UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________________________________
______________________________________________________________________________________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2020
Commission file number: 001-15317
______________________________________________________________________________________________
ResMed Inc.
(Exact name of registrant as specified in its charter)
______________________________________________________________________________________________
Delaware
(State or other jurisdiction of incorporation or organization)
98-0152841
(IRS Employer Identification No.)
9001 Spectrum Center Blvd.
San Diego, CA 92123
United States of America
(Address of principal executive offices)
(858) 836-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.004 per share
Trading
Symbol(s)
RMD
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act
None
______________________________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of
the Exchange Act.
Large Accelerated Filer
Non-accelerated Filer
Emerging Growth Company
Accelerated Filer
Smaller Reporting Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of registrant as of December 31, 2019 (the last business day of the
registrant’s most recently completed second fiscal quarter), computed by reference to the closing sale price of such stock on the New York Stock Exchange, was
$22,240,443,784. All directors, executive officers, and 10% stockholders of registrant are considered affiliates.
At August 7, 2020, registrant had 144,900,654 shares of Common Stock, $0.004 par value, issued and outstanding. This number excludes 41,836,234 shares held by the
registrant as treasury shares.
Portions of the registrant’s definitive Proxy Statement to be delivered to stockholders in connection with the registrant’s 2020 Annual Meeting of Stockholders, to be
filed subsequent to the date hereof, are incorporated by reference into Part III of this report.
Table of Contents
TABLE OF CONTENTS
Cautionary Note Regarding Forward Looking Statements
Part I
Part II
Item 1 Business
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2
Item 3
Item 4 Mine Safety Disclosures
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Properties
Legal Proceedings
Securities
Selected Financial Data
Item 6
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market and Business Risks
Item 8 Consolidated Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A Controls and Procedures
Item 9B Other Information
Item 10 Directors, Executive Officers and Corporate Governance
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13 Certain Relationships and Related Transactions, and Director Independence
Item 14 Principal Accounting Fees and Services
Item 15 Exhibits and Consolidated Financial Statement Schedules
Item 16 Form 10-K Summary
Signatures
Part III
Part IV
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As used in this 10-K, the terms “we”, “us”, “our” and “the Company” refer to ResMed Inc., a Delaware corporation, and its subsidiaries,
on a consolidated basis, unless otherwise stated.
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PART I
RESMED INC. AND SUBSIDIARIES
PART I
Item 1
Cautionary Note Regarding Forward-Looking Statements
This report contains or may contain certain forward-looking statements and information that are based on the beliefs of our management
as well as estimates and assumptions made by, and information currently available to, our management. All statements other than
statements regarding historical facts are forward-looking statements. The words “believe,” “expect,” “intend,” “anticipate,” “will
continue,” “will,” “estimate,” “plan,” “future” and other similar expressions, and negative statements of such expressions, generally
identify forward-looking statements, including, in particular, statements regarding expectations of future revenue or earnings, expenses,
new product development, new product launches, new markets for our products, litigation, and tax outlook. These forward-looking
statements are made in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You are
cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements reflect the views of our
management at the time the statements are made and are subject to a number of risks, uncertainties, estimates and assumptions, including,
without limitation, and in addition to those identified in the text surrounding such statements, those identified in Item 1A “Risk Factors”
and elsewhere in this report.
In addition, important factors to consider in evaluating such forward-looking statements include changes or developments in healthcare
reform, social, economic, market, legal or regulatory circumstances, including the impact of public health crises such as the novel strain
of coronavirus (COVID-19) that has spread globally; changes in our business or growth strategy or an inability to execute our strategy
due to changes in our industry or the economy generally, the emergence of new or growing competitors, the actions or omissions of
third parties, including suppliers, customers, competitors and governmental authorities, and various other factors. If any one or more of
these risks or uncertainties materialize, or underlying estimates or assumptions prove incorrect, actual results may vary significantly
from those expressed in our forward-looking statements, and there can be no assurance that the forward-looking statements contained
in this report will in fact occur.
ITEM 1 BUSINESS
General
We are a global leader in digital health and cloud-connected medical devices. We design innovative solutions to treat and keep people
out of the hospital, empowering them to live healthier, higher-quality lives. Our digital health technologies and cloud-connected medical
devices transform care for people with sleep apnea, chronic obstructive pulmonary disease, or COPD, and other chronic diseases. Our
comprehensive out-of-hospital software platforms support the professionals and caregivers who help people stay healthy in the home or
care setting of their choice. By enabling better care, our products improve quality of life, reduce the impact of chronic disease, and lower
costs for consumers and healthcare systems.
Following our formation in 1989, we commercialized a treatment for obstructive sleep apnea, or OSA. This treatment, nasal continuous
positive airway pressure, or CPAP, was the first successful noninvasive treatment for OSA. CPAP systems deliver pressurized air,
typically through a nasal mask, to prevent collapse of the upper airway during sleep.
Since the development of CPAP, we have expanded our business by developing or acquiring a number of innovative products and
solutions for a broad range of respiratory disorders including technologies to be applied in medical and consumer products, ventilation
devices, diagnostic products, mask systems for use in the hospital and home, headgear and other accessories, dental devices, portable
oxygen concentrators, or POCs, and cloud-based software informatics solutions to manage patient outcomes and customer and provider
business processes. Today, we offer a comprehensive digital solution suite for patients with COPD, including those using inhalers or
supplemental oxygen as well as non-invasive or invasive ventilation. We also provide management software to agencies providing out-
of-hospital care, including home medical equipment, or HME, home health and hospice, skilled nursing, life plan community and senior
living, and private duty services. Our growth has been fueled by geographic expansion, our research and product development efforts,
acquisitions and an increasing awareness of sleep apnea and respiratory conditions like COPD as significant health concerns. We are
also a leading provider of cloud-based software health applications and devices designed to provide connected care, improving patient
outcomes and efficiencies for healthcare providers. These tools are designed to enable clinicians to manage more patients efficiently
and effectively, as well as enable and encourage patients’ long-term adherence to and satisfaction with their therapy.
We employ approximately 7,800 people and sell our products in approximately 140 countries through a combination of wholly owned
subsidiaries and independent distributors.
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Our web site address is www.resmed.com. Information contained on our website is not part of or incorporated into this report. We make
our periodic reports, together with any amendments, available on our website, free of charge, as soon as reasonably practicable after we
electronically file or furnish the reports with the Securities and Exchange Commission, or SEC. The SEC maintains an internet site,
www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file electronically
with the SEC.
Corporate History
ResMed Inc., a Delaware corporation, was formed in March 1994 as the ultimate holding company for our operating subsidiaries. In
June 1995, we completed an initial public offering of common stock and our common stock began trading on the NASDAQ National
Market. In September 1999, we transferred our principal listing to the New York Stock Exchange, or NYSE, trading under the ticker
symbol “RMD”. In November 1999, we established a secondary listing of our common stock via Chess Depositary Instruments, or
CDIs, on the Australian Stock Exchange (now known as the Australian Securities Exchange), or ASX, also under the symbol “RMD”.
Ten CDIs on the ASX represent one share of our common stock on the NYSE.
Our Australian subsidiary, ResMed Holdings Limited, was originally organized in 1989 by Dr. Peter Farrell to acquire from Baxter
Center for Medical Research Pty Limited, or Baxter, the rights to certain technology relating to CPAP treatment as well as Baxter’s
existing CPAP device business. Baxter acquired the rights to the technology in 1987, and sold CPAP devices in Australia from 1988
until our acquisition of the business.
Since formation we have acquired a number of businesses, including distributors, suppliers, developers of medical equipment and related
technologies and software solution providers.
Segment Information
We operate in two segments, which are the Sleep and Respiratory Care segment and the software as a service, or SaaS, segment. See
Note 15 – Segment Information of the Notes to Financial Statements (Part II, Item 8) for financial information regarding segment
reporting. Financial information about our revenues from and assets located in foreign countries is also included in the notes to our
consolidated financial statements.
The Market
We are focused on the sleep and related respiratory care markets, both of which we believe are globally underpenetrated markets, and
where we believe our products can improve patient outcomes, create efficiencies for our customers, help physicians and providers better
manage chronic disease and reduce overall healthcare system costs. Additionally, our software solutions are focused on the out-of-
hospital care market, which we believe is fragmented and underserved and where we see significant opportunity to transform and
significantly improve out-of-hospital healthcare through a strategy of enabling better patient care, improving clinical decision support,
and driving interoperability across out-of-hospital care settings.
Sleep and Respiratory Care
Sleep
Sleep is a complex neurological process that includes two distinct states: rapid eye movement, or REM, sleep and non-rapid eye
movement, or non-REM, sleep. REM sleep, which is about 20-25% of total sleep experienced by adults, is characterized by a high level
of brain activity, bursts of rapid eye movement, increased heart and respiration rates, and paralysis of many muscles. Non-REM sleep
is subdivided into four stages that generally parallel sleep depth; stage 1 is the lightest and stage 4 is the deepest.
The upper airway has no rigid support and is held open by active contraction of upper airway muscles. Normally, during REM sleep
and deeper levels of non-REM sleep, upper airway muscles relax and the airway narrows. Individuals with narrow upper airways or
poor muscle tone are prone to temporary collapses of the upper airway during sleep, called apneas, and to near closures of the upper
airway called hypopneas. These breathing events result in a lowering of blood oxygen concentration, causing the central nervous system
to react to the lack of oxygen or increased carbon dioxide and signaling the body to respond. Typically, the individual subconsciously
arouses from sleep, causing the throat muscles to contract, opening the airway. After a few gasping breaths, blood oxygen levels increase
and the individual can resume a deeper sleep until the cycle repeats itself. Sufferers of OSA typically experience ten or more such cycles
per hour. While these awakenings greatly impair the quality of sleep, the individual is not normally aware of these disruptions. In
addition, OSA has been recognized as a cause of hypertension and a significant comorbidity for heart disease, stroke and diabetes.
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A long-term epidemiology study published in 2013 estimated that 26% of adults age 30-70 have some form of obstructive sleep apnea.
Another study published in 2019 estimated that mild to severe OSA impacts more than 936 million people worldwide, including 54
million Americans. Of those impacted, it was estimated that more than 424 million would have moderate to severe sleep apnea. Despite
the high prevalence of OSA, there is a general lack of awareness of OSA among both the medical community and the general public. It
is estimated that less than 20% of those with OSA have been diagnosed or treated. Many healthcare professionals are often unable to
diagnose OSA because they are unaware that such non-specific symptoms as excessive daytime sleepiness, snoring, hypertension and
irritability are characteristic of OSA.
While sleep apnea has been diagnosed in a broad cross-section of the population, until recently, it has typically been diagnosed among
middle-aged men who are obese. However, we believe the importance of sleep apnea in women is increasingly being recognized, with
nearly 40% of new PAP patients being female. A strong association has been discovered between sleep apnea and a number of
cardiovascular and metabolic diseases. Studies have shown that sleep apnea is present in approximately 83% of patients with drug-
resistant hypertension, approximately 77% of patients with obesity, approximately 76% of patients with chronic heart failure and
approximately 72% of patients with type 2 diabetes.
Sleep-Disordered Breathing and Obstructive Sleep Apnea. Sleep-disordered breathing encompasses all disease processes that
cause abnormal breathing patterns during sleep. Manifestations include OSA, central sleep apnea, or CSA, and hypoventilation
syndromes that occur during sleep. Hypoventilation syndromes are generally associated with obesity, chronic obstructive lung disease
and neuromuscular disease. OSA is the most common form of SDB.
Sleep fragmentation and the loss of the deeper levels of sleep caused by OSA can lead to excessive daytime sleepiness, reduced cognitive
function, including memory loss and lack of concentration, depression and irritability. OSA sufferers also experience an increase in
heart rate and an elevation of blood pressure during the cycle of apneas. Several studies indicate that the oxygen desaturation, increased
heart rate and elevated blood pressure caused by OSA may be associated with increased risk of cardiovascular morbidity and mortality
due to angina, stroke and heart attack. Patients with OSA have been shown to have impaired daytime performance in a variety of
cognitive functions including problem solving, response speed and visual motor coordination, and studies have linked OSA to increased
occurrences of traffic and workplace accidents.
Generally, an individual seeking treatment for the symptoms of OSA is referred by a general practitioner to a sleep specialist for further
evaluation. The diagnosis of OSA typically requires monitoring the patient during sleep at either a sleep clinic or the patient’s home.
During overnight testing, respiratory parameters and sleep patterns may be monitored, along with other vital signs such as heart rate and
blood oxygen levels. Simpler tests, using devices such as our ApneaLink Air, or our automatic positive airway pressure devices, monitor
airflow during sleep, and use computer programs to analyze airflow patterns. These tests allow sleep clinicians to detect any sleep
disturbances such as apneas, hypopneas or subconscious awakenings.
Before 1981, the primary treatment for OSA was a tracheotomy, a surgical procedure to create a hole in the patient’s windpipe.
Alternative surgical treatments have involved either uvulopalatopharyngoplasty, or UPPP, in which surgery is performed on the upper
airway to remove excess tissue and to streamline the shape of the airway or implanting a device to add support to the soft palate. UPPP
alone has a poor success rate; however, when performed in conjunction with multi-stage upper airway surgical procedures, a greater
success rate has been claimed. These combined procedures, performed by highly specialized surgeons, are expensive and involve
prolonged and often painful recovery periods. Surgical treatments are not considered first line therapy for OSA. Other alternative
treatments available today include nasal surgery, mandibular advancement surgery, dental appliances, palatal implants, somnoplasty,
nasal devices and electrical stimulation of the nerves or muscles. Alternative pharmaceutical therapy treatments are reported to be under
development.
A variety of devices are marketed for the treatment of OSA. Most are only partially effective, but CPAP is a reliable treatment for all
severities of OSA and is considered first-line therapy. Use of mandibular advancement devices is increasing as a second-line option in
patients unable to use CPAP or those with mild OSA. These devices cause the mandible and tongue to be pulled forward and improve
the dimensions of the upper airway. CPAP is a non-invasive means of treating OSA. CPAP was first used as a treatment for OSA in
1980 by Dr. Colin Sullivan, the past Chairman of our Medical Advisory Board and was commercialized for treatment of OSA in the
United States in the mid-1980s. During CPAP treatment, a patient sleeps with a nasal interface connected to a small portable air device
that delivers room air at a positive pressure. The patient breathes in air from the device and breathes out through an exhaust port in the
interface. Continuous air pressure applied in this manner acts as a pneumatic splint to keep the upper airway open and unobstructed.
Interfaces include nasal masks and nasal pillows. Sometimes, when a patient leaks air through their mouth, a full-face mask may need
to be used, rather than a nasal interface.
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CPAP is not a cure and, therefore, must be used on a nightly basis as long as treatment is required. Patient compliance has been a major
factor in the efficacy of CPAP treatment. Early generations of CPAP units provided limited patient comfort and convenience. Patients
experienced soreness from the repeated use of nasal masks and had difficulty falling asleep with the CPAP device operating at the
prescribed pressure. In more recent years, product innovations to improve patient comfort and compliance have been developed. These
include more comfortable patient interface systems; delay timers that gradually raise air pressure allowing the patient to fall asleep more
easily; bilevel air devices, including our AirCurve 10 Series and Lumis devices, which provide different air pressures for inhalation and
exhalation; heated humidification systems to make the airflow more comfortable; and autotitration devices that modulate the average
pressure delivered during the night.
Respiratory Care
Our aim is to provide respiratory care solutions to patients with COPD, asthma, and other chronic respiratory diseases, such as overlap
syndrome, obesity hypoventilation syndrome, or OHS, and neuromuscular disease, including amyotrophic lateral sclerosis, or ALS. We
aim to improve their quality of life, slow down disease progression and reduce the costs of patient management.
Our products cover patients ranging from those who only require therapy from CPAP systems at night, to those who are dependent on
non-invasive or invasive ventilation for life-support and those who require portable oxygen concentrators, or POCs. Our devices are
predominantly used in the home and, to a lesser extent, in general hospital wards and respiratory wards. We supply CPAP and bilevel
device systems, non-invasive and invasive ventilators, humidifiers and accessories, including masks and tubing. We also offer stationary
and portable battery-powered oxygen concentrators for the administration of long-term oxygen therapy in the home as well as data
management systems designed to improve the management of patients.
In March 2020, the World Health Organization declared the outbreak of a novel strain of coronavirus, or COVID-19, as a pandemic.
We have observed increased demand for our ventilator devices and masks, and we are working with governments, health authorities,
hospitals, physicians, and patients worldwide to assess their needs, and to deliver the ventilation therapy that is essential to treat the
respiratory complications of COVID-19. Our primary focus is to maximize the availability of ResMed ventilators and other respiratory
support devices for the patients that need them most.
Chronic Obstructive Pulmonary Disease. COPD encompasses a group of lung diseases defined by persistent airflow limitation,
prolongation of exhalation and loss of elasticity in the lungs. It is a progressive and debilitating disease and is associated with an
increased inflammatory response in the airways. Symptoms encountered with COPD include shortness of breath as well as chronic
cough and increased sputum production. COPD includes diseases such as emphysema and chronic bronchitis. A recent study based on
recent epidemiology data estimates that there are over 380 million people worldwide who suffer from COPD, the world’s third leading
cause of death.
Patients with COPD can have different clinical presentations. Patients with chronic bronchitis present with low level of oxygen
(hypoxemia) and elevated levels of carbon dioxide (hypercapnia), a chronic productive cough, cor pulmonale and are commonly
overweight. Patients with emphysema have more normal blood gases, are usually thin and hyperinflated and have a decreased diffusion
capacity. During sleep, chronic bronchitic patients display more severe hypoxemia. In general, the more hypoxic a COPD patient is
during the day the more severe the hypoxemia experienced during sleep. Hypercapnia as a consequence of hypoventilation also occurs
in COPD patients and is more pronounced in REM sleep. Some COPD patients may also suffer from comorbid OSA, a condition known
as Overlap Syndrome.
Home non-invasive ventilation has the potential to reduce healthcare costs associated with the management of patients with severe
COPD by significantly increasing the time between hospital readmissions.
Overlap Syndrome. In patients with Overlap Syndrome, CPAP has been shown to provide benefits in relation to reducing mortality,
decreasing hospitalizations and improving lung function and gas exchange. Non-invasive ventilation, or NIV, has been demonstrated to
improve outcomes in patients with acute exacerbations of COPD through its ability to improve respiratory acidosis and decrease dyspnea
and work of breathing. It may also increase survival rates and reduce length of hospital stays, as well as reducing complicating factors
such as ventilator-associated pneumonia. In patients with stable COPD, the advantages of home NIV are less clear, but clinical studies
have shown improvements in dyspnea scores and health-related quality-of-life measures and reductions in hospital readmissions and
intensive care stays.
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Long-term oxygen therapy, or LTOT, is indicated in chronic respiratory failure patients. The administration of LTOT has been shown
to increase survival rates in patients with severe resting hypoxemia. In hypoxemic COPD patients, LTOT is associated with a lower
mortality compared to nocturnal oxygen therapy alone and also associated with improved health-related quality of life measures. In
long-term COPD survivors with a history of congestive heart failure, LTOT is associated with a slowing of respiratory failure
progression.
Obesity Hypoventilation Syndrome. OHS is characterized by the combination of obesity, chronic alveolar hypoventilation leading
to daytime hypercapnia and hypoxia and sleep apnea after the exclusion of other causes of alveolar hypoventilation. An estimated 90%
of patients with OHS also have OSA. In patients with OHS, positive airway therapy, both CPAP and NIV, has been shown to effectively
treat upper airway obstruction and reverse daytime respiratory failure as well as reduce the work of breathing and improve respiratory
drive.
Neuromuscular Disease. Neuromuscular disease is a broad term that encompasses many diseases that either directly (via intrinsic
muscle pathology) or indirectly (via nerve pathology) impair the functioning of muscles. Symptoms of neuromuscular disease and
respiratory failure include increasing generalized weakness and fatigue, dysphagia, dyspnoea on exertion and at rest, sleepiness, morning
headache, difficulties with concentration and mood changes. Most neuromuscular diseases are characterized by progressive muscular
impairment leading to loss of ambulation, being wheelchair-bound, swallowing difficulties, respiratory muscle weakness and,
eventually, death from respiratory failure. Neuromuscular disorders can progress rapidly or slowly. Rapidly progressive conditions,
such as ALS and Duchenne muscular dystrophy in teenagers, are characterized by muscle impairment which worsens over months and
can result in death within a few years. Variable or slowly progressive conditions, such as myotonic muscular dystrophy, are characterized
by muscle impairment that worsens over years and may mildly reduce life expectancy.
NIV treatment to patients with neuromuscular disease may lead to improvements in respiratory failure symptoms and daytime arterial
blood gases. In ALS patients, NIV treatment has been associated with an improvement in quality of life measures, sleep-related
symptoms and survival. Studies have demonstrated that patients with Duchenne muscular dystrophy may improve in quality of life
measures and may increase chance of survival with NIV treatment.
Software as a Service
Due to multiple acquisitions, including Brightree in April 2016, HEALTHCAREfirst in July 2018 and MatrixCare in November 2018,
our operations now include platforms that comprise our SaaS business. Our SaaS strategy is to develop a portfolio that assists durable
medical equipment, or DME, HME, and other long-term care providers operate more effectively and efficiently across various out-of-
hospital care settings. Our SaaS portfolio provides services across the HME, home health and hospice, skilled nursing, life plan
community and senior living, and private duty services. Our offerings can help providers perform analytics, manage documentation and
implement new reimbursement requirements as well as more effectively transfer data as patients move between different care settings.
Business Strategy
We believe that the sleep apnea and respiratory care markets will continue to grow in the future due to a number of factors, including
increasing awareness of OSA, CSA and COPD, improved understanding of the role of sleep apnea treatment in the management of
cardiac, neurologic, metabolic and related disorders, improved understanding of the role of non-invasive ventilation in the management
of COPD, and an increase in the use of digital and product technology to improve patient outcomes and create efficiencies for customers
and providers. Additionally, the continued impact of COVID-19 or a resurgence of COVID-19 may create more demand for our
ventilator products. Our strategy for expanding our business operations and capitalizing on the growth of the sleep apnea and respiratory
care markets, as well as growth in out-of-hospital care settings, consists of the following key elements:
• Continue Product Development and Innovation in Sleep Apnea Products. We are committed to ongoing innovation in
developing products for the diagnosis and treatment of sleep apnea. We have been a leading innovator of products designed to
treat sleep apnea more effectively, increase patient comfort and encourage compliance with prescribed therapy. In recent years
we have introduced a full suite of masks in our AirTouch and AirFit ranges, advanced and expanded the integrations of our
therapy-based software solutions, including AirView, to promote greater patient adherence and during the COVID-19
pandemic, we released ResMed MaskSelector in the United States, an easy-to-use digital tool to make mask selection and
sizing easier and more effective, both remotely and during in-person clinical setups. We believe that the combination of
continued product development, product and technology acquisitions and innovation are key factors to our ongoing success.
Our recent acquisitions have included a portfolio of sleep apnea products through our acquisition of Curative Medical.
Approximately 16% of our employees are devoted to research and development activities.
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• Continue Product Development and Innovation in Respiratory Care Products. We are committed to ongoing innovation
of our respiratory care products that serve the needs of patients with COPD and neuromuscular diseases. With the addition of
Inova Labs POCs and our non-invasive ventilator devices with masks and accessories, we intend to continue to expand and
enhance our product offerings in this area. In recent years, we launched Mobi, which is our first ResMed-branded portable
oxygen concentrator as well as advanced and expanded the integrations of our therapy-based software solutions including
AirView for Respiratory Care, enabling clinicians to remotely monitor patients on some ventilation devices and bilevel devices.
Additionally, we acquired a digital health platform for inhalers through our acquisition of Propeller Health in 2019, rounding
out our portfolio to treat COPD patients through their therapy journey across different stages of their disease.
• Expand SaaS Solutions in Out-of-Hospital Care Settings. Our vision is to transform and significantly improve out-of-
hospital (OOH) healthcare through a strategy of enabling better patient care, improving clinical decision support, and driving
interoperability across out-of-hospital healthcare settings. Since acquiring Brightree in 2016, plus MatrixCare and
HEALTHCAREfirst in 2018, we offer software solutions across multiple out-of-hospital healthcare settings including HME,
home health and hospice, skilled nursing, life plan communities, senior living and private duty. We are connecting capabilities
across the platforms in these out-of-hospital care settings to help our customers be more efficient, better serve people, keep
them out-of-hospital, and in lower-cost, higher-quality care settings. Today, our SaaS solutions serve OOH customers
combining over 90 million individual accounts.
• Expand Geographic Presence. We market our products in more than 140 countries to sleep clinics, home healthcare dealers,
patients and third-party payors. We intend to increase our sales and marketing efforts in our principal markets, as well as expand
the depth of our presence in other high-growth geographic regions. In 2016, we acquired Curative Medical to invest in the
China market and expand our growth potential in sleep apnea, COPD and respiratory care in China. In 2019, we acquired HB
Healthcare, a privately owned HME that serves both reimbursed and cash-pay customers of sleep and respiratory care devices
in South Korea.
•
Increase Public and Clinical Awareness. We continue to expand our existing promotional activities to increase awareness
of sleep apnea, COPD and other clinical conditions that can be treated with our industry-leading solutions. These promotional
activities target both the population predisposed to sleep apnea and medical specialists, such as pulmonologists, sleep medicine
specialists, primary care physicians, cardiologists, neurologists and other medical subspecialists who treat these conditions and
their associated comorbidities. We target special interest groups, including the National Stroke Association, the American Heart
Association, COPD Foundation and the National Sleep Foundation, to further increase awareness of the relationship between
OSA, COPD, neuromuscular disease and comorbidities such as cardiac disease, diabetes, hypertension and obesity. The
programs also support our efforts to inform the community of the dangers of sleep apnea with regard to occupational health
and safety, especially in the transport industry. We have helped establish a center for clinical care and medical research at the
University of California, San Diego in the fields of sleep apnea and COPD.
• Expand into New Clinical Applications. We continually seek to identify new applications of our technology for significant
unmet medical needs. Studies have established a clinical association between OSA and both stroke and congestive heart failure,
and have recognized sleep apnea as a cause of hypertension or high blood pressure. Research also indicates that sleep apnea is
independently associated with glucose intolerance and insulin resistance. Additionally, research supported by ResMed has
demonstrated that the addition of non-invasive ventilation to patients with severe COPD who are receiving oxygen therapy,
provides meaningful clinical benefits to the patient, and the broader healthcare system. We maintain close working relationships
with a number of prominent physicians to explore new medical applications for our products and technology.
• Leverage the Experience of our Management Team. Our senior management team has extensive experience in the medical
device industry in general, and in the fields of sleep apnea, respiratory care and healthcare informatics in particular. We intend
to continue to leverage the experience and expertise of these individuals to maintain our innovative approach to the development
of products and solutions, and to increase awareness of the serious medical problems caused by sleep apnea and the use of
oxygen, non-invasive ventilation, and in-home life support ventilation to treat COPD.
Products
Our portfolio of products includes devices, diagnostic products, mask systems, headgear and other accessories, dental devices, POCs
and cloud-based software informatics solutions. For purposes of the following discussion, we refer to our air flow generators, ventilators
and oxygen concentrators collectively as devices.
