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RMD > SEC Filings for RMD > Form 10-Q on 31-Oct-2012All Recent SEC Filings

Show all filings for RESMED INC

Form 10-Q for RESMED INC


31-Oct-2012

Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward-Looking Statements

This report contains or may contain certain forward-looking statements and information that are based on the beliefs of our management as well as estimates and assumptions made by, and information currently available to, our management. All statements other than statements regarding historical facts are forward-looking statements. The words "believe," "expect," "anticipate," "will continue," "will," "estimate," "plan," "future" and other similar expressions, and negative statements of such expressions, generally identify forward-looking statements, including, in particular, statements regarding the development and approval of new products and product applications, market expansion, pending litigation and the development of new markets for our products, such as cardiovascular and stroke markets. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on these forward-looking statements. Such forward-looking statements reflect the views of our management at the time such statements are made and are subject to a number of risks, uncertainties, estimates and assumptions, including, without limitation, and in addition to those identified in the text surrounding such statements, those identified in our annual report on Form 10-K for the fiscal year ended June 30, 2012 and elsewhere in this report.

In addition, important factors to consider in evaluating such forward-looking statements include changes or developments in healthcare reform, social, economic, market, legal or regulatory circumstances, changes in our business or growth strategy or an inability to execute our strategy due to changes in our industry or the economy generally, the emergence of new or growing competitors, the actions or omissions of third parties, including suppliers, customers, competitors and governmental authorities and various other factors. Should any one or more of these risks or uncertainties materialize, or underlying estimates or assumptions prove incorrect, actual results may vary significantly from those expressed in such forward-looking statements, and there can be no assurance that the forward-looking statements contained in this report will in fact occur.

Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described in our annual report on Form 10-K, in addition to the other cautionary statements and risks described elsewhere in this report and in our other filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on us, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our common stock will likely decline and you may lose all or part of your investment.

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Table of Contents
PART I - FINANCIAL INFORMATION Item 2

RESMED INC. ANDSUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

The following is an overview of our results of operations for the three months ended September 30, 2012. 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 condensed consolidated financial statements and notes, included in this report.

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 three months ended September 30, 2012, we continued our efforts to build awareness of the consequences of untreated SDB, and to grow our business in this market. In our efforts, we have attempted to raise awareness through market and clinical initiatives highlighting the relationship between sleep-disordered breathing/obstructive sleep apnea and co-morbidities, such as cardiac disease, diabetes, hypertension and obesity, as well as the dangers of sleep apnea in regard to occupational health and safety, especially in the transportation industry.

We are committed to ongoing investment in research and development and product enhancements. During the three months ended September 30, 2012, we invested $27.2 million on research and development activities. Since the development of continuous positive airway pressure ("CPAP") therapy, we have developed a number of innovative products for SDB and other respiratory disorders including airflow generators, diagnostic products, mask systems, headgear, compliance monitoring software and other accessories. Our new product release schedule remains active across both our mask and flow generator categories. We are taking steps to increase awareness of the health dangers of sleep-disordered breathing by sponsoring educational programs targeted at the primary care physician community. We believe these efforts should further increase awareness of both doctors and patients about the relationship between sleep-disordered breathing, obstructive sleep apnea and co-morbidities such as cardiac disease, diabetes, hypertension and obesity. We believe these efforts should also support our efforts to inform the community of the dangers of sleep apnea in occupational health and safety, especially in the transport industry.

During the three months ended September 30, 2012, our net revenue increased by 8% when compared to the three months ended September 30, 2011. Gross margin was 61.4% for the three months ended September 30, 2012 compared to 58.8% for the three months ended September 30, 2011. Diluted earnings per share for the three months ended September 30, 2012 was $0.49 per share, compared to $0.33 per share for the three months ended September 30, 2011.

At September 30, 2012 our cash and cash equivalents totaled $890.6 million, our total assets were $2.2 billion and our stockholders' equity was $1.7 billion.

In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we provide certain financial information on a "constant currency basis", which is in addition to the actual financial information presented. In order to calculate our constant currency information, we translate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period. However, constant currency measures should not be considered in isolation or as an alternative to U.S. dollars measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with U.S. GAAP.

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Table of Contents
PART I - FINANCIAL INFORMATION Item 2

RESMED INC. ANDSUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

Net Revenue

Net revenue increased for the three months ended September 30, 2012 to $339.7 million compared to $314.8 million for the three months ended September 30, 2011, an increase of $25.0 million or 8%. The increase in net revenue is primarily attributable to the growth in our flow generator and masks and accessories sales. Movements in international currencies against the U.S. dollar negatively impacted revenues by approximately $12.6 million during the three months ended September 30, 2012. Excluding the impact of unfavorable foreign currency movements, net revenue for the three months ended September 30, 2012 increased by 12% compared to the three months ended September 30, 2011.

