ResMed Inc. — Form 10-K summary
Reporting period: Fiscal year ended June 30, 2019; comparative period is fiscal 2018. The filing also reports fiscal Q4 2019, ended June 30, 2019. Although the request metadata says “2018 Q4,” this filing is not a 2018-period 10-K. Unless stated otherwise, financial figures below are in U.S. dollars.
Business context
ResMed develops and sells respiratory-care and sleep-disordered-breathing devices, masks and related products, alongside cloud software for out-of-hospital healthcare providers. It reported two operating segments: Sleep and Respiratory Care, and Software as a Service (SaaS). The company operates in about 120 countries.
Financial performance
| Metric | FY2019 | FY2018 | Change / context |
|---|---|---|---|
| Revenue | $2,606.6 million | $2,340.2 million | Up 11%; up 13% at constant currency |
| Gross profit / margin | $1,536.6 million / 59.0% | $1,362.2 million / 58.2% | Margin improved 0.8 percentage points |
| Operating income | $579.3 million | $541.8 million | Up 7% |
| Net income | $404.6 million | $315.6 million | Up 28% |
| Diluted EPS | $2.80 | $2.19 | Up 28% |
| Operating cash flow | $459.1 million | $505.0 million | Down; higher inventory and tax payments were cited |
| Cash and equivalents at year-end | $147.1 million | $188.7 million | Down $41.6 million |
| Total debt at year-end | $1,274.0 million | $281.5 million | Higher primarily to fund acquisitions |
| Working capital | $589.4 million | $554.5 million | Up $34.9 million |
Sleep and Respiratory Care revenue was $2,330.8 million, up 7% reported and 9% at constant currency. SaaS revenue was $275.8 million, up 76%, predominantly reflecting acquisitions. Devices generated $1,361.6 million and masks and other products $969.2 million. Management attributed Sleep and Respiratory Care growth mainly to higher unit sales, partly offset by lower average selling prices. Currency movements reduced that segment’s revenue by approximately $40.9 million.
SG&A was $645.0 million, or 24.7% of revenue versus 25.7% in FY2018. R&D was $180.7 million, or 6.9% of revenue. Operating income included $41.2 million of litigation-settlement expense, $9.4 million of restructuring expense, $6.1 million of acquisition costs and $74.9 million of acquired-intangible amortization. The effective tax rate was 22.0%, compared with 39.5% in FY2018, which included substantial U.S. tax-reform charges.
Fiscal Q4 2019: Revenue was $705.0 million versus $623.6 million in Q4 2018; gross profit was $417.9 million versus $362.5 million. Net income was $68.8 million versus $109.8 million, and diluted EPS was $0.48 versus $0.76. Thus, revenue and gross profit rose, while quarterly net income and EPS fell.
Material changes and capital allocation
- Acquisition spending, net of cash acquired, was $951.4 million in FY2019. Major transactions included MatrixCare, HEALTHCAREfirst and Propeller Health. MatrixCare contributed $79.2 million of reported revenue after its November 2018 acquisition; its purchase-price allocation remained preliminary.
- Goodwill increased to $1,856.4 million from $1,068.9 million, and other intangible assets increased to $522.0 million from $215.2 million. No goodwill impairment was recorded; the annual review used a qualitative assessment.
- Inventory rose 30% to $349.6 million, which management linked mainly to growth and new product launches. Operating cash flow declined partly because of this increase and income-tax payments of $242.9 million, up from $170.7 million.
- Dividends paid were $211.7 million, or $1.48 per share. The company repurchased 200,000 shares for $22.8 million during FY2019.
- After year-end, ResMed issued $500 million of senior notes: $250 million at 3.24% due 2026 and $250 million at 3.45% due 2029. Proceeds were used to reduce revolving-credit borrowings.
Outlook, risks and unusual items
The filing gives no specific numerical revenue, earnings or cash-flow guidance. Management describes continued growth opportunities in underpenetrated sleep and respiratory markets and out-of-hospital software, supported by product development, connected-care offerings and acquisitions. These are strategic expectations, not quantified guidance.
- Government investigation: ResMed tentatively agreed to a civil resolution involving a $39.5 million payment and recorded a $41.2 million reserve for the expected settlement and related costs. Negotiations were not final, and possible ongoing obligations, including a corporate integrity agreement, remained unresolved.
- Australian tax dispute: The ATO assessed $151.7 million of additional tax, $38.4 million of interest and asserted $75.9 million of penalties for 2009–2013. ResMed had paid $75.9 million under an arrangement, disputes the assessments and states it believes it is more likely than not to prevail. The ATO was also auditing later tax years.
- Reimbursement and policy: U.S. Medicare competitive bidding was expected to resume in 2021, with non-invasive ventilators included. The 2.3% U.S. medical-device excise tax was scheduled to return in 2020 absent further legislative action.
- Other material exposures: The filing highlights acquisition integration and valuation, reimbursement and pricing pressure, competition, foreign-exchange movements, variable-rate debt and LIBOR transition, single-source suppliers, medical-device regulation, and privacy, cybersecurity and health-data compliance.
- Debt and liquidity: Most borrowings were variable-rate; the stated rate at June 30, 2019 was 3.4%. The company reported compliance with debt covenants. It expected to meet liquidity needs using cash, operating cash flow and debt facilities.
- Controls and audit: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. MatrixCare, acquired during the year, was excluded from the internal-control assessment.
Key facts for investors to verify
- Final terms and timing of the government settlement, including any compliance obligations beyond the recorded $41.2 million reserve.
- Outcome and potential cash exposure of the ATO dispute, including the status of the $75.9 million payment and audits of later years.
- Post-acquisition SaaS growth, profitability and integration progress; distinguish reported results from acquisition-related effects and purchase-accounting adjustments.
- Debt repayment, interest-rate exposure and covenant headroom following the July 2019 senior-note issuance.
- Effects of 2021 Medicare bidding and any reinstatement of the medical-device excise tax on customer demand, prices and margins.
- Whether higher inventory converts to sales and cash, and how average selling prices and foreign exchange affect future margins.