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PART I
Devices
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Item 1
We produce cloud-connected CPAP, APAP, bilevel, and ASV devices that deliver positive airway pressure through a patient interface,
either a mask or cannula. Our APAP devices, known as AutoSet, are based on a proprietary technology to monitor breathing and can
also be used in the diagnosis, treatment and management of OSA. During fiscal year 2017, we launched AirMini, a small portable CPAP
combining the same proven therapy modes used in the AirSense 10 with effective waterless humidification enabling portable
convenience. We also acquired a line of Chinese-developed and manufactured sleep and ventilation devices with the acquisition of
Curative Medical in fiscal year 2016. Devices in total accounted for approximately 51%, 52% and 56% of our net revenues in fiscal
years 2020, 2019 and 2018, respectively.
The tables below provide a selection of products, as known by our trademarks.
CPAP
PRODUCTS
AirSense 10 Elite
DESCRIPTION
An advanced fixed-pressure therapy device with an integrated humidifier and built-in wireless connectivity. It is designed to be intuitive
and easy-to-use.
AirSense 10 CPAP
The AirSense 10 CPAP is a fixed-pressure therapy device and built-in wireless connectivity. It also provides compliance, AHI and leak
data reporting.
AUTOSET
PRODUCTS
AirSense 10 Auto
DESCRIPTION
A premium auto-adjusting therapy device featuring AutoRamp™ with sleep onset detection, expiratory pressure relief (EPR™) and Easy-
Breathe technology. The device also features built-in wireless connectivity.
AirMini
A small portable CPAP device featuring the same auto-adjusting therapy modes used in the AirSense™ 10 Auto. The device also features
built-in Bluetooth connectivity and effective waterless humidification enabled by HumidX technology.
BILEVEL
PRODUCTS
AirCurve 10 S
DESCRIPTION
A bilevel device for patients who need extra pressure support or find it difficult to adjust to therapy on a fixed pressure continuous positive
airway pressure device. The device features built-in wireless connectivity and works with our AirView™ patient monitoring software.
AirCurve 10 V Auto
An auto-adjusting bilevel device for patients who need greater pressure support to treat their obstructive sleep apnea. The device features
built-in wireless connectivity and works with our AirView™ patient monitoring software.
AirCurve 10 ST
A bilevel device with backup rate that provides exceptional patient-ventilator synchrony, reducing the work of breathing so patients
remain comfortable and well ventilated. The device features built-in wireless connectivity and works with our AirView™ patient
monitoring software.
AirCurve 10 ASV and CS Adaptive servo-ventilators specifically designed to treat patients exhibiting central sleep apnea (CSA), mixed sleep apnea and periodic
breathing, with or without obstructive sleep apnea. These devices also feature built-in wireless connectivity and works with our AirView™
patient monitoring software.
VENTILATION
PRODUCTS
Stellar 100 and 150
DESCRIPTION
Pressure support and volume non-invasive ventilators with invasive capabilities designed to suit a range of environments and for various
respiratory patient types.
Astral 100 and 150
Pressure support and volume ventilators for invasive and non-invasive purposes so it can be used from the hospital to the home.
Lumis 100 and 150
Pressure support non-invasive ventilators that support a variety of therapy modes with built-in wireless connectivity and integrated
humidification.
Lumis ST-A
A Pressure support non-invasive ventilator that supports a variety of therapy modes with built-in wireless connectivity, integrated
humidification and a range of fixed and adjustable alarms.
Mobi
A portable oxygen concentrator system with a lightweight design and extended battery life to promote greater mobility for patients on
oxygen therapy.
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Mask Systems, Diagnostic Products, Accessories and Other Products
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Item 1
Masks, diagnostic products and accessories together accounted for approximately 37%, 37% and 38% of our net revenues in fiscal years
2020, 2019 and 2018, respectively.
Mask Systems
Mask systems are one of the most important elements of sleep apnea treatment systems. Masks are a primary determinant of patient
comfort and as such may drive or impede patient compliance with therapy. We have been a consistent innovator in small nasal, nasal
pillows and full-face masks, by improving patient comfort while minimizing size and weight.
The table below provides an of overview of our mask systems by category.
CATEGORY
Minimalist
DESCRIPTION
AirFit F30, AirFit P10 and AirFit N30 minimalist masks feature our lightest, lowest profile designs. The features of these masks are
focused on minimizing contact with the patient’s face to reduce red marks and irritation.
Freedom
AirFit N30i, AirFit P30i and AirFit F30i freedom masks, which feature top-of-head tubing design allowing flexibility to easily switch
sleep positions.
Ultra Soft
The AirTouch F20 mask features a soft and breathable AirTouch cushion designed to enhance CPAP mask comfort.
Universal Fit
AirFit F20 and AirFit N20 masks are designed to fit a wide range of faces due to the InfinitySeal silicone cushion that adapts to unique
facial contours, which increases comfort, improves the fit and reduces leakage.
Diagnostic Products
We market sleep recorders for the diagnosis and titration of sleep apnea in sleep clinics and hospitals. These diagnostic systems record
relevant respiratory and sleep data, which can be analyzed by a sleep specialist or physician who can then tailor an appropriate OSA
treatment regimen for the patient.
PRODUCTS
ApneaLink Air
DESCRIPTION
A portable diagnostic device which measures oximetry, respiratory effort, pulse, nasal flow and snoring. Works with AirView Diagnostics
to provide comprehensive diagnostic solution to clinicians.
Connected Solutions and Other Products
We have a suite of products that are designed to allow fewer professionals to manage more patients and empower patients to track their
own health outcomes. We are expanding our cloud-based patient management and engagement platforms, such as AirView, enabling
remote monitoring, over-the-air trouble shooting and changing of device settings, U-Sleep enabling automated patient coaching through
a text, email or interactive voice phone call and myAir, a patient engagement application that provides sleep data and a daily score based
on their previous night’s data.
PRODUCTS
AirView
DESCRIPTION
A cloud-based system enabling remote monitoring and changing of patients’ device settings. AirView also makes it easier to simplify
workflows and collaborate more efficiently across the patient’s care network.
myAir
A personalized therapy management application for patients with sleep-disordered breathing providing support, education and
troubleshooting tools for increased patient engagement and improved compliance.
U-Sleep
A compliance monitoring solution that enables HMEs to streamline their sleep programs to achieve better business and patient outcomes.
Connectivity Module
A module providing cellular connection between our compatible ventilation devices (i.e. Astral Stellar) and our AirView™ system.
Propeller
Solutions
Propeller's inhaler sensors track medication usage and pair with a companion smartphone application, giving people with asthma or
COPD a better understanding of their disease and while promoting increased adherence to treatment. The Propeller Provider Portal gives
clinicians the timely and accurate information they need to make better treatment decisions.
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SaaS Products
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Item 1
Following multiple acquisitions, including Brightree in April 2016, HEALTHCAREfirst in July 2018 and MatrixCare in November
2018, we now supply out-of-hospital software products designed to support the professionals and caregivers helping people stay healthy
in the home or care setting of their choice. SaaS revenue accounted for approximately 12%, 11% and 7% of our net revenue in fiscal
years 2020, 2019 and 2018, respectively.
PRODUCTS
Brightree solutions
DESCRIPTION
Brightree enables out-of-hospital care organizations to improve their business performance and deliver better health outcomes. As an
industry-leading cloud-based healthcare IT company, Brightree provides solutions and services for thousands of organizations in home
medical equipment and pharmacy, orthotic and prosthetic, and home infusion.
HEALTHCAREfirst
solutions
HEALTHCAREfirst offers electronic health record, or EHR, software, billing and coding services, and advanced analytics that enable
home health and hospice agencies to optimize their clinical, financial and administrative processes.
MatrixCare solutions
MatrixCare’s EHR software as a service solutions are used by skilled nursing and senior living providers, life plan communities
(CCRCs), and home health and hospice organizations to prosper in an ever-changing healthcare system.
Product Development and Clinical Trials
We have a strong track record of innovation in the sleep and respiratory care markets. In 1989, we introduced our first CPAP device.
Since then we have been committed to an ongoing program of product advancement and development. Currently, our product
development and clinical trial efforts are focused on not only improving our current product offerings and usability, but also expanding
into new product applications.
We continually seek to identify new applications of our technology for significant unmet medical needs. Sleep apnea is associated with
a number of symptoms beyond excessive daytime sleepiness and irritability. Studies have established a clinical association between
untreated sleep apnea and systemic hypertension, diabetes, coronary artery disease, stroke, atrial fibrillation, congestive heart failure,
and mortality.
Across the sleep and respiratory care platforms, we support clinical trials in many countries including the United States, Germany,
Netherlands, France, Japan, the United Kingdom, Switzerland, China, Spain, Canada, Singapore and Australia to develop new clinical
applications for our technology. We have also begun presenting and publishing research findings based on the industry-leading
connectivity platform and data assets that are unique to us. We continue to support some of the largest sleep apnea studies in history by
performing advanced statistical analyses on millions of clinical data points using real-world data.
We consult with physicians at major medical centers throughout the world to identify clinical and technological trends in the treatment
of sleep apnea, COPD and the other conditions associated with these diseases. New product ideas are also identified by our marketing
staff, direct sales force and network of distributors, customers, clinicians and patients.
Sales and Marketing
We currently market our products in more than 140 countries through a network of distributors and our direct sales force. We attempt
to tailor our marketing approach to each national market, based on regional awareness of sleep apnea as a health problem, physician
referral patterns, consumer preferences and local reimbursement policies. See Note 15 – Segment Information of the Notes to
Consolidated Financial Statements (Part II, Item 8) for financial information about our geographic areas.
United States, Canada and Latin America. Our products are typically purchased by a home healthcare dealer who then sells the
products to the patient. The decision to purchase our products, as opposed to those of our competitors, is made or influenced by one or
more of the following individuals or organizations: the prescribing physician and his or her staff; the home healthcare dealer; the insurer
and the patient. In the United States, Canada and Latin America, our sales and marketing activities are conducted through a field sales
organization made up of regional territory representatives, program development specialists and regional sales directors. Our field sales
organization markets and sells products to home healthcare dealer branch locations throughout the United States, Canada and Latin
America.
We also market our products directly to physicians and sleep clinics. Patients who are diagnosed with OSA or another respiratory
condition and prescribed our products are typically referred by the diagnosing physician or sleep clinic to a home healthcare dealer to
fill the prescription. The home healthcare dealer, in consultation with the referring physician, will assist the patient in selecting the
equipment, fit the patient with the appropriate mask and set the device pressure to the prescribed level.
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Item 1
Our SaaS solutions are sold to providers of healthcare in various out-of-hospital settings. We market and sell our Brightree business
management software and service solutions to providers in the U.S. and our primary markets are HME, pharmacy, home infusion,
orthotics and prosthetics. Our sales activities for Brightree products are conducted through a sales organization made up of strategic
account managers, sales engineers and sales directors. We develop, market and sell our MatrixCare care management and related
ancillary solutions to providers in the U.S. and our primary markets are senior living, skilled nursing; life plan communities; home
health, home care, and hospice agencies as well as related accountable care organizations. Our MatrixCare management solutions are
primarily sold through direct sales and ancillary solutions are sold both through direct sales and channel partners.
Combined Europe, Asia and other markets. We market our products in most major countries in combined Europe, Asia and other
markets. We have wholly-owned subsidiaries in Austria, Czech Republic, Denmark, Finland, France, Germany, Ireland, Netherlands,
Norway, Poland, Sweden, Switzerland, the United Kingdom, Australia, China, India, Japan, Korea, New Zealand, Taiwan, and Thailand.
We use a combination of our direct sales force and independent distributors to sell our products in combined Europe, Asia and other
markets. We select independent distributors in each country based on their knowledge of respiratory medicine and a commitment to
sleep apnea therapy. In countries where we sell our products direct, a local senior manager is responsible for direct national sales. In
many countries we sell our products to home healthcare dealers or hospitals who then sell the products to the patients. In Germany,
Australia, New Zealand, and South Korea, we also operate a home healthcare company, in which we provide products and services
directly to patients.
We do not sell our SaaS products in combined Europe, Asia and other markets.
Manufacturing
We operate a globally distributed manufacturing network designed for supply chain resilience, that is intended to control costs and
minimize risks. Our manufacturing operations consist of specialist component production as well as assembly and testing of our devices,
masks and accessories. Of the numerous raw materials, parts and components purchased for assembly of our therapeutic and diagnostic
sleep disorder products, many are off-the-shelf items available from multiple vendors. We also purchase uniquely configured
components from various suppliers, including some who are single-source suppliers for us. Any reduction or halt in supply from one
of these single-source suppliers could limit our ability to manufacture our products or devices until a replacement supplier is found and
qualified. We generally manufacture to our internal sales forecasts and fill orders as received. We strive for continuous improvement in
manufacturing processes to deliver year-on-year improvement in output, cost and product quality. Each manufacturing site and team are
responsible for the quality of their product group and decisions are based on performance and quality measures, including customer
feedback.
Our quality management system is based upon the requirements of ISO 9001, ISO 13485, FDA Quality System Regulations for Medical
Devices, the Medical Device Directive (93/42/EEC) and other applicable regulations for the markets in which we sell. Our main
manufacturing sites are certified to ISO 13485 and audited at regular intervals by a Notified Body. Additionally, our Sydney, Loyang,
San Diego, Atlanta and Moreno Valley sites are certified under the Medical Device Single Audit Program or MDSAP, an audit of
medical device manufacturers’ quality management system to satisfy multiple regulatory requirements. MDSAP audits are conducted
by a MDSAP recognized auditing organization and can fulfill the needs of multiple regulatory jurisdictions (i.e. Australia, Brazil,
Canada, Japan, and the United States of America).
Our main manufacturing facilities are located in Loyang, Singapore; Sydney, Australia; Chatsworth, California; Johor Bahru, Malaysia;
Atlanta, Georgia and Suzhou, China. We are establishing a new manufacturing facility in Tuas, Singapore that will eventually replace
our Loyang facility. Refer to Item 2 for additional details on these properties.
Third-Party Coverage and Reimbursement
The cost of medical care in many of the countries in which we operate is funded in substantial part by government and private insurance
programs. In Germany and Korea, we receive payments directly from these payors but in other countries, although we do not generally
receive payments for our products directly from these payors, our success in major markets depends on the ability of patients to obtain
coverage and adequate reimbursement from third-party payors for our products.
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In the United States, our products are purchased primarily by home healthcare dealers, hospitals or sleep clinics, who invoice third-party
payors directly for reimbursement. Domestic third-party payors include government payors such as Medicare and Medicaid and
commercial health insurance plans. These payors may deny coverage and reimbursement if they determine that a device is not used in
accordance with certain covered treatment methods, or is experimental, unnecessary or inappropriate. The long-term trend towards cost-
containment, through managed healthcare, or other legislative proposals to reform healthcare, could control or significantly influence
the purchase of healthcare services and products and could result in lower prices for our products. In some foreign markets, such as
France, Germany, and Japan, government reimbursement is currently available for purchase or rental of our products, subject to
constraints such as price controls or unit sales limitations. In Australia, China, and some other foreign markets, there is currently limited
or no reimbursement for devices that treat OSA.
Healthcare reform in the United States continues to bring significant changes to the third-party payor landscape. In 2011, the Centers
for Medicare & Medicaid Services, or CMS, implemented the competitive bidding program, which included DME that we manufacture
and develop, specifically, oxygen, CPAP and respiratory assist devices (or bilevel devices), and related supplies and accessories. CMS
is required by law to recompete these contracts at least once every three years. In addition, the 2010 Patient Protection and Affordable
Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the ACA, required CMS to roll out the
competitive bidding process nationally or adjust prices in non-competitive bidding areas, also known as the non-bid or Round 3 areas,
to match competitive bidding prices by 2016. CMS phased in the new rates beginning January 1, 2016, and the rates became fully
effective July 1, 2016. The implementation of the competitive acquisition program has resulted in reduced Medicare payment for
oxygen, CPAP and respiratory assist devices, and related supplies and accessories in both competitive bidding areas and non-competitive
bidding areas. Through an Interim Final Rule issued in May 2018, CMS increased the fee schedule amounts for certain DME in non-
bid areas that qualify as rural and non-contiguous, setting payment for these areas for June 1, 2018 to December 31, 2018 at a 50/50
blended reimbursement rate based on the pre-competitive bidding reimbursement rate and the adjusted reimbursement rate set through
competitive bidding.
Due to the lapse of competitive bid contracts as of December 31, 2018, effective January 1, 2019, Medicare beneficiaries may receive
DME from any Medicare-enrolled supplier until new contracts are in effect under the next round of competitive bidding, which is
expected to take effect on January 1, 2021. Pricing in competitive bidding areas and non-rural, contiguous non-bid areas will continue
to use adjusted fee schedule amounts, subject to annual Consumer Price Index (CPI) adjustments, beginning in 2019, until the next
bidding round takes place. CMS also extended the blended fee schedule amounts for non-bid rural and non-contiguous areas through
December 31, 2020. Under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, the blended fee schedule
amounts for non-bid rural and non-contiguous areas was extended through the end of the COVID-19 public health emergency, should
it extend beyond December 31, 2020, and a blended fee schedule amount was implemented for all other areas for the same period.
In the next round of Durable Medical Equipment, Prosthetics, Orthotics and Supplies (DMEPOS) competitive bidding program,
expected to take effect on January 1, 2021, there have been some revisions to the bidding methodology including the plan to implement
surety bond requirements, lead item pricing, and setting reimbursement rates at the maximum winning bid rate instead of the median
winning bid rate. Although CMS previously expanded the categories of devices subject to competitive bidding to include non-invasive
ventilators, or NIVs, starting in 2021, in response to the COVID-19 pandemic, CMS removed NIVs from Round 2021 of the DMEPOS
Competitive Bidding Program.
The ACA, which was passed both to expand the number of individuals with healthcare coverage and to develop additional revenue
sources, also included, among other things, a deductible excise tax equal to 2.3% of the price for which medical devices are sold in the
United States on any entity that manufactures or imports medical devices, with limited exceptions, beginning in 2013. However, this
excise tax was subsequently suspended by the U.S. Congress for medical device sales, beginning in 2016 and permanently repealed,
effective January 1, 2020. The ACA also provided for a number of Medicare regulatory requirements, including new face-to-face
encounter requirements for DME and home health services.
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We cannot predict at this time the full impact that the ACA, or any U.S. legislation enacted in the future, will have on our revenues,
profit margins, profitability, operating cash flows and results of operations. There have been judicial and Congressional challenges to
certain aspects of the ACA, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the ACA, and
we expect such challenges and amendments to continue. For example, the Tax Cuts and Jobs Act of 2017 includes a provision repealing,
effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain
qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” On December 14, 2018, a
U.S. District Court Judge in the Northern District of Texas ruled that the individual mandate is a critical and inseverable feature of the
ACA, and therefore, because it was repealed as part of the U.S. Tax Act, the remaining provisions of the ACA are invalid as well. On
December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate was
unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of the ACA are invalid
as well. On March 2, 2020, the U.S. Supreme Court granted the petitions for writs of certiorari to review this case, although it is unclear
when or how the Supreme Court will rule. It is also unclear how other efforts to challenge, repeal or replace the ACA will impact the
law or our business.
Service and Warranty
We generally offer either one-year or two-year limited warranties on our devices. In some regions and for certain customers we also
offer extended warranties on our devices for one to three years in addition to our limited warranty. Warranties on mask systems are for
90 days. Our distributors either repair our products with parts supplied by us or arrange shipment of products to our facilities for repair
or replacement. We receive returns of our products from the field for various reasons. We believe that the level of returns experienced
to date is consistent with levels typically experienced by manufacturers of similar devices. We provide for warranties and returns based
on historical data.
Competition
The markets for our products and services are highly competitive. We believe that the principal competitive factors in all of our markets
are product features, value-added solutions, reliability and price. Customer support, reputation and efficient distribution are also
important factors. We compete on a market-by-market basis with various companies, some of which have greater financial, research,
manufacturing and marketing resources than us. The disparity between our resources and those of our competitors may increase as a
result of the trend towards consolidation in the healthcare industry. In addition, some of our competitors are affiliates of customers of
ours, which may make it difficult to compete with them.
Our primary Sleep and Respiratory Care competitors include Philips BV; Fisher & Paykel Healthcare Corporation Limited; DeVilbiss
Healthcare; Apex Medical Corporation; BMC Medical Co. Ltd.; and regional manufacturers. Finally, our products compete with surgical
procedures, nerve stimulation devices and dental appliances designed to treat OSA and other sleep apnea-related respiratory conditions.
The development of new or innovative procedures or devices by others could result in our products becoming obsolete or
noncompetitive, which would harm our revenues and financial condition.
For our SaaS business, the market is highly competitive, rapidly evolving, and subject to changing technology, low barriers to entry,
shifting customer needs and frequent introductions of new products and services. The development of new or innovative solutions by
others could result in our solutions becoming obsolete or noncompetitive, which would harm our revenues and financial condition.
Any product developed by us will have to compete for market acceptance and market share. An important factor in such competition
may be the timing of market introduction of competitive products and solutions. Accordingly, the speed with which we can develop
products and solutions, complete clinical testing and regulatory clearance processes and provide commercial supply of products and
solutions to the market are important competitive factors. In addition, our ability to compete will continue to be dependent on
successfully protecting our patents and other intellectual property.
Patents and Proprietary Rights and Related Litigation
We rely on a combination of patents, designs, trademarks, trade secrets, copyrights, and non-disclosure agreements to protect our
proprietary technology and rights. Some of these patents, patent applications and designs relate to significant aspects and features of our
products. We believe the combination of these rights, in aggregate, are of material importance to each of our businesses. Through our
various subsidiaries, as of the date of this report, we own or have licensed rights to over 6,200 pending, allowed or granted patents and
designs. Patents and designs have various statutory terms based on the legislation in individual jurisdictions which may be subject to
change. Of our patents, 570 U.S. patents and 1,452 foreign patents are due to expire in the next five years. We believe that the expiration
of these patents will not have a material adverse impact on our competitive position.
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Litigation has been necessary in the past and may be necessary in the future to enforce patents issued to us, to protect our rights, or to
defend third-party claims of infringement by us of the proprietary rights of others. The defense and prosecution of patent claims,
including pending claims, as well as participation in other inter-party proceedings, can be expensive and time-consuming, even in those
instances in which the outcome is favorable to us. Patent laws regarding the enforceability of patents vary from country to country.
Therefore, there can be no assurance that patent issues will be uniformly resolved, or that local laws will provide us with consistent
rights and benefits.
Government Regulations
FDA
Our products are subject to extensive regulation particularly as to safety, efficacy and adherence to FDA Quality System Regulation,
and related manufacturing standards. Medical device products are subject to rigorous FDA and other governmental agency regulations
in the United States and similar regulations of foreign agencies abroad. The FDA regulates the design, development, research, preclinical
and clinical testing, introduction, manufacture, advertising, labeling, packaging, marketing, distribution, import and export, and record
keeping for such products, in order to ensure that medical products distributed in the United States are safe and effective for their
intended use. In addition, the FDA is authorized to establish special controls to provide reasonable assurance of the safety and
effectiveness of most devices. Non-compliance with applicable requirements can result in import detentions, fines, civil and
administrative penalties, injunctions, suspensions or losses of regulatory approvals, recall or seizure of products, operating restrictions,
refusal of the government to approve product export applications or allow us to enter into supply contracts, and criminal prosecution.
Unless an exemption applies, the FDA requires that a manufacturer introducing a new medical device or a new indication for use of an
existing medical device obtain either a Section 510(k) premarket notification clearance or a premarket approval, or PMA, before
introducing it into the U.S. market. The type of marketing authorization is generally linked to the classification of the device. The FDA
classifies medical devices into one of three classes (Class I, II or III) based on the degree of risk the FDA determines to be associated
with a device and the level of regulatory control deemed necessary to ensure the device’s safety and effectiveness.
Our products currently marketed in the United States are marketed pursuant to 510(k) pre-marketing clearances and are either Class I or
Class II devices. The process of obtaining a Section 510(k) clearance generally requires the submission of performance data and often
clinical data, which in some cases can be extensive, to demonstrate that the device is “substantially equivalent” to a device that was on
the market before 1976 or to a device that has been found by the FDA to be “substantially equivalent” to such a pre-1976 device, a
predecessor device is referred to as “predicate device.” As a result, FDA clearance requirements may extend the development process
for a considerable length of time. In addition, in some cases, the FDA may require additional review by an advisory panel, which can
further lengthen the process. The PMA process, which is reserved for new devices that are not substantially equivalent to any predicate
device and for high-risk devices or those that are used to support or sustain human life, may take several years and requires the
submission of extensive performance and clinical information.
Medical devices can be marketed only for the indications for which they are cleared or approved. After a device has received 510(k)
clearance for a specific intended use, any change or modification that significantly affects its safety or effectiveness, such as a significant
change in the design, materials, method of manufacture or intended use, may require a new 510(k) clearance or PMA approval and
payment of an FDA user fee. The determination as to whether or not a modification could significantly affect the device’s safety or
effectiveness is initially left to the manufacturer using available FDA guidance; however, the FDA may review this determination to
evaluate the regulatory status of the modified product at any time and may require the manufacturer to cease marketing and recall the
modified device until 510(k) clearance or PMA approval is obtained. The manufacturer may also be subject to significant regulatory
fines or penalties.
Any devices we manufacture and distribute pursuant to clearance or approval by the FDA are subject to pervasive and continuing
regulation by the FDA and certain state agencies. These include product listing and establishment registration requirements, which help
facilitate FDA inspections and other regulatory actions. As a medical device manufacturer, all of our manufacturing facilities are subject
to inspection on a routine basis by the FDA. We are required to adhere to applicable regulations setting forth detailed cGMP
requirements, as set forth in the QSR, which require, manufacturers, including third-party manufacturers, to follow stringent design,
testing, control, documentation and other quality assurance procedures during all phases of the design and manufacturing process.
Noncompliance with these standards can result in, among other things, fines, injunctions, civil penalties, recalls or seizures of products,
total or partial suspension of production, refusal of the government to grant 510(k) clearance or PMA approval of devices, withdrawal
of marketing approvals and criminal prosecutions. We believe that our design, manufacturing and quality control procedures are in
compliance with the FDA’s regulatory requirements.
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We must also comply with post-market surveillance regulations, including medical device reporting, or MDR, requirements which
require that we review and report to the FDA any incident in which our products may have caused or contributed to a death or serious
injury. We must also report any incident in which our product has malfunctioned if that malfunction would likely cause or contribute to
a death or serious injury if it were to recur.
Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission.
Medical devices approved or cleared by the FDA may not be promoted for unapproved or uncleared uses, otherwise known as “off-
label” promotion. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses,
and a company that is found to have improperly promoted off-label uses may be subject to significant liability, including substantial
monetary penalties and criminal prosecution.
Sales of medical devices outside the United States are subject to regulatory requirements that vary widely from country to country.
EEA
In the European Economic Area, (which is comprised of the 27 member states of the European Union plus Norway, Iceland and
Liechtenstein), or EEA, manufacturers of medical devices need to comply with the Essential Requirements laid out in Annex I to the
EU Medical Devices Directive (Council Directive 93/42/EEC). Compliance with these requirements is a prerequisite to be able to affix
the CE mark to medical devices, without which they cannot be marketed or sold in the EEA. To demonstrate compliance with the
Essential Requirements and obtain the right to affix the CE Mark, manufacturers of medical devices must undergo a conformity
assessment procedure, which varies according to the type of medical device and its classification. Except for low-risk medical devices
(Class I with no measuring function and which are not sterile), where the manufacturer can issue an EC Declaration of Conformity based
on a self-assessment of the conformity of its products with the Essential Requirements, a conformity assessment procedure requires the
intervention of a Notified Body, which is an organization designated by a competent authority of an EEA country to conduct conformity
assessments. Depending on the relevant conformity assessment procedure, the Notified Body would audit and examine the Technical
File and the quality system for the manufacture, design and final inspection of the devices. The Notified Body issues a CE Certificate
of Conformity following successful completion of a conformity assessment procedure conducted in relation to the medical device and
its manufacturer and their conformity with the Essential Requirements. This Certificate entitles the manufacturer to affix the CE mark
to its medical devices after having prepared and signed a related EC Declaration of Conformity.
