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RMD > SEC Filings for RMD > Form 10-Q on 30-Oct-2013All Recent SEC Filings

Show all filings for RESMED INC

Form 10-Q for RESMED INC


30-Oct-2013

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, 2013 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.


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, 2013. Management's discussion and analysis of financial condition and results of operations is intended to help the reader understand the results of operations and financial condition of ResMed Inc. Management's discussion and analysis is provided as a supplement to, and should be read in conjunction with selected financial data and condensed 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 three months ended September 30, 2013, 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 SDB/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 transport industry.

We are committed to ongoing investment in research and development and product enhancements. During the three months ended September 30, 2013, we invested $27.4 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 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 SDB 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 SDB, obstructive sleep apnea and co-morbidities such as cardiac disease, diabetes, hypertension and obesity. We also believe these efforts should help 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, 2013, our net revenue increased by 5% when compared to the three months ended September 30, 2012. Gross margin was 63.7% for the three months ended September 30, 2013 compared to 61.4% for the three months ended September 30, 2012. Diluted earnings per share for the three months ended September 30, 2013 increased to $0.56 per share, up from $0.49 per share in the three months ended September 30, 2012.

At September 30, 2013, our cash and cash equivalents totaled $976.6 million, our total assets were $2.3 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.


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, 2013 to $357.7 million compared to $339.7 million for the three months ended September 30, 2012, an increase of $17.9 million or 5%. The increase in net revenue is primarily attributable to an increase in unit sales of our flow generators, masks and accessories. Movements in international currencies against the U.S. dollar favorably impacted revenues by approximately $3.6 million for the three months ended September 30, 2013.

Net revenue in North and Latin America increased for the three months ended September 30, 2013 to $201.5 million from $194.4 million for the three months ended September 30, 2012, an increase of 4%. We believe this increase primarily reflects growth in the overall SDB market. Net revenue in markets outside North and Latin America, for the three months ended September 30, 2013, increased to $156.2 million from $145.4 million for the three months ended September 30, 2012, an increase of 7%. We believe this increase in revenue outside North and Latin America primarily reflects growth in the overall SDB market.

Net revenue from the sales of flow generators, including humidifiers, for the three months ended September 30, 2013 totaled $191.8 million, an increase of 6% compared to the three months ended September 30, 2012 of $181.5 million, including increases of 5% in North and Latin America and 7% elsewhere. Net revenue from the sales of masks and other accessories for the three months ended September 30, 2013 totaled $165.9 million, an increase of 5% compared to the three months ended September 30, 2012 of $158.3 million, including increases of 3% in North and Latin America and 9% elsewhere. We believe these increases primarily reflect growth in the overall SDB market.

The following table summarizes the percentage movements in our net revenue for the three months ended September 30, 2013 compared to the three months ended September 30, 2012:

                                                                                                   International             Total
                                        North and                                                    (Constant             (Constant
                                      Latin America          International          Total           Currency) *           Currency) *
Flow generators                                    5 %                    7 %            6 %                    4 %                  4 %
Masks and other accessories                        3 %                    9 %            5 %                    7 %                  4 %

Total                                              4 %                    7 %            5 %                    5 %                  4 %

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

Gross Profit

Gross profit increased for the three months ended September 30, 2013 to $228.0 million from $208.6 million for the three months ended September 30, 2012, an increase of $19.3 million or 9%. Gross profit as a percentage of net revenue for the three months ended September 30, 2013 increased to 63.7% from 61.4% for the three months ended September 30, 2012.

The improvement in gross margins for the three months ended September 30, 2013 was primarily due to favorable change in product mix as sales of our higher margin products represented a higher proportion of our net revenue, cost savings attributable to the depreciation of the Australian dollar against the U.S. dollar and manufacturing and supply chain improvements, partially offset by declines in our average selling prices.


Table of Contents
PART I - FINANCIAL INFORMATION Item 2

RESMED INC. ANDSUBSIDIARIES

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

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased for the three months ended September 30, 2013 to $101.3 million from $98.3 million for the three months ended September 30, 2012, an increase of $3.0 million or 3%. Selling, general and administrative expenses, as a percentage of net revenue, were 28.3% for the three months ended September 30, 2013 compared to 28.9% for the three months ended September 30, 2012.

