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RMD > SEC Filings for RMD > Form 10-Q on 29-Jan-2014All Recent SEC Filings

Show all filings for RESMED INC

Form 10-Q for RESMED INC


29-Jan-2014

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 and six months ended December 31, 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 and six months ended December 31, 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 and six months ended December 31, 2013, we invested $29.5 million and $56.9 million, respectively, 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 December 31, 2013, our net revenue increased by 2% when compared to the three months ended December 31, 2012. Gross margin was 64.7% for the three months ended December 31, 2013 compared to 61.8% for the three months ended December 31, 2012. Diluted earnings per share for the three months ended December 31, 2013 increased to $0.60 per share, up from $0.53 per share in the three months ended December 31, 2012.

At December 31, 2013, our cash and cash equivalents totaled $972.7 million, our total assets were $2.3 billion and our stockholders' equity was $1.6 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 December 31, 2013 to $384.3 million compared to $376.5 million for the three months ended December 31, 2012, an increase of $7.8 million or 2%. The increase in net revenue is primarily attributable to an increase in unit sales of our flow generators, masks and accessories, partially offset by a decline in average selling prices. Movements in international currencies against the U.S. dollar favorably impacted revenues by approximately $4.1 million for the three months ended December 31, 2013. Excluding the impact of foreign currency movements, net revenue for the three months ended December 31, 2013 increased by 1% compared to the three months ended December 31, 2012.

Net revenue in North and Latin America decreased for the three months ended December 31, 2013 to $206.6 million from $211.8 million for the three months ended December 31, 2012, a decrease of 2%. The decrease in net revenue is primarily attributable to increased competitor activity and market restructuring due to competitive bidding. Net revenue in markets outside North and Latin America, for the three months ended December 31, 2013, increased to $177.7 million from $164.7 million for the three months ended December 31, 2012, an increase of 8%. Movements in international currencies against the U.S. dollar favorably impacted international revenues by approximately $4.1 million during the three months ended December 31, 2012. Excluding the impact of movements in international currencies, international sales grew by 5% compared to the three months ended December 31, 2012.

Net revenue from the sales of flow generators, including humidifiers, for the three months ended December 31, 2013 totaled $207.0 million, an increase of 2% compared to the three months ended December 31, 2012 of $202.6 million, including a decrease of 5% in North and Latin America and an increase of 9% elsewhere. Net revenue from the sales of masks and other accessories for the three months ended December 31, 2013 totaled $177.3 million, an increase of 2% compared to the three months ended December 31, 2012 of $173.9 million, including 0% growth in North and Latin America and 6% elsewhere.

The following table summarizes the percentage movements in our net revenue for the three months ended December 31, 2013 compared to the three months ended December 31, 2012:

                                       North and            International          Total          International            Total
                                     Latin America                                                  (Constant            (Constant
                                                                                                   Currency) *          Currency)*
Flow generators                                  -5 %                    9 %            2 %                    6 %                1 %
Masks and other accessories                       0 %                    6 %            2 %                    4 %                1 %
Total                                            -2 %                    8 %            2 %                    5 %                1 %

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

Net revenue for the six months ended December 31, 2013, was $742.0 million as compared to $716.3 million for the six months ended December 31, 2012, an increase of 4%. For the six months ended December 31, 2013, revenue from sales of flow generators increased by 4% compared to the six months ended December 31, 2012, comprised of a decrease of 1% in North and Latin America and an 8% increase elsewhere. For the six months ended December 31, 2013, revenue from sales of mask systems, motors and other accessories increased by 3% compared to the six months ended December 31, 2012, comprised of a 1% increase in North and Latin America and an 8% increase elsewhere. Movement in international currencies against the U.S. dollar favorably impacted net revenue by approximately $7.7 million during the six months ended December 31, 2013. Excluding the impact of favorable currency movements, total revenue for the six months ended December 31, 2013 increased by 3% compared to the six months ended December 31, 2012.


Table of Contents
PART I - FINANCIAL INFORMATION Item 2

RESMED INC. ANDSUBSIDIARIES

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

The following table summarizes the percentage movements in our net revenue for the six months ended December 31, 2013 compared to the six months ended December 31, 2012:

                                        North and            International          Total          International             Total
                                      Latin America                                                  (Constant             (Constant
                                                                                                    Currency) *           Currency) *
Flow generators                                   -1 %                    8 %            4 %                    5 %                  2 %
Masks and other accessories                        1 %                    8 %            3 %                    6 %                  3 %
Total                                              0 %                    8 %            4 %                    5 %                  3 %

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

Gross Profit

Gross profit increased for the three months ended December 31, 2013 to $248.8 million from $232.7 million for the three months ended December 31, 2012, an increase of $16.0 million or 7%. Gross profit as a percentage of net revenue for the three months ended December 31, 2013 increased to 64.7% from 61.8% for the three months ended December 31, 2012.

