ResMed Inc. (RMD) reported second-quarter fiscal 2015 (ended Dec 31, 2014) earnings per share of 64 cents, beating the Zacks Consensus Estimate by 1.6%. Results also exceeded the prior-year quarter's earnings of 60 cents per share, registering an improvement of 6.7% year over year.
Revenues in Details
Revenues in the reported quarter increased a solid 10% year over year (up 14% at constant exchange rate or CER) to $423 million and also comfortably beat the Zacks Consensus Estimate of $410 million. However, movements in exchange rates, predominantly a weaker euro relative to the U.S. dollar, negatively impacted revenues by approximately $13.8 million in the reported quarter.
On a geographic basis, revenues in the Americas grossed $231 million, up 12% from the year-ago quarter number, while sales in the combined Europe and Asia-Pacific region increased 8% year over year (up 16% at constant exchange rate or CER) to $192 million.
The flow generator category globally recorded a massive growth of 20% at CER while masks and other increased 6%. In Americas, flow generator sales were $111 million, up 25% year over year owing to three key product launches – the AirSense 10, the AirCurve 10 and the Astral in the reported quarter. Masks and other sales were $120 million, up 2%, reflecting a comparatively stable pricing situation.
For revenues in combined Europe and Asia-Pacific, flow generator sales were $129 million, up 17% year over year at CER. Masks and other sales were $63 million, an increase of 14% at CER.
Operational Update
ResMed's gross margin was 62.2% in the reported quarter, reflecting a contraction of 250 basis points (bps) year over year, on account of declines in average selling prices and unfavorable product mix, partially offset by manufacturing and supply chain improvements.
Selling, general and administration expenses totaled $122.5 million, up 10% year over year, primarily driven by higher marketing costs associated with recent product releases, higher variable employee compensation, some impacts from the recent acquisitions and the release of contingent consideration in the prior-year quarter. Research and development expenses amounted to $29.3 million, down 1% year over year.
Accordingly, adjusted income from operations (excluding the impact of amortization expense) came in at $111.4 million, reflecting an upside of 3.7% from the prior-year quarter. However, the company recorded an operating margin of 26.3%, down 170 bps from second-quarter fiscal 2014.
Financial Updates
ResMed exited second quarter fiscal 2015 with cash and cash equivalents of $880.7 million compared with $905.7 million at the end of fiscal 2014.
The company generated $106 million in cash flow from operations in the fourth quarter, up from $84.2 million of prior year quarter; thereby reflecting strong underlying earnings and effective working capital management. Moreover, capital expenditure was $19 million, resulting in free cash flow of $87 million. ResMed also repurchased 667,000 shares for $33.5 million in the reported quarter. At the end of Dec 2014, the company had approximately 16.8 million shares remaining under ResMed's authorized share repurchase program.
Our Take
ResMed's second-quarter fiscal 2015 results were overall impressive with the company squarely beating the Zacks Consensus Estimate. In the second quarter, ResMed continued to invest toward long-term growth in both respiratory care and sleep apnea channel development. The aim is to capture a leading position in both the sleep apnea and home ventilation markets in Asia-Pacific, with a particular focus on the emerging markets of China and India.
Also, the new product launches and a strong upside observed in the European and emerging markets are likely to boost investor confidence in the near term. In fiscal 2015, till now, ResMed has returned 101% of free cash flow to its shareholders through dividends and share repurchases. Currently, ResMed is engaged in executing its three horizons growth strategy of improving patient quality-of-life, lowering healthcare costs, and preventing chronic disease progression.
We believe this impressive second quarter result has given ResMed a competitive leverage in the healthcare industry. Some other players in the similar space includes ICU Medical, Inc. (ICUI), Cardiovascular Systems Inc. (CSII) and Conatus Pharmaceuticals Inc. (CNAT).
Currently, ResMed has a Zacks Rank #4 (Sell).
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