ResMed Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the three months ended September 30, 2017. The filing is unaudited. ResMed designs, manufactures and markets devices and software for sleep-disordered breathing and other respiratory and chronic conditions.
Financial performance
| Metric | Q1 FY2018 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $523.7 million | $465.5 million | +13% reported; +11% constant currency |
| Gross profit / margin | $305.6 million / 58.4% | $269.2 million / 57.8% | Profit +14%; margin +0.6 percentage points reported |
| Operating income | $112.6 million | $94.1 million | +20% |
| Net income | $86.1 million | $76.1 million | +13% |
| Diluted EPS | $0.60 | $0.54 | Up $0.06 |
| Cash from operations | $94.0 million | $86.2 million | Up $7.7 million |
Operating expenses were $193.0 million, including $143.8 million of selling, general and administrative expense, $37.4 million of R&D, and $11.8 million of acquired-intangible amortization. The effective tax rate was 20.6%, compared with 18.1%. The company declared a dividend of $0.35 per share, versus $0.33.
Liquidity, debt and cash flow
- Cash and cash equivalents were $811.1 million at quarter-end, down from $821.9 million at June 30, 2017. Working capital was $1,306.4 million.
- Cash from operations was $94.0 million; investing activities used $15.4 million and financing activities used $106.1 million. The quarter-end cash balance declined by $10.8 million; exchange-rate movements increased cash by $16.7 million.
- Capital expenditures were $16.0 million. Dividends paid were $49.7 million. No shares were repurchased; the company said its buyback program remained temporarily suspended following recent acquisitions.
- Long-term debt was $1.020 billion gross ($1.019 billion net of deferred borrowing costs), down from $1.080 billion gross at June 30. The debt was drawn under a $1.3 billion revolving facility, bore a 2.7% rate at quarter-end, and was due at facility termination on October 31, 2018. ResMed reported compliance with its debt covenants.
- Most cash was held outside the United States: $774.4 million of the $811.1 million total. The filing says repatriation of those funds would be subject to U.S. tax.
Material changes and management commentary
- Revenue growth reflected higher unit sales of devices, masks and accessories, partly offset by lower average selling prices. Brightree revenue was $38.1 million, up 15% year over year. Currency movements added approximately $7.3 million to reported revenue.
- Device revenue rose 10% and masks and accessories revenue rose 15%; on a constant-currency basis, the respective increases were 8% and 14%. Revenue outside North and Latin America increased 15% reported and 11% constant currency.
- Reported gross margin increased to 58.4% from 57.8%. The prior-year quarter included a $5.0 million Astral battery field-safety-notification expense; excluding that item, management said gross margin was lower year over year, primarily due to average-selling-price declines.
- SG&A increased 12% reported, with management attributing the constant-currency increase primarily to additional commercial personnel. R&D increased 9% reported, primarily due to added personnel and materials and tooling costs for product development.
- Inventory increased 12% from June 30, which management attributed to revenue growth and new product introductions. Receivables declined 4%, but days sales outstanding rose from 68 to 72 days; the allowance for doubtful accounts increased to 2.9% of receivables from 2.4%.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings or cash-flow guidance. Management said it expects liquidity and long-term debt requirements to be met through cash on hand, operating cash flow and debt facilities.
- Key stated risks include competition, healthcare and regulatory changes, execution of growth strategy, foreign-currency movements, and uncertainties described in the company’s FY2017 Form 10-K. The company uses currency options and forward contracts for economic risk management; these are not designated as accounting hedges. The reported net loss from currency hedging instruments and other foreign-currency transactions was $0.6 million.
- ResMed is under an Australian Taxation Office audit covering tax years 2009–2013. Management does not expect a material adjustment but says outcomes cannot be predicted with certainty.
- Patent disputes with Fisher & Paykel Healthcare were pending in the United States, New Zealand, Germany and the United Kingdom. The company also reported two federal administrative subpoenas concerning patient-resupply software offerings and other promotional programs and said it was cooperating. Management did not expect routine litigation, considered as a whole, to materially adversely affect the financial statements.
- Receivables sold with recourse had maximum outstanding exposure of $29.4 million at September 30, with a $1.6 million provision for doubtful accounts. The company recognized a $1.0 million impairment charge on cost-method investments during the quarter.
Important facts for investors to verify
- Whether unit-sales growth can continue and offset lower average selling prices, and how much future reported growth depends on currency movements and Brightree.
- Whether margins hold up after accounting for the prior-year $5.0 million safety-notification expense.
- Plans and terms for addressing the $1.020 billion revolving-facility balance due at the October 2018 facility termination.
- Trends in inventory, receivable days and the allowance for doubtful accounts.
- Developments in the Australian tax audit, Fisher & Paykel patent disputes and government subpoena matters.
- Potential U.S. tax consequences if offshore cash is repatriated, and the effects of upcoming accounting-standard adoptions, particularly revenue recognition and leases.