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| RMD > SEC Filings for RMD > Form 10-K on 28-Aug-2008 | All Recent SEC Filings |
28-Aug-2008
Annual Report
Overview
Management's discussion and analysis ("MD&A") of financial condition and results of operations is intended to help the reader understand the results of operations and financial condition of Resmed Inc. MD&A is provided as a supplement to, and should be read in conjunction with selected financial data and consolidated financial statements and notes, included herein.
We are a leading developer, manufacturer and distributor of medical equipment for treating, diagnosing, and managing sleep-disordered breathing ("SDB") and other respiratory disorders. During the fiscal year we continued our efforts in building awareness of the consequences of untreated SDB and to grow our business in this underpenetrated market. In our efforts we have raised awareness through a number of market initiatives which highlighted the increasing link between the potential effect SDB can have on cardiovascular diseases and Type 2 diabetes. In conjunction with these direct efforts we also donated $2.0 million to the ResMed Foundation in the United States during fiscal year 2008. The Foundation's overall mission includes the education of both the public and physicians about the inherent dangers of untreated SDB/OSA, particularly as it relates to cerebrovascular and cardiovascular disease.
We are committed to ongoing investment in research and development and product
enhancements. During fiscal year 2008 we invested approximately $60.5 million on
research and development activities, which represents 7% of revenue. Since the
development of CPAP, we have developed a number of innovative products for SDB
and other respiratory disorders including airflow generators, diagnostic
products, mask systems, headgear and other accessories. During fiscal year 2008,
we were encouraged by the market response to our new full face mask offerings:
the Quattro and Liberty; our new nasal pillows mask, the Swift LT; and our next
generation nasal mask; the Mirage Micro. We also launched the flow generator S8
II and a new bilevel device, the VPAP Auto. These new offerings will enable us
to capitalize on continuing developments in patient needs whilst also
positioning us for future growth.
During the year, our industry has seen some significant market developments. Major cardiac associations have begun advocating screening and treating cardiac patients for SDB whilst the International Diabetes Foundation ("IDF") has issued a consensus statement recommending the screening of type 2 diabetes patients suspected of sleep apnea. In the U.S. Medicare approved reimbursement of home sleep testing to diagnose patients with obstructive sleep apnea. This ruling will offer patients the option to be assessed through a facility-based test in a lab or through a portable diagnostic test performed in the patient's home. We believe this will increase the diagnostic capacity in the U.S. industry allowing greater access for patients. Several U.S large private insurers have followed suit, and the industry is now well positioned for the next wave of patients seeking diagnosis and treatment.
We reported record financial results in fiscal year 2008, with an increase in net revenue of 17% to $835.4 million compared to fiscal year 2007. Gross profit increased for the year ended June 30, 2008 to $493.8 million from $384.5 million for the year ended June 30, 2007, an increase of $109.3 million or 28%. The increase in gross margin is primarily due to $59.7 million of voluntary product recall expenses that we recognized during the year ended June 30 2007. During the year ended June 30, 2008 we also recognized an additional charge of $3.1 million in relation to the product recall announced in the prior year. Our net income for the year ended June 30, 2008 was $110.3 million or $1.40 per diluted share compared to net income of $66.3 million or $0.85 per diluted share for the year ended June 30, 2007. Excluding the impact of the voluntary product recall expenses, diluted earnings per share for the year ended June 30, 2008 was $1.43, an increase of 4% over the year ended June 30, 2007 of $1.38.
Total operating cash flow for fiscal year 2008 was $137.8 million, which represents a 51% increase from the year ended June 30, 2007. At June 30, 2008, our cash and cash equivalents totaled $321.1 million. Our total assets increased by 12% to $1.4 billion and our shareholders' equity was up 16% to $1.1 billion. During fiscal year 2008, we repurchased 2,570,700 shares at a cost of $99.5 million as part of our approved share buy-back program.
Fiscal Year Ended June 30, 2008 Compared to Fiscal Year Ended June 30, 2007
Net Revenues. Net revenue increased for the year ended June 30, 2008 to $835.4 million from $716.3 million for the year ended June 30, 2007, an increase of $119.1 million or 17%. The increase in net revenue was attributable to an increase in unit sales of our flow generators, masks and accessories and a strong contribution from our new full face masks. Movements in international currencies against the U.S. dollar positively impacted revenues by approximately $42.7 million for the year ended June 30, 2008. Excluding the impact of favorable foreign currency movements, sales for the year ended June 30, 2008 increased by 11% compared to the year ended June 30, 2007.
