ResMed Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, three months ended September 30, 2012; comparisons are with the three months ended September 30, 2011 unless noted. Financial statement amounts below are in U.S. dollars.
Business context
ResMed designs, manufactures and markets equipment and services for sleep-disordered breathing and other respiratory disorders. The company cited growth in flow generators, masks and accessories, supported by market growth and recent product releases.
Key financial metrics
| Metric | Q1 FY2013 | Prior comparable period / change |
|---|---|---|
| Net revenue | $339.7 million | $314.8 million; up 8% reported and 12% at constant currency |
| Gross profit / margin | $208.6 million / 61.4% | $185.1 million / 58.8% |
| Operating income | $80.5 million | $60.9 million |
| Net income | $71.3 million | $50.5 million; up 41% |
| Diluted EPS | $0.49 | $0.33; up 48% |
| Operating cash flow | $78.3 million | $89.5 million |
| Capital expenditures | $13.8 million | $12.9 million |
| Cash and cash equivalents | $890.6 million at September 30 | $809.5 million at June 30, 2012 |
| Total debt | $265.8 million, including $265.0 million under the revolving facility | $250.8 million at June 30, 2012 |
| Working capital | $1.2 billion | $1.1 billion at June 30, 2012 |
Gross margin improvement reflected manufacturing and logistics efficiencies and product mix, partly offset by lower average selling prices. Other income rose to $10.4 million from $5.6 million, mainly reflecting foreign-currency and hedging gains versus losses in the prior year, as well as higher interest income. The effective tax rate declined to approximately 21.6% from 24.0%.
Material changes and capital allocation
- North and Latin American revenue increased 15%; international revenue was flat as reported but grew 9% at constant currency. Unfavorable currency movements reduced revenue by approximately $12.6 million.
- Flow-generator revenue rose 6% overall; masks and accessories rose 10%. Constant-currency international growth was 7% for flow generators and 13% for masks and accessories.
- Operating cash flow declined year over year, which management attributed chiefly to the timing of tax installment payments and higher inventory to support growth.
- ResMed paid $22.8 million in dividends and repurchased 0.2 million shares for $8.1 million during the quarter. The board had declared a $0.17-per-share dividend.
- On July 20, 2012, ResMed acquired Umbian Inc., a patient-compliance data services provider. Initial consideration was $5.6 million, with potential earn-out payments up to $35.4 million; a $13.1 million contingent-consideration liability was recorded. The purchase-price allocation remained preliminary.
Outlook, risks and contingencies
- No specific revenue or earnings forecast is provided. Management expected SG&A to be 28%–29% of revenue and R&D to be approximately 8% of revenue.
- Management said short-term liquidity needs were expected to be met through cash on hand and operating cash generation. Approximately $853.8 million of cash was held by non-U.S. subsidiaries and described as indefinitely invested outside the United States; repatriation would require an income-tax provision adjustment.
- The $400 million revolving credit facility expires February 10, 2014. ResMed reported covenant compliance at quarter-end; the facility includes financial covenants and variable-rate borrowings.
- Foreign-exchange exposure affects international sales and Australian and Singapore manufacturing. Derivatives are used for economic risk management, are not designated as accounting hedges, and changes in fair value flow through other income. Management reported no speculative use of derivatives.
- The University of Sydney litigation concerning a license agreement and intellectual property remained ongoing. The company said a loss range could not be reasonably estimated and did not expect a material adverse effect.
- Management cited healthcare, market, competitive, legal and regulatory changes, execution of growth strategy, and currency movements among forward-looking risks. It reported no material changes to the risk factors in its fiscal 2012 Form 10-K.
Important facts for investors to verify
- Whether reported revenue growth and margin improvement persist, particularly after currency effects and changes in product mix and pricing.
- Whether operating cash flow recovers as inventory and tax-payment timing normalize.
- The final Umbian purchase-price allocation and the assumptions underlying its contingent earn-out liability.
- Cash availability and potential tax consequences if funds held outside the United States are repatriated.
- Developments in the University of Sydney litigation and the company’s foreign-exchange and variable-rate debt exposures.
- The filing describes Umbian’s acquisition as effective July 20 in the notes and July 19 in MD&A; verify the intended consolidation date.