Net revenue in North and Latin America increased for the three months ended September 30, 2012 to $194.4 million from $169.3 million for the three months ended September 30, 2011, an increase of 15%. We believe this increase primarily reflects growth in the overall sleep-disordered breathing market and growth generated from our recent product releases. Net international revenue, which includes all markets outside North and Latin America, for the three months ended September 30, 2012, was $145.4 million compared to $145.5 million for the three months ended September 30, 2011. Excluding the negative impact on revenue of movements in international currencies, international revenue grew by 9% compared to the three months ended September 30, 2011. We believe this increase in revenue outside North and Latin America primarily reflects growth in the overall sleep-disordered breathing market and growth generated from our recent product releases.

Net revenue from the sales of flow generators, including humidifiers, for the three months ended September 30, 2012 totaled $181.5 million, an increase of 6% compared to the three months ended September 30, 2011 of $171.0 million, including an increase of 17% in North and Latin America and a decrease of 2% internationally. Net revenue from the sales of masks and other accessories for the three months ended September 30, 2012 totaled $158.3 million, an increase of 10% compared to the three months ended September 30, 2011 of $143.8 million, including increases of 13% in North and Latin America and 4% internationally. Excluding the negative impact on revenue of unfavorable currency movements, international revenue increased by 7% and 13% for flow generators and masks and other accessories, respectively, for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. We believe the increases primarily reflect growth in the overall sleep-disordered breathing market and contributions from new products.

The following table summarizes the percentage movements in our net revenue for the three months ended September 30, 2012 compared to the three months ended September 30, 2011:

                                      North and           International         Total         International          Total
                                    Latin America                                               (Constant          (Constant
                                                                                               Currency) *         Currency)
Flow generators                                 17 %                  -2 %           6 %                   7 %             11 %
Masks and other accessories                     13 %                   4 %          10 %                  13 %             13 %
Total                                           15 %                   0 %           8 %                   9 %             12 %

* Constant currency numbers exclude the impact of movements in international currencies.

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Table of Contents
PART I - FINANCIAL INFORMATION Item 2

RESMED INC. ANDSUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

Gross Profit

Gross profit increased for the three months ended September 30, 2012 to $208.6 million from $185.1 million for the three months ended September 30, 2011, an increase of $23.6 million or 13%. Gross profit as a percentage of net revenue for the three months ended September 30, 2012 increased to 61.4% from 58.8% for the three months ended September 30, 2011. The improvement in gross margins for the three months ended September 30, 2012 is primarily due to manufacturing and logistics improvements and favorable change in product mix, partially offset by declines in our average selling prices.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased for the three months ended September 30, 2012 to $98.3 million from $94.2 million for the three months ended September 30, 2011, an increase of $4.1 million or 4%. Selling, general and administrative expenses, as a percentage of net revenue, were 28.9% for the three months ended September 30, 2012 compared to 29.9% for the three months ended September 30, 2011.

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 and other expenses related to the increase in our sales. As a percentage of net revenue, we expect our future selling, general and administrative expense to be in the range of 28% to 29%. The increase in selling, general and administrative expenses was favorably impacted by the movement of international currencies against the U.S. dollar which decreased our expenses by approximately $8.2 million for the three months ended September 30, 2012, as reported in U.S. dollars.

Research and Development Expenses

Research and development expenses increased for the three months ended September 30, 2012 to $27.2 million from $26.2 million for the three months ended September 30, 2011, an increase of $1.0 million or 4%. Research and development expenses, as a percentage of net revenue, were 8.0% for the three months ended September 30, 2012, compared to 8.3% for the three months ended September 30, 2011.

The increase in research and development expenses was primarily due to an increase in the number of research and development personnel, consulting and contractor expenses and an increase in materials and tooling costs incurred to facilitate development of new products. The increase in research and development expenses was favorably impacted by the movement of the international currencies against the U.S. dollar, which decreased our expenses by approximately $0.5 million for the three months ended September 30, 2012, as reported in U.S. dollars. As a percentage of net revenue, we expect our future research and development expenses to be approximately 8%.

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Table of Contents
PART I - FINANCIAL INFORMATION Item 2

RESMED INC. ANDSUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets for the three months ended September 30, 2012 totaled $2.6 million, as compared to $3.8 million for the three months ended September 30, 2011. The decrease in amortization expense is mainly attributable to previously acquired intangibles reaching their projected end of useful life and therefore being fully written down.