Net revenue in North and Latin America increased for the year ended June 30, 2008 to $409.6 million from $376.7 million for the year ended June 30, 2007, an increase of $32.9 million or 9%. This growth has been generated by increased public and physician awareness of sleep-disordered breathing and growth generated from our recent product releases including the S8II flow generator, Swift LT nasal pillows mask and Mirage Quattro full-face mask.
Net revenue in markets outside North and Latin America increased for the year ended June 30, 2008 to $425.8 million from $339.6 million for the year ended June 30, 2007, an increase of 25%. This sales growth outside North and Latin America predominantly reflects growth in the overall sleep-disordered breathing market, growth generated from our recent product releases including the S8II flow generator and Mirage Quattro full-face mask and the positive impact from movements of international currencies against the U.S. dollar. Excluding the positive impact from movements of international currencies, international sales grew by 13%.
Sales of flow generators for the year ended June 30, 2008 totaled $418.5 million, an increase of 13% compared to the year ended June 30, 2007, including increases of 3% in North and Latin America and 20% elsewhere. Sales of mask systems, motors and other accessories totaled $416.9 million, an increase of 21%, including increases of 13% in North and Latin America and 35% elsewhere, for the year ended June 30, 2008, compared to the year ended June 30, 2007. We believe these increases primarily reflect growth in the overall sleep-disordered breathing market and contributions from new products.
Gross Profit. Gross profit increased for the year ended June 30, 2008 to $493.8 million from $384.5 million for the year ended June 30, 2007, an increase of $109.3 million or 28%. Gross profit as a percentage of net revenue increased for the year ended June 30, 2008 to 59% from 54% for the year ended June 30, 2007. The increase in gross margin is primarily due to $59.7 million of voluntary product recall expenses that we recognized during the year ended June 30 2007. During the year ended June 30, 2008 we also recognized an additional charge of $3.1 million in relation to the product recall announced in 2007 due to higher than original estimated return rates and consulting charges. Excluding voluntary product recall expenses, gross profit as a percentage of revenue was 59% for the year ended June 30, 2008, which is lower than the year ended June 30, 2007 of 62%. The lower gross margin (excluding the voluntary product recall expense) is primarily due to a general reduction in average selling prices, appreciation of the Australian dollar against the U.S. dollar, partially offset by manufacturing and supply chain improvements.
Voluntary Product Recall Expenses. On April 23, 2007, we initiated a worldwide voluntary product recall of approximately 300,000 units of our early production S8 flow generators. In these particular units, which were manufactured between July 2004 and May 15, 2006, there was what we considered to be a remote potential for a short circuit in the power supply connector. The initial estimated cost of this recall action was $59.7 million which was recognized as a charge to cost of sales in the condensed consolidated statement of income during the year ended June 30, 2007. During the year ended June 30, 2008 we recognized an additional charge of $3.1 million due to higher than original estimated return rates and consulting charges. At June 30, 2008 the recall accrual was $1.0 million.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased for the year ended June 30, 2008 to $278.1 million from $237.3 million for the year ended June 30, 2007, an increase of $40.8 million or 17%. As a percentage of net revenue, selling, general and administrative expenses for the year ended June 30, 2008 was 33% and is consistent with the year ended June 30, 2007.
The increase in selling, general and administrative expenses was primarily due to an increase in the number of sales and administrative personnel to support our growth, continued infrastructure investment, particularly in our European businesses, stock-based compensation costs and other expenses related to the increase in our sales. The increase in selling, general and administrative expenses was also attributable to net appreciation of international currencies against the U.S. dollar, which added approximately $18.8 million to our expenses for the year ended June 30, 2008, as reported in U.S. dollars. As a percentage of net revenue, we expect our future selling, general and administrative expense to continue in the historical range of 32% to 34%.
Research and Development Expenses. Research and development expenses increased for the year ended June 30, 2008 to $60.5 million from $50.1 million for the year ended June 30, 2007, an increase of $10.4 million or 21%. As a percentage of net revenue, research and development expenses were 7% for the year ended June 30, 2008 and are consistent with the year ended June 30, 2007.
The increase in research and development expenses was primarily due to an increase in the number of research and development personnel, increased charges for consulting fees and an increase in technical assessments incurred to facilitate development of new products. The increase in research and development expenses was also attributable to the net appreciation of international currencies against the U.S. dollar, which added approximately $7.1 million to our expenses for the year ended June 30, 2007, as reported in U.S. dollars. As a percentage of net revenue, we expect our future research and development expense to continue at approximately 7%.
