ResMed Inc. 10-Q Summary: Quarter Ended March 31, 2009
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2009, and the nine months ended on that date. ResMed Inc. designs, manufactures, and markets equipment for the diagnosis and treatment of sleep-disordered breathing (SDB) and other respiratory disorders. The company operates manufacturing facilities in Australia, Singapore, France, and the United States, with major distribution sites globally.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2009 | Nine Months Ended Mar 31, 2009 |
|---|---|---|
| Net Revenues | $227.9 million | $668.8 million |
| Gross Profit | $138.9 million | $397.1 million |
| Gross Margin | 61.0% | 59.4% |
| Net Income | $39.2 million | $101.1 million |
| Diluted EPS | $0.51 | $1.31 |
| Operating Cash Flow | N/A | $168.6 million |
| Cash and Equivalents | $327.1 million | $327.1 million (Balance Sheet) |
| Total Debt | $159.6 million | $159.6 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 8% ($16.0 million) for the quarter and 11% for the nine months compared to the prior year periods. Excluding unfavorable foreign currency impacts, revenue growth was 16% for the quarter and 15% for the nine months.
- Regional Performance: North and Latin America revenue grew 23% (quarter) and 21% (nine months). International revenue decreased 6% (quarter) and grew 2% (nine months) due to currency headwinds; constant currency growth was 10% and 10% respectively.
- Profitability: Net income increased 32% for the quarter and 25% for the nine months. Gross margin improved to 61.0% in the quarter, driven by the depreciation of the Australian dollar (where manufacturing costs are denominated) and favorable product mix.
- Expenses: Selling, general, and administrative (SG&A) expenses increased slightly, while Research and Development (R&D) expenses decreased 7% for the quarter but increased 7% for the nine months.
- One-Time Items: The prior year period included a $5.9 million gain on the sale of the Poway, California building, which is not present in the current period. No restructuring expenses were incurred in the current period, compared to $2.4 million in the prior nine-month period.
Outlook, Risks, and Management Commentary
- Market Drivers: Management highlights increasing awareness of the link between SDB and cardiovascular disease/diabetes, supported by new clinical guidelines. New product releases (VPAP IV, Swift LT) are driving unit sales.
- Capital Allocation: The company is constructing a new corporate headquarters in San Diego, with $82.5 million incurred to date and an estimated $21.2 million remaining. Capital expenditures for the nine months were $83.9 million.
- Liquidity: The company maintains strong liquidity with $327.1 million in cash. However, $5.0 million of investment securities (auction rate securities) are currently illiquid due to market conditions, though management does not anticipate an impact on operations.
- Debt Covenants: The company amended its revolving credit facility in February 2009 to maintain a $65 million commitment and revised covenants to exclude capital expenditures for the new headquarters from the fixed charge coverage ratio. The company is in compliance with all debt covenants.
- Risks: Key risks include global economic conditions potentially reducing customer purchases, foreign currency exchange rate fluctuations, and the ongoing litigation with the University of Sydney regarding intellectual property (though management does not expect a material adverse effect).
Investor Verification Checklist
- Foreign Currency Impact: Verify the sensitivity of future margins to the Australian dollar and Euro exchange rates, as these significantly impacted current results.
- Auction Rate Securities: Confirm the status of the $5.0 million illiquid investment securities and the timeline for potential liquidity restoration.
- Headquarters Construction: Monitor the completion of the San Diego headquarters and the associated capital expenditure burn rate.
- Debt Maturities: Review the repayment schedule for the $159.6 million total debt, noting significant maturities in fiscal 2010 and 2011.
- Product Mix: Assess the sustainability of the gross margin expansion driven by the mix of higher-margin products and currency effects.