As a general rule, demonstration of conformity of medical devices and their manufacturers with the essential requirements must be
based, among other things, on the evaluation of clinical data supporting the safety and performance of the products during normal
conditions of use. Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal
conditions of use, that the known and foreseeable risks, and any adverse events, are minimized and acceptable when weighed against
the benefits of its intended performance, and that any claims made about the performance and safety of the device are supported by
suitable evidence.
All manufacturers placing medical devices into the market in the EEA must comply with the EU Medical Device Vigilance System.
Under this system, incidents must be reported to the relevant authorities of the member states of the EEA, and manufacturers are required
to take Field Safety Corrective Actions, or FSCAs, to reduce a risk of death or serious deterioration in the state of health associated with
the use of a medical device that is already placed on the market. An incident is defined as any malfunction or deterioration in the
characteristics and/or performance of a device, as well as any inadequacy in the labeling or the instructions for use which, directly or
indirectly, might lead to or might have led to the death of a patient or user or of other persons or to a serious deterioration in their state
of health. An FSCA may include the recall, modification, exchange, destruction or retrofitting of the device. FSCAs must be
communicated by the manufacturer or its legal representative to its customers and/or to the end users of the device through Field Safety
Notices. Where appropriate, our products commercialized in Europe are CE marked and classified as either Class I or Class II.
On April 5, 2017, the European Parliament passed the Medical Devices Regulation, which repeals and replaces the EU Medical Devices
Directive. Unlike directives, which must be implemented into the national laws of the EEA member states, the regulations would be
directly applicable (i.e., without the need for adoption of EEA member State laws implementing them) in all EEA member states and
are intended to eliminate current differences in the regulation of medical devices among EEA member States. The Medical Devices
Regulation, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across
the EEA for medical devices and in vitro diagnostic devices and ensure a high level of safety and health while supporting innovation.
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The Medical Device Regulation was meant to become applicable three years after publication (in May 2020). However, on April 23,
2020, to allow EEA national authorities, notified bodies, manufacturers and other actors to focus fully on urgent priorities related to the
COVID-19 pandemic, the European Council and Parliament adopted Regulation 2020/561, postponing the date of application of the
Medical Device Regulation by one year (to May 2021). Once applicable, the new regulations will among other things:
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strengthen the rules on placing devices on the market and reinforce surveillance once they are available;
establish explicit provisions on manufacturers' responsibilities for the follow-up of the quality, performance and safety of
devices placed on the market;
improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique
identification number;
set up a central database to provide patients, healthcare professionals and the public with comprehensive information on
products available in the EU; and
strengthen rules for the assessment of certain high-risk devices, such as implants, which may have to undergo an additional
check by experts before they are placed on the market.
These modifications may have an impact on the way we design and manufacture products and the way we conduct our business in the
EEA. We are progressing in our plans to meet the new requirements.
Other regulatory bodies
Our devices are sold in multiple countries and often need to be registered with local regulatory bodies such as the Therapeutic Goods
Administration in Australia, Health Canada in Canada and CFDA in China.
Other Healthcare Laws
We are subject to a number of laws and regulations that may restrict our business practices, including, without limitation, anti-kickback,
false claims, physician payment transparency and data privacy and security laws. The government has interpreted these laws broadly
to apply to the marketing and sales activities of manufacturers and distributors like us.
The federal Anti-Kickback Statute prohibits, among other things, persons or entities from knowingly and willfully soliciting, receiving,
offering or providing remuneration, directly or indirectly, in cash or in kind, in exchange for or to induce either the referral of an
individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service for which payment may be made,
in whole or in part, under federal healthcare programs such as Medicare and Medicaid. In addition, a person or entity does not need to
have actual knowledge of this statute or specific intent to violate it in order to have committed a violation. Violations of the federal Anti-
Kickback Statute may result in significant civil monetary penalties for each violation, plus up to three times the remuneration involved.
Violations of the Federal Anti-Kickback Statute can also result in criminal penalties, including significant criminal fines and
imprisonment. In addition, violations can result in debarment, suspension or exclusion from participation in government healthcare
programs, including Medicare and Medicaid.
The federal civil False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or causing to be
presented, a false or fraudulent claim for payment or approval to the federal government or knowingly making, using or causing to be
made or used a false record or statement material to a false or fraudulent claim to the federal government. A claim includes “any request
or demand” for money or property presented to the U.S. government. The civil False Claims Act also applies to false submissions that
cause the government to be paid less than the amount to which it is entitled, such as a rebate. Intent to deceive is not required to establish
liability under the civil False Claims Act. In addition, a claim including items or services resulting from a violation of the federal Anti-
Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. When an entity is determined
to have violated the federal civil False Claims Act, the government may impose significant civil fines and penalties for each false claim,
plus treble damages, and exclude the entity from participation in Medicare, Medicaid and other federal healthcare programs. Private
suits filed under the civil False Claims Act, known as qui tam actions, can be brought by individuals on behalf of the government. These
individuals may share in any amounts paid by the entity to the government in fines or settlement.
The federal Civil Monetary Penalties Law prohibits, among other things, the offering or transfer of remuneration to a Medicare or state
healthcare program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular
provider, practitioner, or supplier of services reimbursable by Medicare or a state healthcare program, unless an exception applies.
Additionally, there has been a recent trend of increased federal and state regulation of payments and transfers of value provided to
healthcare professionals or entities.
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The federal Physician Sunshine Act, which requires certain manufacturers of drugs, biologicals, and medical devices or supplies that
require premarket approval by or notification to the FDA, and for which payment is available under Medicare, Medicaid or the Children’s
Health Insurance Program, to report annually to the CMS information related to (i) payments and other transfers of value to teaching
hospitals, physicians (as defined by statute) and, beginning in 2022, physician assistants, nurse practitioners and other practitioners, and
(ii) ownership and investment interests held by such providers and their immediate family members. Applicable manufacturers are
required to submit annual reports to CMS. Failure to submit required information may result in significant civil monetary penalties for
each failure and additional penalties for “knowing failures”, for all payments, transfers of value or ownership or investment interests
that are not timely, accurately, and completely reported in an annual submission, and may result in liability under other federal laws or
regulations. Certain states also mandate implementation of commercial compliance programs, impose restrictions on device
manufacturer marketing practices and/or require the tracking and reporting of gifts, compensation and other remuneration to healthcare
professionals and entities.
The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, created federal criminal statutes that prohibit
among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program,
including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully
obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material
fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare
benefits, items or services. Like the Anti-Kickback Statute, a person or entity does not need to have actual knowledge of these statutes
or specific intent to violate them in order to have committed a violation.
Also, many U.S. states and countries outside the U.S. have similar fraud and abuse statutes or regulations that may be broader in scope
and may apply regardless of payor, in addition to items and services reimbursed under government programs.
Under HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, which
we collectively refer to as HIPAA, the Department of Health and Human Services, or HHS, has issued regulations, including the HIPAA
Privacy, Security and Breach Notification Rules, to protect the privacy and security of protected health information, or PHI, used or
disclosed by covered entities including health care providers and their business associates. HIPAA also regulates standardization of data
content, codes and formats used in health care transactions and standardization of identifiers for health plans and providers. Penalties
for violations of HIPAA regulations include significant civil and criminal penalties for each violation. In addition to federal privacy and
security regulations, there are a number of state laws governing confidentiality and security of personally identifiable information that
are applicable to our business. For example, the California Consumer Privacy Act, or the CCPA, became effective on January 1, 2020.
The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal
information sharing and receive detailed information about how their personal information is used by requiring covered companies to
provide new disclosures to California consumers (as that term is broadly defined) and provide such consumers new ways to opt-out of
certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data
breaches that is expected to increase data breach litigation. Although the law includes limited exceptions, including for “protected health
information” maintained by a covered entity or business associate, it may regulate or impact our processing of personal information
depending on the context. CCPA’s implementation standards and enforcement practices are likely to remain uncertain for the foreseeable
future, and the CCPA may increase our compliance costs and potential liability. Similar privacy laws have been proposed at the federal
level and in other states.
In some of our operations, such as those involving our cloud-based software digital health applications, we are a business associate
under HIPAA and therefore required to comply with the HIPAA Security Rule, Breach Notification Rule and certain provisions of the
HIPAA Privacy Rule, as well as the terms of our business associate agreements that we enter into with our covered entity customers,
and are subject to significant civil and criminal penalties for failure to do so.
In addition, the General Data Protection Regulation, or GDPR, went into effect in May 2018. The GDPR imposes stringent data
protection requirements for the processing of personal data in the European Economic Area, or EEA. The GDPR imposes several
stringent requirements for controllers and processors of personal data, and has increased our obligations, for example, by imposing
higher standards for obtaining consent from individuals to process their personal data, requiring more robust disclosures to individuals,
strengthening individual data rights, shortening timelines for data breach notifications, limiting retention periods and secondary use of
information (including for research purposes), increasing requirements pertaining to health data and pseudonymised (i.e., key-coded)
data and imposing additional obligations when we contract with third party processors in connection with the processing of the personal
data. The GDPR also imposes strict rules on the transfer of personal data out of the EEA, including to the United States; recent legal
developments in Europe have created complexity and uncertainty regarding such transfers of personal data from the EEA to the United
States. For example, on July 16, 2020, the Court of Justice of the European Union, or CJEU, invalidated the EU-US Privacy Shield
Framework, or Privacy Shield, under which personal data could be transferred from the EEA to United States entities that had self-
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certified under the Privacy Shield scheme. While the CJEU upheld the adequacy of the standard contractual clauses (a standard form of
contract approved by the European Commission as an adequate personal data transfer mechanism, and potential alternative to the Privacy
Shield), it made clear that reliance on them alone may not necessarily be sufficient in all circumstances. Use of the standard contractual
clauses must now be assessed on a case-by-case basis taking into account the legal regime applicable in the destination country, in
particular applicable surveillance laws and rights of individuals and additional measures and/or contractual provisions may need to be
put in place, however, the nature of these additional measures is currently uncertain. European data protection law provides that EEA
member states may make their own further laws and regulations limiting the processing of genetic, biometric or health data, which could
limit our ability to use and share personal data or could cause our costs could increase, and harm our business and financial condition.
The GDPR and other similar regulations impose additional conditions in order to satisfy such consent for electronic marketing, such as
a prohibition on pre-checked tick boxes and bundled consents, thereby requiring customers to affirmatively consent for a given purpose
through separate tick boxes or other affirmative action. Failure to comply with the requirements of GDPR and the applicable national
data protection and marketing laws of the EEA member states may result in fines of up to €20,000,000 or up to 4% of the total worldwide
annual turnover of the preceding financial year, whichever is higher, and other administrative penalties as well as individual claims for
compensation.
Further, following the United Kingdom’s departure from the EU and EEA on January 31, 2020 and the end of the transition period on
December 31, 2020, we will have to comply with the GDPR and the GDPR as incorporated into the United Kingdom domestic law, the
Data Protection Act 2018, the latter regime having the ability to separately fine up to the greater of £17.5 million or 4% of global
turnover. Compliance with these and any other applicable privacy and data security laws and regulations is a rigorous and time-intensive
process, and we may be required to put in place additional mechanisms ensuring compliance with the new data protection rules. If we
fail to comply with any such laws or regulations, we may face significant fines and penalties that could adversely affect our business,
financial condition and results of operations.
Numerous other state, federal and foreign laws, including consumer protection laws and regulations, govern the collection,
dissemination, use, access to, confidentiality and security of patient health information. In addition, Congress and some states are
considering new laws and regulations that further protect the privacy and security of medical records or medical information. With the
recent increase in publicity regarding data breaches resulting in improper dissemination of consumer information, all 50 states have
passed laws regulating the actions that a business must take if it experiences a data breach, such as prompt disclosure to affected
customers. Generally, these laws are limited to electronic data and make some exemptions for smaller breaches. Congress has also been
considering similar federal legislation relating to data breaches. The Federal Trade Commission, or FTC, and states’ Attorneys General
have also brought enforcement actions and prosecuted some data breach cases as unfair and/or deceptive acts or practices under the FTC
Act. In addition to data breach notification laws, some states have enacted statutes and rules requiring businesses to reasonably protect
certain types of personal information they hold or to otherwise comply with certain specified data security requirements for personal
information. These laws may apply directly to our business or indirectly by contract when we provide services to other companies. We
intend to continue to comprehensively protect all personal information and to comply with all applicable laws regarding the protection
of such information.
The shifting commercial compliance environment and the need to build and maintain robust systems to comply with different compliance
or reporting requirements in multiple jurisdictions increase the possibility that a healthcare company may fail to comply fully with one
or more of these requirements. If our operations are found to be in violation of any of the health regulatory laws described above or any
other laws that apply to us, we may be subject to penalties, including potentially significant criminal and civil and administrative
penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in government healthcare programs, contractual
damages, reputational harm, administrative burdens, diminished profits and future earnings, and the curtailment or restructuring of our
operations, any of which could adversely affect our ability to operate our business and our results of operations.
Employees
As of June 30, 2020, we had approximately 7,770 employees or full-time consultants, of which approximately 3,490 were employed in
cost of sales activities including areas such as warehousing and manufacturing, 1,280 in research and development and 3,000 in sales,
marketing and administration. Of our employees and consultants, approximately 3,030 were located in the United States, Canada and
Latin America, 1,560 in Australia, 1,260 in Europe and 1,920 in Asia. We believe that the success of our business will depend, in part,
on our ability to attract and retain qualified personnel.
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Item 1A
Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the
other cautionary statements and risks described elsewhere, and the other information contained, in this Report and in our other filings
with the SEC, including our subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only
ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our
business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on us, our business,
financial condition and results of operations could be seriously harmed. In that event, the market price for our common stock will likely
decline, and you may lose all or part of your investment.
Our inability to compete successfully in our markets may harm our business. The markets for our products, which encompass
Sleep and Respiratory Care products and SaaS offerings, are highly competitive and are characterized by frequent product improvements
and evolving technology. Our ability to compete successfully depends, in part, on our ability to develop, manufacture and market
innovative new products. For our Sleep and Respiratory Care business, the development of innovative new products by our competitors
or the discovery of alternative treatments or potential cures for the conditions that our products treat could make our products
noncompetitive or obsolete. Current competitors, new entrants, academics, and others are trying to develop new devices, alternative
treatments or cures, and pharmaceutical solutions to the conditions our products treat. For SaaS, the market for business management
software is highly competitive, rapidly evolving, subject to changing technology, with low barriers to entry, shifting customer needs and
frequent introductions of new products and services. Many prospective customers have invested substantial personnel and financial
resources to implement and integrate their current business management software into their operations and, therefore, may be reluctant
or unwilling to change from their current solution or provider to one of our platforms or products.
Additionally, some of our competitors have greater financial, research and development, manufacturing and marketing resources than
we do. The past several years have seen a trend towards consolidation in the healthcare industry and in the markets for our products.
Industry consolidation could result in greater competition if our competitors combine their resources, if our competitors are acquired by
other companies with greater resources than ours, or if our competitors become affiliated with customers of ours. This competition could
increase pressure on us to reduce the selling prices of our products or could cause us to increase our spending on research and
development and sales and marketing. If we are unable to develop innovative new products, maintain competitive pricing, and offer
products that consumers perceive to be as good as those of our competitors, our sales or gross margins could decrease which would
harm our business.
Our business depends on our ability to market effectively to dealers of home healthcare products and sleep clinics. We market
our products primarily to home healthcare dealers and to sleep clinics that diagnose OSA and other sleep disorders, as well as to non-
sleep specialist physician practices that diagnose and treat sleep disorders. We believe that these groups play a significant role in
determining which brand of product a patient will use. The success of our business depends on our ability to market effectively to these
groups to ensure that our products are properly marketed and sold by these third-parties.
We have limited resources to market to the sleep clinics, home healthcare dealer branch locations and to the non-sleep specialists, most
of whom use, sell or recommend several brands of products. In addition, home healthcare dealers have experienced price pressures as
government and third-party reimbursement has declined for home healthcare products, and home healthcare dealers are requiring price
discounts and longer periods of time to pay for products purchased from us. We cannot assure you that physicians will continue to
prescribe our products, or that home healthcare dealers or patients will not substitute competing products when a prescription specifying
our products has been written.
We have expanded our marketing activities in some markets to target the population with a predisposition to sleep-disordered breathing
as well as primary care physicians and various medical specialists. We cannot assure you that these marketing efforts will be successful
in increasing awareness or sales of our products.
Consolidation in the health care industry could have an adverse effect on our revenues and results of operations. Many home
health care dealers and out-of-hospital health providers are consolidating, which may result in greater concentration of market power.
As the health care industry consolidates, competition to provide goods and services to industry participants may become more intense.
These industry participants may try to use their market power to negotiate price concessions or reductions for medical devices and
components produced by us. If we are forced to reduce our prices because of consolidation in the health care industry, our revenues may
decrease and our consolidated earnings, financial condition, and/or cash flows may suffer.
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If we are unable to support our continued growth, our business could suffer. As we continue to grow, the complexity of our
operations increases, placing greater demands on our management. Our ability to manage our growth effectively depends on our ability
to implement and improve our financial and management information systems on a timely basis and to effect other changes in our
business including, the ability to monitor and improve manufacturing systems, information technology, and quality and regulatory
compliance systems, among others. Unexpected difficulties during expansion, the failure to attract and retain qualified employees, the
failure to successfully replace or upgrade our management information systems, the failure to manage costs or our inability to respond
effectively to growth or plan for future expansion could cause our growth to stop. If we fail to manage our growth effectively and
efficiently, our costs could increase faster than our revenues and our business results could suffer.
Our business, financial condition and results of operations could be harmed by the effects of the COVID-19 pandemic. We are
subject to risks related to the global pandemic associated with COVID-19, which may have an adverse impact on certain aspects of our
business. Specifically, diagnostic pathways for sleep apnea treatment, including physician practices, HME suppliers and sleep clinics,
have been impacted and, in some instances, been required, or in the future may be required, to temporarily close due to governments’
“shelter-in-place” orders, quarantines or similar orders or restrictions enacted to control the spread of COVID-19. In some countries,
new patients are prescribed sleep apnea treatment through hospitals that are directing their resources to critical care, including COVID-
19 treatment. The impact on these diagnostic and prescription pathways has resulted and may continue to result in a decrease in demand
for our products designed to treat sleep apnea.
While we have experienced increased demand for our respiratory care products due to the nature of COVID-19, we cannot guarantee
that demand will continue or that we will be able to identify and obtain adequate raw materials or otherwise maintain operations, supply
chains and distribution systems to satisfy demand for our products in a cost-effective manner or at all. Additionally, if the increase in
demand currently being experienced for our respiratory care products declines more abruptly than expected this could adversely impact
our inventory levels and may result in excess inventory, which we may be unable to sell. Furthermore, due to governments’ varying
restrictions on international and domestic travel, access to labor for our manufacturing facilities could be adversely impacted.
Our SaaS business may also be affected by COVID-19 and measures taken to control the spread of COVID-19. Some of our existing
and potential SaaS customers are HME distributors and, therefore, have been impacted, or may be impacted, by the same temporary
business closures noted above. We also have existing and potential SaaS customers that operate care facilities and are either receiving
and treating patients infected with COVID-19 or are implementing significant measures to safeguard their facilities against a potential
COVID-19 outbreak. Given these challenging business conditions and the uncertain economic environment, we expect businesses will
be deterred from adopting new or changing SaaS platforms, which may adversely impact our ability to engage new customers for our
SaaS businesses, or expand the services used by existing customers.
Additionally, the types of restrictions enacted to control the spread of COVID-19 have resulted in most of our employees working from
home, and have resulted or may result in the employees of our key suppliers and customers working from home or, as noted above, not
working at all. Neither we nor our suppliers have significant experience operating with the majority of our work forces working from
home and this may disrupt our standard operations or significantly hamper our products from moving through our supply chain. If we
are unable to move products efficiently through the supply chain we may be unable to satisfy customer demand, which could negatively
impact our results of operations.
Health regulatory agencies globally may also experience disruptions in their operations as a result of the COVID-19 pandemic. Any
delay or de-prioritization of our product development activities or delay in regulatory review resulting from such disruptions could
materially affect our results of operations.
In addition to existing travel restrictions, countries may continue to close borders, impose prolonged quarantines, and further restrict
travel, which may also disrupt our ability to move our product by air and sea. The continued spread of COVID-19 has also led to extreme
disruption and volatility in the global capital markets, which increases the cost of, and adversely impacts access to, capital and increases
economic uncertainty. While we expect COVID-19 to negatively impact certain aspects of our business, given the rapid and evolving
nature of the virus and the uncertainty about its impact on society and the global economy, we cannot predict the extent to which it will
affect our global operations, particularly if these impacts persist or worsen over an extended period of time.
We are subject to various risks relating to international activities that could affect our overall profitability. We manufacture
substantially all of our products outside the United States and sell a significant portion of our products in non-U.S. markets. Sales in
combined Europe, Asia and other markets accounted for approximately 38% and 39% of our net revenues in the years ended June 30,
2020 and June 30, 2019 respectively. We expect that sales within these areas will account for approximately 35-40% of our net revenues
in the foreseeable future. Our sales and operations outside of the U.S. are subject to several difficulties and risks that are separate and
distinct from those we face in the U.S., including:
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fluctuations in currency exchange rates;
tariffs and other trade barriers;
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compliance with foreign medical device manufacturing regulations;
difficulty in enforcing agreements and collecting receivables through foreign legal systems;
reduction in third-party payor reimbursement for our products;
inability to obtain import licenses;
the impact of public health epidemics/pandemics on the global economy, such as COVID-19 that has spread globally;
changes in trade policies and in U.S. and foreign tax policies;
possible changes in export or import restrictions; and
the modification or introduction of other governmental policies with potentially adverse effects.
Any of the above factors may have a material adverse effect on our ability to increase or maintain our non-U.S. sales.
If we fail to effectively integrate and capitalize on our acquisitions, combining them with our other SaaS operations, our SaaS
businesses could suffer. Part of our growth strategy includes acquiring businesses consistent with our commitment to innovation in
developing products for the diagnosis and treatment of sleep apnea and respiratory care as well as our SaaS business. For example, we
acquired MatrixCare in November 2018 and Propeller Health in January 2019. The success of our acquisitions will depend, in part, on
our ability to successfully integrate the business and operations of the acquired companies. Additionally, our management may have
their attention diverted while trying to integrate these businesses. If we are not able to successfully integrate the operations, we may not
realize the anticipated benefits of the acquisitions fully or at all, or may take longer to realize than expected.
We have made certain assumptions relating to our recent acquisitions that may prove to be materially inaccurate. We have
made certain assumptions relating to our recent acquisitions, including MatrixCare, such as:
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projections of each acquired company’s future revenue;
the amount of goodwill and intangibles that will result from our acquisitions;
acquisition costs, including transaction, contingent consideration and integration costs; and
other financial and strategic rationales and risks of the acquisitions.
While management has made such assumptions in good faith and believes them to be reasonable, the assumptions may turn out to be
materially inaccurate, including for reasons beyond our control. If these assumptions are incorrect we may change or modify our
assumptions, and such change or modification could have a material adverse effect on our financial condition or results of operations.
Our SaaS business depends substantially on customers entering into, renewing, upgrading and expanding their agreements for
cloud services, term licenses, and maintenance and support agreements with us. Any decline in our customer renewals, upgrades
or expansions could adversely affect our future operating results. We typically enter into term-based agreements for our licensed
on-premises offerings, cloud services, and maintenance and support services, which customers have discretion to renew or terminate at
the end of the initial term. In order for us to improve our operating results, it is important that new customers enter into renewable
agreements, and our existing customers renew, upgrade and expand their term-based agreements when the initial contract term expires.
Our customers have no obligation to renew, upgrade or expand their agreements with us after the terms have expired. Our customers’
renewal, upgrade and expansion rates may decline or fluctuate as a result of a number of factors, including their satisfaction or
dissatisfaction with our offerings, our pricing, the effects of general economic conditions, competitive offerings or alterations or
reductions in our customers’ spending levels. If our customers do not renew, upgrade or expand their agreements with us or renew on
terms less favorable to us, our revenues may decline.
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Government and private insurance plans may not adequately reimburse our customers for our products, which could result in
reductions in sales or selling prices for our products. Our ability to sell our products depends in large part on the extent to which
coverage and adequate reimbursement for our products will be available from government health administration authorities, private
health insurers and other organizations. These third-party payers are increasingly challenging the prices charged for medical products
and services and can, without notice, deny coverage for our products or treatments that may include the use of our products. Therefore,
even if a product is approved for marketing, we cannot make assurances that coverage and reimbursement will be available for the
product, that the reimbursement amount will be adequate or that the reimbursement amount, even if initially adequate, will not be
subsequently reduced. For example, in some markets, such as Spain, France and Germany, government coverage and reimbursement
are currently available for the purchase or rental of our products but are subject to constraints such as price controls or unit sales
limitations. In other markets, such as Australia, there is currently limited or no reimbursement for devices that treat sleep apnea
conditions. As we continue to develop new products, those products will generally not qualify for coverage and reimbursement until
they are approved for marketing, if at all.
In the United States, we sell our products primarily to home healthcare dealers, hospitals and sleep clinics. Reductions in reimbursement
to our customers by third-party payers, if they occur, may have a material impact on our customers and, therefore, may indirectly affect
our pricing and sales to, or the collectability of receivables we have from, those customers. A development negatively affecting
reimbursement stems from the Medicare competitive bidding program mandated by the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA). Under the program, our customers who provide HME must compete to offer products in designated
competitive bidding areas, or CBAs. In addition, under the ACA, in 2016, CMS adjusted the prices in non-competitive bidding areas to
match competitive bidding prices. CMS phased in the new rates beginning January 1, 2016, and were fully effective July 1, 2016. This
program has significantly reduced the Medicare reimbursement to our customers compared with reimbursement in 2011, at the beginning
of the program. The 21st Century Cures Act retroactively adjusted rates in non-bid areas to allow for the higher phase-in rates to be paid
for items furnished between July 1, 2016 and December 31, 2016, rather than the lower fully-adjusted rates. Rules issued by CMS in
2018 resumed the higher phase-in rates in rural and non-contiguous non-competitive bidding areas for items furnished between June 1,
2018 and December 31, 2020. Pursuant to the CARES Act, these higher phase-in rates were extended through December 31, 2020, or
through the end of the COVID-19 public health emergency, and were implemented in areas other than rural areas and noncontiguous
areas for the same period. On March 7, 2019, CMS announced it would initiate a new round of competitive bidding, named Round 2021,
with contracts expected to become effective on January 1, 2021, and extend through December 31, 2023. In addition to adopting new
bidding processes, CMS expanded the product categories included in competitive bidding to include non-invasive ventilators, in addition
to oxygen. However, due to the COVID-19 pandemic, CMS removed NIVs from Round 2021 of the DMEPOS Competitive Bidding
Program. CPAP, and respiratory assist devices, and related supplies and accessories, which had been included in prior rounds of
competitive bidding, remain included in Round 2021.
We cannot predict at this time the full impact the competitive bidding program and the developments in the competitive bidding program
will have on our business and financial condition. If changes are made to this program in the future, it could affect amounts being
recovered by our customers.