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. The selling, general and administrative expenses were favorably impacted by the movement of international currencies against the U.S. dollar, which decreased our expenses by approximately $0.8 million for the three months ended September 30, 2013, as reported in U.S. dollars. As a percentage of net revenue, we expect our future selling, general and administrative expenses to be approximately 28%.

Research and Development Expenses

Research and development expenses increased slightly for the three months ended September 30, 2013 to $27.4 million from $27.2 million for the three months ended September 30, 2012, an increase of $0.1 million. Research and development expenses, as a percentage of net revenue, were 7.7% for the three months ended September 30, 2013 compared to 8.0% for the three months ended September 30, 2012.

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 research and development expenses were favorably impacted by the movement of international currencies against the U.S. dollar, which decreased our expenses by approximately $2.3 million for the three months ended September 30, 2013, as reported in U.S. dollars. As a percentage of net revenue, we expect our future research and development expenses to be approximately 8%.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets for the three months ended September 30, 2013 totaled $2.4 million, compared to $2.6 million for the three months ended September 30, 2012. The reduction in amortization expense is mainly attributable to certain acquired intangibles reaching the end of their useful lives and therefore being fully amortized.

Total Other Income, Net

Total other income, net for the three months ended September 30, 2013 was $5.2 million compared to $10.4 million for the three months ended September 30, 2012. The decrease in total other income, net, was due primarily to losses on foreign currency transactions, and lower net interest income due primarily to lower interest rates on cash balances held.

Income Taxes

Our effective income tax rate of approximately 20.7% for the three months ended September 30, 2013 was lower than our effective income tax rate of approximately 21.6% for the three months ended September 30, 2012. 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 and Malaysia manufacturing operations. Our Singapore and Malaysia operations operate under certain tax holidays and tax incentive programs which will expire in whole or in part at various dates through June 30, 2020. As of


Table of Contents
PART I - FINANCIAL INFORMATION Item 2

RESMED INC. ANDSUBSIDIARIES

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

Income Taxes, Continued

the quarter ended September 30, 2013, we have not provided for U.S. income taxes for the undistributed earnings of our foreign subsidiaries. These earnings are intended to be permanently reinvested outside the United States.

Net Income

As a result of the factors above and share repurchases, our net income and earnings per share for the three months ended September 30, 2013 was $80.9 million or $0.56 per diluted share compared to net income of $71.3 million or $0.49 per diluted share for the three months ended September 30, 2012, an increase of 14% over the three months ended September 30, 2012.

Liquidity and Capital Resources

As of September 30, 2013 and June 30, 2013, we had cash and cash equivalents of $976.6 million and $876.0 million, respectively. Working capital was $946.9 million and $874.8 million at September 30, 2013 and June 30, 2013, respectively.

As of September 30, 2013 and June 30, 2013, our cash and cash equivalent balances held within the United States amounted to $28.1 million and $38.2 million, respectively. Our remaining cash and cash equivalent balances at September 30, 2013 and June 30, 2013, of $948.5 million and $837.8 million, respectively, were held by our non-U.S. subsidiaries and would be subject to tax if repatriated. If these funds were needed for our operations in the United States, we would be required to accrue and pay United States taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the United States and our current plans do not demonstrate a need to repatriate them to fund our United States operations. Our cash and cash equivalent balances are held at highly rated financial institutions.

Inventories at September 30, 2013 were $175.4 million, a decrease of $17.8 million or 9% over the September 30, 2012 balance of $193.2 million. The decrease in inventories was mainly due to improved inventory management.

Accounts receivable at September 30, 2013 were $282.4 million, an increase of $15.9 million or 6% over the September 30, 2012 accounts receivable balance of $266.5 million. Accounts receivable days outstanding of 69 days at September 30, 2013 was lower than the 71 days at September 30, 2012. Our allowance for doubtful accounts as a percentage of total accounts receivable at September 30, 2013 was 4.2% compared to 3.0% at June 30, 2013. The increase in our allowance for doubtful debts as a percentage of total accounts receivable was predominantly attributable to an additional provision for one customer account during the September 2013 quarter.

