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ResMed Inc. (RMD - Analyst Report) reported second-quarter fiscal 2014 (ended Dec 31, 2013) adjusted earnings per share of 60 cents, missing the Zacks Consensus Estimate of 63 cents. Results, however, surpassed the prior-year quarter’s earnings of 53 cents per share, registering an increase of 13.2% year over year. The year-over-year improvement in earnings resulted from higher revenues and a lower share count.

Revenues in Details

Revenues, which grew 2.1% year over year to $384.3 million, were well below the Zacks Consensus Estimate of $396 million.

Global revenues were driven by higher sales of flow generators, accompanied with healthy sales of masks spares and accessories.

On a geographic basis, revenues in the Americas declined 2% from the year-ago quarter to $206.6 million, while sales outside the Americas increased 8% year over year (5% on a constant currency basis).
Europe experienced steep regional growth in the quarter, along with robust sales recorded in countries like the U.K., Switzerland and some emerging markets.

Operational Update

ResMed’s gross margin was 64.7% in the reported quarter, reflecting a massive expansion of 292 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.

Research and development expenses were $29.5 million or 7.7 % of revenues, compared with $30.3 million or 8% of revenues in the prior-year quarter.

Selling, general and administration expenses, which accounted for 29.1% of revenues in second quarter fiscal 2014 (compared to 28.6% of revenues in the year-ago quarter), amounted to $111.7 million, up 3.6% year over year.

Income from operations came in at $105 million, reflecting an upside of 14.1% from the prior-year quarter. The company posted net income of $86.6 million in the quarter, exhibiting an increase of 11.2% over the year-ago quarter.

Financial Updates

ResMed exited fiscal second quarter with cash and cash equivalents of $972.7 million compared with $976.5 million at the end of Sep 30, 2013.

The company generated $84.2 million in cash flow from operations, reflecting strong underlying earnings and effective working capital management.

Capital expenditure was $19.7 million, while depreciation and amortization stood at $18.6 million. ResMed also repurchased 1.5 million shares for $74 million in the reported quarter. At the end of the quarter, the company still had 2.6 million shares remaining under its authorized buyback program.

Our Take

ResMed’s second-quarter fiscal 2014 results were disappointing with the company missing the Zacks Consensus Estimate on both fronts – earnings and revenues. It is currently facing challenges like market restructuring due to competitive bidding, reimbursement pressure and increasing competition particularly in the flow generator space, along with foreign currency headwinds. Additionally, a slowdown in the market demand can also act as a deterrent to growth, going forward.

However, new product launches, strong product pipeline and robust growth in the European and emerging markets are likely to boost investor confidence in the near term.

ResMed currently carries a Zacks Rank #3 (Hold). However, better-ranked companies like NuVasive, Inc. (NUVA - Snapshot Report), Covidien plc (COV - Analyst Report) and Mead Johnson Nutrition Company (MJN - Snapshot Report) are expected to do well in the health care industry. While NuVasive sports a Zacks Rank #1 (Strong Buy), Covidien and Mead Johnson Nutrition Company carry a Zacks Rank #2 (Buy).

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