The improvement in gross margins for the three months ended December 31, 2013 was primarily due to manufacturing and supply chain improvements, favorable product mix, positive foreign currency impact due to the cost savings attributable to the depreciation of the Australian dollar against the U.S. dollar and Euro and a favorable geographic mix of sales, 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 December 31, 2013 to $111.7 million from $107.8 million for the three months ended December 31, 2012, an increase of $3.9 million or 4%. Selling, general and administrative expenses, as a percentage of net revenue, were 29.1% for the three months ended December 31, 2013 compared to 28.6% for the three months ended December 31, 2012.

Selling, general and administrative expenses increased for the six months ended December 31, 2013 to $213.1 million from $206.1 million for the six months ended December 31, 2012, an increase of $7.0 million or 3%. Selling, general and administrative expenses, as a percentage of net revenue, were 28.7% for the six months ended December 31, 2013 compared to 28.8% for the six months ended December 31, 2012.

The increase in selling, general and administrative expenses was primarily due to an increase in the number of sales and administrative personnel and other related expenses to support 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 $1.1 million for the three months ended December 31, 2013, as reported in U.S. dollars. As a percentage of net revenue, we expect our selling, general and administrative expenses for the year ended June 30, 2014, to be approximately 29%.


Table of Contents
PART I - FINANCIAL INFORMATION Item 2

RESMED INC. ANDSUBSIDIARIES

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

Research and Development Expenses

Research and development expenses decreased slightly for the three months ended December 31, 2013 to $29.5 million from $30.3 million for the three months ended December 31, 2012, a decrease of $0.8 million. The research and development expenses were favorably impacted by the depreciation of the Australian dollar against the U.S. dollar, which decreased our expenses by approximately $2.2 million for the three months ended December 31, 2013, as reported in U.S. dollars. In constant currency terms, our research and development expenses increased by 5% compared to the three months ended December 31, 2012. Research and development expenses, as a percentage of net revenue, were 7.7% for the three months ended December 31, 2013 compared to 8.1% for the three months ended December 31, 2012.

Research and development expenses decreased for the six months ended December 31, 2013 to $56.9 million from $57.5 million for the six months ended December 31, 2012, a decrease of $0.6 million or 1%. Research and development expenses, as a percentage of net revenue, were 7.7% for the six months ended December 31, 2013 compared to 8.0% for the six months ended December 31, 2012.

The constant currency 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. As a percentage of net revenue, we expect our research and development expenses for the year ended June 30, 2014, to be approximately 8%.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets for the three and six months ended December 31, 2013 totaled $2.5 million and $4.9 million, respectively, as compared to $2.5 million and $5.1 million for the three and six months ended December 31, 2012.

Total Other Income, Net

Other income, net for the three and six months ended December 31, 2013 was $4.4 million and $9.6 million, respectively, compared to $6.3 million and $16.7 million, respectively, for the three and six months ended December 31, 2012. The decrease in other income, net, during the three and six months ended December 31, 2013, was due primarily to losses on foreign currency transactions, lower net interest income due to lower interest rates on cash balances held, and the depreciation of the Australian dollar against the U.S. dollar.

Income Taxes

Our effective income tax rate of approximately 20.9% for the three months ended December 31, 2013 was consistent with our effective income tax rate of approximately 20.8% for the three months ended December 31, 2012. Our effective income tax rate of approximately 20.8% for the six months ended December 31, 2013 was broadly consistent with our effective tax rate of 21.2% for the six months ended December 31, 2012. Our effective income tax rate is affected by 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 December 31, 2013, we have not provided for U.S. income taxes for the undistributed earnings of our foreign subsidiaries. We intend these earnings to be permanently reinvested outside the United States.


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 Income

As a result of the factors above and share repurchases, our net income for the three months ended December 31, 2013 was $86.6 million or $0.60 per diluted share compared to net income of $77.9 million or $0.53 per diluted share for the three months ended December 31, 2012, an increase of 11% and 13%, respectively, over the three months ended December 31, 2012. Our net income for the six months ended December 31, 2013 was $167.6 million or $1.15 per diluted share compared to net income of $149.2 million or $1.02 per diluted share for the six months ended December 31, 2012, an increase of 12% and 13%, respectively, over the six months ended December 31, 2012.

