ResMed Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2011 (first quarter of fiscal 2012). Unaudited U.S. GAAP results; comparisons are with the three months ended September 30, 2010 unless otherwise stated. Financial amounts below are in U.S. dollars, millions, except per-share data.
Business context and results
ResMed designs, manufactures, and markets equipment for diagnosing and treating sleep-disordered breathing and other respiratory disorders. Management cited market growth and recent product releases as contributors to revenue growth.
| Metric | Q1 FY2012 | Prior period | Change / context |
|---|---|---|---|
| Net revenue | $314.8 | $282.0 | Up 12% reported; up 8% at constant currency |
| Gross profit / margin | $185.1 / 58.8% | $174.0 / 61.7% | Profit up 6%; margin down 2.9 percentage points |
| Operating income / margin | $60.9 / 19.3% | $66.4 / 23.5% | Operating income down 8% |
| Net income | $50.5 | $56.7 | Down 11% |
| Diluted EPS | $0.33 | $0.36 | Down 8% |
| Operating cash flow | $89.5 | $59.1 | Increased $30.4 |
| Capital expenditures | $12.9 | $15.3 | Purchases of property, plant and equipment |
Revenue, margins, and material changes
- Masks and accessories revenue grew 20% to $143.8 million; flow-generator revenue grew 6% to $171.0 million. North and Latin American revenue rose 9%; international revenue rose 15% reported and 7% at constant currency.
- Favorable currency movements added approximately $10.6 million to revenue. International currency movements also increased reported SG&A by approximately $5.4 million and R&D by approximately $2.9 million.
- Management attributed lower gross margin primarily to unfavorable currency movements, particularly Australian-dollar appreciation, and lower average selling prices. Product mix and manufacturing and supply-chain savings partly offset those pressures.
- SG&A increased 11% to $94.2 million, while its share of revenue eased to 29.9% from 30.1%. R&D increased 33% to $26.2 million, or 8.3% of revenue. Acquired-intangible amortization rose to $3.8 million from $2.0 million.
- Other income, net, declined to $5.6 million from $10.2 million, mainly due to foreign-currency and hedging losses; it included a $2.1 million gain from remeasuring ResMed’s prior BiancaMed investment upon acquisition.
Liquidity, cash flow, and debt
- Cash and cash equivalents were $610.1 million at September 30, down from $735.3 million at June 30, 2011. Current assets were $1,142.8 million and current liabilities $225.7 million; working capital was $917.1 million.
- Cash from operations was $89.5 million. Investing used $71.7 million, including $51.9 million for acquisitions; financing used $83.9 million, including $121.7 million of treasury-stock purchases, $80.0 million of borrowings, and $52.5 million of repayments. Exchange-rate changes reduced cash by $59.1 million.
- Total debt was $134.1 million, including $130.0 million drawn under the $300 million revolving credit facility and $4.1 million current debt. The facility matures in February 2014; the company reported compliance with its covenants. It also assumed €4.7 million of Gruendler debt, repaid €1.8 million during the quarter, and expected to settle the remainder within 12 months.
- $593.3 million of cash was held by non-U.S. subsidiaries and described as indefinitely invested outside the United States. Repatriation could require an income-tax provision adjustment. Management said short-term liquidity needs would be met from cash, operating cash flow, and available credit.
Outlook, risks, and unusual items
- Management expected future SG&A to be approximately 30% of revenue and R&D approximately 8%; the filing provides no specific revenue or earnings guidance and cautions that quarterly results are not necessarily indicative of full-year results.
- ResMed acquired BiancaMed and Gruendler for aggregate consideration of $64.5 million, funded from cash. The preliminary purchase-price allocation included $51.5 million of goodwill; completion of the allocation was expected in the quarter ending December 31, 2011. Gruendler’s agreement may require up to €5.5 million of additional performance-based payments.
- The company repurchased 4.4 million shares for $124.7 million during the quarter and had authorization to repurchase a further 18.1 million shares at September 30.
- Foreign-exchange exposure remains significant. Derivative contracts had $433.0 million notional value; changes in their fair value are recorded in other income, and the company said its program was not designated as an effective hedge. Debt carries variable interest rates.
- The University of Sydney intellectual-property and license dispute remained ongoing; ResMed said a potential loss range could not be reasonably estimated, while not expecting a material adverse effect. The company similarly could not estimate a range for the ongoing SMRT dispute. It reported no material change to the risks in its latest Form 10-K.
- Customer-financing arrangements carried a maximum potential recourse liability of $5.0 million, with $0.6 million recognized. The filing also disclosed German tax appeals and other contingencies; management considered the estimated potential loss for the German assessments immaterial.
Important facts for investors to verify
- Whether masks-and-accessories growth and constant-currency revenue trends continued, and whether flow-generator sales recovered in North and Latin America.
- Whether gross-margin pressure from currency and pricing persisted or was offset by product mix and cost savings.
- How the acquisitions performed, including final purchase-price allocations, goodwill, and any Gruendler milestone payments.
- Cash generation, offshore cash availability and tax implications of repatriation, debt balances, and compliance with credit-facility covenants.
- Developments in the University of Sydney and SMRT litigation and any change in the company’s stated assessment of contingencies.