ResMed Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2015. The filing also reports the fourth quarter ended June 30, 2015; it is not a 2014 fiscal-year filing. ResMed develops and sells products for sleep-disordered breathing and other respiratory disorders, including CPAP devices, ventilators, masks, diagnostics and patient-management software. It operates as one reportable segment and sells in approximately 100 countries.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net revenue | $1,678.9 million | $1,555.0 million | +8% reported; +13% constant currency |
| Gross profit / margin | $1,011.4 million / 60.2% | $989.8 million / 63.7% | Profit +2%; margin down 3.5 percentage points |
| Operating income | $409.2 million | $405.1 million | +1% |
| Net income | $352.9 million | $345.3 million | +2% |
| Diluted EPS | $2.47 | $2.39 | +3% |
| Operating cash flow | $383.2 million | $391.3 million | Down $8.1 million |
- Fourth quarter: Revenue was $453.1 million versus $415.2 million a year earlier; gross profit was $259.4 million versus $261.3 million; net income was $87.5 million versus $87.7 million; diluted EPS was $0.61 versus $0.61.
- Revenue mix and growth: Flow-generator revenue rose 15% to $975.9 million, while masks and accessories declined 1% to $703.0 million. North and Latin American revenue increased 15% to $962.7 million; revenue outside those markets was essentially flat at $716.2 million reported, but rose 10% on a constant-currency basis.
- Margins and expenses: Management attributed the gross-margin decline to lower average selling prices, unfavorable product and geographic mix, and currency effects. SG&A increased 5% reported, while R&D declined 3% reported to $114.9 million (about 7% of revenue); both expense comparisons were affected by currency movements.
- Liquidity and debt: Cash and cash equivalents were $717.2 million, down from $905.7 million; working capital was $1.18 billion, versus $1.29 billion. Long-term debt was $300.6 million, with $300.0 million outstanding under a $700 million revolving facility. The company reported covenant compliance and said it expected to meet liquidity needs with cash, operating cash flow and debt facilities.
- Cash uses and balance-sheet items: Operating cash flow was affected primarily by inventory growth; inventory rose 49% to $246.9 million. The reported foreign-exchange effect reduced cash by $172.8 million. ResMed paid $157.3 million in dividends and repurchased 2.7 million shares for $152.6 million during FY2015.
Material changes, outlook and risks
- New products included AirSense 10 and AirCurve 10 devices, Lumis ventilators in markets outside the U.S., and AirView cloud-based therapy monitoring. Management described product innovation, geographic expansion, greater awareness of sleep-disordered breathing and new respiratory-care applications as growth priorities. No specific FY2016 revenue or earnings guidance is provided.
- On July 30, 2015, after fiscal year-end, ResMed announced an increase in its quarterly dividend from $0.28 to $0.30 per share. The company said it expected to fund dividends from operating cash flow and existing facilities.
- Significant safety matter: Preliminary SERVE-HF trial results identified a statistically significant 2.5% absolute increase in cardiovascular mortality for a subgroup of patients with symptomatic chronic heart failure and predominant central sleep apnea treated with adaptive servo-ventilation (ASV). ResMed was working with regulators on revised labeling and instructions and informing providers and patients. It recorded $5.0 million of related field-notification costs, including a $4.3 million accrual at June 30, 2015.
- Reimbursement and policy: Medicare competitive bidding reduced payment rates for CPAP and respiratory devices; further rate changes were scheduled to begin in 2016. The filing also identifies possible effects from healthcare reform, medical-device taxes, reimbursement constraints and pricing pressure.
- Other principal risks: Foreign-exchange volatility, intense competition, single-source component suppliers, regulatory clearance and quality requirements, product liability, intellectual-property disputes, privacy and cybersecurity, and dependence on distributors and third-party reimbursement. Foreign subsidiaries held $685.2 million of cash; approximately $1.4 billion of undistributed foreign earnings were treated as permanently reinvested. The filing estimates $364 million of deferred taxes if those earnings were not permanently reinvested.
- Legal matters: ResMed’s patent disputes with BMC included U.S. and German proceedings and appeals. BMC distributor 3B Medical also alleged antitrust violations; ResMed Corp. denied the allegations. Management did not expect the legal matters, considered together, to materially adversely affect the consolidated financial statements.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective as of June 30, 2015.
Important facts for investors to verify
- Whether unit growth and constant-currency performance can offset lower selling prices, unfavorable mix and continued currency impacts—and whether gross margin stabilizes.
- The clinical, regulatory, labeling and financial implications of the SERVE-HF safety signal, including whether the recorded field-notification accrual proves adequate.
- Whether inventory growth supports product launches and demand, or creates a risk of excess or obsolete inventory.
- How Medicare competitive-bidding changes and other reimbursement pressures affect customer economics, pricing and ResMed sales.
- Cash availability and capital-allocation plans, including the location of cash, potential repatriation taxes, debt repayment, dividends and share repurchases.
- Developments in the BMC/3B litigation and any impact on product access, intellectual-property rights or legal costs.