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ResMed Inc. (RMD - Analyst Report) posted adjusted earnings per share (EPS) of 62 cents in the fourth quarter of fiscal 2013, edging past the Zacks Consensus Estimate by a penny. The results were also better than the year-ago EPS of 53 cents.
 
On a reported basis, fourth-quarter net income was $73 million (or 50 cents per share), lower than $76.8 million (or 53 cents per share) in the prior-year quarter. The decline was attributed to certain education, research and settlement expenses.

Fiscal 2013 adjusted EPS was $2.22, better than $1.71 in fiscal 2012. However, it missed the Zacks Consensus Estimate of $2.25.
 
Revenues improved 11% year over year (up 11% at constant exchange rates or CER) to $414.6 million, a record high for the company. The top-line beat the Zacks Consensus Estimate of $410 million. Growth was led by market expansion and improved worldwide performance.

Revenues in the fiscal year improved 11% (up 12% at CER) to $1,514.5 million, another milestone for ResMed. It also surpassed the Zacks Consensus Estimate of $1,511 million.

Quarter in Detail

Riding on the back of increasing awareness regarding sleep-disordered breathing and a vastly under-penetrated and growing sleep-disorder breathing market, revenues in the Americas shot up 11% to $230.3 million whereas revenues outside the Americas increased 12% (up 11% at CER) at $184.3 million. Growth in the overseas market was on account of strong contributions from Germany, U.K., France and the Nordic region in Europe. The solid performance in Asia-Pacific region was led by stellar contributions from the high focus Japanese market along with strong sales in emerging nations like India and China.
 
At CER, worldwide flow generator sales increased 13% year over year, while masks and other increased 8%. The company reported domestic flow generator sales of $104.7 million in the quarter, up 16% year over year due to robust sales of Automatic Positive Airway Pressure (APAP) systems and Bi-Level device. Masks and other sales were $125.6 million in the Americas, up 7% year over year, on the back of higher sales of the mask product range and persistent growth in accessories.
 
Outside the Americas, flow generator sales were $124.8 million, up 13% (up 11% at CER) year over year. Masks and other sales outside the Americas increased 11% (up 11% at CER) to $59.5 million.
 
Gross profit in the reported quarter increased 14.7% to $259.8 million leading to a considerable 180 basis points (bps) expansion in gross margin to 62.7%. Although ResMed faced lower average selling price (ASP) in the quarter, gross margin improved on account of favorable product mix towards higher-margin flow generators and robust accessory sales coupled with higher manufacturing and operating efficiency.

Selling, general and administrative, and research and development expenses increased 9% (up 9% at CER) to $115.1 million and spurted 12% (up 14% at CER) to $31.4 million, respectively. Nevertheless, operating margin expanded about 240 bps to 27.4% in the quarter.
 
Financial Position

ResMed exited the fiscal with cash and cash equivalents of $876 million, up 8.2% from fiscal 2012. Cash flow from operations surged 27.7% to $123.9 million in the quarter, another record for ResMed. This depicts solid capital management fundamentals. Capital expenditures were $16 million in the quarter.
 
ResMed repurchased 1.5 million shares for $72.7 million in the quarter with 4.5 million shares left under the current repurchase authorization. In fiscal 2013, ResMed purchased about 4.3 million shares for $188 million. Additionally, the Board declared a quarterly dividend of 25 cents per share, reflecting a 47% hike from the earlier dividend.
 
Our Take
 

We are encouraged by ResMed’s solid fourth quarter results, that beat the Zacks Consensus Estimates on both fronts. The company beat Zacks Consensus Estimate for EPS for the seventh straight quarter. Apart from increased sales and considerable margin expansion, a decline in tax rate supported the huge EPS improvement.

Despite the contagion of economic problems in Europe, the company’s solid underlying growth in the region is encouraging. Moreover, penetration into the untapped Asia-Pacific market continues to drive growth. Footprint expansion in emerging markets presents another high growth avenue. With a healthy portfolio of well-regarded solutions to cater to the growing sleep-disorder market, there is no dearth of positive catalysts at ResMed.

However, we are wary about lower ASP that might hurt margin in fiscal 2014. The competitive bidding process might further worsen the pricing pressure for ResMed. Of late, the company has also witnessed heightened competitive pressure

The stock currently carries a Zacks Rank #3 (Hold). While we remain on the sidelines for ResMed, other stocks such as LeMaitre Vascular, Inc. (LMAT - Snapshot Report), Hanger, Inc. (HGR - Analyst Report) and Alere Inc. (ALR - Snapshot Report) appear impressive. While Alere carries a Zacks Rank #2 (Buy), the rest are Zacks Rank #1 (Strong Buy) stocks.
 

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