Donations to Foundations. In the years ended June 30, 2008 and 2007, we donated $2.0 million and $Nil, respectively, to the ResMed Foundation in the United States. The Foundations' overall mission includes the education of both the public and physicians about the inherent dangers of untreated SDB/OSA, particularly as it relates to cerebrovascular and cardiovascular disease.
Amortization of Acquired Intangible Assets. Amortization of acquired intangible assets for the year ended June 30, 2008 totaled $7.8 million compared to $6.9 million for the year ended June 30, 2007. The increase in amortization expense is attributable to the appreciation of the Euro against the U.S. dollar as the majority of the acquired intangible assets are denominated in Euros.
Restructuring Expenses. Restructuring expenses incurred for the year ended June 30, 2008 were $2.4 million compared to $Nil for the year ended June 30, 2007. Restructuring expenses consisted of expenses associated with our decision to streamline European management, including the closure of part of the European headquarters in Basel, Switzerland and two regional offices in the Netherlands.
The restructuring expenses mainly comprise employee termination costs, leasehold improvement write-downs and property lease exit costs. We will continue to monitor the progress of this restructure and adjust our business strategies and personnel accordingly to achieve maximum efficiencies and cost savings.
Other Income (Expense), Net. Other income, net for the year ended June 30, 2008 was $14.9 million, an increase of $7.0 million over the year ended June 30, 2007. This was predominantly due to higher interest income on additional cash balances and a $5.9 million gain on the sale of our Poway property. These impacts were partly offset by a $3.2 million impairment write-down of our at cost-method investments.
Income Taxes. Our effective income tax rate decreased to approximately 30.1% for the year ended June 30, 2008 from approximately 32.3% for the year ended June 30, 2007. Our effective income tax rate was impacted by the tax benefit associated with the voluntary product recall expense that was recognized during the years ended June 30, 2008 and 2007. Excluding the impact of voluntary product recall expenses, the effective income tax rate was 30.1% and 31.4% for the years ended June 30, 2008 and 2007, respectively. The reduction in the full year effective tax rate is mainly due to factors such as an increase in the concessional R&D tax claim in Australia and a 10% decrease in the German corporate tax rate. We continue to benefit from the Australian corporate tax rate of 30% and certain Australian research and development tax benefits because we generate the majority of our taxable income in Australia.
Net Income. As a result of the factors above, our net income for the year ended June 30, 2008 was $110.3 million or $1.40 per diluted share compared to net income of $66.3 million or $0.85 per diluted share for the year ended June 30, 2007. The net after tax impact of the voluntary product recall expense of $2.2 million described above resulted in a reduction of diluted earnings per share of $0.03 on an after-tax basis for the year ended June 30, 2008 compared to $41.8 million or $0.53 diluted earnings per share for the year ended June 30, 2007. Excluding the impact of the voluntary product recall expenses, diluted earnings per share for the year ended June 30, 2008 was $1.43, an increase of 4% over the year ended June 30, 2007 of $1.38.
Fiscal Year Ended June 30, 2007 Compared to Fiscal Year Ended June 30, 2006
Net Revenues. Net revenue increased for the year ended June 30, 2007 to $716.3 million from $607.0 million for the year ended June 30, 2006, an increase of $109.3 million or 18%. The increase in net revenue was attributable to an increase in unit sales of our flow generators, masks and accessories. Movements in international currencies against the U.S. dollar positively impacted revenues by approximately $20.5 million for the year ended June 30, 2007. Excluding the impact of favorable foreign currency movements, sales for the year ended June 30, 2007 increased by 15% compared to the year ended June 30, 2006.
Net revenue in North and Latin America increased for the year ended June 30, 2007 to $376.7 million from $321.0 million for the year ended June 30, 2006, an increase of $55.7 million or 17%. This growth has been generated by increased public and physician awareness of sleep-disordered breathing together with our continued investment in our sales force and marketing initiatives. Recent product releases, in particular the Adapt SV, Swift II and Mirage Quattro, have also contributed to our sales growth.
Net revenue in markets outside the Americas increased for the year ended June 30, 2007 to $339.6 million from $286.0 million for the years ended June 30, 2007 and 2006, respectively, an increase of 19%. International sales growth predominantly reflects growth in the overall sleep-disordered breathing market and the positive impact from movements of international currencies against the U.S. dollar. Excluding the positive impact from movements of international currencies, international sales grew by 12%.
