ResMed Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 31, 2020 (fiscal 2020 third quarter), not 2019 Q3. Comparative results are for the quarter and nine months ended March 31, 2019. Amounts are in U.S. dollars.
Business context and reporting period
ResMed designs, manufactures and markets devices and software for sleep-disordered breathing and other respiratory conditions. Its two operating segments are Sleep and Respiratory Care and software-as-a-service (SaaS). The filing covers the three- and nine-month periods ended March 31, 2020; financial statements are unaudited.
Key financial metrics
| Metric | Three months ended March 31, 2020 | Nine months ended March 31, 2020 |
|---|---|---|
| Revenue | $769.5 million, up 16% year over year | $2,186.7 million, up 15% |
| Gross profit / margin | $449.7 million / 58.4% (prior-year margin 57.5%) | $1,268.4 million / 58.0% (prior-year margin 57.4%) |
| Operating income | $217.5 million | $586.4 million |
| Net income | $163.1 million, up 55% | $443.8 million, up 32% |
| Diluted EPS | $1.12 (prior year $0.73) | $3.05 (prior year $2.33) |
| Operating cash flow | Not separately presented for the quarter | $472.0 million (prior year $317.2 million) |
For the quarter, Sleep and Respiratory Care revenue was $679.9 million, up 17%, and SaaS revenue was $89.6 million, up 12%. Nine-month SaaS revenue rose 38%, primarily reflecting MatrixCare, acquired in November 2018. Gross-margin improvement was attributed mainly to favorable product mix and manufacturing and procurement efficiencies, partly offset by lower average selling prices.
At March 31, 2020, cash and cash equivalents were $352.9 million; working capital was $918.2 million. Total debt was approximately $1.377 billion net of borrowing costs ($1.381 billion outstanding under the credit agreements and senior notes). The company had $895 million available on its revolving facility and reported combined cash and revolver availability of $1.2 billion. Current assets were $1.470 billion and current liabilities $551.5 million. Nine-month capital expenditures were $77.4 million, and dividends paid were $168.6 million.
Material changes versus comparable periods
- Quarterly revenue growth was driven by higher device and mask sales, including increased ventilator demand associated with COVID-19; foreign exchange reduced Sleep and Respiratory Care revenue by about $8.5 million.
- Quarterly net income and diluted EPS increased substantially year over year. The effective tax rate fell to 14.9% from 23.6%, reflecting favorable geographic earnings mix; nine-month tax benefits from employee share-based awards also reduced tax expense.
- Other loss increased to $25.8 million for the quarter from $19.0 million, including equity-investment impairment, partly offset by lower interest expense. Nine-month other loss was $65.4 million versus $35.1 million, reflecting impairment, higher interest expense and larger equity-method investment losses.
- Cash increased from $147.1 million at June 30, 2019, in part because ResMed drew on its revolving facility amid COVID-19 uncertainty. Debt rose from $1.271 billion at June 30, 2019. The company issued $500 million of senior notes in July 2019 and used the proceeds to repay revolver borrowings.
- Foreign-currency translation reduced comprehensive income: the quarter recorded a $120.3 million translation loss, leaving comprehensive income of $42.8 million.
Outlook, risks and unusual items
- Management expected elevated ventilator demand to continue through the remainder of fiscal 2020, but reported that raw-material, component and labor constraints were limiting production capacity. It gave no quantified revenue or earnings guidance.
- Management expected COVID-19 to temporarily reduce demand from new sleep-apnea patients as clinics, hospitals and home medical equipment providers faced closures or redirected resources. Mask resupply demand was expected to be less affected. SaaS customer acquisition and expansion could also be hindered by uncertain business conditions.
- The filing cautions that pandemic-related supply-chain, manufacturing, distribution, regulatory-review and customer disruptions could harm results; a sharper-than-expected decline in respiratory-product demand could also create excess inventory. Management said operations had broadly continued and liquidity had not been negatively affected through the quarter.
- The Australian Taxation Office asserted $151.7 million of additional tax, $38.4 million of interest and $75.9 million of penalties for tax years 2009–2013. ResMed disputes the assessments and expects a refund of the $75.9 million already paid; an audit of 2014–2018 was ongoing. The company warned that an adverse outcome could require additional payments.
- A $9.1 million quarterly impairment charge on equity investments was reported in MD&A; the investment note reports $14.5 million of impairment for the nine months. The IRS separately granted relief on a historical filing oversight, and the company said no additional tax or penalties were owed on that matter.
- ResMed was in compliance with debt covenants at March 31, 2020. Its Australian tax dispute, variable-rate borrowing exposure, foreign-currency exposure and COVID-19-related operating risks remain relevant.
Important facts for investors to verify
- Confirm the intended filing period: this is fiscal Q3 2020, not Q3 2019.
- Track whether ventilator demand and constrained manufacturing capacity persist, and whether sleep-device demand and SaaS growth weaken as management anticipated.
- Review subsequent disclosures on the ATO assessments and the recoverability of the $75.9 million tax payment.
- Monitor debt, revolver availability, covenant compliance, and cash generation alongside acquisition and capital-spending needs.
- Reconcile the reported investment impairment amounts and assess continued losses from equity-method investments.