ResMed Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2010; comparisons are with the periods ended December 31, 2009 unless noted. ResMed designs, manufactures and sells equipment for sleep-disordered breathing and other respiratory disorders. Financial amounts below are in U.S. dollars.
Key financial results
| Metric | Three months | Six months |
|---|---|---|
| Net revenue | $306.0 million, up 11% | $588.0 million, up 13% |
| Gross profit / gross margin | $186.0 million / 60.8% (59.7% prior year) | $360.0 million / 61.2% (60.2% prior year) |
| Operating income | $69.9 million | $136.3 million |
| Net income | $58.5 million, up 27% | $115.2 million, up 31% |
| Diluted EPS | $0.37 (up from $0.30) | $0.73 (up from $0.57) |
| Operating cash flow | Not separately reported for the quarter | $127.5 million (versus $75.7 million) |
| Capital spending on property, plant and equipment | Not separately reported for the quarter | $33.1 million (versus $28.6 million) |
At December 31, 2010, cash and cash equivalents were $616.2 million, working capital was $898.7 million, total assets were $1.884 billion, and stockholders’ equity was $1.611 billion. Total debt was $64.4 million, all current and due before March 1, 2011; management expected repayment under the facility terms. Cash flow from operations was offset in part by $46.8 million of investing outflows and $38.5 million of financing outflows. The reported cash increase included a positive $85.2 million foreign-exchange effect.
Changes and operating drivers
- Quarter revenue growth was driven by higher flow-generator and mask/accessory unit sales. North and Latin America revenue rose 10%; international revenue rose 12%, or 17% on a constant-currency basis. Unfavorable currency movements reduced quarterly revenue by about $6.5 million.
- For the six months, revenue grew 15% on a constant-currency basis; unfavorable currency movements reduced reported revenue by about $14.3 million.
- Gross margin improved in both periods, which management attributed to new products, manufacturing and supply-chain savings, and product mix, partly offset by Australian-dollar appreciation.
- Operating expenses increased in dollars, including higher SG&A and R&D spending to support growth, staffing and product development. As a share of revenue, SG&A and R&D declined or remained broadly stable.
- Other income increased, primarily from foreign-currency and hedging gains and higher net interest income. The six-month period included a $2.3 million long-lived-asset impairment charge, versus none in the prior-year period.
- Cash increased from $488.8 million at June 30, 2010. The company acquired certain assets of its headgear supplier for a total purchase price of $21.7 million, intended to improve supply capability, lower costs and support headgear development.
Outlook, risks and contingencies
- Management expected future SG&A expense to be 30%–31% of revenue and R&D expense to be 7%–8%. The filing provides no clear full-year revenue or EPS guidance.
- Management cited an active product release schedule and continued investment in R&D and market education. It attributed growth to market expansion and product introductions, including the S9 flow generator and new mask products.
- Key exposures include foreign exchange, especially the Australian dollar, and variable-rate debt. The company used currency options and forward contracts; it reported no interest-rate hedges. Management said a hypothetical 10% interest-rate change would not have materially affected quarterly pretax income.
- The company identified healthcare reform as a risk: a 2.3% U.S. medical-device excise tax was scheduled to begin in 2013, alongside potential reimbursement and competitive-bidding effects. FDA changes to the 510(k) process could increase compliance costs, delay clearances or constrain product changes.
- A University of Sydney intellectual-property and licensing case remained ongoing; the company said no loss range could be reasonably estimated and did not expect a material adverse effect. Other routine litigation was not expected to materially affect the financial statements. The Vaughn Medical dispute was settled in December 2010.
- Management reported compliance with debt covenants and effective disclosure controls. The filing states there were no material changes to previously reported risk factors other than the healthcare-reform discussion.
Important facts for investors to verify
- Whether revenue and margin growth continue after separating underlying performance from foreign-exchange effects.
- Repayment of the $64.4 million revolving-facility balance due before March 1, 2011, and any effect on liquidity.
- Inventory growth, which management linked to new-product materials and currency movements, and the company’s ability to convert inventory into sales.
- The realized impact of healthcare reform, reimbursement changes, the scheduled device excise tax and evolving FDA requirements.
- Developments in the University of Sydney litigation and the company’s currency-hedging gains, exposures and counterparty risk.