Sales of flow generators for the year ended June 30, 2007 totaled $370.6 million, an increase of 17% compared to the year ended June 30, 2006, including increases of 19% in North and Latin America and 16% elsewhere. Sales of mask systems, motors and other accessories totaled $345.8 million, an increase of 19%, including increases of 16% in North and Latin America and 24% elsewhere, for the year ended June 30, 2007, compared to the year ended June 30, 2006. We believe these increases primarily reflect growth in the overall sleep-disordered breathing market and contributions from new products.
Gross Profit. Gross profit increased for the year ended June 30, 2007 to $384.5 million from $376.9 million for the year ended June 30, 2006, an increase of $7.6 million or 2%. Gross profit as a percentage of net revenue decreased for the year ended June 30, 2007 to 54% from 62% for the year ended June 30, 2006. The decrease in gross margin is primarily due to $59.7 million of voluntary product recall expenses that we recognized during the year ended June 30 2007. Excluding voluntary product recall expenses, gross profit as a percentage of revenue was 62% for the year ended June 30, 2007, which is consistent with the year ended June 30, 2006. Stock-based compensation expenses of $1.1 million have been included in cost of sales for the year ended June 30, 2007 compared to $0.9 million for the year ended June 30, 2006.
Voluntary Product Recall Expenses. On April 23, 2007, we initiated a worldwide voluntary product recall of approximately 300,000 units of our early production S8 flow generators. In these particular units, which were manufactured between July 2004 and May 15, 2006, there is a remote potential for a short circuit in the power supply connector.
The estimated cost of this recall action is $59.7 million which has been recognized as a charge to cost of sales in the condensed consolidated statement of income during the year ended June 30, 2007. At June 30, 2007, we have incurred costs of approximately $16.3 million associated with the product recall. We expect the product recall to continue throughout fiscal year 2008. We cannot assure that the actual costs of the product recall will not differ from the amount we have estimated and recognized in our financial statements.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased for the year ended June 30, 2007 to $237.3 million from $200.2 million for the year ended June 30, 2006, an increase of $37.1 million or 19%. As a percentage of net revenue, selling, general and administrative expenses for the year ended June 30, 2007 was 33% and is consistent with the year ended June 30, 2006. Stock-based compensation expenses of $14.5 million have been included within selling, general and administrative expenses for the year ended June 30, 2007 compared to $12.4 million for the year ended June 30, 2006.
The increase in selling, general and administrative expenses was primarily due to an increase in the number of sales and administrative personnel to support our growth, continued infrastructure investment, particularly in our European businesses, stock-based compensation costs and other expenses related to the increase in our sales. The increase in selling, general and administrative expenses was also attributable to net appreciation of international currencies against the U.S. dollar, which added approximately $9.0 million to our expenses for the year ended June 30, 2007, as reported in U.S. dollars. As a percentage of net revenue, we expect our future selling, general and administrative expense to continue in the historical range of 32% to 34%.
Research and Development Expenses. Research and development expenses increased for the year ended June 30, 2007 to $50.1 million from $37.2 million for the year ended June 30, 2006, an increase of $12.9 million or 35%. As a percentage of net revenue, research and development expenses were 7% for the year ended June 30, 2007 compared to 6% for the year ended June 30, 2006. Stock-based compensation costs of $2.0 million have been included within research and development expenses for both the year ended June 30, 2007 and the year ended June 30, 2006.
The increase in research and development expenses was primarily due to an increase in the number of research and development personnel, increased charges for consulting fees and an increase in technical assessments incurred to facilitate development of new products. The increase in research and development expenses was also attributable to net appreciation of international currencies against the U.S. dollar, which added approximately $2.4 million to our expenses for the year ended June 30, 2007, as reported in U.S. dollars. As a percentage of net revenue, we expect our future research and development expense to continue in the range of 6% to 7%.
Donations to Foundations. In the years ended June 30, 2007 and 2006, we donated $Nil and $0.8 million, respectively, to the ResMed Foundation in the United States, and the ResMed Foundation in Australia. The Foundations' overall mission includes the education of both the public and physicians about the inherent dangers of untreated SDB/OSA, particularly as it relates to cerebrovascular and cardiovascular disease.
Amortization of Acquired Intangible Assets. Amortization of acquired intangible assets for the year ended June 30, 2007 totaled $6.9 million compared to $6.3 million for the year ended June 30, 2006. The increase in amortization expense is mainly attributable to the appreciation of the Euro against the U.S. dollar as the majority of the acquired intangible assets are denominated in Euros. The amortized amounts in 2007 related to acquired intangible assets associated with the acquisitions of Pulmomed, PolarMed, Saime, Hoefner and Resprecare.