Healthcare reform may have a material adverse effect on our industry and our results of operations. In March 2010, the ACA
was signed into law in the United States. The ACA made changes that significantly impacted the healthcare industry, including medical
device manufacturers. One of the principal purposes of the ACA was to expand health insurance coverage to millions of Americans who
were uninsured. The ACA required adults not covered by an employer or government-sponsored insurance plan to maintain health
insurance coverage or pay a penalty, a provision commonly referred to as the individual mandate.
The ACA also contained a number of provisions designed to generate the revenues necessary to fund the coverage expansions. This
included new fees or taxes on certain health-related industries, including medical device manufacturers. Beginning in 2013, entities that
manufacture, produce or import medical devices were required to pay an excise tax in an amount equal to 2.3% of the price for which
such devices are sold in the United States. This excise tax was applicable to our products that are primarily used in hospitals and sleep
labs, which includes the ApneaLink, VPAP Tx, certain Respiratory Care and dental sleep products. Through a series of legislative
amendments, the tax was suspended beginning in 2016, and permanently repealed effective January 1, 2020. In addition to the
competitive bidding changes discussed above, the ACA also included, among other things, demonstrations to develop organizations that
are paid under a new payment methodology for voluntary coordination of care by groups of providers, such as physicians and hospitals,
and the establishment of a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative
clinical effectiveness research. The increased funding and focus on comparative clinical effectiveness research, which compares and
evaluates the risks and benefits, clinical outcomes, effectiveness and appropriateness of products, may result in lower reimbursements
by payors for our products and decreased profits to us.
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Other federal legislative changes have been proposed and adopted since the ACA was enacted. These changes included an aggregate
reduction in Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013. The CARES Act, which
was signed into law in March 2020, suspended the payment reductions from May 1, 2020 through December 31, 2020, and extended
the sequester by one additional year, through 2030. In addition, on January 2, 2013, the American Taxpayer Relief Act of 2012, was
signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals, and increased
the statute of limitations period for the government to recover overpayments to providers from three to five years.
The full impact on our business of the ACA and other new laws is uncertain. Nor is it clear whether other legislative changes will be
adopted, if any, or how such changes would affect the demand for our products. Future actions by the administration and the U.S.
Congress including, but not limited to, repeal or replacement of the ACA could have a material adverse impact on our results of
operations or financial condition. Additionally, all or a portion of the ACA and related subsequent legislation may be modified, repealed
or otherwise invalidated through other judicial challenge. For example, on December 14, 2018, a U.S. District Court Judge in the
Northern District of Texas, ruled that the individual mandate is a critical and inseverable feature of the ACA, and therefore, because it
was repealed as part of the U.S. Tax Act, the remaining provisions of the ACA are invalid as well. On December 18, 2019, the U.S.
Court of Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate was unconstitutional and remanded the
case back to the District Court to determine whether the remaining provisions of the ACA are invalid as well. On March 2, 2020, the
United States Supreme Court granted the petitions for writs of certiorari to review this case, although it remains unclear when or how
the Supreme Court will rule. It is also unclear how other efforts to challenge, repeal or replace the ACA will impact the ACA or our
business.
Various healthcare reform proposals have also emerged at the state level within the United States. The ACA as well as other federal
and/or state healthcare reform measures that may be adopted in the future, singularly or in the aggregate, could have a material adverse
effect on our business, financial condition and results of operations.
Failure to comply with anti-kickback and fraud regulations could result in substantial penalties and changes in our business
operations. Although in the United States we do not provide healthcare services, submit claims for third-party reimbursement, or
receive payments directly from Medicare, Medicaid or other third-party payors for our products, we are subject to healthcare fraud and
abuse regulation and enforcement by federal, state and foreign governments, which could significantly impact our business. We also are
subject to foreign fraud and abuse laws, which vary by country.
In the United States, the laws that may affect our ability to operate include, but are not limited to:
•
•
the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully
soliciting, receiving, offering, or paying remuneration, directly or indirectly, in cash or in kind, in exchange for or to induce
either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service
for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid.
A person or entity does not need to have actual knowledge of this statute or specific intent to violate the Anti-Kickback Statute
itself to have committed a violation. The U.S. government has interpreted this law broadly to apply to the marketing and sales
activities of manufacturers and distributors like us. Violations of the federal Anti-Kickback Statute may result in significant
civil monetary penalties for each violation, plus up to three times the remuneration involved. Violations of the Federal Anti-
Kickback Statute can also result in significant criminal penalties and imprisonment;
federal civil and criminal false claims laws and civil monetary penalty laws, that prohibit, among other things, knowingly
presenting, or causing to be presented, claims for payment or approval to the federal government that are false or fraudulent,
knowingly making a false statement material to an obligation to pay or transmit money or property to the federal government
or knowingly concealing or knowingly and improperly avoiding or decreasing an obligation to pay or transmit money or
property to the federal government. These laws may apply to manufacturers and distributors who provide information on
coverage, coding, and reimbursement of their products to persons who do bill third-party payors. In addition, the government
may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a
false or fraudulent claim for purposes of the federal civil False Claims Act. Violations can result in debarment, suspension or
exclusion from participation in government healthcare programs, including Medicare and Medicaid. When an entity is
determined to have violated the federal civil False Claims Act, the government may impose significant civil fines and penalties
for each false claim, plus treble damages, and exclude the entity from participation in Medicare, Medicaid and other federal
healthcare programs.
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• HIPAA, which created federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or
making false statements relating to healthcare matters. A person or entity does not need to have actual knowledge of these
statutes or specific intent to violate them to have committed a violation. Further, failure to comply with the HIPAA privacy
and security standards can result in significant civil monetary penalties per violation and, in certain circumstances, significant
criminal penalties and/or imprisonment;
•
•
•
the federal Physician Sunshine Act requirements under the ACA, which impose reporting and disclosure requirements on
device and drug manufacturers for any “transfer of value” made or distributed by certain manufacturers of drugs, devices,
biologics, and medical supplies to physicians (including doctors, dentists, optometrists, podiatrists and chiropractors), teaching
hospitals, and ownership and investment interests held by physicians and their immediate family members. Beginning in 2022,
applicable manufacturers also will be required to report such information regarding payments and transfers of value provided,
as well as ownership and investment interests held, during the previous year to physician assistants, nurse practitioners, clinical
nurse specialists, certified nurse anesthetists and certified nurse midwives;
federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that
potentially harm customers; and
state and foreign law equivalents of each of the above federal laws, such as state anti-kickback and false claims laws that may
apply to items or services reimbursed by any third-party payor, including commercial insurers; state laws that require device
companies to comply with the industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated
by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral
sources; state laws that require device manufacturers to report information related to payments and other transfers of value to
physicians and other healthcare providers or marketing expenditures.
The scope and enforcement of these laws are uncertain and subject to rapid change in the current environment of healthcare reform,
especially in light of the lack of applicable precedent and regulations. Federal and state enforcement bodies have recently increased their
scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations,
prosecutions, convictions and settlements in the healthcare industry. Responding to investigations can be time-and resource-consuming
and can divert management’s attention from the business. Additionally, as a result of these types of investigations, healthcare providers
and entities may face litigation or have to agree to settlements that can include monetary penalties and onerous compliance and reporting
requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs
or otherwise have an adverse effect on our business.
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us
now or in the future, we may be subject to penalties, including civil and criminal penalties, damages, fines, disgorgement, exclusion
from governmental health care programs, additional compliance and reporting obligations, imprisonment and the curtailment or
restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results.
In December 2019, we entered into a settlement agreement with the U.S. Department of Justice and the U.S. Attorneys’ Offices for the
District Court of South Carolina, the Southern District of California, the Northern District of Iowa and the Eastern District of New York.
The agreement resolves five lawsuits originally brought by whistleblowers under the qui tam provisions of the False Claims Act and
allegations that we: (a) provided DME companies with free telephone call center services and other free patient outreach services that
enabled these companies to order resupplies for their patients with sleep apnea, (b) provided sleep labs with free and below-cost positive
airway pressure masks and diagnostic machines, as well as free installation of these machines, (c) arranged for, and fully guaranteed the
payments due on, interest-free loans that DME supplies acquired from third-party financial institutions for the purchase of our
equipment, and (d) provided non-sleep specialist physicians free home sleep testing devices referred to as “ApneaLink.” We agreed
with the government to civilly resolve these matters for a payment of $39.5 million ($37.5 million to the federal government and $2
million to the various states) and we incurred additional fees and administrative costs that typically accompany such a resolution
amounting to $1.1 million. The total final costs relating to these matters was $40.6 million.
Contemporaneous with the civil settlement, we also entered into a Corporate Integrity Agreement, or CIA, with the Department of
Health and Human Services Office of Inspector General. The CIA requires, among other things, that we implement additional controls
around our product pricing and sales and that we conduct internal and external monitoring of our arrangements with referrals sources.
The settlement agreement with the government and the CIA could result in reputational harm, the curtailment or restructuring of our
operations and an increase in our compliance costs, any of which could materially adversely affect our financial results and our ability
to operate our business.
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Our use and disclosure of individually identifiable information, including health information, is subject to federal, state and
foreign privacy and security regulations, and our failure to comply with those regulations or to adequately secure the
information we hold could result in significant liability or reputational harm. The privacy and security of personally identifiable
information stored, maintained, received or transmitted electronically is a major issue in the United States and abroad. While we strive
to comply with all applicable privacy and security laws and regulations, as well as our own posted privacy policies, legal standards for
privacy, including but not limited to “unfairness” and “deception,” as enforced by the FTC and state attorneys general, continue to
evolve and any failure or perceived failure to comply may result in proceedings or actions against us by government entities or others,
or could cause us to lose audience and customers, which could have a material adverse effect on our business. Recently, there has been
an increase in public awareness of privacy issues in the wake of revelations about the activities of various government agencies and in
the number of private privacy-related lawsuits filed against companies. Concerns about our practices with regard to the collection, use,
disclosure, or security of personally identifiable information or other privacy-related matters, even if unfounded and even if we are in
compliance with applicable laws, could damage our reputation and harm our business.
Numerous foreign, federal and state laws and regulations govern collection, dissemination, use and confidentiality of personally
identifiable health information, including (i) state privacy and confidentiality laws (including state laws requiring disclosure of
breaches); (ii) HIPAA; and (iii) European and other foreign data protection laws, including the GDPR.
HIPAA establishes a set of national privacy and security standards for the protection of individually identifiable health information, or
protected health information, by health plans, healthcare clearinghouses and healthcare providers that submit certain covered
transactions electronically, or covered entities, and their “business associates,” which are persons or entities that perform certain services
for, or on behalf of, a covered entity that involve creating, receiving, maintaining or transmitting protected health information. Certain
portions of our business, such as the cloud-based software digital health applications, are subject to HIPAA as a business associate of
our covered entity clients. To provide our covered entity clients with services that involve access to PHI, HIPAA requires us to enter
into business associate agreements that require us to safeguard PHI in accordance with HIPAA. As a business associate, we are also
directly liable for compliance with HIPAA. Penalties for violations of HIPAA regulations include civil and criminal penalties.
HIPAA authorizes state attorneys’ general to file suit under HIPAA on behalf of state residents. Courts can award damages, costs and
attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals
to sue us in civil court for HIPAA violations, its standards have been used as the basis for a duty of care claim in state civil suits such
as those for negligence or recklessness in the misuse or breach of PHI.
HIPAA further requires business associates like us to notify our covered entity clients “without unreasonable delay and in no case later
than 60 calendar days after discovery of the breach.” Covered entities must notify affected individuals “without unreasonable delay and
in no case later than 60 calendar days after discovery of the breach” if their unsecured PHI is subject to an unauthorized access, use or
disclosure. If a breach affects 500 patients or more, covered entities must report it to HHS and local media without unreasonable delay,
and HHS will post the name of the breaching entity on its public website. If a breach affects fewer than 500 individuals, the covered
entity must log it and notify HHS at least annually.
If we are unable to properly protect the privacy and security of health information entrusted to us, our solutions may be perceived as not
secure, we may incur significant liabilities and customers may curtail their use of or stop using our solutions. In addition, if we fail to
comply with the terms of our business associate agreements with our clients, we are liable not only contractually but also directly under
HIPAA.
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In addition, the California Consumer Privacy Act of 2018 or CCPA became effective on January 1, 2020. The CCPA gives California
residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive
detailed information about how their personal information is used by requiring covered companies to provide new disclosures to
California consumers (as that term is broadly defined) and provide such consumers new ways to opt-out of certain sales of personal
information. The CCPA includes civil penalties for violations, as well as a private right of action for data breaches that is expected to
increase data breach litigation. Although the law includes limited exceptions, including for “protected health information” maintained
by a covered entity or business associate, it may regulate or impact our processing of personal information depending on the context.
CCPA’s implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future, and the CCPA
may increase our compliance costs and potential liability. Any failure or perceived failure by us to comply with privacy or security laws,
policies, legal obligations or industry standards or any security incident that results in the unauthorized release or transfer of personally
identifiable information may also result in governmental enforcement actions and investigations, fines and penalties, litigation and/or
adverse publicity, including by consumer advocacy groups, and could cause our customers to lose trust in us, which could have an
adverse effect on our reputation and business. Such failures could have a material adverse effect on our financial condition and
operations. If the third parties we work with violate applicable laws, contractual obligations or suffer a security breach, such violations
may also put us in breach of our obligations under privacy laws and regulations and/or could in turn have a material adverse effect on
our business.
We are also subject to laws and regulations in non-U.S. countries covering data privacy and the protection of health-related and other
personal information. For example, EU member states and other jurisdictions have adopted data protection laws and regulations, which
impose significant compliance obligations. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage,
disclosure and security of personal information that identifies or may be used to identify an individual, such as names, contact
information, and sensitive personal data such as health data. These laws and regulations are subject to frequent revisions and differing
interpretations, and have generally become more stringent over time.
In addition, the GDPR went into effect in May 2018. The GDPR imposes stringent data protection requirements for the processing of
personal data in the European Economic Area, or EEA. The GDPR imposes several stringent requirements for controllers and processors
of personal data, and increased our obligations, for example, by imposing higher standards for obtaining consent from individuals to
process their personal data, requiring more robust disclosures to individuals, strengthening individual data rights, shortening timelines
for data breach notifications, limiting retention periods and secondary use of information (including for research purposes), increasing
requirements pertaining to health data and pseudonymised (i.e., key-coded) data and imposing additional obligations when we contract
with third party processors in connection with the processing of the personal data. The GDPR also imposes strict rules on the transfer
of personal data out of the EEA, including to the United States, and recent legal developments in Europe have created complexity and
uncertainty regarding such transfers of personal data from the EEA to the United States. For example, on July 16, 2020, the Court of
Justice of the European Union, or CJEU, invalidated the EU-US Privacy Shield Framework, or Privacy Shield, under which personal
data could be transferred from the EEA to United States entities that had self-certified under the Privacy Shield scheme. While the CJEU
upheld the adequacy of the standard contractual clauses (a standard form of contract approved by the European Commission as an
adequate personal data transfer mechanism, and potential alternative to the Privacy Shield), it made clear that reliance on them alone
may not necessarily be sufficient in all circumstances. Use of the standard contractual clauses must now be assessed on a case-by-case
basis taking into account the legal regime applicable in the destination country, in particular applicable surveillance laws and rights of
individuals and additional measures and/or contractual provisions may need to be put in place, however, the nature of these additional
measures is currently uncertain. European data protection law provides that EEA member states may make their own further laws and
regulations limiting the processing of genetic, biometric or health data, which could limit our ability to use and share personal data or
could cause our costs could increase, and harm our business and financial condition. The GDPR and other similar regulations impose
additional conditions in order to satisfy such consent for electronic marketing, such as a prohibition on pre-checked tick boxes and
bundled consents, thereby requiring customers to affirmatively consent for a given purpose through separate tick boxes or other
affirmative action. Failure to comply with the requirements of GDPR and the applicable national data protection and marketing laws of
the EEA member states may result in fines of up to €20,000,000 or up to 4% of the total worldwide annual turnover of the preceding
financial year, whichever is higher, and other administrative penalties as well as individual claims for compensation.
In addition, following the United Kingdom’s departure from the EU and the EEA on January 31, 2020 and the end of the transition
period on December 31, 2020, we will have to comply with the GDPR and the GDPR as incorporated into the United Kingdom domestic
law, the Data Protection Act 2018, the latter regime having the ability to separately fine up to the greater of £17.5 million or 4% of
global turnover. Compliance with these and any other applicable privacy and data security laws and regulations is a rigorous and time-
intensive process, and we may be required to put in place additional mechanisms ensuring compliance with the new data protection
rules. If we fail to comply with any such laws or regulations, we may face significant fines and penalties that could adversely affect our
business, financial condition and results of operations.
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Our business activities are subject to extensive regulation, and any failure to comply could have a material adverse effect on our
business, financial condition, or results of operations. We are subject to extensive U.S. federal, state, local and international
regulations regarding our business activities. Failure to comply with these regulations could result in, among other things, recalls of our
products, substantial fines and criminal charges against us or against our employees. Furthermore, certain of our products could be
subject to recall if the Food and Drug Administration, or the FDA, other regulators or we determine, for any reason, that those products
are not safe or effective. Any recall or other regulatory action could increase our costs, damage our reputation, affect our ability to
supply customers with the quantity of products they require and materially affect our operating results.
Actual or attempted breaches of security, unauthorized disclosure of information, denial of service attacks or the perception
that personal and/or other sensitive or confidential information in our possession is not secure, could result in a material loss of
business, substantial legal liability or significant harm to our reputation. We receive, collect, process, use and store a large amount
of information from clients and our own employees, including personally identifiable, protected health and other sensitive and
confidential information. This data is often accessed by us through transmissions over public and private networks, including the
Internet. The secure transmission of such information over the Internet and other mechanisms is essential to maintain confidence in our
information technology systems. We have implemented security measures, technical controls and contractual precautions designed to
identify, detect and prevent unauthorized access, alteration, use or disclosure of our clients’, patients’ and employees’ data. However,
the techniques used in these attacks change frequently and may be difficult to detect for periods of time and we may face difficulties in
anticipating and implementing adequate preventative measures. As a result of the COVID-19 pandemic, we may face increased
cybersecurity risks due to our reliance on internet technology and the number of our employees who are working remotely, which may
create additional opportunities for cybercriminals to exploit vulnerabilities. Beyond external criminal activity, systems that access or
control access to our services and databases may be compromised as a result of human error, fraud or malice on the part of employees
or third parties, or may result from accidental technological failure. Because the techniques used to circumvent security systems can be
highly sophisticated and change frequently, often are not recognized until launched against a target and may originate from less regulated
and remote areas around the world, we may be unable to proactively address all possible techniques or implement adequate preventive
measures for all situations.
If someone is able to circumvent or breach our security systems, they could steal any information located therein or cause serious and
potentially long lasting disruption to our operations. Security breaches or attempts thereof could also damage our reputation and expose
us to a risk of monetary loss and/or litigation, fines and sanctions. We also face risks associated with security breaches affecting third
parties that conduct business with us or our clients and others who interact with our data. While we maintain insurance that covers
certain security and privacy breaches, we may not carry appropriate insurance or maintain sufficient coverage to compensate for all
potential liability.
We are subject to diverse laws and regulations relating to data privacy and security, including HIPAA and European data privacy laws.
Complying with these numerous and complex regulations is expensive and difficult, and failure to comply with these regulations could
result in regulatory scrutiny, fines and civil liability. In addition, any security breach or attempt thereof could result in liability for stolen
assets or information, additional costs associated with repairing any system damage, incentives offered to clients or other business
partners to maintain business relationships after a breach, and implementation of measures to prevent future breaches, including
organizational changes, deployment of additional personnel and protection technologies, employee training and engagement of third-
party experts and consultants. Additionally, the costs incurred to remediate any data security or privacy incident could be substantial.
We cannot assure you that any of our third-party service providers with access to our or our clients and/or employees’ personally
identifiable and other sensitive or confidential information will maintain appropriate policies and practices regarding data privacy and
security in compliance with all applicable laws or that they will not experience data security breaches or attempts thereof, which could
have a corresponding effect on our business.
If there are interruptions or performance problems associated with our technology or infrastructure, our existing SaaS
customers may experience service outages, and our new customers may experience delays in the deployment of our
platform. We depend on services from various third parties as well as our own technical operations infrastructure to distribute our
SaaS products via the Internet. If a service provider fails to provide sufficient capacity to support our platform or otherwise experiences
service outages, such failure could interrupt our customers’ access to our service, which could adversely affect their perception of our
platform's reliability and our revenues. Any disruptions in these services, including as a result of actions outside of our control, would
significantly impact the continued performance of our SaaS products. In the future, these services may not be available to us on
commercially reasonable terms, or at all. Any loss of the right to use any of these services could result in decreased functionality of our
SaaS products until equivalent technology is either developed by us or, if available from another provider, is identified, obtained and
integrated into our infrastructure.
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To meet our business needs, we must maintain sufficient excess capacity in our operations infrastructure to ensure that our SaaS products
are accessible. Design and mechanical errors, spikes in usage volume and failure to follow system protocols and procedures could cause
our systems to fail, resulting in interruptions in our SaaS products. Any interruptions or delays in our service, whether or not caused by
our products, or as a result of third-party error, our own error, natural disasters or security breaches, whether accidental or willful, could
harm our relationships with customers and cause our revenue to decrease and/or our expenses to increase.
Any of the above circumstances or events may harm our reputation, cause customers to terminate their agreements with us, impair our
ability to obtain contract renewals from existing customers, impair our ability to grow our customer base, result in the expenditure of
significant financial, technical and engineering resources, subject us to financial penalties and liabilities under our service level
agreements, and otherwise harm our business, results of operations and financial condition.
Product sales, introductions or modifications may be delayed or canceled as a result of FDA regulations or similar foreign
regulations, which could cause our sales and profits to decline. Unless a product is exempt, before we can market or sell a new
medical device in the United States, we must obtain FDA clearance or approval, which can be a lengthy and time-consuming process.
We generally receive clearance from the FDA to market our products in the United States under Section 510(k) of the Federal Food,
Drug, and Cosmetic Act or our products are exempt from the Section 510(k) clearance process. The 510(k) clearance process can be
expensive, time-consuming and uncertain. In the 510(k) clearance process, the FDA must determine that a proposed device is
“substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use, technology
and safety and effectiveness, in order to clear the proposed device for marketing. The FDA has a high degree of latitude when evaluating
submissions and may determine that a proposed device submitted for 510(k) clearance is not substantially equivalent to a predicate
device. After a device receives 510(k) premarket notification clearance from the FDA, any modification that could significantly affect
its safety or effectiveness, or that would constitute a major change in the intended use of the device, technology, materials, packaging,
and certain manufacturing processes may require a new 510(k) clearance or premarket approval. We have modified some of our Section
510(k) approved products without submitting new Section 510(k) notices, which we do not believe were required. However, if the FDA
disagrees with us and requires us to submit new Section 510(k) notifications for modifications to our existing products, we may be
required to stop marketing the products while the FDA reviews the Section 510(k) notification.
Any new product introduction or existing product modification could be subjected to a lengthier, more rigorous FDA examination
process. For example, in certain cases we may need to conduct clinical trials of a new product before submitting a 510(k) notice. We
may also be required to obtain premarket approvals for certain of our products. Indeed, recent trends in the FDA’s review of premarket
notification submissions suggest that the FDA is often requiring manufacturers to provide new, more expansive, or different information
regarding a particular device than what the manufacturer anticipated upon 510(k) submission. This has resulted in increasing uncertainty
and delay in the premarket notification review process. For example, in November 2018, FDA officials announced forthcoming steps
that the FDA intends to take to modernize the 510(k) premarket notification pathway. Among other things, the FDA announced that it
plans to develop proposals to drive manufacturers utilizing the 510(k) pathway toward the use of newer predicates. These proposals
include plans to potentially sunset certain older devices that were used as predicates under the 510(k) clearance pathway, and to
potentially publish a list of devices that have been cleared on the basis of demonstrated substantial equivalence to predicate devices that
are more than 10 years old. In September 2019, the FDA also issued revised final guidance establishing a “Safety and Performance
Based Pathway” for “manufacturers of certain well-understood device types” allowing manufacturers to rely on objective safety and
performance criteria recognized by the FDA to demonstrate substantial equivalence, obviating the need for manufacturers to compare
the safety and performance of their medical devices to specific predicate devices in the clearance process. The FDA intends to develop
and maintain a list of device types appropriate for the “safety and performance based” pathway and will continue to develop product-
specific guidance documents that identify the performance criteria and recommended testing methodologies for each such device type,
where feasible. Some of these proposals have not yet been finalized or adopted, and the FDA announced that it would seek public
feedback prior to publication of any such proposals, and may work with Congress to implement such proposals through legislation.
Accordingly, it is unclear the extent to which any proposals, if adopted, could impose additional regulatory requirements on us that
could delay our ability to obtain new 510(k) clearances, increase the costs of compliance, or restrict our ability to maintain our current
clearances, or otherwise create competition that may negatively affect our business.
The FDA’s ongoing review of the 510(k) program may make it more difficult for us to make modifications to our previously cleared
products, either by imposing stricter requirements on when a manufacturer must submit a new 510(k) for a modification to a previously
cleared product, or by applying more onerous review criteria to such submissions. FDA continues to review its 510(k) clearance process
which could result in additional changes to regulatory requirements or guidance documents which could increase the costs of compliance,
or restrict our ability to maintain current clearances. The requirements of the more rigorous premarket approval process and/or
significant changes to the 510(k) clearance process could delay product introductions and increase the costs associated with FDA
compliance. Marketing and sale of our products outside the United States are also subject to regulatory clearances and approvals, and
if we fail to obtain these regulatory approvals, our sales could suffer. We cannot assure you that any new products we develop will
receive required regulatory approvals from U.S. or foreign regulatory agencies.
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We are subject to substantial regulation related to quality standards applicable to our manufacturing and quality processes.
Our failure to comply with these standards could have an adverse effect on our business, financial condition, or results of
operations. The FDA regulates the approval, manufacturing, and sales and marketing of many of our products in the United States.
Significant government regulation also exists in Canada, Japan, Europe, and other countries in which we conduct business. As a device
manufacturer, we are required to register with the FDA and are subject to periodic inspection by the FDA for compliance with the FDA’s
Quality System Regulation requirements, which require manufacturers of medical devices to adhere to certain regulations, including
testing, quality control and documentation procedures. In addition, the federal Medical Device Reporting regulations require us to
provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a
death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. Compliance with
applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA.
In the European Community, we are required to maintain certain ISO certifications in order to sell our products and must undergo
periodic inspections by notified bodies to obtain and maintain these certifications. Failure to comply with current governmental
regulations and quality assurance guidelines could lead to temporary manufacturing shutdowns, product recalls or related field actions,
product shortages or delays in product manufacturing. Efficacy or safety concerns, an increase in trends of adverse events in the
marketplace, and/or manufacturing quality issues with respect to our products could lead to product recalls or related field actions,
withdrawals, and/or declining sales.
Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder
their ability to hire, retain or deploy key leadership and other personnel, or otherwise prevent new or modified products from
being developed, cleared or approved or commercialized in a timely manner or at all, which could negatively impact our
business. The ability of the FDA to review and clear or approve new products can be affected by a variety of factors, including
government budget and funding levels, statutory, regulatory, and policy changes, the FDA’s ability to hire and retain key personnel and
accept the payment of user fees, and other events that may otherwise affect the FDA’s ability to perform routine functions. Average
review times at the FDA have fluctuated in recent years as a result. In addition, government funding of other government agencies that
fund research and development activities is subject to the political process, which is inherently fluid and unpredictable. Disruptions at
the FDA and other agencies may also slow the time necessary for medical devices or modifications to cleared or approved medical
devices to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example,
over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times
and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities.