Liquidity and Capital Resources

As of December 31, 2013 and June 30, 2013, we had cash and cash equivalents of $972.7 million and $876.0 million, respectively. Working capital was $1.3 billion and $874.8 million at December 31, 2013 and June 30, 2013, respectively.

As of December 31, 2013 and June 30, 2013, our cash and cash equivalent balances held within the United States amounted to $22.5 million and $38.2 million, respectively. Our remaining cash and cash equivalent balances at December 31, 2013 and June 30, 2013, of $950.2 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, we intend 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 December 31, 2013 were $178.1 million, a decrease of $16.7 million or 9% over the December 31, 2012 balance of $194.8 million. The decrease in inventories was mainly due to improved inventory management.

Accounts receivable at December 31, 2013 were $301.6 million, an increase of $20.2 million or 7% over the December 31, 2012 accounts receivable balance of $281.4 million. Accounts receivable days outstanding of 70 days at December 31, 2013 was higher than the 68 days at December 31, 2012. Our allowance for doubtful accounts as a percentage of total accounts receivable at December 31, 2013 was 4.0% 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 three months ended September 30, 2013.

During the six months ended December 31, 2013, we generated cash of $174.6 million from operations. This was broadly consistent with the cash generated from operations for the six months ended December 31, 2012 of $171.9 million. Movements in foreign currency exchange rates during the six months ended December 31, 2013 had the effect of reducing our cash and cash equivalents by $16.4 million, as reported in U.S. dollars. During the six months ended December 31, 2013 and 2012, we repurchased 2.0 million and 1.2 million shares at a cost of $95.1 million and $48.1 million, respectively. During the six months ended December 31, 2013 and 2012, we also paid a dividend of $71.1 million and $48.7 million, respectively.

Capital expenditures for the six months ended December 31, 2013 and 2012 amounted to $36.4 million and $27.6 million, respectively. The capital expenditures for the six months ended December 31, 2013 primarily reflected investment in production tooling equipment and machinery, computer hardware and software, and rental and loan equipment. At December 31, 2013, our balance sheet reflects net property, plant and equipment of $414.3 million compared to $411.4 million at June 30, 2013.


Table of Contents
PART I - FINANCIAL INFORMATION Item 2

                          RESMED INC. ANDSUBSIDIARIES

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



At December 31, 2013, no capital lease obligations exist. Details of contractual
obligations at December 31, 2013 are as follows:



                                                                                    Payments Due by Period
In $000's                            Total                 2014            2015         2016        2017         2018         Thereafter
Long Term Debt                   $      435,812       $           18     $      -     $      -     $     -     $ 435,000     $        794
Interest on Long Term Debt               25,542                5,258        5,258        5,258       5,258         4,386              124
Operating Leases                         41,748               16,567       11,362        6,231       2,996         1,279            3,313
Purchase Obligations                     89,881               89,881            -            -           -             -                -
Total                            $      592,983       $      111,724     $ 16,620     $ 11,489     $ 8,254     $ 440,665     $      4,231

Details of other commercial commitments as at December 31, 2013 are as follows:

                                                                          Amount of Commitment Expiration Per Period
In $000's                            Total                 2014            2015         2016        2017         2018         Thereafter
Guarantees*                      $       16,231       $        5,576     $    832     $  2,031     $     -     $       -     $      7,792
Other                                     1,250                  357          357          357         179             -                -
Total                            $       17,481       $        5,933     $  1,189     $  2,388     $   179     $       -     $      7,792

* 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

On October 31, 2013, we entered into a credit agreement, as borrower, with lenders, including Union Bank, N.A., as administrative agent, joint lead arranger, swing line lender and letters of credit issuer, and HSBC Bank USA, National Association, as syndication agent and joint lead arranger. Our obligations under the credit agreement are guaranteed by ResMed Corp. and ResMed Motor Technologies Inc., two of our U.S. subsidiaries.

The credit agreement provides a $700 million senior unsecured five-year revolving credit facility, with an uncommitted option to increase the credit facility by an additional $300 million. The credit facility also includes a $25 million sublimit for letters of credit. The credit facility terminates on October 31, 2018, when 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 LIBOR plus 1.0% to 2.0% (depending on the then-applicable leverage ratio). At December 31, 2013, the interest rate that was being charged on the outstanding principal amount was 1.2%. An applicable commitment fee of 0.15% to 0.25% (depending on the then-applicable leverage ratio) applies on the unused portion of the credit facility.

When we entered into the credit agreement, we used a portion of the proceeds from the initial funding of the credit facility to repay the outstanding balance under our previously existing revolving credit facility with Union Bank, N.A and other lenders. On that repayment, the previously-existing credit agreement, dated as of February 10, 2011, between us and 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), was . . .

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