ResMed Inc. (RMD) reported fourth-quarter fiscal 2014 (ended Jun 30, 2014) adjusted earnings per share of 64 cents, missing the Zacks Consensus Estimate of 66 cents. Results, however, exceeded the prior-year quarter’s earnings of 62 cents per share, registering an increase of 3.2% year over year. For the full year, adjusted EPS came in at $2.42, up 9% year over year.
Revenues in Details
Revenues in the reported quarter inched up a mere 0.1% year over year to $415.2 million but were considerably below the Zacks Consensus Estimate of $434 million. Fiscal 2014 revenues were pegged at $1.55 billion, up 2.6% from the year-ago number.
On a geographic basis, revenues in the Americas grossed $214.9 million, up 7% from the year-ago quarter number, while sales outside the Americas increased 9% year over year (up 5% at constant exchange rate or CER) to $200.3 million. Global revenues were lower than anticipated with softer sales in the Americas, partially offset by strong international market growth. However, the company continues to benefit from its globally diversified business, with constant currency revenue growth of 5% in combined Europe and Asia-Pacific businesses.
The flow generator category recorded nominal growth of 1% at CER while masks and other decreased by 4%. In Americas, flow generator sales were $99.3 million, down 5% year over year on continued pricing pressures and tough prior-year comparables. Masks and other sales were $115.6 million, down 8%, reflecting a rather competitive environment.
For revenues outside the Americas, flow generator sales were $136 million, up 6% year over year at CER. Masks and other sales were $64.3 million, an increase of 4% at CER.
Operational Update
ResMed’s gross margin was 62.9% in the reported quarter, reflecting an expansion of 25 basis points (bps) year over year, on account of positive foreign currency movements, a favorable geographic mix, and manufacturing and supply chain improvements, partially offset by average selling price (ASPs) declines.
Research and development expenses were $31.8 million, up 1.3% year over year. Selling, general and administration expenses amounted to $122.2 million, up 6.2% year over year.
Accordingly, income from operations came in at $107.2 million, reflecting a downside of 5.5% from the prior-year quarter. Thus, the company recorded operating margin of 25.8%, down 153 bps from fourth-quarter fiscal 2013.
Financial Updates
ResMed exited fiscal 2014 with cash and cash equivalents of $905.7 million compared with $876 million at the end of fiscal 2013.
The company generated $115.6 million in cash flow from operations in the fourth quarter, reflecting strong underlying earnings and effective working capital management. Moreover, capital expenditure was $18.5 million, resulting in free cash flow of $97.1 million. ResMed also repurchased 0.8 million shares for $40.4 million in the reported quarter. At the end of the fiscal, the company repurchased 4.4 million shares for a total consideration of $208 million and currently has 18.3 million shares remaining under its authorized buyback program. In addition, the board of directors declared a 12% hike in quarterly dividend to 28 cents per share.
Our Take
ResMed’s fourth-quarter fiscal 2014 results were overall week with the company posting both earnings and revenue miss. The CMS decision on competitive bidding was a major letdown for the company. Moreover, the ongoing headwind related to reimbursement issues across the world along with the recent healthcare reform in the U.S. is taking a toll on the company’s business.
Additionally, a slowdown in the market demand along with foreign currency headwinds can also act as deterrents to growth, going forward.
However, new product launches, a strong product pipeline and robust growth in the European and emerging markets are expected to likely boost investor confidence in the near term. In fiscal 2014, ResMed returned 110% of free cash flow to its shareholders through dividends and share repurchases. The company expects to maintain an active share repurchase program in fiscal 2015.
ResMed currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the medical products sector that warrant a look are Abaxis, Inc. (ABAX), Alere Inc. (ALR) and Hospira Inc. (HSP). All the three stocks carry a Zacks Rank #2 (Buy).
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