Separately, in response to the COVID-19 pandemic, on March 10, 2020, the FDA announced its intention to postpone most foreign
inspections of manufacturing facilities, and subsequently, on March 18, 2020, the FDA temporarily postponed routine surveillance
inspections of domestic manufacturing facilities. Regulatory authorities outside the United States may adopt similar restrictions or other
policy measures in response to the COVID-19 pandemic. Subsequently, on July 10, 2020, the FDA announced its intention to resume
certain on-site inspections of domestic manufacturing facilities subject to a risk-based prioritization system. The FDA intends to use this
risk-based assessment system to identify the categories of regulatory activity that can occur within a given geographic area, ranging
from mission critical inspections to resumption of all regulatory activities. If a prolonged government shutdown occurs, or if global
health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other
regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our
regulatory submissions, which could have a material adverse effect on our business.
Laws regulating consumer contacts could adversely affect our business operations or create liabilities. Our business activities
include contacts with consumers in different parts of the world. Certain laws, such as the U.S. Telephone Consumer Protection Act,
regulate telemarketing practices and certain automated outbound contacts with consumers, such as phone calls, texts or emails. Our use
of outbound contacts may be restricted by existing laws, or by laws, regulations, or regulatory decisions that may be adopted in the
future. Similarly, the new California Consumer Privacy Act of 2018 requires disclosure of our privacy practices to consumers. If we are
found to have violated these laws or regulations, we may be subjected to substantial fines, penalties, or liabilities to consumers.
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Our products are the subject of clinical trials conducted by us, our competitors, or other third parties, the results of which may
be unfavorable, or perceived as unfavorable, and could have a material adverse effect on our business, financial condition, and
results of operations. As a part of the regulatory process to obtain marketing clearance for new products and new indications for
existing products, or for other reasons, we conduct and participate in numerous clinical trials with a variety of study designs, patient
populations, and trial endpoints. We, our competitors, or other third parties may also conduct clinical trials involving our commercially
marketed products. The results of clinical trials may be unfavorable or inconsistent with previous findings, or could identify safety
signals associated with our products. Current or future clinical trials may not meet primary endpoints, may reveal disadvantages of our
products and solutions for various markets we address, or could generate unfavorable or inconsistent clinical data. Clinical data, or the
market’s or regulatory bodies’ perception of the clinical data, may adversely impact our ability to obtain product clearances or approvals,
and our position in, and share of, the markets in which we participate. Moreover, if these clinical trials identify serious safety issues
associated with our marketed products, potentially adverse consequences could result, including that regulatory authorities could
withdraw clearances or approvals of our products, we could be required to halt the marketing and sales of our products or recall our
products, we could be required to update our product labeling with additional warnings, we could be sued and held liable for harm
caused to patients, and our reputation may suffer. Any of these could have a material adverse impact on our business, financial condition,
and results of operations.
Off-label marketing of our products could result in substantial penalties. The FDA strictly regulates the promotional claims that
may be made about FDA-cleared products. In particular, clearance under Section 510(k) only permits us to market our products for the
uses indicated on the labeling cleared by the FDA. We may request additional label indications for our current products, and the FDA
may deny those requests outright, require additional expensive clinical data to support any additional indications or impose limitations
on the intended use of any cleared products as a condition of clearance. If the FDA determines that we have marketed our products for
off-label use, we could be subject to fines, injunctions or other penalties. It is also possible that other federal, state or foreign enforcement
authorities might take action if they consider our business activities to constitute promotion of an off-label use, which could result in
significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion
from participation in government healthcare programs, and the curtailment of our operations. Any of these events could significantly
harm our business and results of operations and cause our stock price to decline.
Disruptions in the supply of components from our suppliers could result in a significant reduction in sales and profitability. We
purchase configured components for our devices from various suppliers, including some who are single-source suppliers for us.
Disruptions to our suppliers, including disruptions in connection with the novel strain of coronavirus (COVID-19), may limit our ability
to manufacture our devices in a timely or cost-effective manner, which could result in a significant reduction in sales and profitability.
We cannot assure you that a replacement supplier would be able to configure its components for our devices on a timely basis or, in the
alternative, that we would be able to reconfigure our devices to integrate the replacement part. A reduction or halt in supply while a
replacement supplier reconfigures its components, or while we reconfigure our devices for the replacement part, would limit our ability
to manufacture our devices in a timely or cost-effective manner, which could result in a significant reduction in sales and profitability.
We cannot assure you that our inventories would be adequate to meet our production needs during any prolonged interruption of supply.
If we fail to attract develop and retain key employees our business may suffer. Our ability to compete effectively depends on our
ability to attract and retain key employees, including people in senior management, sales, marketing, technology and R&D positions.
Competition for top talent in the healthcare industry can be intense. Our ability to recruit and retain such talent will depend on a number
of factors, including hiring practices of our competitors, compensation and benefits, work location, work environment and industry
economic conditions. If we cannot effectively recruit, develop and retain qualified employees to drive our strategic goals, our business
could suffer.
We are subject to potential product liability claims that may exceed the scope and amount of our insurance coverage, which
would expose us to liability for uninsured claims. We are subject to potential product liability claims as a result of the design,
manufacture and marketing of medical devices. Any product liability claim brought against us, with or without merit, could result in
the increase of our product liability insurance rates. In addition, we would have to pay any amount awarded by a court in excess of our
policy limits. Our insurance policies have various exclusions, and thus we may be subject to a product liability claim for which we have
no insurance coverage, in which case, we may have to pay the entire amount of any award. We cannot assure you that our insurance
coverage will be adequate or that all claims brought against us will be covered by our insurance and we cannot assure you that we will
be able to obtain insurance in the future on terms acceptable to us or at all. A successful product liability claim brought against us in
excess of our insurance coverage, if any, may require us to pay substantial amounts, which could harm our business.
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Item 1A
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If our SaaS products fail to perform properly and if we fail to develop enhancements, we could lose customers, become subject
to service performance or warranty claims and our market share could decline. Our SaaS operations are dependent upon our
ability to prevent system interruptions and, as we continue to grow, we will need to devote additional resources to improving our
infrastructure in order to maintain the performance of our products and solutions. The applications underlying our SaaS products are
inherently complex and may contain material defects or errors, which may cause disruptions in availability or other performance
problems. We have from time to time found defects in our products and may discover additional defects in the future that could result
in data unavailability, unauthorized access to, loss, corruption or other harm to our customers’ data. While we implement bug fixes and
upgrades as part of our regularly scheduled system maintenance, we may not be able to detect and correct defects or errors before
implementing our products and solutions. Consequently, we or our customers may discover defects or errors after our products and
solutions have been deployed. If we fail to perform timely maintenance or if customers are otherwise dissatisfied with the frequency
and/or duration of our maintenance services and related system outages, our existing customers could elect not to renew their contracts,
delay or withhold payment, or potential customers may not adopt our products and solutions and our brand and reputation could be
harmed. In addition, the occurrence of any material defects, errors, disruptions in service or other performance problems with our
software could result in warranty or other legal claims against us and diversion of our resources. The costs incurred in addressing and
correcting any material defects or errors in our software and expanding our infrastructure and architecture in order to accommodate
increased demand for our products and solutions may be substantial and could adversely affect our operating results.
Our intellectual property may not protect our products, and/or our products may infringe on the intellectual property rights of
third-parties. We rely on a combination of patents, trade secrets and non-disclosure agreements to protect our intellectual property.
Our success depends, in part, on our ability to obtain and maintain United States and foreign patent protection for our products, their
uses and our processes to preserve our trade secrets and to operate without infringing on the proprietary rights of third-parties. We have
a number of pending patent applications, and we do not know whether any patents will issue from any of these applications. We do not
know whether any of the claims in our issued patents or pending applications will provide us with any significant protection against
competitive products or otherwise be commercially valuable. Legal standards regarding the validity of patents and the proper scope of
their claims are still evolving, and there is no consistent law or policy regarding the valid breadth of claims. Additionally, there may be
third-party patents, patent applications and other intellectual property relevant to our products and technology which are not known to
us and that block or compete with our products. We face the risks that:
•
•
third-parties will infringe our intellectual property rights;
our non-disclosure agreements will be breached;
• we will not have adequate remedies for infringement;
•
•
our trade secrets will become known to or independently developed by our competitors; or
third-parties will be issued patents that may prevent the sale of our products or require us to license and pay fees or royalties in
order for us to be able to market some of our products.
Litigation may be necessary to enforce patents issued to us, to protect our proprietary rights, or to defend third-party claims that we have
infringed on proprietary rights of others. If the outcome of any litigation or proceeding brought against us were adverse, we could be
subject to significant liabilities to third-parties, could be required to obtain licenses from third-parties, could be forced to design around
the patents at issue or could be required to cease sales of the affected products. A license may not be available at all or on commercially
viable terms, and we may not be able to redesign our products to avoid infringement. Additionally, the laws regarding the enforceability
of patents vary from country to country, and we cannot assure you that any patent issues we face will be uniformly resolved, or that
local laws will provide us with consistent rights and benefits.
Tax laws, regulations, and enforcement practices are evolving and may have a material adverse effect on our results of
operations, cash flows and financial position. Tax laws, regulations, and administrative practices in various jurisdictions are
evolving and may be subject to significant changes due to economic, political, and other conditions. There are many transactions that
occur during the ordinary course of business for which the ultimate tax determination is uncertain, and significant judgment is required
in evaluating and estimating our provision and accruals for taxes. Governments are increasingly focused on ways to increase tax
revenues, particularly from multinational corporations, which may lead to an increase in audit activity and aggressive positions taken
by tax authorities.
Changes or clarifications to U.S. tax laws could materially affect the tax treatment of our domestic and foreign earnings. The
Organisation for Economic Co-operation and Development, an international association of 34 countries, including the United States,
released the final reports from its Base Erosion and Profit Shifting, or BEPS, Action Plans, which aim to standardize and modernize
global tax policies. The BEPS Action Plans propose revisions to numerous tax rules, including country-by-country reporting, permanent
establishment, hybrid entities and instruments, transfer pricing, and tax treaties. The BEPS Action Plans have been or are being enacted
by countries where we have operations.
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RESMED INC. AND SUBSIDIARIES
Item 1A
Developments in relevant tax laws, regulations, administrative practices and enforcement practices could have a material adverse effect
on our operating results, financial position and cash flows, including the need to obtain additional financing.
We are subject to tax audits by various tax authorities in many jurisdictions. Our income tax returns are based on calculations
and assumptions that require significant judgment, and are subject to audit by various tax authorities. In addition, the calculation of our
tax liabilities involves dealing with uncertainties in the application of complex tax laws. We regularly assess the potential outcomes of
examinations by tax authorities in determining the adequacy of our provision for income taxes.
In connection with the audit by the Australian Taxation Office, or ATO, for the tax years 2009 to 2013, we received Notices of Amended
Assessments in March 2018. Based on these assessments, the ATO asserted that we owe $151.7 million in additional income tax and
$38.4 million in accrued interest. We agreed to a payment arrangement with the ATO, whereby an amount of $75.9 million was paid by
us in April 2018, with the remaining amounts due only if we are unsuccessful in defending our position. In June 2018, we received a
notice from the ATO claiming penalties of 50% of the additional income tax that was assessed or $75.9 million. In accordance with the
payment arrangement, all remaining tax, interest and penalty amounts outstanding are due only if we are unsuccessful in defending our
position. We do not agree with the ATO’s assessments and intend to pursue administrative and legal steps to defend our position. We
continue to believe we are more likely than not to be successful in defending our position. However, if we are not successful, there may
be material changes to our past or future taxable income, tax payable or deferred tax assets, we will not receive a refund of the $75.9
million we paid in April 2018, and we will be required to pay penalties and interest that could materially adversely affect our financial
results. The ATO is currently auditing tax years 2014 to 2018 and may advance the position that additional taxes are owed for those
years as well.
Our quarterly operating results are subject to fluctuation for a variety of reasons. Our operating results have, from time to time,
fluctuated on a quarterly basis and may be subject to similar fluctuations in the future. These fluctuations may result from a number of
factors, including:
•
•
•
•
•
•
•
•
•
•
•
the introduction of new products by us or our competitors;
the geographic mix of product sales;
the success and costs of our marketing efforts in new regions;
changes in third-party payor reimbursement;
timing of regulatory clearances and approvals;
costs associated with acquiring and integrating new businesses, technologies and product offerings;
timing of orders by distributors;
expenditures incurred for research and development;
competitive pricing in different regions;
the effect of foreign currency transaction gains or losses; and
other activities of our competitors.
Fluctuations in our quarterly operating results may cause the market price of our common stock to fluctuate.
If a natural or man-made disaster strikes our manufacturing facilities, we will be unable to manufacture our products for a
substantial amount of time and our sales and profitability will decline. Our facilities and the manufacturing equipment we use to
produce our products would be costly to replace and could require substantial lead-time to repair or replace. The facilities may be
affected by natural or man-made disasters, including COVID-19 that has spread globally, and in the event they were affected by a
disaster, we would be forced to rely on third-party manufacturers. Although we believe we possess adequate insurance for the disruption
of our business from causalities, such insurance may not be sufficient to cover all of our potential losses and may not continue to be
available to us on acceptable terms, or at all.
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Item 1A
RESMED INC. AND SUBSIDIARIES
Delaware law and provisions in our charter and could make it difficult for another company to acquire us. Provisions of our
certificate of incorporation may have the effect of delaying or preventing changes in control or management which might be beneficial
to us or our security holders. In particular, our board of directors has the authority to issue up to 2,000,000 shares of preferred stock and
to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without further vote or
action by the stockholders. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control, may discourage bids for our common stock at a premium over the market price of
our common stock and may adversely affect the market price of our common stock and the voting and other rights of the holders of our
common stock.
You may not be able to enforce the judgments of U.S. courts against some of our assets or officers and directors. A substantial
portion of our assets are located outside the United States. Additionally, some of our directors and executive officers reside outside the
United States, along with all or a substantial portion of their assets. As a result, it may not be possible for investors to enforce judgments
of U.S. courts relating to any liabilities under U.S. securities laws against our assets, those persons or their assets. In addition, investors
may not be able to pursue claims based on U.S. securities laws against these assets or these persons in non-U.S. courts, where most of
these assets and persons reside.
We are increasingly dependent on information technology systems and infrastructure. Our technology systems are potentially
vulnerable to breakdown or other interruption by fire, power loss, system malfunction, unauthorized access and other events. Likewise,
data privacy breaches by employees and others with both permitted and unauthorized access to our systems may pose a risk that sensitive
data may be exposed to unauthorized persons or to the public, or may be permanently lost. While we have invested heavily in the
protection of data and information technology and in related training, there can be no assurance that our efforts will prevent significant
breakdowns, breaches in our systems or other cyber incidents that could have a material adverse effect upon the reputation, business,
operations or financial condition of the company. In addition, significant implementation issues may arise as we continue to consolidate
and outsource certain computer operations and application support activities.
Our results of operations may be materially affected by global economic conditions generally, including conditions in the
financial markets. Recently, concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the impact
of the COVID-19 pandemic, and the ability of sovereign nations to pay their debts have contributed to increased volatility and diminished
expectations for the economy and the financial markets going forward. These factors, combined with volatile commodity prices,
declining business and consumer confidence and increased unemployment, have precipitated an economic slowdown. It is difficult to
predict how long the current economic conditions will continue and whether the economic conditions will continue to deteriorate. If
the economic climate in the United States or outside the United States continues to deteriorate or there is a shift in government spending
priorities, customers or potential customers could reduce or delay their purchases, which could impact our revenue, our ability to manage
inventory levels, collect customer receivables, and ultimately decrease our profitability.
Our leverage and debt service obligations could adversely affect our business. As of June 30, 2020, our total consolidated debt
was $1.2 billion. We may incur additional indebtedness in the future. Our indebtedness could have adverse consequences, including:
• making it more difficult to satisfy our financial obligations;
•
•
•
•
increasing our vulnerability to adverse economic, regulatory and industry conditions;
limiting our ability to compete and our flexibility in planning for, or reacting to, changes in our business and the industry in
which we operate;
limiting our ability to borrow additional funds for working capital, capital expenditure, acquisitions and general corporate or
other purposes; and
exposing us to greater interest rate risk.
Our debt service obligations will require us to use a portion of our operating cash flow to pay interest and principal in indebtedness,
which could impede our growth. Our ability to make payments on, and to refinance, our indebtedness, and to fund capital expenditures
will depend on our ability to generate cash in the future. This is subject to general economic, financial, competitive, legislative,
regulatory, and other factors, many of which are beyond our control.
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We may be adversely affected by recent proposals to reform LIBOR. Certain of our financial arrangements, including credit
facilities, are made at variable interest rates that use the London Interbank Offered Rate, or LIBOR (or metrics derived from or related
to LIBOR), as a benchmark for establishing the interest rate. On July 27, 2017, the United Kingdom’s Financial Conduct Authority
announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. These reforms may cause LIBOR
to cease to exist, new methods of calculating LIBOR to be established, or alternative reference rates to be established. The Alternative
Reference Rates Committee (ARRC) has proposed that the Secured Overnight Financing Rate (SOFR) is the rate that represents best
practice as the alternative to LIBOR for use in financial and other derivatives contracts that are currently indexed to United States dollar
LIBOR. ARRC has proposed a paced market transition plan to SOFR from LIBOR, and organizations are currently working on industry
wide and company specific transition plans as it relates to financial and other derivative contracts exposed to LIBOR. Uncertainty exists
as to the transition process and broad acceptance of SOFR as the primary alternative to LIBOR, and the potential consequences to us
cannot be fully predicted. Changes in market interest rates may influence our financing costs, returns on financial investments and the
valuation of derivative contracts and could reduce our earnings and cash flows.
We may impair intangible assets, such as goodwill. We have recorded intangible assets, including goodwill in connection with our
acquisitions. At least on an annual basis, we will evaluate whether facts and circumstances indicate any impairment of the values of
these intangible assets. As circumstances change, we cannot assure you that the value of these intangible assets will be realized by us. If
we determine that a significant impairment has occurred, we will be required to write-off the impaired portion of intangible assets, which
could have a material adverse effect on our results of operations in the period in which the write-off occurs.
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PART I
ITEM 1B UNRESOLVED STAFF COMMENTS
RESMED INC. AND SUBSIDIARIES
Items 1B – 4
We have received no written comments regarding our periodic or current reports from the staff of the SEC that were issued 180 days or
more before the end of our fiscal year 2020 that remain unresolved.
ITEM 2 PROPERTIES
We conduct our operations in both owned and leased properties. Our principal executive offices and U.S. sales facilities consist of
approximately 230,000 square feet and are located on Spectrum Center Boulevard in San Diego, California, in a building we own. We
have our primary research and development facilities, as well as office and manufacturing facilities at our owned site in Sydney,
Australia. Other facilities are leased in Atlanta, Georgia, and Moreno Valley, California, U.S.A.; Loyang and Galaxis, Singapore;
Munich, Germany; Lyon, France; Suzhou, China; and Johor Bahru, Malaysia. We are establishing a new manufacturing facility in Tuas,
Singapore that will eventually replace our Loyang facility.
We believe that our facilities are adequate to meet the needs of our current business operations. At June 30, 2020, our principal owned
and leased properties were as follows:
Location
San Diego, California
Sydney, Australia
Suzhou, China
Atlanta, Georgia
Moreno Valley, California
Tuas, Singapore
Munich, Germany
Loyang, Singapore
Minneapolis, United States
Chatsworth, California
Lyon, France
Halifax, Canada
Johor Bahru, Malaysia
Ownership Status
(Owned / Leased)
Owned
Owned
Owned
Square
footage
230,000 Corporate headquarters, sales and administration
224,000 Manufacturing, engineering, research and development, sales and administration
53,000 Manufacturing, engineering, research and development
Primary Usage
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
522,000
Warehouse and distribution; SaaS sales and administration, engineering, research and
development
244,000 Warehouse and distribution
268,000 Future manufacturing facility, currently being established
109,000 Sales and distribution
95,000 Manufacturing facility, engineering, research and development
86,000 SaaS sales and administration, engineering, research and development
72,000 Motor manufacturing, engineering, research and development
52,000 Sales and distribution
47,000 Engineering, research and development
46,000 Engineering, research and development
ITEM 3 LEGAL PROCEEDINGS
We are involved in various legal proceedings, claims, investigations and litigation that arise in the ordinary course of our business. We
investigate these matters as they arise, and accrue estimates for resolution of legal and other contingencies in accordance with Statement
of Financial Accounting Standard No. 5. See Note 17 – Legal Actions, Contingencies and Commitments of the Notes to Consolidated
Financial Statements (Part II, Item 8) included in this report.
Litigation is inherently uncertain. Accordingly, we cannot predict with certainty the outcome of these matters. But we do not expect the
outcome of these matters to have a material adverse effect on our consolidated financial statements when taken as a whole.
ITEM 4 MINE SAFETY DISCLOSURES
Not Applicable.
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PART II
RESMED INC. AND SUBSIDIARIES
PART II
Item 5
ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NYSE under the symbol “RMD”. As of July 31, 2020, there were 26 holders of record of our
common stock, although the actual number of stockholders of our common stock is greater than this number of holders of record and
many of these holders of record own shares as nominees on behalf of other beneficial owners.
Securities Authorized for Issuance Under Equity Compensation Plans
The information included under Item 12 of Part III of this Report, “Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters,” is hereby incorporated by reference into this Item 5 of Part II of this Report.
Purchases of Equity Securities
On February 21, 2014, our board of directors approved our current share repurchase program, authorizing us to acquire up to an
aggregate of 20.0 million shares of our common stock. The program allows us to repurchase shares of our common stock from time to
time for cash in the open market, or in negotiated or block transactions, as market and business conditions warrant and subject to
applicable legal requirements. There is no expiration date for this program, and the program may be accelerated, suspended, delayed
or discontinued at any time at the discretion of our board of directors. All share repurchases after February 21, 2014 have been
executed under this program.
In fiscal year 2019, we temporarily suspended our share repurchase program due to recent acquisitions. As a result, we did not repurchase
any shares during the twelve months ended June 30, 2020. However, there is no expiration date for this program, and we may, at any
time, elect to resume the share repurchase program as the circumstances allow. Since the inception of the share buyback programs, we
have repurchased 41.8 million shares at a total cost of $1.6 billion. At June 30, 2020, 12.9 million additional shares can be repurchased
under the approved share repurchase program.
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PART II
RESMED INC. AND SUBSIDIARIES
PERFORMANCE GRAPH
Item 5
This performance graph is furnished and shall not be deemed “filed” with the SEC or subject to Section 18 of the Exchange Act, nor
shall it be deemed incorporated by reference in any of our filings under the Securities Act of 1933, as amended.
The following graph compares the cumulative total stockholders return on our common stock from June 30, 2015 through June 30, 2020,
with the comparable cumulative return of the S&P 500 index, the S&P 500 Health Care index, and the Dow Jones U.S. Medical Devices
index. The graph assumes that $100 was invested in our common stock and each index on June 30, 2015. In addition, the graph assumes
the reinvestment of all dividends paid. The stock price performance on the following graph is not necessarily indicative of future stock
price performance.
The following table shows total indexed return of stock price plus reinvestments of dividends, assuming an initial investment of $100
at June 30, 2015, for the indicated periods.
Index
ResMed Inc.
S&P 500
S&P 500 Health Care
Dow Jones U.S. Medical Devices
As of June 30,
2015
100
100
100
100
2016
115
102
96
115
2017
144
117
106
142
2018
195
132
112
171
2019
233
143
125
206
2020
370
150
136
227
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PART II
ITEM 6 SELECTED FINANCIAL DATA
RESMED INC. AND SUBSIDIARIES
Item 6
The following table summarizes certain selected consolidated financial data for, and as of the end of, each of the fiscal years in the five-
year period ended June 30, 2020. The data set forth below should be read together with Item 7 of Part II of this report, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and Item 8 of Part II of this report, “Consolidated Financial
Statements and Supplementary Data”, and related notes included elsewhere in this report. The consolidated statement of income data
for the years ended June 30, 2020, 2019 and 2018 and the consolidated balance sheet data as of June 30, 2020 and 2019 are derived
from our audited consolidated financial statements included elsewhere in this report. The consolidated statement of income data for the
years ended June 30, 2017 and 2016 and the consolidated balance sheet data as of June 30, 2018, 2017 and 2016 are derived from our
audited consolidated financial statements not included in this report. Historical results do not necessarily indicate the results to be
expected in the future, and the results for the years presented should not be considered to indicate our future results of operations.
Consolidated Statement of Income Data
(In thousands, except per share data):
Net revenue
Cost of sales (exclusive of amortization shown separately below)
Amortization of acquired intangible assets*
Total cost of sales
Gross profit
Selling, general and administrative expenses
Research and development expenses
Amortization of acquired intangible assets*
Restructuring expenses
Litigation settlement expenses
Acquisition related expenses
Total operating expenses
Income from operations
Other income:
Interest income (expense), net
Loss attributable to equity method investments
Other, net
Total other income (loss), net
Income before income taxes
Income taxes
Net income
Basic earnings per share
Diluted earnings per share
Dividends per share
Weighted average:
Basic shares outstanding
Diluted shares outstanding
$
$
$
$
2020
2,957,013
1,189,624
49,603
1,239,227
1,717,786
676,689
201,946
30,092
-
(600)
-
908,127
809,659
2019
2,606,572
1,069,987
42,514
1,112,501
1,494,071
645,010
180,651
32,424
9,401
41,199
6,123
914,808
579,263
Years Ended June 30,
2018
2,340,196
978,032
27,266
1,005,298
1,334,898
600,369
155,149
19,117
18,432
-
-
793,067
541,831
2017
2,066,737
864,992
29,477
894,469
1,172,268
553,968
144,467
17,101
12,358
8,500
10,076
746,470
425,798
(39,356)
(25,058)
(12,157)
(76,571)
733,088
111,414
621,674 $
4.31 $
4.27 $
1.56 $
(33,857)
(15,833)
(10,726)
(60,416)
518,847
114,255
404,592 $
2.83 $
2.80 $
1.48 $
(11,977)
-
(8,542)
(20,519)
521,312
205,724
315,588 $
2.21 $
2.19 $
1.40 $
(11,151)
-
4,096
(7,055)
418,743
76,459
342,284 $
2.42 $
2.40 $
1.32 $
144,338
145,652
143,111
144,484
142,764
143,987
141,360
142,453
2016
1,838,713
772,216
12,906
785,122
1,053,591
488,057
118,651
11,017
6,914
-
-
624,639
428,952
5,654
-
4,960
10,614
439,566
87,157
352,409
2.51
2.49
1.20
140,242
141,669
*
Within our consolidated statements of income for the years ended June 30, 2020, 2019, 2018, 2017 and 2016, cost of sales has been adjusted to include
amortization of acquired intangible assets directly applicable to revenue. As a result, gross profit includes amortization of acquired intangible assets relating
to cost of sales and operating expenses have been reduced by this amount. There was no impact on income from operations, income before taxes or net income,
as a result of this reclassification.
Consolidated Balance Sheet Data (In thousands):
Working capital
Total assets
Long-term debt, less current maturities
Total stockholders’ equity
$
$
2020
920,698 $
4,587,376
1,164,133
2,497,027 $
2019
As of June 30,
2018
589,375 $
4,107,682
1,258,861
2,072,193 $
554,468 $
3,063,923
269,988
2,058,980 $
2017
1,283,877 $
3,468,487
1,078,611
1,960,266 $
2016
781,730
3,256,705
873,332
1,694,831
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Table of Contents
PART II
Item 7
RESMED INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Management’s discussion and analysis of financial condition and results of operations is intended to help the reader understand the
results of operations and financial condition of ResMed Inc. and subsidiaries. It is provided as a supplement to, and should be read
together with the selected financial data and consolidated financial statements and notes included elsewhere in this report.
