ResMed Inc. — Form 10-Q Summary
Business context and reporting period
ResMed designs, manufactures, and markets equipment and services for sleep-disordered breathing and other respiratory disorders. This unaudited report covers the quarter and six months ended December 31, 2012, compared with the corresponding 2011 periods. Fiscal year-end is June 30. All amounts below are U.S. dollars.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2012 | Three months ended Dec. 31, 2011 | Six months ended Dec. 31, 2012 | Six months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Revenue | $376.5 million | $332.7 million | $716.3 million | $647.5 million |
| Gross profit | $232.7 million | $198.7 million | $441.4 million | $383.8 million |
| Gross margin | 61.8% | 59.7% | 61.6% | 59.3% |
| Operating income | $92.1 million | $67.3 million | $172.6 million | $128.1 million |
| Net income | $77.9 million | $62.9 million | $149.2 million | $113.4 million |
| Diluted EPS | $0.53 | $0.42 | $1.02 | $0.75 |
- Quarterly revenue rose 13% (14% at constant currency); six-month revenue rose 11% (13% at constant currency). Foreign exchange reduced revenue by approximately $4.2 million for the quarter and $16.8 million for the half year.
- For the quarter, flow-generator revenue increased 12% and masks/accessories increased 14%. North and Latin America revenue grew 16%; international revenue grew 10% reported and 12% at constant currency.
- Gross-margin improvement reflected manufacturing and supply-chain efficiencies and a richer product mix, partly offset by lower average selling prices. Quarterly operating income increased 37%; diluted EPS increased 26%.
- Six-month operating cash flow was $171.9 million, down from $200.2 million. Management attributed the decline mainly to tax-payment timing and higher receivables and inventories. Investing cash outflow was $30.5 million; financing cash outflow was $7.0 million.
- Cash and equivalents were $958.3 million at December 31, versus $809.5 million at June 30. Working capital was $1.3 billion. Approximately $915.4 million of cash was held by non-U.S. subsidiaries and described as indefinitely invested outside the U.S.; repatriation would trigger incremental tax.
- Total debt was $300.9 million, including $300.0 million outstanding on the revolving credit facility. The facility matures February 10, 2014; ResMed reported compliance with its debt covenants. The company said cash on hand and operating cash flows should meet short-term liquidity needs.
- Receivables were $281.4 million, and days outstanding rose to 68 from 63 a year earlier. Inventories were $194.8 million at period end. Capital expenditures for the half year were $27.6 million.
Material changes versus the prior comparable periods
- Revenue and earnings increased in both the quarter and half year, supported by unit-sales growth in flow generators, masks, and accessories and recent product releases.
- SG&A rose 7% for the quarter and 6% for the half year, but declined as a share of revenue to 28.6% and 28.8%, respectively. R&D expense increased 11% for the quarter and 8% for the half year.
- Other income, net, fell to $6.3 million from $15.7 million for the quarter and to $16.7 million from $21.3 million for the half year, mainly because of foreign-currency and hedging losses. Lower effective tax rates—20.8% for the quarter and 21.2% for the half year, versus 24.2% and 24.1%—largely reflected geographic income mix, including Singapore manufacturing.
- Weighted-average diluted shares declined year over year. During the half year, ResMed repurchased 1.2 million shares for $48.1 million and paid $48.7 million in dividends. It initiated a quarterly dividend of $0.17 per share in fiscal 2013.
Outlook, commentary, risks, and unusual items
- Management cited ongoing investment in product development, an active product-release schedule, and initiatives to raise awareness of sleep-disordered breathing. It expects future SG&A to be approximately 29% of revenue and R&D approximately 8%. The filing provides no specific revenue or earnings guidance.
- On July 20, 2012, ResMed acquired Umbian Inc., a patient-compliance data-services company. The initial purchase price was $5.6 million, with potential earn-out payments up to $35.4 million through June 30, 2014; a liability of approximately $12.2 million was recognized.
- Foreign-exchange exposure is material: the company uses options and forward contracts but does not designate them as accounting hedges. Derivative fair-value movements flow through other income. Management reported $431.4 million of derivative notional exposure and no speculative trading intent.
- A University of Sydney lawsuit in Australia alleges breach of a license agreement, intellectual-property infringement, and breach of confidentiality, among other claims. The matter is ongoing; a possible loss range could not be reasonably estimated. Management did not expect a material adverse effect.
- Other considerations include variable-rate debt, dependence on international markets and currencies, and the potential tax cost of repatriating offshore cash. Management reported no material change to the risk factors in the prior annual report and no significant off-balance-sheet arrangements.
Important facts for investors to verify
- Whether sales growth and gross-margin gains persist, particularly given lower average selling prices and dependence on product launches.
- Receivables collection and inventory trends, including the increase in receivable days and the lower operating cash flow.
- Cash availability and potential tax consequences of repatriating the substantial offshore cash balance.
- Repayment or refinancing plans for the $300 million revolving-facility balance due in February 2014, and continued covenant compliance.
- Umbian earn-out performance and the potential payment relative to the recognized contingent liability.
- Developments in the University of Sydney litigation and related intellectual-property risks.