ResMed Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2011. The filing also reports unaudited fourth-quarter results for the quarter ended June 30, 2011; this is not a 2010 fiscal fourth-quarter filing.
Business context
ResMed develops, manufactures and sells equipment to diagnose and treat sleep-disordered breathing and other respiratory disorders. Its products include airflow generators, masks, diagnostic devices, ventilators and accessories. The company reported one operating segment and sold in more than 70 countries. North and Latin America generated 53% of fiscal 2011 revenue, Europe 37%, and Asia Pacific 10%.
Financial performance
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $1,243.1 million | $1,092.4 million | +14% |
| Gross profit | $741.3 million | $655.5 million | +13% |
| Gross margin | 60% | 60% | Unchanged |
| Operating income | $266.9 million | $240.4 million | +11% |
| Net income | $227.0 million | $190.1 million | +19% |
| Diluted EPS | $1.44 | $1.23 | +17% |
| Cash from operations | $283.2 million | $188.2 million | +$95.0 million |
Revenue growth reflected higher unit sales and new products. Flow-generator sales rose 10% to $699.3 million; masks, motors and accessories rose 19% to $543.9 million. On a constant-currency basis, total revenue increased 13%. Gross margin held at 60%: favorable product mix and manufacturing savings were offset by lower average selling prices and Australian-dollar appreciation. Other income increased to $36.8 million, including foreign-currency and hedging gains and higher interest income. The effective tax rate fell to 25.3% from 27.1%.
Fourth quarter: Revenue was $341.9 million versus $291.6 million in Q4 FY2010; gross profit was $198.9 million versus $174.5 million; net income was $58.5 million versus $53.2 million; diluted EPS was $0.37 versus $0.34.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $735.3 million at June 30, 2011, up from $488.8 million. Working capital was $1,083.6 million, versus $672.7 million.
- About $624.1 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.
- Total debt was approximately $100.2 million, including $100.0 million outstanding under a $300 million revolving facility due February 2014. The company reported compliance with debt covenants.
- Capital expenditures were $66.6 million. The company repurchased 4.9 million shares for $160.1 million and had 9.7 million shares remaining under its repurchase authorization. It reported no current intention to pay cash dividends.
Changes, outlook and material matters
- R&D spending rose 22% to $92.0 million, or 7% of revenue. Management expected R&D to be about 8% of revenue going forward; it expected SG&A to remain broadly around 30% of revenue. No specific revenue or earnings guidance was provided.
- Fiscal 2011 product launches included the S9 bilevel flow-generator range, Quattro FX and Mirage FX masks, and Stellar ventilation devices. Management attributed growth in part to new products and continued expansion of awareness and diagnosis of sleep-disordered breathing.
- Subsequent to year-end, the company completed acquisitions of BiancaMed, Gründler and its Middle East distributor for an aggregate purchase price of approximately $70 million. Purchase-price allocations were not complete at filing.
- Key risks include reimbursement and competitive-bidding reductions, the medical-device excise tax of 2.3% scheduled to begin in 2013, foreign exchange exposure, regulatory clearance and quality requirements, competition, and dependence on some single-source suppliers. Australian-dollar strength can raise manufacturing costs; the company uses currency derivatives but does not designate them as accounting hedges.
- Pending matters included University of Sydney licensing and intellectual-property litigation, a customer dispute, a patent-infringement complaint concerning gel-mask technology, and German tax assessments under appeal. Management said it could not estimate a loss range for several cases and did not expect the matters to materially adversely affect the consolidated financial statements. The prior S8 recall had no remaining accrual in FY2011.
- Management and the auditor reported effective internal control over financial reporting; the financial-statement audit opinion was unqualified.
Most important facts for investors to verify
- Whether sales growth and product launches sustain momentum, particularly given the faster growth in masks and accessories than in flow generators.
- The composition, accessibility and tax consequences of the substantial offshore cash balance, and the company’s planned use of cash for acquisitions and repurchases.
- Exposure to reimbursement changes and competitive bidding, including indirect effects on home healthcare dealers and customer collections.
- Foreign-exchange sensitivity, especially Australian-dollar manufacturing costs, and how much reported earnings benefited from currency and hedging gains.
- Developments and potential financial effects of the disclosed litigation, German tax matters, warranty accrual growth and post-year-end acquisitions.