We are a global leader in the development, manufacturing, distribution and marketing of medical devices and cloud-based software
applications that diagnose, treat and manage respiratory disorders, including sleep apnea, COPD, neuromuscular disease and other
chronic diseases. Sleep apnea includes obstructive sleep apnea and other respiratory disorders that occur during sleep. Our products and
solutions are designed to improve patient quality of life, reduce the impact of chronic disease and lower healthcare costs as global
healthcare systems continue to drive a shift in care from hospitals to the home and lower cost settings. Our cloud-based digital health
applications, along with our devices, are designed to provide connected care to improve patient outcomes and efficiencies for our
customers.
Since the development of continuous positive airway pressure therapy, we have expanded our business by developing or acquiring a
number of products and solutions for a broader range of respiratory disorders including technologies to be applied in medical and
consumer products, ventilation devices, diagnostic products, mask systems, headgear and other accessories, dental devices, portable
oxygen concentrators and cloud-based software informatics solutions to manage patient outcomes and customer and provider business
processes. Our growth has been fueled by geographic expansion, our research and product development efforts, acquisitions and an
increasing awareness of sleep apnea and other respiratory conditions like chronic obstructive pulmonary disease as significant health
concerns.
We are committed to ongoing investment in research and development and product enhancements. During fiscal year 2020, we invested
$201.9 million on research and development activities, which represents 6.8% of net revenues with a continued focus on the development
and commercialization of new, innovative products and solutions that improve patient outcomes, create efficiencies for our customers
and help physicians and providers better manage chronic disease and lower healthcare costs. During fiscal year 2020, we released new
products including AirFit N30, a nasal cradle mask with a front-facing tube, and AirFit F30i, a top-of-head connected full face mask as
well as expanded our AirView offering to include certain respiratory care devices. Due to multiple acquisitions, including of Brightree
in April 2016, HEALTHCAREfirst in July 2018 and MatrixCare in November 2018, our operations now include out-of-hospital software
platforms designed to support the professionals and caregivers who help people stay healthy in the home or care setting of their choice.
These platforms comprise our SaaS business. These products, our cloud-based remote monitoring and therapy management system, and
a robust product pipeline, should continue to provide us with a strong platform for future growth.
We have determined that we have two operating segments, which are the sleep and respiratory disorders sector of the medical device
industry (“Sleep and Respiratory Care”) and the supply of business management software as a service to out-of-hospital health providers
(“SaaS”).
Net revenue in fiscal year 2020 increased to $2,957.0 million, an increase of 13% compared to fiscal year 2019. Gross profit increased
for the year ended June 30, 2020 to $1,717.8 million, from $1,494.1 million for the year ended June 30, 2019, an increase $223.7 million
or 15%. Our net income for the year ended June 30, 2020 was $621.7 million or $4.27 per diluted share compared to net income of
$404.6 million or $2.80 per diluted share for the year ended June 30, 2019.
Total operating cash flow for fiscal year 2020 was $802.3 million and at June 30, 2020, our cash and cash equivalents totaled $463.2
million. At June 30, 2020, our total assets were $4.6 billion and our stockholders’ equity was $2.5 billion. We paid a quarterly dividend
of $0.39 per share during fiscal 2020 with a total amount of $225.1 million paid to stockholders.
In order to provide a framework for assessing how our underlying businesses performed, excluding the effect of foreign currency
fluctuations, we provide certain financial information on a “constant currency basis”, which is in addition to the actual financial
information presented. In order to calculate our constant currency information, we translate the current period financial information
using the foreign currency exchange rates that were in effect during the previous comparable period. However, constant currency
measures should not be considered in isolation or as an alternative to U.S. dollar measures that reflect current period exchange rates, or
to other financial measures calculated and presented in accordance with U.S. generally accepted accounting principles.
For discussion related to the results of operations and changes in financial condition for the fiscal year ended June 30, 2019 compared
to fiscal year June 30, 2018, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” in our Annual Report for the Year Ended June 30, 2019, which was filed with the United States Securities and Exchange
Commission on August 18, 2019.
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Table of Contents
PART II
Item 7
RESMED INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Impact of COVID-19
In March 2020, the World Health Organization declared the outbreak of a novel strain of coronavirus (“COVID-19”) as a pandemic.
Our primary goal during the COVID-19 pandemic is the preservation of life. We have prioritized protecting the health and safety of our
employees and continuing to use our employees’ talents and our resources to help society meet and overcome the challenges the
pandemic poses.
We have observed increased demand for our ventilator devices and masks, which can be used to treat COVID-19 patients. Due to
governments’ varying restrictions on international and domestic travel, access to labor for our manufacturing facilities was impacted as
was the availability of raw materials and components, which constrained our manufacturing capacity and restricted our ability to initially
meet the substantial demand for ventilators. Our primary focus is maximizing the availability of our ventilators and other respiratory
support devices for the patients that need them the most in the countries facing the greatest challenges. The global increase in our sales
for these respiratory care products during fiscal year 2020 generally followed infection patterns around the world. We believe the global
demand for these devices has largely been met, however, this may change depending on the ability for regions to contain and control
infection rates, which remains highly uncertain. Additionally, as more becomes known about the virus and as governments pursue testing
and vaccines, we may see an overall reduction in demand, and then face a corresponding risk of oversupply by us and by our competitors.
While further outbreaks in the future are highly uncertain, we expect lower demand for ventilator products for the fiscal year ending
June 30, 2021.
As anticipated, we observed lower demand for our sleep devices and masks during the three months ended June 30, 2020, and we
continue to expect COVID-19 will lead to a temporary decrease in demand for these products from new patients for some or all of our
fiscal year 2021. Specifically, diagnostic pathways for sleep apnea treatment, including HME suppliers and sleep clinics, have been
impacted and, in some instances, been required, or in the future may be required, to temporarily close due to governments’ “shelter-in-
place” orders, quarantines or similar orders or restrictions enacted to control the spread of COVID-19. In some countries, new patients
are prescribed sleep apnea treatment through hospitals that are directing their resources to critical care, including COVID-19 treatment.
The impact on these diagnostic and prescription pathways has likely resulted in a decrease in demand from new patients for our products
designed to treat sleep apnea. Given the ongoing uncertainty regarding the duration and extent of the COVID-19 pandemic and measures
taken to control the spread of COVID-19, we are uncertain as to the duration and extent of decreased demand for our sleep devices.
However, due to the nature of the installed base of existing patients using our devices, we expect the demand for re-supply of our masks
to be less impacted compared to devices.
Our SaaS business may also be affected by COVID-19 and measures taken to control the spread of COVID-19. Some of our existing
and potential SaaS customers are HME distributors and, therefore, have been impacted, or may be impacted, by the same temporary
business closures noted above. We also have existing and potential SaaS customers that operate care facilities and are either receiving
and treating patients infected with COVID-19 or are implementing significant measures to safeguard their facilities against a potential
COVID-19 outbreak. Given these challenging business conditions and the uncertain economic environment, we expect businesses will
be deterred from adopting new or changing SaaS platforms, which may adversely impact our ability to engage new customers for our
SaaS businesses, or expand the services used by existing customers.
Our ability to continue to operate without any significant negative impacts will in part depend on our ability to protect our employees.
We have endeavored and continue to follow recommended actions of government and health authorities to protect our employees
worldwide, but since COVID-19 was declared a pandemic in March 2020, we were able to broadly maintain our operations, and we are
beginning the slow and careful process of progressively returning to work in our offices around the world. The pandemic has not
negatively impacted our liquidity position.
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Table of Contents
PART II
Item 7
RESMED INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Fiscal Year Ended June 30, 2020 Compared to Fiscal Year Ended June 30, 2019
Net Revenues. Net revenue for the year ended June 30, 2020 increased to $2,957.0 million from $2,606.6 million for the year ended
June 30, 2019, an increase of $350.4 million or 13% (a 15% increase on a constant currency basis). The following table summarizes our
net revenue disaggregated by segment, product and region for the year ended June 30, 2020 compared to the year ended June 30, 2019
(in thousands):
U.S., Canada and Latin America
Devices
Masks and other
Total Sleep and Respiratory Care
Software as a Service
Total
Combined Europe, Asia and other markets
Devices
Masks and other
Total Sleep and Respiratory Care
Global revenue
Devices
Masks and other
Total Sleep and Respiratory Care
Software as a Service
Total
*
2020
2019
% Change
Constant
Currency*
Year Ended June 30,
$
$
$
$
$
$
$
$
792,766 $
779,561
1,572,327 $
354,632
1,926,959 $
715,056 $
314,998
1,030,054 $
1,507,822 $
1,094,559
2,602,381 $
354,632
2,957,013 $
743,066
677,430
1,420,496
275,789
1,696,285
618,525
291,762
910,287
1,361,591
969,192
2,330,783
275,789
2,606,572
7 %
15
11
29
14
16 %
8
13
11 %
13
12
29
13
19 %
11
16
12 %
14
13
29
15
Constant currency numbers exclude the impact of movements in international currencies.
Sleep and Respiratory Care
Net revenue from our Sleep and Respiratory Care business for the year ended June 30, 2020 increased to $2,602.4 million from $2,330.8
million for the year ended June 30, 2019, an increase of $271.6 million or 12%. Movements in international currencies against the U.S.
dollar negatively impacted net revenues by approximately $29.9 million for the year ended June 30, 2020. Excluding the impact of
currency movements, total net revenue from our Sleep and Respiratory Care business for the year ended June 30, 2020 increased by
13% compared to the year ended June 30, 2019. The increase in net revenue was primarily attributable to an increase in unit sales of our
devices and masks, including as a result of increased demand for our ventilators due to COVID-19.
Net revenue from our Sleep and Respiratory Care business in the United States, Canada and Latin America for the year ended June 30,
2020 increased to $1,572.3 million from $1,420.5 million for the year ended June 30, 2019, an increase of $151.8 million or 11%. The
increase was primarily due to an increase in unit sales of our devices and masks, including as a result of increased demand for our
ventilators due to COVID-19.
Net revenue from our Sleep and Respiratory Care business in markets in combined Europe, Asia and other markets increased for the
year ended June 30, 2020 to $1,030.1 million from $910.3 million for the year ended June 30, 2019, an increase of $119.8 million or
13% (an increase of 16% on a constant currency basis). The constant currency increase in sales in combined Europe, Asia and other
markets predominantly reflects an increase in unit sales of our devices and masks, including as a result of increased demand for our
ventilators due to COVID-19.
Net revenue from devices for the year ended June 30, 2020 increased to $1,507.8 million from $1,361.6 million for the year ended
June 30, 2019, an increase of $146.2 million or 11%, including an increase of 7% in the United States, Canada and Latin America and
an increase of 16% in combined Europe, Asia and other markets (a 19% increase on a constant currency basis). Excluding the impact of
foreign currency movements, device sales for the year ended June 30, 2020 increased by 12%.
Net revenue from masks and other for the year ended June 30, 2020 increased to $1,094.6 million from $969.2 million for the year ended
June 30, 2019, an increase of 13%, including an increase of 15% in the United States, Canada and Latin America and an increase of 8%
in combined Europe, Asia and other markets (an 11% increase on a constant currency basis). Excluding the impact of foreign currency
movements, masks and other sales increased by 14%, compared to the year ended June 30, 2019.
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Table of Contents
PART II
Item 7
RESMED INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Software as a Service
Net revenue from our SaaS business for the year ended June 30, 2020 was $354.6 million, compared to $275.8 million for the year ended
June 30, 2019, an increase of $78.8 million or 29%. The increase was predominantly due to revenue attributable to MatrixCare, which
was acquired on November 13, 2018, and continued growth in our SaaS product offerings.
Gross Profit and Gross Margin. Within our consolidated statements of income for the years ended June 30, 2020, 2019 and 2018,
cost of sales has been adjusted to include amortization of acquired intangible assets directly applicable to revenue. As a result, gross
profit now includes amortization of acquired intangible assets relating to cost of sales and operating expenses have been reduced by this
amount. There was no impact on income from operations, income before taxes or net income, as a result of this reclassification. The
adjustments to the previously reported amounts are not material.
The table below presents a reconciliation of amortization of acquired intangible assets by income statement caption summing to total
amortization of acquired intangible assets as previously reported for the year ended June 30, 2019 (in thousands):
Amortization of acquired intangible assets related to cost of sales
Amortization of acquired intangible assets related to operating expenses
Total as previously reported
$
$
2019
42,514
32,424
74,938
The table below presents a reconciliation of gross profit as previously reported for the year ended June 30, 2019 adjusted for the
amortization of acquired intangible assets now included in cost of sales (in thousands):
Gross profit as previously reported
Amortization of acquired intangible assets related to cost of sales
Gross profit
$
$
2019
1,536,585
(42,514)
1,494,071
Gross profit increased for the year ended June 30, 2020 to $1,717.8 million from $1,494.1 million for the year ended June 30, 2019, an
increase of $223.7 million or 15%. Gross profit as a percentage of net revenue was 58.1% for the year ended June 30, 2020, compared
with the 57.3% for the year ended June 30, 2019. The increase in gross margin was due primarily to favorable product mix, which was
partially offset by an increase in manufacturing and logistics costs as a result of the COVID-19 pandemic and an increase in amortization
of intangible assets associated with MatrixCare and Propeller Health, which were acquired in November 2018 and January 2019,
respectively.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased for the year ended June 30,
2020 to $676.7 million from $645.0 million for the year ended June 30, 2019, an increase of $31.7 million or 5%. The selling, general
and administrative expenses, as reported in U.S. dollars, were favorably impacted by the movement of international currencies against
the U.S. dollar, which decreased our expenses by approximately $15.1 million. Excluding the impact of foreign currency movements,
selling, general and administrative expenses for the year ended June 30, 2020 increased by 7% compared to the year ended June 30,
2019. As a percentage of net revenue, selling, general and administrative expenses for the year ended June 30, 2020 improved to 22.9%
compared to 24.7% for the year ended June 30, 2019.
The constant currency increase in selling, general and administrative expenses was primarily due to additional personnel to support our
commercial activities and additional expenses associated with the consolidation of our acquisitions of MatrixCare and Propeller Health,
partially offset by a decrease in legal costs and travel, marketing and consulting expenses, either as a direct or indirect result of the
COVID-19 pandemic.
Research and Development Expenses. Research and development expenses increased for the year ended June 30, 2020 to
$201.9 million from $180.7 million for the year ended June 30, 2019, an increase of $21.3 million or 12%. The research and development
expenses were favorably impacted by the movement of international currencies against the U.S. dollar, which decreased our expenses
by approximately $4.4 million, as reported in U.S. dollars. Excluding the impact of foreign currency movements, research and
development expenses for the year ended June 30, 2020 increased by 14% compared to the year ended June 30, 2019. As a percentage
of net revenue, research and development expenses were 6.8% for the year ended June 30, 2020 compared to 6.9% for the year ended
June 30, 2019.
The constant currency increase in research and development expenses was primarily due to additional expenses associated with the
consolidation of our acquisitions of MatrixCare and Propeller Health as well as additional personnel to facilitate development of new
products and solutions.
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Table of Contents
PART II
Item 7
RESMED INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Amortization of Acquired Intangible Assets. Amortization of acquired intangible assets for the year ended June 30, 2020 totaled
$30.1 million compared to $32.4 million for the year ended June 30, 2019. The decrease in amortization expense was attributable to our
historical intangible assets becoming fully amortized during the fiscal year.
Restructuring Expenses. During the year ended June 30, 2020, we did not incur material restructuring expenses. During the year
ended June 30, 2019, we incurred restructuring expenses of $9.4 million associated with the reorganization, rationalization and
relocation of some of our research and development and SaaS operations including the closure of our German research and development
site. We recorded the full amount of $9.4 million during the year ended June 30, 2019, within our operating expenses, which was
separately disclosed as restructuring expenses. The restructuring expenses consisted primarily of severance payments to employees and
contract exit costs associated with several impacted sites.
Acquisition Related Expenses. During the year ended June 30, 2020, we did not incur material acquisition related expenses. During
the year ended June 30, 2019, we recognized acquisition related expenses of $6.1 million associated primarily with our acquisition of
MatrixCare.
Litigation Settlement Expenses. During the year ended June 30, 2020, we did not incur material litigation settlement expenses.
During the year ended June 30, 2019, we recognized litigation settlement expenses of $41.2 million on account of a tentative agreement
with the Department of Justice to resolve an ongoing investigation by the government into certain of our product offerings. The final
agreement, entered into in December 2019, included payment by us of $39.5 million, and additional fees and administrative costs raising
the overall total to $41.2 million.
Total Other Income (Loss), Net. Total other income (loss), net for the year ended June 30, 2020 was a loss of $76.6 million, compared
to a loss of $60.4 million for the year ended June 30, 2019. The change was due primarily to an increase in losses attributable to equity
method investments for the year ended June 30, 2020 of $25.1 million, compared to $15.8 million for the year ended June 30, 2019. The
losses attributable to equity method investments relate to our joint venture with Verily whereby we recognize our share of the joint
venture’s losses. Additionally, interest expense increased to $40.4 million for the year ended June 30, 2020 compared to interest expense
of $36.2 million for the year ended June 30, 2019.
Income Taxes. Our effective income tax rate decreased to 15.2% for the year ended June 30, 2020 from 22.0% for the year ended
June 30, 2019. Our effective income tax rate was affected by the geographic mix of our earnings and windfall tax benefits related to the
vesting or settlement of employee share-based awards. Our Singapore operations operate under certain tax holidays and tax incentive
programs that will expire in whole or in part at various dates through June 30, 2030. As a result of the U.S. Tax Act, we treated all non-
U.S. historical earnings as taxable during the year ended June 30, 2018. Therefore, future repatriation of cash held by our non-U.S.
subsidiaries will generally not be subject to U.S. federal tax, if repatriated.
Finally, in connection with the audit by the Australian Tax Office (the “ATO”) for the tax years 2009 to 2013, we received Notices of
Amended Assessments in March 2018. Based on these assessments, the ATO asserted that we owe $151.7 million in additional income
tax and $38.4 million in accrued interest, of which $75.9 million was paid in April 2018 under a payment arrangement with the ATO.
As of June 30, 2020, we have recorded a receivable in prepaid taxes and other non-current assets for the amount paid as we ultimately
expect this will be refunded by the ATO. In June 2018, we received a notice from the ATO claiming penalties of 50% of the additional
income tax that was assessed or $75.9 million. The ATO is currently auditing tax years 2014 to 2018. We do not agree with the ATO’s
assessments and continue to believe we are more likely than not to be successful in defending our position.
Net Income and Earnings per Share. As a result of the factors above, our net income for the year ended June 30, 2020 was
$621.7 million compared to net income of $404.6 million for the year ended June 30, 2019. Our earnings per diluted share for the year
ended June 30, 2020 was $4.27 compared to $2.80 for the year ended June 30, 2019, an increase of 53%.
Liquidity and Capital Resources
As of June 30, 2020 and June 30, 2019, we had cash and cash equivalents of $463.2 million and $147.1 million, respectively. Working
capital was $920.7 million and $589.4 million, at June 30, 2020 and June 30, 2019, respectively. As of June 30, 2020 we had $1.2 billion
of borrowings under our revolving credit facility, term credit facility and senior notes as compared to $1.3 billion at June 30, 2019. In
response to the uncertainty associated with the COVID-19 pandemic, we increased our cash and cash equivalents position during the
year by drawing down from our revolving credit facility. As of June 30, 2020, we had $1.1 billion available for draw down under the
revolving credit facility and a combined total of $1.5 billion in cash and available liquidity under the revolving credit facility.
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Table of Contents
PART II
Item 7
RESMED INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
As of June 30, 2020 and June 30, 2019, our cash and cash equivalent balances held within the United States amounted to $158.8 million
and $33.6 million, respectively. Our remaining cash and cash equivalent balances at June 30, 2020 and June 30, 2019, of $304.4 million
and $113.5 million, respectively, were held by our non-U.S. subsidiaries. Our cash and cash equivalent balances are held at highly rated
financial institutions.
We repatriated $400.0 million and $360.0 million to the United States during both the years ended June 30, 2020 and 2019, respectively,
from earnings generated in each of those years. The amount of the current year foreign earnings that we have repatriated to the United
States in the past has been determined, and the amount that we expect to repatriate during fiscal year 2021 will be determined, based on
a variety of factors, including current year earnings of our foreign subsidiaries, foreign investment needs and the cash flow needs we
have in the United States, such as for the repayment of debt, dividend distributions, and other domestic obligations.
During the year ended June 30, 2018, as a result of the U.S. Tax Act, we treated all non-U.S. historical earnings as taxable, which
resulted in additional tax expense of $126.9 million which was payable over the proceeding eight years. Therefore, future repatriation
of cash held by our non-U.S. subsidiaries will generally not be subject to U.S. federal tax if repatriated. On June 14, 2019, the U.S.
Treasury Department issued final and temporary regulations relating to the repatriation of non-U.S. earnings. As a result, in the event
our non-U.S. earnings had not been permanently reinvested, deferred taxes of approximately $194.4 million in U.S. federal deferred tax
and $5.2 million in U.S. state deferred taxes would have been recognized in the consolidated financial statements.
Inventories at June 30, 2020 were $416.9 million, an increase of $67.3 or 19% over the balance at June 30, 2019 of $349.6 million. The
increase in inventories was required primarily to support our revenue growth, including increased demand for our ventilators due to
COVID-19.
Accounts receivable, net of allowance for doubtful accounts, at June 30, 2020 were $474.6 million, a decrease of $53.9 million or 10%
over the June 30, 2019 accounts receivable balance of $528.5 million. Accounts receivable days’ sales outstanding of 65 days at June 30,
2020 decreased by 2 days compared to 67 days at June 30, 2019. Our allowance for doubtful accounts as a percentage of total accounts
receivable at June 30, 2020 and 2019 was 5.7% and 4.5%, respectively.
Effective July 1, 2019, we adopted the Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (Topic 842). As of June 30, 2020,
and in accordance with the new guidance, we have recognized a right-of-use asset (“ROU”) of $118.3 million and a lease liability of
$123.1 million on the balance sheet for all operating leases, other than those that meet the definition of a short-term lease.
During the year ended June 30, 2020, we generated cash of $802.3 million from operations compared to $459.1 million for the year
ended June 30, 2019. The increase in cash generated from operations during the year ended June 30, 2020 was primarily due to the
increase in operating profit and improvement in working capital, partially offset by higher inventory levels. Movements in foreign
currency exchange rates during the year ended June 30, 2020 had the effect of increasing our cash and cash equivalents by $10.9 million,
as reported in U.S. dollars.
During the year ended June 30, 2020, we paid $27.9 million associated with business acquisitions, net of cash acquired, compared to
$951.4 million during the year ended June 30, 2019.
We have temporarily suspended our share repurchase program and, accordingly, did not repurchase any shares during year ended
June 30, 2020. During the year ended June 30, 2019, we repurchased 200,000 shares at a cost of $22.8 million under our share repurchase
program. During fiscal years 2020 and 2019, we also paid dividends totaling $225.1 million and $211.7 million, respectively.
Details of contractual obligations at June 30, 2020 are as follows (in thousands):
Debt
Interest on debt
Operating leases
Purchase obligations
Total
Total
1,180,000 $
155,129
131,382
462,996
1,929,507 $
$
$
2021
2022
Payments Due by June 30,
2024
2023
12,000 $
26,435
25,963
458,623
523,021 $
12,000 $
26,435
19,038
3,678
61,151 $
12,000 $
24,816
15,906
518
53,240 $
644,000 $
16,725
13,407
111
674,243 $
2025
Thereafter
- $
16,725
10,684
66
27,475 $
500,000
43,994
46,384
-
590,378
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Table of Contents
PART II
Item 7
RESMED INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Details of other commercial commitments at June 30, 2020 are as follows (in thousands):
Standby letter of credit
Guarantees*
Total
*
Total
2021
2022
2023
2024
2025
Thereafter
$
$
16,318 $
3,302
19,620 $
3,638 $
185
3,823 $
33 $
24
57 $
536 $
38
574 $
- $
49
49 $
- $
18
18 $
12,111
2,988
15,099
Amount of Commitment Expiration Per Period
These guarantees mainly relate to requirements under contractual obligations with insurance companies transacting with our German subsidiaries and
guarantees provided under our facility leasing obligations.
Refer to Note 17 - Legal Actions, Contingencies and Commitments of the Notes to the Consolidated Financial Statements (Part II,
Item 8) for details of our contingent obligations under recourse provisions.
Segment Information
We have determined that we have two operating segments, which are the Sleep and Respiratory Care segment and the SaaS segment.
See Note 15 – Segment Information of the Notes to the Consolidated Financial Statements (Part II, Item 8) for financial information
regarding segment reporting. Financial information about our revenues from and assets located in foreign countries is also included in
the notes to the consolidated financial statements included in this report.
Credit Facility
On April 17, 2018, we entered into an amended and restated credit agreement, or the Revolving Credit Agreement, as borrower, with
lenders MUFG Union Bank, N.A., as administrative agent, joint lead arranger, joint book runner, swing line lender and letter of credit
issuer, and Westpac Banking Corporation, as syndication agent, joint lead arranger and joint book runner. The Revolving Credit
Agreement, among other things, provided a senior unsecured revolving credit facility of $800.0 million, with an uncommitted option to
increase the revolving credit facility by an additional $300.0 million.
Additionally, on April 17, 2018, ResMed Limited entered into a syndicated facility agreement, or the Term Credit Agreement, as
borrower, with lenders MUFG Union Bank, N.A., as administrative agent, joint lead arranger and joint book runner, and Westpac
Banking Corporation, as syndication agent, joint lead arranger and joint book runner. The Term Credit Agreement, among other things,
provides ResMed Limited a senior unsecured term credit facility of $200.0 million.
On November 5, 2018, we entered into a first amendment to the Revolving Credit Agreement to, among other things, increase the size
of our senior unsecured revolving credit facility from $800.0 million to $1.6 billion, with an uncommitted option to increase the revolving
credit facility by an additional $300.0 million.
Our obligations under the Revolving Credit Agreement are guaranteed by certain of our direct and indirect U.S. subsidiaries, and ResMed
Limited’s obligations under the Term Credit Agreement are guaranteed by us and certain of our direct and indirect U.S. subsidiaries.
The Revolving Credit Agreement and Term Credit Agreement contain customary covenants, including, in each case, a financial covenant
that requires that we maintain a maximum leverage ratio of funded debt to EBITDA (as defined in the Revolving Credit Agreement and
Term Credit Agreement, as applicable). The entire principal amounts of the revolving credit facility and term credit facility, and, in each
case, any accrued but unpaid interest may be declared immediately due and payable if an event of default occurs, as defined in the
Revolving Credit Agreement and the Term Credit Agreement, as applicable. Events of default under the Revolving Credit Agreement
and the Term Credit Agreement include, in each case, failure to make payments when due, the occurrence of a default in the performance
of any covenants in the respective agreements or related documents, or certain changes of control of us, or the respective guarantors of
the obligations borrowed under the Revolving Credit Agreement and Term Credit Agreement.
