Disappointing Quarter for ResMed

ResMed Inc. (RMD - Snapshot Report) reported EPS of 33 cents in the first quarter of fiscal 2012, missing the Zacks Consensus Estimate by 2 cents and 8% lower than the year-ago quarter. This was mainly due to unfavorable currency movements that impacted the EPS by approximately 8 cents during the quarter. In the reported quarter, revenues increased 12% (up 8% at constant exchange rates or CER) year over year to $314.8 million. However, reported revenues missed the Zacks Consensus Estimate by 4.5%.  

The disappointing result led to a huge 9% drop in ResMed’s share price on Monday.

Based on a favorable product mix and vastly under-penetrated and growing sleep-disorder breathing market, ResMed registered a 9% growth in domestic market revenues to $169.3 million during the reported quarter. Revenues from the international market increased 15% (7% at CER) to $159 million, attributable to strong sales of S9 AutoSet and VPAP Adapt SV.  Additionally, the company generated higher Patient interface sales across all regions.

Gross profit climbed 6.4% to $185.1 million, but gross margin contracted 290 basis points (bps) to 58.8% due to a 19.9% rise in cost of sales. Moreover, adjusted operating expenses rose 15.2% to $120.4 million based on higher selling, general and administrative (SG&A) expenses (up 11.1%; 5% at CER) and research and development (R&D) expenses (up 32.7%; 18% at CER).

The increase in SG&A and R&D expenses was primarily due to the depreciation of domestic currency against the Australian dollar as well as euro. Higher expenses led to a 410 bps plunge in adjusted operating margin to 20.5%. 

ResMed exited the quarter with cash and cash equivalents of $610.1 million compared with $735.3 million at the end of June 2011. Cash flow generated from operations was $89.5 million versus $74.3 at the end of June 2011. ResMed repurchased 4.4 million shares for $124.7 million during the quarter and was left with authorization to buyback 18.1 million shares.

During the third quarter, ResMed completed the acquisitions of Irish medical technology company BiancaMed Ltd, a manufacturer and distributor of non-contact devices for monitoring sleep and breathing and Germany-based Grundler Medical GmbH, which develops innovative medical humidification products that fit a wide range of ventilators

ResMed is one of the leading players in the generators, masks, and related accessories market that are used for the treatment of obstructive sleep apnea and related respiratory disorders. The company is focused on medical equipment for the diagnosis and treatment of sleep-disordered breathing. Besides, the industry is benefiting from an aging population and an inclination for availing medical care away from hospitals.

Presently, ResMed is emphasizing on building strategic relationships in order to penetrate further in the international arena. This includes the recent 5-year exclusive distribution agreement with CareFusion (CFN - Snapshot Report), providing CareFusion the exclusive right to distribute the ResMed Stellar 100 and 150 non-invasive ventilators and their related accessories into the US institutional healthcare market.

Currently ResMed retains a short-term Zacks #3 (Hold), which also corresponds to our long-term “Neutral’ recommendation.

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