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ResMed (RMD) Q3 Earnings Miss, Revenues Meet Estimates

ResMed Inc.RMD announced third-quarter fiscal 2016 adjusted earnings per share of 68 cents, up 4.6% from the prior-year quarter. Earnings however missed the Zacks Consensus Estimate by a penny. Including one-time items, ResMed reported earnings per share came in at 63 cents in the quarter, down 1.6% year over year.

Overall, foreign exchange movements boosted ResMed’s third-quarter earnings by approximately 4 cents per share, reflecting the favorable impact of a weaker Australian dollar, partially offset by a weaker euro.

Revenue in Details

Revenues in the reported quarter increased 7.4% year over year (up 9% at constant exchange rate or CER) to $453.9 million. The revenue figure was in line with the Zacks Consensus Estimate of $454 million. According to ResMed, movements in exchange rates, predominantly a weaker euro relative to the U.S. dollar, negatively impacted revenue by approximately $6.3 million.

On a geographic basis, revenues in the Americas rose 12% year over year to $282.2 million, while sales in the combined EMEA and APAC region remained flat (up 3% at CER) at $171.7 million.

ResMed currently generates revenues from two product segments: device and mask and other. During the third quarter, globally device sales increased by 10% at CER while masks and other sales rose 7% year over year.

In the Americas, device sales improved 15% year over year to $153.2 million, while masks and other sales grew 10% to $129 million.

For revenues in the combined EMEA and APAC region, device sales grew 3% at CER to $116.7 million, while masks and other sales improved 3% at CER to $55 million.

Operational Update

ResMed's gross margin was 57.3% in the reported quarter, reflecting a contraction of 220 basis points (bps) year over year, on account of changes in product mix, decline in average selling prices and changes in geographic mix. This was partially offset by favorable net currency movements.

Selling, general and administration (SG&A) expenses rose 3% year over year (up 5% at CER) to $119.4 million, while research and development (R&D) expenses increased 4% (up 11% at CER) to $26.3 million.

The resultant adjusted income from operations (excluding the impact of amortization and acquisition expenses) improved 4% year over year to $112.4 million, owing to improved year-over-year gross profit. However, the company witnessed a contraction of 80 bps in its third-quarter adjusted operating margin of 24.8%. 

Financial Update

ResMed exited third-quarter fiscal 2016 with cash and cash equivalents of $718.5 million compared with $658.8 million at the end of the previous quarter.

At the end of the quarter, the company generated $391.7 million of cash flow from operations, up 38.2% from the prior-year quarter, reflecting strong underlying earnings and an improvement in net working capital balances.

Moreover, along with its third-quarter earnings release, ResMed announced a quarterly dividend of 30 cents per share. During the reported quarter, ResMed did not repurchase any shares, in line with its earlier announced decision involving a temporary suspension of share repurchase program owing to the company’s recent acquisition. At the end of Mar 2016, the company had approximately 13.6 million shares remaining under its authorized share repurchase program.

Our Take

ResMed ended third-quarter fiscal 2016 on a modest note. While the company missed the Zacks Consensus Estimate on the bottom-line front, the top line met the same. Nevertheless, ResMed posted positive year-over-year growth as far as its segmental and geographical results are concerned. The company’s strong cash balance bolsters our confidence in the stock.

Moreover, the company has continued with its investments in companies in the respiratory care space; as is evident from its Inova Lab acquisition. Management has also started the integration process following this deal’s closure in the third quarter; which we believe will fetch more revenues in the fourth quarter and beyond.

However, fluctuating foreign currency continued to impact ResMed’s sales growth in the third quarter and given the current volatile market situation, we do not expect the company to witness any improvement in this front.

Zacks Rank & Key Picks

Currently, ResMed carries a Zacks Rank #3 (Hold). Some better-ranked medical stocks are Orthofix International N.V. OFIX, Boston Scientific Corporation BSX and Cardiovascular Systems Inc. CSII. While Orthofix sports a Zacks Rank #1 (Strong Buy), Boston Scientific and Cardiovascular Systems carry a Zacks Rank #2 (Buy).

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