The Revolving Credit Agreement and Term Credit Agreement each terminate on April 17, 2023, when all unpaid principal and interest
under the loans must be repaid. Amounts borrowed under the Term Credit Agreement will also amortize on a semi-annual basis, with a
$6.0 million principal payment required on each such semi-annual amortization date. The outstanding principal amounts will bear
interest at a rate equal to LIBOR plus 0.75% to 1.50% (depending on the then-applicable leverage ratio) or the Base Rate (as defined in
the Revolving Credit Agreement and the Term Credit Agreement, as applicable) plus 0.0% to 0.50% (depending on the then-applicable
leverage ratio). At June 30, 2020, the interest rate that was being charged on the outstanding principal amounts was 1.2%. An applicable
commitment fee of 0.100% to 0.175% (depending on the then-applicable leverage ratio) applies on the unused portion of the revolving
credit facility. At June 30, 2020, we were in compliance with our debt covenants and there was $680.0 million outstanding under the
Revolving Credit Agreement and Term Credit Agreement.
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Table of Contents
PART II
Senior Notes
RESMED INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7
On July 10, 2019, we entered into a Note Purchase Agreement with the purchasers to that agreement, in connection with the issuance
and sale of $250.0 million principal amount of our 3.24% senior notes due July 10, 2026, and $250.0 million principal amount of our
3.45% senior notes due July 10, 2029. Our obligations under the Note Purchase Agreement and the Notes are unconditionally and
irrevocably guaranteed by certain of our direct and indirect U.S. subsidiaries, including ResMed Corp., ResMed Motor Technologies
Inc., Birdie Inc., Inova Labs, Inc., Brightree LLC, Brightree Home Health & Hospice LLC, Brightree Patient Collections LLC, ResMed
Operations Inc., HEALTHCAREfirst Holding Company, HCF Holdco Company, HEALTHCAREfirst, Inc., CareFacts Information
Systems, LLC and Lewis Computer Services, LLC, MatrixCare Holdings Inc., MatrixCare, Inc., Reciprocal Labs Corporation and
ResMed SaaS Inc., under a Subsidiary Guaranty Agreement dated as of July 10, 2019. The net proceeds from this transaction were used
to pay down borrowings on our Revolving Credit Agreement.
Under the terms of the Note Purchase Agreement, we agreed to customary covenants including with respect to our corporate existence,
transactions with affiliates, and mergers and other extraordinary transactions. We also agreed that, subject to limited exceptions, we will
maintain a ratio of consolidated funded debt to consolidated EBITDA of no more than 3.50 to 1.00 as of the last day of any fiscal quarter,
and will not at any time permit the amount of all secured and unsecured debt of us and our subsidiaries to exceed 10% of our consolidated
tangible assets, determined as of the end of our most recently ended fiscal quarter.
On June 30, 2020, we were in compliance with our debt covenants and there was a total of $1,180.0 million outstanding under the
Revolving Credit Agreement, Term Credit Agreement and Senior Notes. We expect to satisfy all of our liquidity and long-term debt
requirements through a combination of cash on hand, cash generated from operations and undrawn debt facilities.
Critical Accounting Principles and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect our
reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an
ongoing basis we evaluate our estimates, including those related to allowance for doubtful accounts, inventory reserves, warranty
obligations, goodwill, potentially impaired assets, intangible assets, income taxes and contingencies.
We state these accounting policies in the notes to the financial statements and at relevant sections in this discussion and analysis. The
estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable
under the circumstances. Actual results could vary from those estimates under different assumptions or conditions.
We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of
our consolidated financial statements:
(1) Valuation of Goodwill, Intangible and Other Long-Lived Assets. We make assumptions in establishing the carrying value, fair
value and estimated lives of our goodwill, intangibles and other long-lived assets. Our goodwill impairment tests are performed at our
reporting unit level, which is one level below our operating segments. The criteria used for these evaluations include management’s
estimate of the asset’s continuing ability to generate positive income from operations and positive cash flow in future periods compared
to the carrying value of the asset, as well as the strategic significance of any identifiable intangible asset in our business objectives. If
assets are considered to be impaired, we recognize as impairment the amount by which the carrying value of the assets exceeds their fair
value, and for goodwill is limited to the value of goodwill allocated to the impaired reporting unit, as described in Step 1 below. We
base useful lives and related amortization or depreciation expense on our estimate of the period that the assets will generate revenues or
otherwise be used by us. Factors that would influence the likelihood of a material change in our reported results include significant
changes in the asset’s ability to generate positive cash flow, loss of legal ownership or title to the asset, a significant decline in the
economic and competitive environment on which the asset depends, significant changes in our strategic business objectives, utilization
of the asset, and a significant change in the economic and/or political conditions in certain countries.
We conduct an annual review for goodwill impairment at our reporting unit level based on the following steps:
Step 0 or Qualitative assessment – Evaluate qualitative factors to determine whether it is more likely than not that the fair value
of a reporting unit is less than its carrying amount, including goodwill. The factors we consider include, but are not limited to,
macroeconomic conditions, industry and market considerations, cost factors, overall financial performance or events-specific
to that reporting unit. If or when we determine it is more likely than not that the fair value of a reporting unit is less than the
carrying amount, including goodwill, we would move to Step 1 of the quantitative method.
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Table of Contents
PART II
Item 7
RESMED INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Step 1 – Compare the fair value for each reporting unit to its carrying value, including goodwill. Fair value is determined based
on estimated discounted cash flows. A goodwill impairment charge is recognized for the amount that the carrying amount of a
reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.
If a reporting unit’s fair value exceeds the carrying value, no further work is performed and no impairment charge is necessary.
(2) Income Tax. We assess our income tax positions and record tax benefits for all years subject to audit based upon management’s
evaluation of the facts, circumstances and information available at the reporting date. If we determine that it is not more likely than not
that we would be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be
charged to income tax expense in the period such determination is made. Alternatively, if we determine that it is more likely than not
that the net deferred tax assets would be realized, any previously provided valuation allowance is reversed. These changes to the
valuation allowance and resulting increases or decreases in income tax expense may have a material effect on our operating results.
Our income tax returns are based on calculations and assumptions subject to audit by various tax authorities. In addition, the calculation
of our tax liabilities involves dealing with uncertainties in the application of complex tax laws. Although currently immaterial, we
recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition
by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit,
including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount
that is more than 50% likely of being realized upon settlement. While we believe we have appropriate support for the positions taken on
our tax returns, we regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our
provision for income taxes. Based on our regular assessment, we may adjust the income tax provision and deferred taxes in the period
in which the facts that give rise to a revision become known.
In connection with the audit by the ATO for the tax years 2009 to 2013, we received Notices of Amended Assessments in March 2018.
Based on these assessments, the ATO asserted that we owe $151.7 million in additional income tax and $38.4 million in accrued interest,
of which $75.9 million was paid in April 2018 under a payment arrangement with the ATO. In June 2018, we received a notice from
the ATO claiming penalties of 50% of the additional income tax that was assessed or $75.9 million. At June 30, 2020, we recorded a
receivable in prepaid taxes and other non-current assets for the amount paid as we ultimately expect this will be refunded by the ATO.
The ATO is currently auditing tax years 2014 to 2018. We do not agree with the ATO’s assessments and continue to believe we are
more likely than not to be successful in defending our position.
(3) Revenue Recognition. We have determined that we have two operating segments, which are the sleep and respiratory disorders
sector of the medical device industry (“Sleep and Respiratory Care”) and the supply of business management software as a service to
out-of-hospital health providers (“SaaS”). For products in our Sleep and Respiratory Care business, we transfer control and recognize a
sale when products are shipped to the customer in accordance with the contractual shipping terms. For our SaaS business, revenue
associated with professional services are recognized as they are provided. We defer the recognition of a portion of the consideration
received when performance obligations are not yet satisfied. Consideration received from customers in advance of revenue recognition
is classified as deferred revenue. Performance obligations resulting in deferred revenue in our Sleep and Respiratory Care business relate
primarily to extended warranties on our devices and the provision of data for patient monitoring. Performance obligations resulting in
deferred revenue in our SaaS business relate primarily to the provision of software access with maintenance and support over an agreed
term and material rights associated with future discounts upon renewal of some SaaS contracts. Generally, deferred revenue will be
recognized over a period of one to five years. Our contracts do not contain significant financing components.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. In
our Sleep and Respiratory Care business, the amount of consideration received and revenue recognized varies with changes in marketing
incentives (e.g., rebates, discounts, free goods) and returns offered to customers. In accounting for these rebate programs, we reduce
revenue ratably as sales occur over the rebate period by the expected value of the rebates to be returned to the customer. We also
recognize discount on products as a reduction to revenue when control is transferred. We adjust the estimate of revenue for the impact
of returned items at the earlier of when the most likely amount of consideration can be estimated, the amount expected to be received
changes, or when the consideration becomes fixed. However, returns of products, excluding warranty-related returns, are infrequent and
insignificant.
When Sleep and Respiratory Care or SaaS contracts have multiple performance obligations, we generally use an observable price to
determine the stand-alone selling price by reference to pricing and discounting practices for the specific product or service when sold
separately to similar customers. Revenue is then allocated proportionately, based on the determined stand-alone selling price, to each
performance obligation. An allocation is not required for many of our Sleep and Respiratory Care contracts that have a single
performance obligation, which is the shipment of our therapy-based equipment.
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Table of Contents
PART II
Item 7
RESMED INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Recently Issued Accounting Pronouncements
See Note 3 – New Accounting Pronouncements of the Notes to Consolidated Financial Statements (Part II, Item 8) for a description of
recently issued accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations,
financial positions and cash flows.
Off-Balance Sheet Arrangements
As of June 30, 2020, we are not involved in any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of
Regulation S-K promulgated by the SEC.
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Table of Contents
PART II
Item 7A
RESMED INC. AND SUBSIDIARIES
Quantitative and Qualitative Disclosures About Market and Business Risks
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET AND BUSINESS RISKS
Foreign Currency Market Risk
Our reporting currency is the U.S. dollar, although the financial statements of our non-U.S. subsidiaries are maintained in their respective
local currencies. We transact business in various foreign currencies, including a number of major European currencies as well as the
Australian dollar. We have significant foreign currency exposure through both our Australian and Singapore manufacturing activities
and international sales operations. We have established a foreign currency hedging program using purchased currency options and
forward contracts to hedge foreign-currency-denominated financial assets, liabilities and manufacturing cash flows. The goal of this
hedging program is to economically manage the financial impact of foreign currency exposures predominantly denominated in euros,
Australian dollars and Singapore dollars. Under this program, increases or decreases in our foreign-currency-denominated financial
assets, liabilities, and firm commitments are partially offset by gains and losses on the hedging instruments. We do not enter into
financial instruments for trading or speculative purposes. The foreign currency derivatives portfolio is recorded in the consolidated
balance sheets at fair value and included in Other assets current, Other assets non-current, Accrued expenses and Other liabilities non-
current. All movements in the fair value of the foreign currency derivatives are recorded within Other income, net, on our consolidated
statements of income.
The table below provides information (in U.S. dollars) on our significant foreign-currency-denominated financial assets by legal entity
functional currency as of June 30, 2020 (in thousands):
AUD Functional:
Assets
Liability
Foreign Currency Hedges
Net Total
USD Functional:
Assets
Liability
Foreign Currency Hedges
Net Total
SGD Functional:
Assets
Liability
Foreign Currency Hedges
Net Total
U.S.
Dollar
(USD)
Euro
(EUR)
Great Britain
Pound
(GBP)
Canadian
Dollar
(CAD)
Chinese
Yuan
(CNY)
412,883
(414,802)
-
(1,919)
139,175
(120,745)
(16,852)
1,578
-
-
-
-
-
-
-
-
539,940
(238,584)
(295,000)
6,356
145,999
(67,624)
(73,025)
5,350
-
(309)
-
(309)
-
(134)
-
(134)
-
-
-
-
-
-
-
-
18,949
(564)
(22,647)
(4,262)
19,472
(5,606)
(14,687)
(821)
-
-
-
-
-
-
-
-
12
-
-
12
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Table of Contents
PART II
Item 7A
RESMED INC. AND SUBSIDIARIES
Quantitative and Qualitative Disclosures About Market and Business Risks
The table below provides information about our foreign currency derivative financial instruments and presents the information in U.S.
dollar equivalents. The table summarizes information on instruments and transactions that are sensitive to foreign currency exchange
rates, including foreign currency call options, collars and forward contracts held at June 30, 2020. The table presents the notional
amounts and weighted average exchange rates by contractual maturity dates for our foreign currency derivative financial instruments.
These notional amounts generally are used to calculate payments to be exchanged under the options contracts (in thousands, except
exchange rates):
Foreign Exchange Contracts
AUD/USD
Contract amount
Ave. contractual exchange rate
AUD/Euro
Contract amount
Ave. contractual exchange rate
SGD/Euro
Contract amount
Ave. contractual exchange rate
SGD/USD
Contract amount
Ave. contractual exchange rate
AUD/CNY
Contract amount
Ave. contractual exchange rate
USD/CAD
Contract amount
Ave. contractual exchange rate
Interest Rate Risk
Year 1
Year 2
-
-
Total
-
61,791
AUD 1 =
Euro 0.6293
84,260
SGD 1 =
Euro 0.6345
295,000
SGD 1 =
USD 0.7176
22,647
AUD 1 =
CNY 4.9450
14,687
USD 1 =
CAD 1.3695
11,235
AUD 1 =
Euro 0.58
5,617
SGD 1 =
Euro 0.6120
-
-
-
73,026
AUD 1 =
Euro 0.6211
89,877
SGD 1 =
Euro 0.6331
295,000
SGD 1 =
USD 0.7176
22,647
AUD 1 =
CNY 4.9450
14,687
USD 1 =
CAD 1.3695
Fair Value Assets / (Liabilities)
June 30,
2020
June 30,
2019
-
202
886
(124)
126
(183)
40
71
(161)
(15)
(83)
(66)
We are exposed to risk associated with changes in interest rates affecting the return on our cash and cash equivalents and debt. At
June 30, 2020, we held cash and cash equivalents of $463.2 million principally comprising of bank term deposits and at-call accounts
and are invested at both short-term fixed interest rates and variable interest rates. At June 30, 2020, there was $680.0 million outstanding
under the revolving credit and term loan facilities, which were subject to variable interest rates. A hypothetical 10% change in interest
rates during the year ended June 30, 2020, would not have had a material impact on pretax income. We have no interest rate hedging
agreements. On July 10, 2019, we entered into the Note Purchase Agreement with the purchasers to that agreement, in connection with
the issuance and sale of $250.0 million principal amount of our 3.24% senior notes due July 10, 2026, and $250.0 million principal
amount of our 3.45% senior notes due July 10, 2029. The interest rate on these notes is fixed and not subject to fluctuation. Proceeds
from the issuance and sale of the notes were used to repay borrowings under the revolving credit facility.
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Table of Contents
PART II
Item 8
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RESMED INC. AND SUBSIDIARIES
The information required by this Item is incorporated by reference to the financial statements set forth in Item 15 of Part IV of this
report, “Exhibits and Consolidated Financial Statement Schedules.”
(a) Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2020 and 2019
Consolidated Statements of Income for the years ended June 30, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the years ended June 30, 2020, 2019 and 2018
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended June 30, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
Schedule II – Valuation and Qualifying Accounts and Reserves
51
53
54
55
56
57
58
81
(b) Supplementary Data
Quarterly Financial Information (unaudited)—The quarterly results for the years ended June 30, 2020 and 2019 are summarized below
(in thousands, except per share amounts):
2020
Net revenue
Gross profit*
Net income
Basic earnings per share
Diluted earnings per share
2019
Net revenue
Gross profit*
Net income
Basic earnings per share
Diluted earnings per share
$
$
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
681,056
391,619
120,148
0.84
0.83
First
Quarter
588,279
336,138
105,737
0.74
0.73
$
$
736,157
427,130
160,554
1.11
1.10
Second
Quarter
651,100
374,532
124,639
0.87
0.86
$
$
769,455
449,662
163,137
1.13
1.12
Third
Quarter
662,228
380,970
105,416
0.74
0.73
$
$
770,343
449,372
177,835
1.23
1.22
Fourth
Quarter
704,964
402,432
68,797
0.48
0.48
Fiscal
Year
2,957,013
1,717,786
621,674
4.31
4.27
Fiscal
Year
2,606,572
1,494,071
404,592
2.83
2.80
* Within our consolidated statements of income for the years ended June 30, 2020 and 2019, cost of sales has been adjusted to include amortization of acquired
intangible assets directly applicable to revenue. As a result, gross profit includes amortization of acquired intangible assets relating to cost of sales and operating
expenses have been reduced by this amount. There was no impact on income from operations, income before taxes or net income, as a result of this reclassification
Note: the amounts for each quarter are computed independently and, due to the computation formula, the sum of the four quarters may not equal the year.
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Table of Contents
PART II
RESMED INC. AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
Item 8
To the Stockholders and Board of Directors
ResMed Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of ResMed Inc. and subsidiaries (the Company) as of
June 30, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity,
and cash flows for each of the years in the three year period ended June 30, 2020, and the related notes and financial
statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019,
and the results of its operations and its cash flows for each of the years in the three year period ended June 30, 2020, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2020, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission, and our report dated August 12, 2020 expressed an unqualified opinion on the effectiveness
of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for
leases beginning July 1, 2019 due to the adoption of the FASB’s Accounting Standards Codification Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated
financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate
to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our
opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit
matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they
relate.
Evaluation of goodwill triggering events
As discussed in Notes 1(i) and 5 to the consolidated financial statements, the carrying amount of goodwill as of
June 30, 2020 was $1,890 million. The Company performs goodwill impairment testing on an annual basis and
whenever events or changes in circumstances indicate that the carrying value of a reporting unit, including
goodwill, might exceed the fair value of the reporting unit. In the current year, the Company performed qualitative,
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Table of Contents
PART II
Item 8
RESMED INC. AND SUBSIDIARIES
or Step 0, assessments to determine whether there was a greater than 50 percent likelihood that the fair value of
each reporting unit was less than its carrying value.
We identified the evaluation of goodwill triggering events as a critical audit matter because such events indicate
possible impairment of goodwill, which required the application of greater auditor judgment. Potential triggering
events, such as macroeconomic conditions, industry and market considerations, cost factors, overall financial
performance, market capitalization and events specific to the entity and reporting units, required a higher degree
of auditor judgment to evaluate. These possible triggering events could have a significant effect on the
Company’s Step 0 assessment and the determination of whether further quantitative analysis of goodwill
impairment was required.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the
design and tested the operating effectiveness of internal controls related to the critical audit matter. This included
a control related to the Company’s assessment of possible goodwill triggering events. We evaluated the
Company’s Step 0 assessment for its reporting units by:
• Considering macroeconomic indicators such as gross domestic product and inflation by key regions around
the world;
• Evaluating information from analyst reports in the enterprise software and sleep and respiratory care
industries, which are compared to industry and market considerations used by the Company; and
• Analyzing information including changes in the costs of raw materials and labor, the financial performance of
the reporting units, the Company’s market capitalization, and other entity and reporting-unit specific events.
Evaluation of uncertain tax positions related to Australian Tax Office audits
As discussed in Note 14 to the consolidated financial statements, the Company’s tax filings in Australia for the
years 2009 through 2017 are under audit by the Australian Tax Office (ATO). The Company has been assessed
$266 million of additional income tax, penalties, and interest for tax years 2009 through 2013 in connection with
this tax audit. Certain of these amounts have been paid by the Company to the ATO. However, the Company has
not recorded any expense relating to the ongoing audit, or these assessments, as the Company believes it is
more likely than not (more than a 50% likelihood) that its tax positions will be upheld.
We identified the evaluation of uncertain tax positions related to Australian Tax Office audits as a critical audit
matter. This critical audit matter required challenging auditor judgment due to the nature and the subjectivity of the
applicable tax rules and regulations.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the
design and tested the operating effectiveness of certain internal controls related to the critical audit matter. This
included controls over the Australian tax calculation and assessment of uncertain tax positions. We involved tax
professionals with specialized skills and knowledge of Australian tax laws, who assisted in:
• Reading formal notices and assessments, and other correspondence received by the Company from the
ATO in connection with the audit, as well as responses and information the Company submitted to the ATO
in response to its requests for information;
• Evaluating the Company’s analysis and conclusions regarding its assertion, which included an assessment of
the Company’s analysis of Australian tax laws and regulations related to the specific audit findings, and an
evaluation of the facts, assumptions, and representations made; and
• Reading legal opinions obtained by the Company from third parties, and inquiring of third-party legal counsel
about the likelihood of the Company’s tax position being ultimately upheld.
We have served as the Company’s auditor since 1994.
San Diego, California
August 12, 2020
-52-
Table of Contents
PART II
Item 8
RESMED INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2020 and 2019
(In thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $28,508 and $25,171
at June 30, 2020 and June 30, 2019, respectively
Inventories (note 4)
Prepaid expenses and other current assets
Total current assets
Non-current assets:
Property, plant and equipment, net (note 4)
Operating lease right-of-use assets (note 10)
Goodwill (note 5)
Other intangible assets, net (note 5)
Deferred income taxes (note 14)
Prepaid taxes and other non-current assets
Total non-current assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued expenses (note 7)
Operating lease liabilities, current (note 10)
Deferred revenue
Income taxes payable (note 14)
Short-term debt, net (note 9)
Total current liabilities
Non-current liabilities:
Deferred revenue
Deferred income taxes (note 14)
Operating lease liabilities, non-current (note 10)
Other long-term liabilities
Long-term debt, net (note 9)
Long-term income taxes payable (note 14)
Total non-current liabilities
Total liabilities
Commitments and contingencies (note 17)
Stockholders’ equity: (note 11)
Preferred stock, $0.01 par value, 2,000,000 shares authorized; none issued
Common stock, $0.004 par value, 350,000,000 shares authorized;
186,723,407 issued and 144,887,175 outstanding at June 30, 2020 and
185,491,064 issued and 143,654,830 outstanding at June 30, 2019
Additional paid-in capital
Retained earnings
Treasury stock, at cost, 41,836,234 shares at June 30, 2020 and June 30, 2019
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
June 30,
2020
June 30,
2019
$
463,156
$
$
$
$
$
474,643
416,915
168,745
1,523,459
417,335
118,348
1,890,324
448,168
41,065
148,677
3,063,917
4,587,376
135,786
270,353
21,263
98,617
64,755
11,987
602,761
87,307
13,011
101,880
8,347
1,164,133
112,910
1,487,588
2,090,349
-
580
1,570,694
2,832,991
(1,623,256)
(283,982)
2,497,027
4,587,376
$
$
147,128
528,484
349,641
120,113
1,145,366
387,460
-
1,856,449
521,950
45,478
150,979
2,962,316
4,107,682
115,725
266,359
-
88,667
73,248
11,992
555,991
81,143
11,380
-
2,058
1,258,861
126,056
1,479,498
2,035,489
-
575
1,511,473
2,436,410
(1,623,256)
(253,009)
2,072,193
4,107,682
-53-
Table of Contents
PART II
Item 8
RESMED INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended June 30, 2020, 2019 and 2018
(In thousands, except per share data)
Net revenue - Sleep and Respiratory Care products
Net revenue - Software as a Service
Net revenue
Cost of sales - Sleep and Respiratory Care products
Cost of sales - Software as a Service
Cost of sales
Amortization of acquired intangible assets - Sleep and Respiratory Care products
Amortization of acquired intangible assets - Software as a Service
Amortization of acquired intangible assets
Total cost of sales
Gross profit
Selling, general and administrative
Research and development
Amortization of acquired intangible assets
Restructuring expenses (note 19)
Litigation settlement expenses (note 20)
Acquisition related expenses (note 18)
Total operating expenses
Income from operations
Other income (loss), net:
Interest income
Interest expense
Loss attributable to equity method investments (note 6)
Other, net (note 13)
Total other income (loss), net
Income before income taxes
Income taxes
Net income
Basic earnings per share (note 12)
Diluted earnings per share (note 12)
Dividend declared per share
Basic shares outstanding (000's)
Diluted shares outstanding (000's)
June 30, 2020
June 30, 2019
June 30, 2018
$
2,602,381 $
354,632
2,957,013
2,330,783 $
275,789
2,606,572
1,067,967
121,657
1,189,624
8,584
41,019
49,603
1,239,227
1,717,786
676,689
201,946
30,092
-
(600)
-
908,127
809,659
1,021
(40,377)
(25,058)
(12,157)
(76,571)
733,088
111,414
621,674 $
4.31 $
4.27 $
1.56 $
144,338
145,652
977,223
92,764
1,069,987
8,591
33,923
42,514
1,112,501
1,494,071
645,010
180,651
32,424
9,401
41,199
6,123
914,808
579,263
2,299
(36,156)
(15,833)
(10,726)
(60,416)
518,847
114,255
404,592 $
2.83 $
2.80 $
1.48 $
143,111
144,484
$
$
$
$
2,183,193
157,003
2,340,196
929,350
48,682
978,032
7,217
20,049
27,266
1,005,298
1,334,898
600,369
155,149
19,117
18,432
-
-
793,067
541,831
16,378
(28,355)
-
(8,542)
(20,519)
521,312
205,724
315,588
2.21
2.19
1.40
142,764
143,987
See accompanying notes to consolidated financial statements.
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Table of Contents
PART II
Item 8
RESMED INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years Ended June 30, 2020, 2019 and 2018
(In US$ thousands)
Net income
Other comprehensive (loss) income:
Foreign currency translation (loss) gain adjustments
Comprehensive income
2020
Years Ended June 30,
2019
$
621,674
404,592
2018
315,588
$
(30,973)
590,701 $
(28,681)
375,911 $
(35,269)
280,319
See accompanying notes to consolidated financial statements.
-55-
Table of Contents
PART II
RESMED INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
Years ended June 30, 2020, 2019 and 2018
(In thousands)
Common Stock
Amount
Additional
Paid-in
Capital
1,379,130 (41,086) $ (1,546,611) $
Treasury Stock
Amount
Shares
569 $
Balance, June 30, 2017
Common stock issued on exercise of options
(note 11)
Common stock issued on vesting of restricted stock
units, net of shares withheld for tax (note 11)
Common stock issued on employee stock purchase
plan (note 11)
Treasury stock purchases
Stock-based compensation costs
Other comprehensive income (loss)
Net income
Dividends declared
Balance, June 30, 2018
Common stock issued on exercise of options
(note 11)
Common stock issued on vesting of restricted stock
units, net of shares withheld for tax (note 11)
Common stock issued on employee stock purchase
plan (note 11)
Treasury stock purchases
Stock-based compensation costs
Other comprehensive income (loss)
Net income
Cumulative effect of change in accounting
standards
Dividends declared
Balance, June 30, 2019
Common stock issued on exercise of options
(note 11)
Common stock issued on vesting of restricted stock
units, net of shares withheld for tax (note 11)
Common stock issued on employee stock purchase
plan (note 11)
Treasury stock purchases
Stock-based compensation costs
Other comprehensive income (loss)
Net income
Dividends declared
Balance, June 30, 2020
Shares
183,261 $
539
214
302
-
-
-
-
-
184,316 $
252
638
285
-
-
-
-
-
-
185,491 $
350
617
265
-
-
-
-
-
186,723 $
2
1
1
(2)
-
-
-
-
571 $
1
3
1
(1)
-
-
-
-
-
575 $
1
3
1
-
-
-
-
-
580 $
18,759
(15,385)
19,955
-
48,362
-
-
-
-
-
-
(550)
-
-
-
-
-
-
-
(53,801)
-
-
-
-
1,450,821 (41,636) $ (1,600,412) $
12,329
(28,104)
24,364
-
52,063
-
-
-
-
-
-
-
(200)
-
-
-
-
-
-
-
-
(22,844)
-
-
-
-
-
1,511,473 (41,836) $ (1,623,256) $
19,986
(46,061)
28,196
-
57,100
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,570,694 (41,836) $ (1,623,256) $
Item 8
Accumulated
Other
Retained
Earnings
Comprehensive
Income (Loss)
2,316,237 $
(189,059) $
-
-
-
-
-
-
-
-
-
315,588
(199,497)
2,432,328 $
-
-
(35,269)
-
-
(224,328) $
-
-
-
-
-
-
-
-
-
404,592
(188,798)
(211,712)
2,436,410 $
-
-
(28,681)
-
-
-
(253,009) $
-
-
-
-
-
-
-
-
-
621,674
(225,093)
2,832,991 $
-
-
(30,973)
-
-
(283,982) $
Total
1,960,266
18,761
(15,384)
19,956
(53,803)
48,362
(35,269)
315,588
(199,497)
2,058,980
12,330
(28,101)
24,365
(22,845)
52,063
(28,681)
404,592
(188,798)
(211,712)
2,072,193
19,987
(46,058)
28,197
-
57,100
(30,973)
621,674
(225,093)
2,497,027
See accompanying notes to consolidated financial statements.
