ResMed Inc. — Form 10-Q summary
Business context and period. ResMed designs, manufactures and markets devices and software for sleep-disordered breathing and other respiratory disorders. This filing covers the quarter and six months ended December 31, 2017, the second quarter of fiscal 2018. Financial statements are unaudited.
Key financial results
| Metric | Quarter ended Dec. 31, 2017 | Prior-year quarter | Six months ended Dec. 31, 2017 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $601.3 million | $530.4 million | $1,124.9 million | $995.8 million |
| Gross profit | $349.8 million | $309.1 million | $655.4 million | $578.3 million |
| Gross margin | 58.2% | 58.3% | 58.3% | 58.1% |
| Operating income | $146.0 million | $96.9 million | $258.6 million | $191.0 million |
| Net income | $9.5 million | $76.7 million | $95.7 million | $152.8 million |
| Diluted EPS | $0.07 | $0.54 | $0.67 | $1.08 |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $226.5 million | $206.1 million |
- Quarterly revenue grew 13% year over year, or 11% at constant currency; six-month revenue also grew 13%, or 11% at constant currency. Management attributed growth primarily to higher device, mask and accessory unit sales, partly offset by lower average selling prices. Currency added approximately $14.4 million to quarterly revenue and $21.7 million to six-month revenue.
- Quarterly Brightree software revenue was $38.7 million, up 14% year over year. Quarterly device revenue increased 12%; masks and accessories increased 15%.
- Quarterly gross margin was nearly flat year over year; manufacturing and procurement efficiencies partly offset pricing pressure. Six-month gross margin improved from 58.1% to 58.3%, including the benefit of a prior-year $5.0 million Astral battery safety-notification expense.
- Operating income increased despite higher SG&A and R&D spending. Quarterly SG&A rose 9% and R&D rose 6%; management cited commercial staffing, R&D personnel, and product-development materials and tooling.
- Net income and EPS fell sharply because income tax expense included a provisional $126.6 million charge related to the U.S. Tax Cuts and Jobs Act. The charge comprised $119.9 million for the transition tax on accumulated foreign earnings and $6.7 million from revaluing deferred tax assets. The charge is payable over eight years; the accounting estimate remained provisional.
Financial position, cash flow and capital resources
- At December 31, 2017, cash and cash equivalents were $858.9 million; total assets were $3.564 billion; stockholders’ equity was $2.020 billion.
- Debt was $1.020 billion, classified as short-term because the revolving facility matures October 31, 2018. Net debt was $160.2 million. The facility’s reported interest rate was 2.8%; ResMed said it was in compliance with its covenants.
- Working capital was $397.9 million, down from $1.284 billion at June 30, 2017, principally because $1.019 billion of net debt was reclassified as short-term. Management expected to have new facilities in place by June 30, 2018 and expected liquidity needs to be met through cash, operating cash flow and new or existing facilities.
- Six-month operating cash flow was $226.5 million. Investing cash outflow was $43.7 million, including $32.0 million of capital expenditures; financing cash outflow was $161.5 million, including $99.6 million of dividends and $8.5 million of share repurchases. Cash increased by $37.0 million over the period.
- Inventory rose 10% from June 30, 2017 to $296.1 million to support growth and product introductions. Receivables rose 7% to $482.9 million; days sales outstanding increased from 68 to 72 days.
Material changes, outlook and risks
- Tax and audit exposure: The Australian Taxation Office’s December 2017 audit position proposed approximately $150 million of additional tax for tax years 2009–2013. ResMed disputes the position, has not recorded an additional liability, and says the audit is ongoing.
- Legal matters: ResMed and Fisher & Paykel Healthcare are involved in patent disputes in several jurisdictions. A U.K. court invalidated three ResMed patents in November 2017. The filing warns that adverse outcomes could entail damages, royalties, sales restrictions, licensing costs or product changes.
- Government investigation: ResMed is responding to U.S. Department of Health and Human Services Inspector General subpoenas concerning resupply software, discounts, leasing, samples and promotional programs. The company describes potential penalties and business impacts if violations are found.
- Currency and interest-rate exposure: ResMed uses foreign-currency options and forwards for economic hedging, but does not designate them as accounting hedges; fair-value movements flow through other income. The filing reports $789.3 million in derivative notional amounts. Debt bears variable rates; ResMed has no interest-rate hedges.
- Outlook: No specific revenue, earnings or margin guidance is provided. Management emphasized product development and connected-care solutions; it also expected new debt facilities by June 30, 2018. Management cautions that interim results are not necessarily indicative of full-year results.
- Management reported effective disclosure controls as of December 31, 2017 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the provisional $126.6 million U.S. tax charge is finalized, including its effect on reported earnings, cash taxes and future tax rates.
- Progress and outcome of the ATO audit, including whether an assessment is issued and whether any liability is recognized.
- Refinancing or replacement of the $1.020 billion revolving-facility balance before its October 31, 2018 maturity, and the terms of any new facilities.
- Whether unit growth can continue to offset average-selling-price pressure and currency effects, and whether gross margins remain resilient.
- Developments in the patent disputes and HHS OIG investigation, including any changes to estimated exposure or business practices.
- Receivables collection trends and inventory levels, given higher days sales outstanding and increased inventory.