ResMed Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2012, filed August 13, 2012. The request metadata refers to “2011 Q4,” but this filing covers FY2012; it also reports fourth-quarter FY2012 results.
Business context
ResMed develops, manufactures and sells equipment to diagnose and treat sleep-disordered breathing and other respiratory disorders, including CPAP and bilevel flow generators, masks, diagnostic devices and accessories. It operates as one reportable segment and sells in more than 70 countries. Management cited product innovation, geographic expansion and greater awareness of sleep apnea and related conditions as central growth priorities.
Financial performance
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Revenue | $1,368.5 million | $1,243.1 million | +10% reported; +11% constant currency |
| Gross profit | $820.7 million | $741.3 million | +11% |
| Gross margin | 60% | 60% | Flat |
| Operating income | $294.4 million | $266.9 million | +10% |
| Net income | $254.9 million | $227.0 million | +12% |
| Diluted EPS | $1.71 | $1.44 | +19% |
| Operating cash flow | $383.2 million | $283.2 million | +$100.0 million |
Revenue growth reflected higher unit sales across flow generators, masks and accessories. Masks, motors and other accessories grew 16%; flow-generator revenue grew 5%. North and Latin American revenue rose 13%, while international revenue rose 7% reported and 8% constant currency. Foreign exchange reduced FY2012 revenue by approximately $7.3 million.
Gross margin benefited from product mix and manufacturing and supply-chain savings, offset by lower average selling prices and Australian-dollar appreciation. SG&A was $401.6 million, or 29% of revenue (versus 30%); R&D was $109.7 million, or 8% (versus 7%). The effective tax rate declined to 23.2% from 25.3%.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $809.5 million, up from $735.3 million; working capital was $1.108 billion.
- Long-term debt was $250.8 million, including $250.0 million drawn under a revolving credit facility. The facility was increased to $400 million; it matures in February 2014. ResMed reported compliance with its debt covenants.
- Operating cash flow was $383.2 million; capital expenditures were $47.1 million. Cash used in financing included $392.7 million of treasury-stock purchases.
- ResMed repurchased 13.6 million shares for approximately $391.2 million during FY2012. At year-end, 8.8 million shares remained authorized for repurchase.
- Approximately $747.8 million of cash was held by non-U.S. subsidiaries and treated as indefinitely invested abroad; repatriation could trigger additional tax.
Fourth-quarter results and changes
FY2012 fourth-quarter revenue was $371.9 million versus $341.9 million in FY2011’s fourth quarter; net income was $76.8 million versus $58.5 million, and diluted EPS was $0.53 versus $0.37. FY2012 revenue and net income increased year over year, while diluted EPS also benefited from the lower weighted-average share count following repurchases.
Other notable year-over-year changes included improved inventory management (inventories fell 13% to $174.4 million), increased debt, and acquisitions of BiancaMed and Gruendler. Amortization of acquired intangible assets rose to $14.0 million from $10.1 million. Other income included a $2.1 million gain on remeasurement of a previously held investment and a $4.0 million impairment charge on cost-method investments.
Outlook, risks and contingencies
- No specific revenue or earnings forecast is provided. Management expected future SG&A to remain broadly around 29% of revenue and R&D around 8%.
- Management identified reimbursement and pricing pressure as key uncertainties. U.S. Medicare competitive bidding had reduced payment rates for CPAP and respiratory devices in the first round by approximately 32%; a second round covering 91 areas was scheduled for summer 2013. The company also highlighted the 2.3% U.S. medical-device excise tax scheduled to begin in 2013.
- Other material risks include intense competition, foreign-currency exposure, dependence on third-party payers and suppliers, regulatory clearance and quality requirements, and potential changes to healthcare laws. The filing states that currency movements lowered cash by $30.2 million during FY2012; the company uses foreign-exchange derivatives but does not designate them as accounting hedges.
- A University of Sydney lawsuit alleges breach of a license agreement, intellectual-property infringement and breach of confidentiality, among other claims. The matter is ongoing; the company said a loss range could not be reasonably estimated and did not expect a material adverse effect on the consolidated financial statements.
- In August 2012, after year-end, the board declared a quarterly dividend of $0.17 per share, payable September 28, 2012, subject to the stated record date.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls as of June 30, 2012.
Important facts for investors to verify
- Confirm the requested period: this is FY2012, not a FY2011 fourth-quarter filing; compare the reported fourth-quarter figures with the intended period.
- Track the effects of Medicare competitive bidding, reimbursement changes and the device excise tax on pricing, volumes and margins.
- Assess cash availability and tax implications, given the substantial offshore cash balance and the $250 million facility maturity in February 2014.
- Review developments in the University of Sydney litigation and the contingent consideration associated with acquisitions.
- Monitor whether product growth, cost savings and share repurchases continue to support earnings growth as R&D spending rises.