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ResMed Posts In-line Earnings but Misses on Revs

Zacks Equity Research

ResMed Inc.(RMD) reported third-quarter fiscal 2014 (ended Mar 31, 2014) earnings per share of 63 cents in line with the Zacks Consensus Estimate. Results, however, surpassed the prior-year quarter’s earnings of 58 cents per share, registering an increase of 8.6% year over year.

Revenues in Details

Revenues grew 3.7% year over year to $397.8 million but were below the Zacks Consensus Estimate of $399 million.

On a geographic basis, revenues in the Americas grossed $216.1 million, flat with the year-ago quarter number, while sales outside the Americas increased 8% year over year (6% on a constant currency basis) to $181.6 million. Global revenues were driven by constant currency growth in the mask category of 14%.

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Europe experienced another quarter of steep regional growth, along with robust sales recorded in major markets like the U.K., France and Germany and some emerging markets.

The flow generator category recorded nominal growth of 2% across Europe, Asia-Pacific and Rest of world in the reported quarter. ResMed is expecting growth in this category in the upcoming sequential quarter based on the launch of its respiratory care platform in these aforementioned regions.

Operational Update

ResMed’s gross margin was 63.3% in the reported quarter, reflecting an expansion of 90 basis points (bps) year over year, on account of favorable currency movements, a healthy product mix and strong manufacturing efficiencies. However, this rise was partially offset by a decline in average selling prices (ASPs).

Research and development expenses were $29.5 million or 7.4% of revenues, compared with $31.2 million or 8.1% of revenues in the prior-year quarter.

Selling, general and administration expenses (which accounted for 28.9% of revenues compared to 28.6% in the year-ago quarter) amounted to $115.1 million, up 4.9% year over year.

Accordingly, income from operations came in at $107.2 million, reflecting an upside of 8.6% from the prior-year quarter. Thus, the company recorded operating margin of 26.9%, up 120 bps from third- quarter fiscal 2013.

Financial Updates

ResMed exited the third quarter of fiscal 2014 with cash and cash equivalents of $938.6 million compared with $876 million at the end of Jun 30, 2013.

The company generated $101.1 million in cash flow from operations in 1Q14, reflecting strong underlying earnings and effective working capital management. Moreover, capital expenditure was $17.8 million during 1Q14, resulting in free cash flow amounting $83.3 million. ResMed also repurchased 1.6 million shares for $72.5 million in the reported quarter. At the end of the quarter, the company still had 19.1 million shares remaining under its authorized buyback program.

For fiscal 2014, ResMed expects its gross margin to be in the range of 61% ­– 63% assuming current exchange rates.

Our Take

ResMed’s third-quarter fiscal 2014 results were overall unimpressive with the company posting in-line earnings and a revenue miss. It is currently facing challenges like reimbursement pressure and competitive pricing activities to deal with competitors in the U.S. market, particularly in the flow generator space. Additionally, a slowdown in the market demand along with foreign currency headwinds can also act as a deterrent to growth, going forward. However, with growing numbers in terms of new patients and resupply to installed base of patients, we believe the U.S. market environment is gradually improving.

Moreover, new product launches, a strong product pipeline and robust growth in the European and emerging markets as well are expected to likely boost investor confidence in the near term.

ResMed currently carries a Zacks Rank #4 (Sell).Some better-ranked stocks in the broader healthcare sector that warrant a look are Enzymotec Ltd. (ENZY), Myriad Genetics Inc. (MYGN) and Amgen Inc. (AMGN). Enzymotec and Myriad Genetics sport a Zacks Rank #1 (Strong Buy) while Amgen carries a Zacks Rank #2 (Buy).

Read the Full Research Report on RMD
Read the Full Research Report on AMGN
Read the Full Research Report on MYGN
Read the Full Research Report on ENZY


Zacks Investment Research