ResMed Inc. — Form 10-Q Summary
Period: Three months ended September 30, 2010 (fiscal 2011 first quarter), compared with the three months ended September 30, 2009. Unaudited U.S. GAAP results. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and performance
ResMed designs, manufactures and markets equipment for diagnosing and treating sleep-disordered breathing and other respiratory disorders. Management cited market awareness efforts, growth in the sleep-disordered breathing market, and recent product launches—including S9 flow generators and Swift FX and Mirage SoftGel masks—as contributors to sales growth.
Key financial metrics
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Revenue | $282.0 | $247.0 | 14% reported; 17% excluding currency effects |
| Gross profit / margin | $174.0 / 61.7% | $150.2 / 60.8% | Gross profit +16%; margin +0.9 percentage points |
| Operating income / margin | $66.4 / 23.5% | $52.7 / 21.3% | Operating income +26% |
| Net income / net margin | $56.7 / 20.1% | $42.1 / 17.0% | Net income +35% |
| Diluted EPS | $0.36 | $0.27 | +33% |
| Operating cash flow | $59.1 | $64.1 | Down $5.0 |
| Capital expenditures | $15.3 | $14.1 | — |
Flow-generator revenue, including humidifiers, rose 15% to $161.8 million; masks and accessories rose 13% to $120.2 million. North and Latin America revenue increased 16% to $155.6 million. International revenue increased 13% to $126.4 million as reported, or 19% excluding currency effects. Unfavorable currency movements reduced revenue by approximately $7.7 million.
SG&A was $84.8 million (30.1% of revenue), versus $76.8 million (31.1%). R&D was $19.7 million (7.0% of revenue), versus $17.9 million (7.3%). Other income, net, increased to $10.2 million from $5.2 million, mainly due to foreign-currency and hedging gains and higher net interest income. The effective tax rate declined to approximately 25.9% from 27.3%, primarily reflecting geographic earnings mix.
Liquidity, debt and balance sheet
At September 30, 2010, cash and equivalents were $540.0 million, up from $488.8 million at June 30, 2010; working capital was $782.2 million. Total debt was $93.8 million, all classified as current, leaving net cash of approximately $446.2 million. Management said it expected to meet short-term liquidity needs with cash on hand and operating cash generation. Debt covenants were reported as met.
Cash increased by $51.2 million during the quarter. The cash flow statement included $59.5 million of favorable exchange-rate effects; operating, investing and financing cash flows were respectively $59.1 million provided, $30.9 million used and $36.5 million used. Investing included $21.2 million paid for an acquisition. Financing included $30.0 million of debt repayment and $22.6 million of treasury-stock purchases.
Total assets were $1.79 billion and stockholders’ equity was $1.48 billion. Inventories were $214.2 million, up from $185.6 million at June 30; management attributed the increase to materials for new products and currency movements. Accounts receivable were $225.8 million, and receivable days outstanding improved to 70 from 77 a year earlier.
Material changes, outlook and notable items
- On August 19, 2010, ResMed acquired certain assets of its headgear supplier for a $21.7 million purchase price. Management said the acquisition is intended to strengthen supply capability, reduce costs and support headgear technology development; purchase accounting remained preliminary.
- A two-for-one stock split was distributed August 30, 2010; share and per-share figures in the filing are adjusted for the split.
- The company repurchased 347,395 shares for $17.9 million during the quarter. Approximately 14.2 million shares remained available under the repurchase authorization at September 30.
- A $2.3 million long-lived-asset impairment charge was recorded; there was no comparable charge in the prior-year quarter.
- Management expected future SG&A to remain 30%–31% of revenue and R&D to remain 7%–8%. The filing gives no specific revenue or earnings guidance and cautions that quarterly results are not necessarily indicative of full-year results.
- Risks highlighted include foreign-exchange exposure, healthcare and regulatory changes, competition, execution of growth and product strategies, and litigation. A University of Sydney intellectual-property and license dispute remained ongoing; ResMed said it did not expect a material adverse effect. A German tax audit appeal also remained unresolved. The Vaughn Medical case had been dismissed, with the plaintiff’s appeal pending.
- Foreign-currency contracts had $193.8 million of notional exposure and $16.3 million positive fair value. ResMed classifies its hedge program as non-effective for accounting purposes, with fair-value changes recorded in other income. All $93.8 million of debt was due within the following year under the maturity schedule.
Important facts for investors to verify
- Whether reported sales and margin growth persist after separating product, regional and foreign-exchange effects.
- Whether operating cash flow, which declined year over year despite higher earnings, improves as inventory and other working-capital needs evolve.
- The timing and sources of repayment for the $93.8 million of current debt, and any refinancing or covenant developments.
- The final purchase-price allocation and operating contribution of the headgear-supplier acquisition.
- Developments in the University of Sydney litigation, German tax appeal, and foreign-currency exposures and hedge results.