Other Income, Net

Other income, net for the three months ended September 30, 2012 was $10.4 million, compared to $5.6 million for the three months ended September 30, 2011. The increase in other income, net, during the three months ended September 30, 2012, was primarily due to gains on foreign currency and hedging transactions compared to foreign currency losses incurred for the three months ended September 30, 2011. The improvement in other income, net was also due to higher interest income due primarily to an increase in cash balances held.

Income Taxes

Our effective income tax rate of approximately 21.6% for the three months ended September 30, 2012 was lower than our effective income tax rate of approximately 24.0% for the three months ended September 30, 2011. The lower effective income tax rate was primarily due to a change in the geographic mix of our taxable income, including the lower taxes associated with our Singapore manufacturing operation.

We continue to benefit from the lower 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 and share repurchases, our net income for the three months ended September 30, 2012 was $71.3 million or $0.49 per diluted share compared to net income of $50.5 million or $0.33 per diluted share for the three months ended September 30, 2011, an increase of 41% and 48%, respectively, over the three months ended September 30, 2011.

Liquidity and Capital Resources

As of September 30, 2012 and June 30, 2012, we had cash and cash equivalents of $890.6 million and $809.5 million, respectively. Working capital was $1.2 billion and $1.1 billion at September 30, 2012 and June 30, 2012, respectively.

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Table of Contents
PART I - FINANCIAL INFORMATION Item 2

RESMED INC. ANDSUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources, Continued

As of September 30, 2012 and June 30, 2012, our cash and cash equivalent balances held within the United States amounted to $36.8 million and $61.7 million, respectively. Our remaining cash and cash equivalent balances at September 30, 2012 and June 30, 2012, of $853.8 million and $747.8 million, respectively, were held by our non-U.S. subsidiaries, indefinitely invested outside the United States. Our cash and cash equivalent balances are held at highly rated financial institutions. Should we repatriate our cash and cash equivalent balances held outside the U.S., we would have to adjust the income tax provision in the period any such repatriation were to occur.

Inventories at September 30, 2012 were $193.2 million, an increase of $5.2 million or 3% over the September 30, 2011 balance of $188.0 million.

Accounts receivable at September 30, 2012 were $266.5 million, an increase of $15.4 million or 6% over the September 30, 2011 accounts receivable balance of $251.1 million. Accounts receivable days outstanding of 71 days at September 30, 2012 was unchanged compared to September 30, 2011. Our allowance for doubtful accounts as a percentage of total accounts receivable at September 30, 2012 was 3.0% compared to 2.5% at June 30, 2012. We have not experienced any significant decline in the credit quality of our customers and it remains broadly consistent with our past experience.

During the three months ended September 30, 2012, we generated cash of $78.3 million from operations. This was lower than the cash generated from operations for the three months ended September 30, 2011 of $89.5 million and was primarily the result of the timing of tax installment payments in the current fiscal quarter and the increase in our inventory holdings to support our revenue growth. Movements in foreign currency exchange rates during the quarter ended September 30, 2012 had the effect of increasing our cash and cash equivalents by $10.1 million, as reported in U.S. dollars. During the fiscal quarters ended September 30, 2012 and 2011, we repurchased 0.2 million and 4.4 million shares at a cost of $8.1 million and $124.7 million, respectively. During the fiscal quarter ended September 30, 2012, we also paid a dividend of $22.8 million.

Capital expenditures for the three months ended September 30, 2012 and 2011 amounted to $13.8 million and $12.9 million, respectively. The capital expenditures for the quarter ended September 30, 2012 primarily reflected investment in computer hardware and software, rental and loan equipment and purchase of production tooling equipment and machinery. At September 30, 2012, our balance sheet reflects net property, plant and equipment of $438.4 million compared to $434.4 million at June 30, 2012.

At September 30, 2012, no capital lease obligations exist. Details of contractual obligations at September 30, 2012 are as follows:

                                                                          Payments Due by Period
In $000's                          Total         2013          2014         2015        2016        2017        Thereafter
Long Term Debt                   $ 265,838     $      53     $ 265,000     $     0     $     0     $     0     $        785
Interest on Long Term Debt           8,888         5,338         3,305          38          38          38              131
Operating Leases                    40,925        15,089        12,100       7,959       3,821       1,803              153
Purchase Obligations                86,102        85,846           256           0           0           0                0
Total                            $ 401,753     $ 106,326     $ 280,661     $ 7,997     $ 3,859     $ 1,841     $      1,069

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PART I - FINANCIAL INFORMATION Item 2

RESMED INC. ANDSUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources, Continued



Details of other commercial commitments as at September 30, 2012 are as follows:



                                                 Amount of Commitment Expiration Per Period
                Total Amounts
 In $000's        Committed          2013         2014       2015      2016       2017        Thereafter
 Guarantees*   $        13,335     $   2,401     $ 1,225     $ 521     $   0     $ 2,033     $      7,155
 Other                     726             0         311       415         0           0                0
 Total         $        14,061     $   2,401     $ 1,536     $ 936     $   0     $ 2,033     $      7,155

* The above guarantees mainly relate to requirements under contractual obligations with insurance companies transacting with our German subsidiaries and guarantees provided under our facility leasing obligations.