Restructuring Expenses. Restructuring expenses incurred for the year ended June 30, 2007 were $Nil compared to $1.1 million for the year ended June 30, 2006. Restructuring expenses for 2006 consisted of restructure charges associated with our integration of the separate operations of ResMed Germany and MAP into a single operating unit. We have completed the relocation of our ResMed Germany operation, previously located in Moenchengladbach, to Munich and associated integration of the back office functions including customer service, logistics and administration.
Other Income (Expense), Net. Other income, net for the year ended June 30, 2007 was $7.8 million, an increase of $5.7 million over the year ended June 30, 2006. This was predominantly due to higher interest income on additional cash balances, lower interest expense due to the reduction in our convertible debt, which was converted into equity during the quarter ended March 31, 2006 and higher foreign currency gains on foreign currency transactions and hedging.
Income Taxes. Our effective income tax rate decreased to approximately 32.3% for the year ended June 30, 2007 from approximately 33.9% for the year ended June 30, 2006. Our effective income tax rate was impacted by the tax benefit associated with the voluntary product recall expense that was recognized during the year ended June 30, 2007. Excluding the impact of voluntary product recall expenses, the effective income tax rate was 31.4% for the year ended June 30, 2007.
The decrease in our effective tax rate from June 30, 2006 is primarily due to the one-time additional income tax expense of $3.5 million, which we incurred during the year ended June 30, 2006, associated with the repatriation of $75 million in dividends received from certain controlled foreign corporations. These dividend payments were made to take advantage of a temporary tax incentive under the American Jobs Creation Act of 2004, which provides an 85% exclusion from U.S. taxable income for qualifying dividends. We continue to benefit from the Australian corporate tax rate of 30% and certain Australian research and development tax benefits because we generate a majority of our taxable income in Australia. Excluding the impact of tax expense associated with the dividend payment in fiscal year 2006, our effective tax rate was 31.2%, which is broadly consistent with our effective tax rate for fiscal year 2007.
Net Income. As a result of the factors above, our net income for the year ended June 30, 2007 was $66.3 million or $0.85 per diluted share compared to net income of $88.2 million or $1.16 per diluted share for the year ended June 30, 2006. The net after tax impact of the voluntary product recall expense of $41.8 million described above resulted in a reduction of diluted earnings per share of $0.53 on an after-tax basis for the year ended June 30, 2007. Excluding the impact of the voluntary product recall expense, diluted earnings per share was $1.38, an increase of 19% over the year ended June 30, 2006.
Liquidity and Capital Resources
As of June 30, 2008 and June 30, 2007, we had cash and cash equivalents of $321.1 million and $257.8 million, respectively. Working capital was $546.6 million and $466.4 million at June 30, 2008 and June 30, 2007, respectively. The increase in working capital predominantly reflects the growth and profitability of the business during the year.
Inventories at June 30, 2008 increased by $1.0 million or 1% to $158.3 million compared to June 30, 2007 inventories of $157.2 million. The increase in inventories was lower than the increase of 17% in revenues in the year ended June 30, 2008 compared to the year ended June 30, 2007, which reflects an improvement in management of our working capital.
Accounts receivable at June 30, 2008 were $192.2 million, an increase of $24.4 million or 15% over the June 30, 2007 accounts receivable balance of $167.8 million. The increase was lower than the 17% incremental increase in revenues for the year ended June 30, 2008 compared to the year ended June 30, 2007. Accounts receivable days sales outstanding of 72 days at June 30, 2008 decreased by 5 days compared to 77 days at June 30, 2007. Our allowance for doubtful accounts as a percentage of total accounts receivable at June 30, 2008 and 2007 was 2.5% and 2.7%, respectively. The credit quality of our customers remains consistent with our past experience.
During the year ended June 30, 2008, we generated cash of $137.8 million from operations. This was higher than the cash generated from operations for the year ended June 30, 2007 of $91.1 million and was primarily the result of the increase in net income and improved working capital management. During fiscal years 2008 and 2007, we repurchased 2,570,700 and 50,000 shares at a cost of $99.5 million and $2.1 million, respectively.
Capital expenditures for the years ended June 30, 2008 and 2007 aggregated $75.8 million and $77.6 million, respectively. The capital expenditures for the year ended June 30, 2008 primarily reflected construction costs related to the extension of our manufacturing facility in Sydney, Australia, construction of our new corporate headquarters in Kearny Mesa, San Diego, office facilities, computer hardware and software, rental and loan equipment and purchase of . . .
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