ResMed Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2017 (ResMed fiscal Q3 2017; fiscal year ends June 30). The request metadata says “2016 Q3,” but the filing itself identifies the period as March 31, 2017.
Business context
ResMed designs, manufactures and markets devices and cloud-based software for sleep-disordered breathing and other respiratory disorders. The business includes devices, masks and accessories, and—following its April 2016 acquisition—Brightree post-acute-care software.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $514.2 million, up 13% from $453.9 million | $1,510.1 million, up 14% from $1,320.1 million |
| Gross margin | 58.3%, versus 57.3% | 58.1%, versus 58.0% |
| Operating income | $107.4 million, versus $104.3 million | $298.4 million, versus $310.3 million |
| Net income | $87.8 million, down 3% from $90.8 million | $240.7 million, down 11% from $269.3 million |
| Diluted EPS | $0.62, versus $0.64 | $1.69, versus $1.90 |
| Operating cash flow | Not separately presented in the filing summary for the quarter | $273.7 million, versus $405.0 million |
Quarterly revenue included $35.0 million from Brightree. Excluding Brightree, quarterly revenue increased 6% (7% in constant currency); reported growth was driven mainly by higher device, mask and accessory unit sales, partly offset by lower average selling prices. Foreign exchange reduced quarterly revenue by approximately $4.8 million and nine-month revenue by approximately $11.8 million.
Quarterly gross margin improved primarily through manufacturing and procurement efficiencies and Brightree’s contribution, partly offset by lower average selling prices. Operating expenses increased: quarterly R&D rose 25% to $35.1 million and SG&A rose 12% to $137.9 million. Higher amortization from recent acquisitions also weighed on earnings.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $827.3 million at March 31, 2017, compared with $731.4 million at June 30, 2016; working capital was $1,269.1 million, versus $781.7 million.
- Total debt, net of deferred borrowing costs, was $1,168.4 million, versus $1,172.8 million at June 30, 2016. The $1.17 billion revolving-credit balance bears variable interest; the rate was 2.5% at quarter-end. The facility terminates October 31, 2018. ResMed reported compliance with its debt covenants.
- Most cash was held by non-U.S. subsidiaries: $796.4 million of the $827.3 million total. The company intends to keep those funds invested abroad; repatriation would be subject to U.S. tax.
- Nine-month operating cash flow fell to $273.7 million, primarily due to increases in receivables and inventory and timing of income-tax payments. Capital expenditures were $43.9 million; dividends paid were $139.5 million.
- Share repurchases were suspended amid recent acquisitions; none occurred in the nine-month period. The quarterly dividend declared was $0.33 per share, versus $0.30 a year earlier.
Material changes, outlook and risks
- Brightree contributed $35.0 million of quarterly revenue. ResMed completed the purchase-price allocation for the acquisition during the quarter; acquisition-related amortization increased materially.
- Restructuring charges were $7.9 million for the quarter and $12.4 million year to date, mainly related to closing Paris manufacturing activities and reorganizing R&D. The restructuring was substantially completed by March 31.
- Nine-month results included an $8.5 million litigation settlement charge related to BMC Medical and its U.S. distributor, 3B, and a $10.1 million charge for additional Curative Medical contingent consideration after performance milestones exceeded prior expectations.
- The filing provides no specific financial guidance or quantified forward outlook. Management said it expects to meet liquidity and long-term debt needs through cash on hand, operating cash flow and debt facilities.
- Risks and contingencies include an ongoing HHS Office of Inspector General subpoena inquiry concerning patient resupply software and promotional programs; patent disputes with Fisher & Paykel Healthcare; and an Australian tax audit covering 2009–2013. Management did not expect the audit to result in material adjustments but noted outcomes are uncertain. The filing reported no material change to the risk factors in the 2016 Form 10-K.
- Management identified healthcare, regulatory, competitive, economic, execution and foreign-currency uncertainties as factors that could cause actual results to differ from forward-looking statements. Foreign-currency contracts are used for economic risk management and are not designated as accounting hedges.
Important facts for investors to verify
- Whether core device and mask/accessory growth persists after separating Brightree revenue and the impact of currency and average selling prices.
- Whether operating cash flow recovers as receivables and inventory rise; accounts-receivable days increased to 70 from 63 at June 30, 2016.
- Debt repayment and refinancing plans ahead of the revolving facility’s October 2018 maturity, including exposure to variable interest rates and covenant headroom.
- The ongoing financial and operational effects of acquisition integration, increased amortization, restructuring and the contingent-consideration charge.
- Developments in the OIG inquiry, Fisher & Paykel disputes and Australian tax audit, as well as the terms and continuing effects of the BMC/3B settlement.
- The tax and practical availability of offshore cash if domestic funding needs change.