ResMed Inc.RMD reported first-quarter fiscal 2016 adjusted earnings per share of 58 cents, a penny less than the prior-year quarter number. Earnings also missed the Zacks Consensus Estimate by a penny.
Including one-time items, ResMed’s reported earnings per share for the quarter came in at 57 cents, down 1.7% from the first quarter of fiscal 2015, as a result of foreign currency hedging losses and lower interest income.
Overall, foreign exchange movements negatively affected ResMed’s fiscal first quarter earnings by a penny per share, reflecting the impact from a weaker euro, largely offset by a less weak Australian dollar.
Revenues in Details
Revenues in the reported quarter increased 8.2% year over year (up 15% at constant exchange rate or CER) to $411.6 million. The top line also exceeded the Zacks Consensus Estimate of $410 million. According to ResMed, adverse exchange rate movement, predominantly characterized by a weak euro relative to the U.S. dollar, impacted revenues by approximately $26.8 million in the quarter.
On a geographic basis, revenues in the Americas grossed $254.2 million, up 23% from the year-ago quarter, while sales in the combined EMEA and APAC region declined 9% year over year (up 5% at constant exchange rate or CER) to $157.5 million.
The flow generator category globally recorded impressive growth of 20% at CER while masks and other increased 9%. In Americas, flow generator sales were $132.1 million, up a robust 39% year over year. On the other hand, masks and other sales grossed $122 million, up 9% year over year.
For revenues in the combined EMEA and APAC region, flow generator sales were $107.5 million, up 5% year over year at CER. Masks and other sales were $50 million, an increase of 7% at CER.
Operational Update
ResMed's gross margin was 58% in the reported quarter, reflecting a contraction of 440 basis points (bps) year over year, on account of unfavorable product mix, declines in average selling prices and an unfavorable geographic mix.
Selling, general and administration (SG&A) expenses totaled $111.1 million, up 0.5% year over year (up 11% at CER), primarily due to higher employee compensation and the impact of recent acquisitions. Research and development (R&D) expenses amounted to $27.2 million, down 9.4% year over year (up 12% at CER). The increase at CER reflects incremental investment across the company’s R&D portfolio.
Accordingly, adjusted income from operations (excluding the impact of amortization expense) came in at $100.3 million, reflecting an upside of 3.7% from the prior-year quarter. However, the company recorded an operating margin of 24.4%, down 100 bps from first-quarter fiscal 2015.
Financial Update
ResMed exited first-quarter fiscal 2016 with cash and cash equivalents of $822.1 million compared with $717.2 million at the end of fiscal 2015.
During the quarter under review, the company generated $122.1 million in cash flow from operations, up 41.1% from the prior-year period; thereby reflecting strong underlying earnings and an improvement in net working capital balances.
Moreover, during the first quarter earnings release, ResMed announced a quarterly dividend of 30 cents per share, payable on Dec 17, 2015 to shareholders on record as of Nov 19. ResMed also repurchased 1.2 million shares for $62 million in the reported quarter. At the end of Sep 2015, the company had approximately 14.3 million shares remaining under its authorized share repurchase program.
Our Take
ResMed reported a mixed first-quarter fiscal 2016 with revenues beating the Zacks Consensus Estimate and earnings missing the same. Moreover, earnings slipped year over year as well. However, it is a relief that unfavorable foreign currency translation played spoilsport and not any inherent weakness in the company’s fundamentals.
On a brighter note, ResMed’s positive revenue growth across its global business is encouraging, especially in the face of tough currency headwind. The revenue growth reflects successful product launches in both its sleep apnea and respiratory care businesses. Moreover, the company’s strong cash balance position is impressive, along with a healthy operating leverage during the quarter, thanks to expenses (both R&D and SG&A) growing at a lower rate than the top line.
We believe, going ahead, ResMed is on track to increase operating leverage further through fiscal 2016. The company is currently undertaking steps to improve its gross margin, in turn driving efficiency in manufacturing and supply chain costs.
Zacks Rank
Currently, ResMed carries a Zacks Rank #2 (Buy). Some other well-ranked players in the same sector are Baxter International Inc. BAX, Hill-Rom Holdings, Inc. HRC and NuVasive, Inc. NUVA. All the three stocks sport a Zacks Rank #1 (Strong Buy).
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