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Another Positive Quarter at ResMed

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ResMed Inc. (RMD - Free Report) posted earnings per share (‘EPS’) of 53 cents in the second quarter of fiscal 2013, edging past the Zacks Consensus Estimate by a couple of cents. The results were also better than the year-ago EPS by 26%. Apart from increased sales and higher margins, a decline in tax rate supported the huge EPS improvement.

Revenues soared 13% year over year (up 14% at constant exchange rates or CER) to $376.5 million, a record high for ResMed. The top-line comfortably beat the Zacks Consensus Estimate of $365 million. 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 surged 16% to $211.8 million whereas revenues outside the Americas increased 10% (up 9% at CER) at $164.7 million. Growth in the overseas market was on account of strong contributions from Germany, France, the U.K. and Japan.

The company reported domestic flow generator sales of $93.7 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 $118.1 million in the Americas, up 16% 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 $108.9 million, up 9% (up 11% at CER) year over year. Masks and other sales outside the Americas, were $55.9 million, up 11% (up 16% at CER) year over year. At CER, worldwide flow generator sales increased 13% year over year, while masks and other increased 16%.

Gross profit in the reported quarter climbed 17.1% to $232.7 million leading to a 210 basis points (bps) expansion in gross margin to 61.8%. The improvement in gross margin was attributed to favorable product mix towards higher-margin flow generators and robust accessory sales. Selling, general and administrative, and research and development expenses during the quarter increased 7% (up 8% at CER) to $107.8 million and up 11% (up 11% at CER) to $30.3 million, respectively. Nevertheless, operating margin expanded about 420 bps to 24.5% in the quarter.

ResMed exited the quarter with cash and cash equivalents of $958.3 million compared with $809.5 million at the end of fiscal 2012. Cash flow from operations was $93.6 million in the second quarter. This depicts solid capital management fundamentals.

ResMed repurchased 1 million shares for $40 million in the second quarter (13.6 million shares for $391.2 million in fiscal 2012) and was left with the authorization to repurchase 7.6 million shares. In fiscal 2013, ResMed intends to purchase at least 2 million shares through its existing share buyback program. Additionally, the Board declared a quarterly dividend of 17 cents per share, payable on Mar 19, 2013.

Our Take

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, primarily in Japan, is another material upside. 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.

The positive events are reflected in the bullish momentum of the stock. Though by smaller margins, ResMed inched towards a new 52-week high of $45.62 on the day the results were announced. With estimates moving higher for the current as well as next fiscal, the stock carries a Zacks Rank #2 (Buy). Other Zacks Rank #2 medical stocks are CareFusion , Edwards Lifesciences (EW - Free Report) and Hanger Orthopedic .

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