall financial-statement impact.
- Operating cash flow declined mainly because of higher working capital, including inventory, and timing of tax payments, partly offset by stronger operating profit.
Outlook, risks and contingencies
ResMed gave no specific numerical revenue or earnings guidance in the filing. Management expected lower ventilator demand in fiscal 2021 as pandemic-related demand could ease, and anticipated a temporary reduction in new sleep-device demand as diagnostic and prescription pathways were disrupted. It expected mask resupply to be less affected than device demand. Management also warned that renewed outbreaks could change demand and create oversupply risk, and that economic uncertainty could slow SaaS customer additions or expansions. The company said the pandemic had not negatively affected its liquidity and expected to meet liquidity and debt needs through cash, operating cash flow and debt facilities.
The Australian Tax Office is disputing prior tax years and asserted $151.7 million of additional tax, $38.4 million of interest, and $75.9 million of penalties. ResMed had paid $75.9 million and recorded it as a receivable, stating it believed it would prevail and receive a refund. An adverse outcome could require additional payments and tax expense. The company also disclosed limited-recourse customer financing exposure of up to $24.5 million, with a $7.3 million contingent provision. Routine litigation was not expected to have a material adverse effect. COVID-19 effects, supply availability, foreign exchange, tax audits, investment valuations and debt-covenant compliance remain relevant risks.
Important facts for investors to verify
- How much of device growth and future demand depends on COVID-19-related ventilator sales, and whether any demand reversal could create excess inventory.
- Whether sleep-device demand and patient pathways recover as management expects, and whether SaaS growth remains resilient.
- The quality and cash conversion of earnings, particularly the impact of inventory growth and tax-payment timing on operating cash flow.
- The status and potential financial exposure of the Australian tax dispute, including the recorded receivable and possible additional tax, interest and penalties.
- Debt maturities, variable-rate exposure and covenant headroom; the filing states covenant compliance but does not provide a clear current leverage ratio.