ResMed Sees Impressive Growth in Q3

ResMed delivered another impressive performance in the third quarter of fiscal 2013. Revenue rose 10% to USD 384 million, operating income increased 26% to USD 96.1 million and net income was 31% higher at USD 84.9 million. Diluted earnings per share rose 32% to USD 0.58 and over the nine months to 31 March 2013 are 36% higher than in the corresponding nine months in fiscal 2012.

Its ability to introduce novel products that improve the comfort and effectiveness associated with these devices has helped ResMed become a key leader in the sleep apnea niche and generate returns well above its capital costs. Considering those development capabilities, and the large potential patient pool that still remains undiagnosed or untreated in the sleep apnea market, ResMed looks positioned to continue growing at a fast pace. A risk is that pricing comes under pressure due to strained government finances.

The company will pay another quarterly dividend of USD 0.17 per share.

The operating margin expanded from 21.9% in third-quarter 2012 to 25.1%. This primarily reflected a 212 basis point increase in the gross margin to 62.4%, in turn a function of a greater proportion of high-margin product in the sales mix and further manufacturing efficiency gains. This is testament to consistently effective product innovation and continuous engineering refinements. The gross margin also benefits from the ongoing shift of manufacturing from Australia to Singapore, where costs are significantly lower.

Net operating cash flow was USD 107 million, implying impressive 101% conversion of profit to cash. The company bought back 1.5 million shares for USD 63 million at an average price of USD 42. At the end of the period the balance sheet had net cash of USD 672 million, providing significant capacity for acquisitions or increased capital management.

Sales of flow generators were particularly strong, increasing 21% to USD 95 million in the Americas and 9% to USD 115 million outside the Americas, or 14% globally, while sales of masks and accessories rose only 8% in the Americas to USD 120 million and were flat in the rest of the world at USD 54 million. The latter was a function of customers trialing new masks released by competitors, and a particularly strong comparative period when mask and accessory sales grew 21% in the Americas and 16% in the rest of the world. ResMed will release two new considerably improved masks in the fourth quarter and has more in the pipeline for release in fiscal 2014. There is no reason to believe the firm has suffered any permanent loss of competitiveness in this segment; temporary shifts in share are common.

ResMed confidently asserts it will shoulder little of the pricing pain. Its response is to assist home-care dealers make their businesses more efficient to offset the cuts. ResMed and competitor Philips-owned Respironics, each have roughly 40% share of the sleep disordered breathing equipment market giving them significant bargaining power relative to the fragmented home-care dealer segment. However, as a result of the hit to profitability, there will likely be more consolidation of home-care dealers, which will likely lead to some shift of negotiating power away from the manufacturers. We have been more conservative than the company; our forecasts still assume ResMed absorbs roughly one third of the price falls, the dealers bearing the remainder.


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