Mixed 2Q for ResMed

ResMed Inc. (RMD - Snapshot Report) reported EPS of 42 cents in the second quarter of fiscal 2012, beating the Zacks Consensus Estimate of 38 cents and also the year-ago EPS by 14%. Revenues increased 9% year over year (flat at constant exchange rates or CER) to $332.7 million but missed the Zacks Consensus Estimate of $340 million. Following the earnings release, shares of ResMed surged 10.47% on Friday.

Based on a favorable product mix and vastly under-penetrated and growing sleep-disorder breathing market, ResMed registered a 12% growth in domestic market revenues to $182.5 million during the reported quarter underpinned by strong contributions from masks and others sales (up 19%) and growth in flow generator sales (up 4%) coupled with continued growth in accessories. Revenues from the international market increased 5% (same at CER) to $150.2 million, attributable to strong sales of mask and accessories.  Additionally, the company generated higher Patient interface sales across all regions.

Gross profit climbed 6.9% to $198.7 million, but gross margin contracted 100 basis points (bps) to 59.7%. However, on a sequential basis, gross margin improved 90 bps   on the back of favorable product mix, lower manufacturing and logistics costs. Adjusted operating expenses rose 13.2% to $120.4 million due to higher selling, general and administrative (SG&A) expenses (up 10%; 9% at CER) and research and development (R&D) expenses (up 24%; 21% at CER). Higher expenses led to a 260 bps plunge in adjusted operating margin to 20.2%. 

ResMed exited the quarter with cash and cash equivalents of $723.2 million compared with $735.3 million at the end of June 2011. Cash flow generated from operations was $110.6 million for the quarter. ResMed repurchased 4.1 million shares for $110.5 million during the quarter and was left with roughly 14 million shares for future repurchase. For the first half of fiscal 2012, the company repurchased 8.5 million shares.

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.

The company remains optimistic based on its new generation S9 line of products. In the reported quarter, domestic flow generator sales swung back to profit, which is encouraging. The company also benefited from strong sales of S9 VPAP Adapt in the US and the S9 range of bilevel devices, which started gaining market traction.

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 Rank).  Over the longer term, we are “neutral’ on the stock.

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