During the three months ended September 30, 2013, we generated cash of $90.4 million from operations compared to $78.3 million for the three months ended September 30, 2012. Movements in foreign currency exchange rates during the three months ended September 30, 2013 had the effect of increasing our cash and cash equivalents by $21.7 million, as reported in U.S. dollars. During the three months ended September 30, 2013 and 2012, we repurchased 0.4 million and 0.2 million shares at a cost of $21.1 million and $8.1 million, respectively. During the three months ended September 30, 2013 and 2012, we also paid dividends totaling $35.5 million and $22.8 million, respectively.


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

Capital expenditures for the three months ended September 30, 2013 and 2012 amounted to $16.8 million and $13.8 million, respectively. The capital expenditures for the three months ended September 30, 2013 primarily reflected investment in computer hardware and software, rental and loan equipment and purchase of production tooling equipment and machinery. At September 30, 2013, our balance sheet reflects net property, plant and equipment of $416.7 million compared to $411.4 million at June 30, 2013.

At September 30, 2013, no capital lease obligations exist. Details of contractual obligations at September 30, 2013 are as follows:

                                                                          Payments Due by Period
In $000's                           Total         2015          2016        2017        2018        2019        Thereafter
Long Term Debt                    $ 360,808     $ 360,018     $     -      $    -      $    -      $    -      $        790
Interest on Long Term Debt            2,936         2,661           38          38          38          38              123
Operating Leases                     38,880        15,378       11,150       5,762       2,791       1,138            2,661
Purchase Obligations                 91,382        91,382           -           -           -           -                -

Total                             $ 494,006     $ 469,439     $ 11,188     $ 5,800     $ 2,829     $ 1,176     $      3,574

Details of other commercial commitments as at September 30, 2013 are as follows:

                                             Amount of Commitment Expiration Per Period
 In $000's       Total         2015          2016        2017        2018        2019        Thereafter
 Guarantees*   $  15,595     $   3,094     $    563     $    32     $ 1,799     $ 2,488     $      7,619
 Other             1,399            -           280         373         373         373               -

 Total         $  16,994     $   3,094     $    843     $   405     $ 2,172     $ 2,861     $      7,619

* 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.

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). At September 30, 2013, the interest rate that was being charged on the outstanding principal amount was 1.7%. 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


Table of Contents
PART I - FINANCIAL INFORMATION Item 2

RESMED INC. ANDSUBSIDIARIES

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

Credit Facility, Continued

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.

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, 2013, we were in compliance with our debt covenants and there was $360.0 million outstanding under the credit agreement. As the credit facility terminates on February 10, 2014, we are currently finalizing a new financing facility. We expect that the new facility will have similar or more favorable terms to the existing facility and that it will be in place before our existing facility expires.

We expect to satisfy all of our liquidity requirements through a combination of cash on hand, cash generated from operations and debt facilities.

Common Stock

On August 24, 2011, our board of directors approved a new share repurchase program, authorizing us to acquire up to an aggregate of 20.0 million shares of ResMed Inc. common stock. The program allows us to repurchase shares of our common stock from time to time for cash in the open market, or in negotiated or block transactions, as market and business conditions warrant. This program canceled and replaced our previous share repurchase program authorized on May 27, 2009 pursuant to which we had repurchased 10.0 million shares. These were in addition to the 6.6 million shares repurchased under an earlier program authorized on June 6, 2002. The new program authorizes us to purchase in addition to the shares we repurchased under our previous programs. There is no expiration date for this program. All share repurchases since August 24, 2011 have been executed in accordance with this program.

During the three months ended September 30, 2013, we repurchased 0.4 million shares at a cost of $21.1 million. At September 30, 2013, we have repurchased a total of 32.5 million shares at a cost of $1.1 billion. Shares that are repurchased are classified as treasury stock pending future use and reduce the number of shares outstanding used in calculating earnings per share. At September 30, 2013, 4.1 million additional shares can be repurchased under the approved share repurchase program.


Table of Contents
PART I - FINANCIAL INFORMATION Item 2

RESMED INC. ANDSUBSIDIARIES

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

Critical Accounting Principles and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis we evaluate our estimates, including those related to allowance for doubtful accounts, inventory reserves, warranty obligations, goodwill, potentially impaired assets, intangible assets, income taxes and contingencies.

We state these accounting policies in the notes to the financial statements and at relevant sections in this discussion and analysis. The estimates are based on . . .

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