We use independent leasing companies to provide financing to certain customers for the purchase of our products. In some cases, we are contingently liable in the event of a customer default, to the leasing companies, within certain limits, for unpaid installment receivables transferred to the leasing companies. The gross amount of receivables sold under these arrangements, for the three months ended September 30, 2012 and 2011, amounted to $0.5 million and $3.2 million, respectively. The maximum potential amount of contingent liability under these arrangements at September 30, 2012 and June 30, 2012 was $1.2 million, and $2.1 million, respectively. The recourse liability recognized by us at September 30, 2012 and June 30, 2012, in relation to these arrangements was $0.2 million and $0.6 million, respectively.

Credit Facility

During the year ended June 30, 2011, we entered into a credit agreement with lenders, including Union Bank, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, HSBC Bank USA, National Association, as Syndication Agent and Union Bank, N.A., HSBC Bank USA, National Association, Commonwealth Bank of Australia and Wells Fargo Bank, N.A. The credit agreement provides a $300 million three-year revolving credit facility, with an uncommitted option to increase the credit facility by an additional $100 million. The credit facility also includes a $10 million sublimit for letters of credit. The credit facility terminates on February 10, 2014, at which time all unpaid principal and interest under the loans must be repaid. The outstanding principal amount due under the credit facility will bear interest at a rate equal to, at our option, either
(i) LIBOR plus 1.5% to 2.0% (depending on the applicable leverage ratio) or
(ii) a base rate, as defined in the credit agreement, plus 0.5% to 1.0% (depending on the applicable leverage ratio). Commitment fees of 0.25% to 0.375% (depending on the applicable leverage ratio) apply on the unused portion of the credit facility. When we executed the credit agreement, we used a portion of the credit facility's initial funding proceeds to repay the outstanding balance under our previously existing revolving credit facility with Union Bank, N.A., which was then terminated.

Our obligations under the credit agreement are secured by (a) the corporate stock we hold in our subsidiaries ResMed Corp. and ResMed Motor Technologies Inc. ("ResMed Motor"), and (b) up to 65% of the ownership interests we hold in our subsidiary ResMed EAP Holdings LLC ("ResMed EAP"). Our obligations under the credit agreement are also guaranteed by our subsidiaries ResMed Corp and ResMed Motor. The credit agreement contains customary covenants, including certain financial covenants and an obligation that we maintain certain financial ratios, including a maximum ratio of Funded Debt to EBITDA (each as defined in the credit agreement), an interest coverage ratio and a maximum amount of annual capital expenditures. The entire principal amount of the credit facility and any accrued but unpaid interest may be declared immediately due and payable if an event of default occurs. Events of default include failure to make payments when due, a default in the performance of any covenants in the credit agreement or related documents or certain changes of control of us or our subsidiaries ResMed Corp., ResMed Motor, ResMed Limited, ResMed Holdings Ltd/LLC or ResMed EAP.

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Table of Contents
PART I - FINANCIAL INFORMATION Item 2

RESMED INC. ANDSUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources, Continued

On January 25, 2012, we entered into a first amendment to the credit agreement. The amendment increases, from $300 million to $400 million, the maximum principal amount that can be borrowed on a revolving basis under the credit agreement, subject to customary conditions

At September 30, 2012, we were in compliance with our debt covenants and there was $265.0 million outstanding under the credit agreement.

We expect to satisfy all of our short-term liquidity requirements through a combination of cash on hand and cash generated from operations.

Acquisition of Business

On July 20, 2012 we acquired 100% of the outstanding shares of Umbian Inc., an innovative data services technology provider, based in Nova Scotia, Canada. Umbian offers a comprehensive patient compliance management solution, which monitors continuous positive airway pressure devices and provides a suite of interactive follow-up services for healthcare providers. The initial purchase price was $5.6 million with an additional potential earn-out payment of up to $35.4 million based on the achievement of certain performance milestones following the acquisition, of which we have recognized a liability of $13.1 million. The acquisition has been accounted for as a business combination using purchase accounting and is included in our consolidated financial statements . . .

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