-56-
Table of Contents
PART II
Item 8
RESMED INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2020, 2019 and 2018
(In thousands)
Cash flows from operating activities:
Net income
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization of right-of-use-assets
Stock-based compensation costs
Loss attributable to equity method investments (note 6)
Impairment of equity investments (note 6)
Gain on previously held equity interest (note 18)
Changes in fair value of business combination contingent consideration
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable
Inventories
Prepaid expenses, net deferred income taxes and other current assets
Accounts payable, accrued expenses and other
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Patent registration costs
Business acquisitions, net of cash acquired
Purchases of investments (note 6)
Payments on maturity of foreign currency contracts
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock, net
Taxes paid related to net share settlement of equity awards
Purchases of treasury stock
Payments of business combination contingent consideration
Proceeds from borrowings, net of borrowing costs
Repayment of borrowings
Dividends paid
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Income taxes paid, net of refunds
Interest paid
Fair value of assets acquired, excluding cash
Liabilities assumed
Goodwill on acquisition
Deferred payments
Fair value of contingent consideration
Cash paid for acquisitions
June 30, 2020
June 30, 2019
June 30, 2018
$
621,674 $
404,592 $
315,588
154,850
26,523
57,559
25,058
14,519
-
(7)
54,383
(69,881)
(58,999)
(23,424)
802,255
(95,330)
(10,608)
(27,910)
(31,616)
(14,397)
(179,861)
150,795
-
52,073
15,833
15,007
(1,909)
(286)
(18,013)
(84,188)
(47,575)
(27,278)
459,051
(68,710)
(8,632)
(951,383)
(46,717)
(264)
(1,075,706)
48,182
(46,061)
-
(302)
1,190,000
(1,284,012)
(225,093)
(317,286)
10,920
316,028
147,128
463,156 $
180,359 $
40,377 $
14,919 $
(4,292)
20,375
408
(3,500)
27,910 $
36,727
(28,104)
(22,844)
(909)
1,519,230
(711,745)
(211,712)
580,643
(5,561)
(41,573)
188,701
147,128 $
242,860 $
36,156 $
429,522 $
(265,217)
794,320
(7,242)
-
951,383 $
$
$
$
$
$
119,960
-
48,412
-
11,593
-
411
(32,356)
1,494
(160,726)
200,650
505,026
(62,581)
(8,876)
(902)
(14,495)
(14,970)
(101,824)
38,717
(15,385)
(53,801)
(486)
350,000
(1,146,242)
(199,497)
(1,026,694)
(9,742)
(633,234)
821,935
188,701
170,653
28,355
290
-
247
365
-
902
See accompanying notes to consolidated financial statements.
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Table of Contents
PART II
(1) Organization and Basis of Presentation
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
ResMed Inc. (referred to herein as “we”, “us”, “our” or the “Company”) is a Delaware corporation formed in March 1994 as a holding
company for the ResMed Group. Through our subsidiaries, we design, manufacture and market equipment for the diagnosis and
treatment of sleep-disordered breathing and other respiratory disorders, including obstructive sleep apnea. Our manufacturing operations
are located in Australia, Singapore, Malaysia, France, China and the United States. Major distribution and sales sites are located in the
United States, Germany, France, the United Kingdom, Switzerland, Australia, Japan, China, Finland, Norway and Sweden. We also
operate a Software as a Service (“SaaS”) business in the United States that includes out-of-hospital software platforms designed to
support the professionals and caregivers who help people stay healthy in the home or care setting of their choice.
(2) Summary of Significant Accounting Policies
(a) Basis of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-
company transactions and balances have been eliminated in consolidation. The preparation of financial statements in conformity with
U.S. generally accounting principles requires management estimates and assumptions that affect amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from management’s estimates.
(b) Revenue Recognition
In accordance with Accounting Standard Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”, we account for
a contract with a customer when there is a legally enforceable contract, the rights of the parties are identified, the contract has commercial
substance, and collectability of the contract consideration is probable. We have determined that we have two operating segments, which
are the sleep and respiratory disorders sector of the medical device industry (“Sleep and Respiratory Care”) and the supply of business
management software as a service to out-of-hospital health providers (“SaaS”). Our Sleep and Respiratory Care revenue relates primarily
to the sale of our products that are therapy-based equipment. Some contracts include additional performance obligations such as the
provision of extended warranties and data for patient monitoring. Our SaaS revenue relates to the provision of software access with
ongoing support and maintenance services as well as professional services such as training and consulting.
Disaggregation of revenue
See note 15 – Segment Information for our net revenue disaggregated by segment, product and region for the years ended June 30, 2020,
2019 and 2018.
Effective in the fourth quarter of the fiscal year ended June 30, 2020, our consolidated statements of income separately present the
revenues and related costs of the Sleep and Respiratory Care and SaaS segments. Net revenues and cost of sales were previously
presented on an aggregate basis. This change separately states net sales of products and revenues from services, which materially aligns
with net revenues associated with our Sleep and Respiratory Care and SaaS segments, respectively. While this change has been applied
retrospectively to the consolidated statements of income for the years ended June 30, 2019 and 2018, there was no impact on net revenue,
cost of sales, income from operations, income before taxes or net income as a result of this change.
Performance obligations and contract balances
Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied; generally, this occurs
with the transfer of risk and/or control of our products are provided at a point in time. For products in our Sleep and Respiratory Care
business, we transfer control and recognize a sale when products are shipped to the customer in accordance with the contractual shipping
terms. For our SaaS business, revenue associated with professional services are recognized as they are provided. We defer the recognition
of a portion of the consideration received when performance obligations are not yet satisfied. Consideration received from customers in
advance of revenue recognition is classified as deferred revenue. Performance obligations resulting in deferred revenue in our Sleep and
Respiratory Care business relate primarily to extended warranties on our devices and the provision of data for patient monitoring.
Performance obligations resulting in deferred revenue in our SaaS business relate primarily to the provision of software access with
maintenance and support over an agreed term and material rights associated with future discounts upon renewal of some SaaS contracts.
Generally, deferred revenue will be recognized over a period of one year to five years. Our contracts do not contain significant financing
components.
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Table of Contents
PART II
Item 8
The following table summarizes our contract balances as of June 30, 2020 and 2019 (in thousands):
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Contract assets
Accounts receivable, net
Unbilled revenue, current
Unbilled revenue, non-current
Contract liabilities
Deferred revenue, current
Deferred revenue, non-current
Transaction price determination
2020
2019
Balance sheet caption
$
474,643 $
9,452
6,957
528,484 Accounts receivable, net
9,834 Prepaid expenses and other current assets
4,592 Prepaid taxes and other non-current assets
(98,617)
(87,307)
(88,667) Deferred revenue (current liabilities)
(81,143) Deferred revenue (non-current liabilities)
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. In
our Sleep and Respiratory Care segment, the amount of consideration received and revenue recognized varies with changes in marketing
incentives (e.g., rebates, discounts, free goods) and returns offered to customers and their customers. When we give customers the right
to return eligible products and receive credit, returns are estimated based on an analysis of historical experience. However, returns of
products, excluding warranty-related returns, are infrequent and insignificant. We adjust the estimate of revenue at the earlier of when
the most likely amount of consideration can be estimated, the amount expected to be received changes, or when the consideration
becomes fixed.
We offer our Sleep and Respiratory Care customers cash or product rebates based on volume or sales targets measured over quarterly
or annual periods. We estimate rebates based on each customer’s expected achievement of its targets. In accounting for these rebate
programs, we reduce revenue ratably as sales occur over the rebate period by the expected value of the rebates to be returned to the
customer. Rebates measured over a quarterly period are updated based on actual sales results and, therefore, no estimation is required
to determine the reduction to revenue. For rebates measured over annual periods, we update our estimates on a quarterly basis based on
actual sales results and updated forecasts for the remaining rebate periods. We also offer discounts to both our Sleep and Respiratory
Care as well as our SaaS customers as part of normal business practice and these are deducted from revenue when the sale occurs.
When Sleep and Respiratory Care or SaaS contracts have multiple performance obligations, we generally use an observable price to
determine the stand-alone selling price by reference to pricing and discounting practices for the specific product or service when sold
separately to similar customers. Revenue is then allocated proportionately, based on the determined stand-alone selling price, to each
performance obligation. An allocation is not required for many of our Sleep and Respiratory Care contracts that have a single
performance obligation, which is the shipment of our therapy-based equipment.
Accounting and practical expedient elections
We have elected to account for shipping and handling activities associated with our Sleep and Respiratory Care segment as a fulfillment
cost within cost of sales, and record shipping and handling costs collected from customers in net revenue. We have also elected for all
taxes assessed by government authorities that are imposed on and concurrent with revenue-producing transactions, such as sales and
value added taxes, to be excluded from revenue and presented on a net basis. We have adopted two practical expedients including the
“right to invoice” practical expedient, which allows us to recognize revenue in the amount of the invoice when it corresponds directly
with the value of performance completed to date and which is relevant for some of our SaaS contracts. The second practical expedient
adopted permits relief from considering a significant financing component when the payment for the good or service is expected to be
one year or less.
(c) Concentration of Credit Risk and Significant Customers
Financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash and cash equivalents,
marketable securities, derivatives and trade receivables. Our cash and cash equivalents are generally held with large, diverse financial
institutions to reduce the amount of exposure to any single financial institution. Our derivative contracts are transacted with various
financial institutions with high credit standings and any exposure to counterparty credit-related losses in these contracts is largely
mitigated with collateralization and master-netting agreements. The risk with respect to trade receivables is mitigated by credit
evaluations we perform on our customers, the short duration of our payment terms for the significant majority of our customer contracts
and by the diversification of our customer base. No single customer accounted for 10% or more of our total revenues for any of the
periods presented.
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Table of Contents
PART II
(d) Fair Value of Financial Instruments
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
The fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. We measure our financial instruments at fair value at each reporting
period using a fair value hierarchy that requires that we maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level
of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs that are supported by little or no market activity.
The carrying value of cash equivalents, accounts receivable and accounts payable, approximate their fair value because of their short-
term nature. The carrying value of long-term debt related to our Revolving Credit and Term Credit Agreements approximates its fair
value as the principal amounts outstanding are subject to variable interest rates that are based on market rates which are regularly reset.
The carrying value of long-term debt related to our Senior Notes can differ to its fair value as the principal amounts outstanding are
subject to fixed interest rates as outlined in note 9 - Debt. Foreign currency hedging instruments are marked to market and therefore
reflect their fair value. We do not hold or issue financial instruments for trading purposes.
(e) Cash and Cash Equivalents
Cash equivalents include certificates of deposit and other highly liquid investments and we state them at cost, which approximates
market. We consider investments with original maturities of 90 days or less to be cash equivalents for purposes of the consolidated
statements of cash flows.
(f) Inventories
We state inventories at the lower of cost (determined principally by the first-in, first-out method) or net realizable value. We include
material, labor and manufacturing overhead costs in finished goods and work-in-process inventories. We review and provide for any
product obsolescence in our manufacturing and distribution operations by assessing throughout the year individual products and
components (based on estimated future usage and sales).
(g) Property, Plant and Equipment
We record property, plant and equipment, including rental and demonstration equipment at cost. We compute depreciation expense
using the straight-line method over the estimated useful lives of the assets. Useful lives are generally two years to ten years except for
buildings which are depreciated over an estimated useful life of 40 years and leasehold improvements, which we amortize over the lease
term. We charge maintenance and repairs to expense as we incur them.
Depreciation expense for property, plant, and equipment was $65.6 million, $65.9 million, and $64.7 million for the years ended June 30,
2020, 2019 and 2018, respectively.
(h) Intangible Assets
We capitalize the registration costs for new patents and amortize the costs over the estimated useful life of the patent, which is generally
ten years. If a patent is superseded or a product is retired, any unamortized costs are written off immediately.
We amortize all of our other intangible assets on a straight-line basis over their estimated useful lives, which range from two years to
fifteen years. We take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment
exists and, at least annually, evaluate the recoverability of intangible assets. We have not identified any impairment of intangible assets
during any of the periods presented.
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PART II
(i) Goodwill
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
We conducted our annual review for goodwill impairment during the final quarter of 2020. Our goodwill impairment review is performed
at our reporting unit level, which is one level below our operating segments and involves the following steps:
Step 0 or Qualitative assessment – Evaluate qualitative factors to determine whether it is more likely than not that the fair value
of a reporting unit is less than its carrying amount, including goodwill. The factors we consider include, but are not limited to,
macroeconomic conditions, industry and market considerations, cost factors, overall financial performance or events-specific
to that reporting unit. If or when we determine it is more likely than not that the fair value of a reporting unit is less than the
carrying amount, including goodwill, we would move to Step 1 of the quantitative method.
Step 1 – Compare the fair value for each reporting unit to its carrying value, including goodwill. Fair value is determined based
on estimated discounted cash flows. A goodwill impairment charge is recognized for the amount that the carrying amount of a
reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.
If a reporting unit’s fair value exceeds the carrying value, no further work is performed and no impairment charge is necessary.
During the annual review, we completed a Step 0 or Qualitative assessment and determined it was more likely than not that the fair
value of our reporting units exceeded their carrying amounts, including goodwill and, therefore, goodwill was not impaired.
(j) Equity investments
Equity investments whereby we have significant influence but not control over the investee, and are not the primary beneficiary of the
investee’s activities, are accounted for under the equity method. Under this method, we record our share of gains or losses attributable
to equity method investments.
Non-marketable equity securities consist of investments in privately held companies without readily determinable fair values, and are
reported at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for
the identical or similar investment of the same issuer. We estimate the fair value of our equity investments using Level 3 inputs to assess
whether impairment losses shall be recorded.
(k) Research and Development
We record all research and development expenses in the period we incur them.
(l) Foreign Currency
The consolidated financial statements of our non-U.S. subsidiaries, whose functional currencies are other than the U.S. dollar, are
translated into U.S. dollars for financial reporting purposes. We translate assets and liabilities of non-U.S. subsidiaries whose functional
currencies are other than the U.S. dollar at period end exchange rates, but translate revenue and expense transactions at average exchange
rates for the period. We recognize cumulative translation adjustments as part of comprehensive income, as detailed in the consolidated
statements of comprehensive income, and include those adjustments in accumulated other comprehensive income in the consolidated
balance sheets until such time the relevant subsidiary is sold or substantially or completely liquidated. We reflect gains and losses on
transactions denominated in other than the functional currency of an entity in our results of operations.
(m) Foreign Exchange Risk Management
We transact business in various foreign currencies, including a number of major European currencies as well as the Australian and
Singapore dollars. We have significant foreign currency exposure through both our Australian and Singaporean manufacturing activities,
and international sales operations. We have established a foreign currency hedging program using purchased currency options and
forward contracts to hedge foreign-currency-denominated financial assets, liabilities and manufacturing cash flows. The terms of such
foreign currency hedging contracts generally do not exceed three years. The goal of this hedging program is to economically manage
the financial impact of foreign currency exposures denominated mainly in Euros, Australian and Singapore dollars. Under this program,
increases or decreases in our foreign currency denominated financial assets, liabilities, and firm commitments are partially offset by
gains and losses on the hedging instruments.
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PART II
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
We do not designate these foreign currency contracts as hedges. We have determined our hedge program to be a non-effective hedge
as defined under the FASB issued authoritative guidance. All movements in the fair value of the foreign currency instruments are
recorded within other income, net in our consolidated statements of income and through changes in our operating assets and liabilities
within our consolidated statements of cash flows. We classify purchases of foreign currency derivatives and proceeds received from the
exercise of foreign currency derivatives as an investing activity within our consolidated statements of cash flows. We do not enter into
financial instruments for trading or speculative purposes.
We held foreign currency instruments with notional amounts totaling $495.2 million and $496.9 million at June 30, 2020 and June 30,
2019, respectively, to hedge foreign currency fluctuations. These contracts mature at various dates prior to June, 2021.
(n) Income Taxes
We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. We measure deferred tax assets and liabilities using the enacted tax rates we expect to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the enactment date.
We recognize the impact of a tax position in the consolidated financial statements only if that position is more likely than not of being
sustained upon examination by taxing authorities, based on the technical merits of the position. Any interest and penalties related to
uncertain tax positions are reflected in income tax expense.
(o) Provision for Warranty
We provide for the estimated cost of product warranties on our Sleep and Respiratory Care products at the time the related revenue is
recognized. We determine the amount of this provision by using a financial model, which takes into consideration actual historical
expenses and potential risks associated with our different products. We use this financial model to calculate the future probable expenses
related to warranty and the required level of the warranty provision. Although we engage in product improvement programs and
processes, our warranty obligation is affected by product failure rates and costs incurred to correct those product failures. Should actual
product failure rates or estimated costs to repair those product failures differ from our estimates, we would be required to revise our
estimated warranty provision.
(p) Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required
payments, which results in bad debt expense. We determine the adequacy of this allowance by periodically evaluating individual
customer receivables, considering a customer’s financial condition, credit history and current economic conditions. Customer
receivables are charged against the allowance when they are deemed uncollectible. We are also contingently liable, within certain limits,
in the event of a customer default, to independent financing companies in connection with customer financing programs. We monitor
the collection status of these installment receivables and provide for estimated losses separately under accrued expenses within our
consolidated balance sheets based upon our historical collection experience with such receivables and a current assessment of our credit
exposure.
(q) Impairment of Long-Lived Assets
We periodically evaluate the carrying value of long-lived assets to be held and used, including certain identifiable intangible assets,
when events and circumstances indicate that the carrying amount of an asset may not be recovered. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.
If assets are considered to be impaired, we recognize as the impairment the amount by which the carrying amount of the assets exceeds
the fair value of the assets. We report assets to be disposed of at the lower of the carrying amount or fair value less costs to sell. We did
not recognize impairment charges in relation to long-lived assets during the fiscal years ended June 30, 2020, 2019 and 2018.
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PART II
(r) Contingencies
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
We record a liability in the consolidated financial statements for loss contingencies when a loss is known or considered probable and
the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the
range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or
probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. When determining the estimated loss or range
of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded.
(3) New Accounting Pronouncements
(a) Recently issued accounting standards not yet adopted
ASU No. 2016-13 “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments”
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13,
“Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments” (Topic 326), which amends the
impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain
types of financial instruments, including trade receivables. The guidance is effective for us beginning in the first quarter of the fiscal
year ending June 30, 2021 and will be adopted using a modified retrospective approach, with a cumulative-effect adjustment recorded
directly to retained earnings. We do not expect the adoption to have a material impact on our consolidated financial statements.
ASU No. 2018-15 “Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs
Incurred in a Cloud Computing Arrangement That Is a Service Contract”
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting
for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (Subtopic 350-40), which aligns the
requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for
capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance is effective for us beginning in the
first quarter of the fiscal year ending June 30, 2021 and will be applied prospectively. Under the new ASU, capitalized implementation
costs will be presented as other non-current assets on our consolidated balance sheets and within operating cash flows on our
consolidated statements of cash flows. The adoption of this ASU is not expected to have a material effect on our consolidated financial
statements.
ASU No. 2020-04 “Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting”
In March 2020, the FASB issued ASU No. 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting”
(Topic 848), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other
transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance
is effective for us as of March 12, 2020 through December 31, 2022. We are currently evaluating the impact that this guidance, if elected,
will have on our consolidated financial statements.
(b) Recently adopted accounting pronouncements
ASU No. 2016-02, “Leases”
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842). Under the new guidance, lessees are required to recognize
a right-of-use asset (“ROU”) and a lease liability on the balance sheet for all leases, other than those that meet the definition of a short-
term lease. This update establishes a lease asset and lease liability by lessees for those leases classified as operating under prior GAAP.
Leases are classified as either operating or finance under the new guidance. Operating leases result in straight-line expense in the income
statement, similar to prior operating lease treatment, and finance leases result in more expense being recognized in the earlier years of
the lease term, similar to prior capital lease treatment. For lessors, the update more closely aligns lease accounting to comparable
guidance in the new revenue standards described.
Effective, July 1, 2019, we adopted the new standard on a modified retrospective transition basis for leases existing at, or entered into
after, the date of adoption. In addition, we elected the package of practical expedients permitted under the transition guidance to not
reassess (1) whether any expired or existing contracts are, or contain, leases, (2) the lease classification for expired or existing leases,
and (3) initial direct costs for existing leases. In preparation for and upon adoption of this guidance, we have designed and operated
internal controls over its implementation, which includes a system solution for lease administration, accounting and disclosures of
financial information surrounding our leasing arrangements.
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PART II
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
The adoption of the guidance on July 1, 2019 resulted in the recognition of ROU assets of $77.6 million and lease liabilities of $81.3
million, which all related to operating leases. The ROU assets were lower than the lease liabilities due to the de-recognition of deferred
rent balances of $3.7 million. We did not recognize any adjustment to the comparative period presented in the financial statements in
accordance with our adoption method. The guidance did not have a material impact on our consolidated statements of income. See note
10 - Leases for further disclosures related to our leases under the new guidance.
ASU No. 2017-04 “Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment”
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment”
(Topic 350). ASU 2017-04 eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be
measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to
each reporting unit with a zero or negative carrying amount of net assets should be disclosed. We adopted this guidance in the fourth
quarter of fiscal year June 30, 2020. The adoption did not have a material impact on our consolidated financial statements.
(c) Adjustment to prior periods
As noted at note 2b) – Disaggregation of revenue, we now present revenue and cost of sales for our Sleep and Respiratory Care and
SaaS segments on the consolidated statements of income. Additionally, within our consolidated statements of income for the years ended
June 30, 2020, 2019 and 2018, cost of sales has been adjusted to include amortization of acquired intangible assets directly applicable
to revenue. As a result, gross profit now includes amortization of acquired intangible assets relating to cost of sales and operating
expenses have been reduced by this amount. There was no impact on income from operations, income before taxes or net income, as a
result of this reclassification. The adjustments to the previously reported amounts are not material.
The table below presents a reconciliation of amortization of acquired intangible assets by income statement caption summing to total
amortization of acquired intangible assets as previously reported for the years ended June 30, 2019 and June 30, 2018 (in thousands):
Amortization of acquired intangible assets related to cost of sales
Amortization of acquired intangible assets related to operating expenses
Total as previously reported
2019
2018
$
$
42,514 $
32,424
74,938 $
27,266
19,117
46,383
The table below presents a reconciliation of gross profit as previously reported for the years ended June 30, 2019 and June 30, 2018
adjusted for the amortization of acquired intangible assets now included in cost of sales (in thousands):
Gross profit as previously reported
Amortization of acquired intangible assets related to cost of sales
Gross profit
(4) Supplemental Balance Sheet Information
$
$
2019
1,536,585 $
(42,514)
1,494,071 $
2018
1,362,164
(27,266)
1,334,898
Components of selected captions in the consolidated balance sheets consisted of the following as of June 30, 2020 and June 30, 2019
(in thousands):
Inventories
Raw materials
Work in progress
Finished goods
Total inventories
Property, Plant and Equipment
Machinery and equipment
Computer equipment
Furniture and fixtures
Vehicles
Clinical, demonstration and rental equipment
Leasehold improvements
Land
Buildings
Property, plant and equipment, at cost
Accumulated depreciation and amortization
Property, plant and equipment, net
$
$
$
$
$
2020
2019
128,096 $
2,807
286,012
416,915 $
80,861
2,256
266,524
349,641
2020
2019
285,287 $
188,036
54,275
5,513
95,860
60,490
51,803
227,902
969,166 $
(551,831)
417,335 $
262,010
173,895
51,942
7,477
94,007
34,210
52,406
223,028
898,975
(511,515)
387,460
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PART II
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
(5) Goodwill and Other Intangible Assets, net
Goodwill
For each of the years ended June 30, 2020 and June 30, 2019, we have not recorded any goodwill impairments. Changes in the carrying
amount of goodwill is comprised of the following for the year ended June 30, 2020 (in thousands):
Balance at the beginning of the period
Business acquisitions
Adjustment to fair values of preliminary purchase price allocations
Foreign currency translation adjustments
Balance at the end of the period
Other Intangible Assets
Sleep and
Respiratory Care
2020
SaaS
$
$
616,965 $
266
526
(3,309)
614,448 $
1,239,484 $
20,109
16,283
-
1,275,876 $
Total
1,856,449
20,375
16,809
(3,309)
1,890,324
Other intangibles, net are comprised of the following as of June 30, 2020 and June 30, 2019 (in thousands):
Developed/core product technology
Accumulated amortization
Developed/core product technology, net
Customer relationships
Accumulated amortization
Customer relationships, net
Other intangibles
Accumulated amortization
Other intangibles, net
Total other intangibles, net
2020
2019
$
$
382,806 $
(197,670)
185,136
279,370
(80,922)
198,448
177,091
(112,507)
64,584
448,168 $
401,842
(157,651)
244,191
273,114
(68,630)
204,484
176,351
(103,076)
73,275
521,950
Intangible assets consist of developed/core product technology, trade names, non-compete agreements, customer relationships, and
patents, and we amortize them over the estimated useful life of the assets, generally between two years and fifteen years. There are no
expected residual values related to these intangible assets.
Refer to note 18 of the consolidated financial statements for details of acquisitions.
Amortization expense related to identified intangible assets for the years ended June 30, 2020 and June 30, 2019 was $79.7 million and
$74.9 million, respectively. Amortization expense related to patents for the years ended June 30, 2020 and June 30, 2019 was $8.3
million and $8.1 million, respectively. Total estimated annual amortization expense for the years ending June 30, 2021 through June 30,
2025, is shown below (in thousands):
Estimated amortization expense
$
80,636 $
72,219 $
55,015 $
50,628 $
45,298
2021
Fiscal Years Ending June 30
2023
2022
2024
2025
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PART II
(6) Investments
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
We have a number of equity investments in privately held companies that are unconsolidated entities and are recorded in the non-current
balance of other assets on the consolidated balance sheets. The following table shows a reconciliation of the changes in all of our
investments during the years ended June 30, 2020 and June 30, 2019 (in thousands):
Equity method investments
Balance at the beginning of the period
Investments
Loss attributable to equity method investments
Carrying value of equity method investments
Non-marketable securities
Balance at the beginning of the period
Investments
Impairment of investments
Acquisition of controlling interest in previously held investment
Carrying value of non-marketable securities
Total investments in unconsolidated entities
(7) Accrued Expenses
Accrued expenses at June 30, 2020 and June 30, 2019 consist of the following (in thousands):
Product warranties (note 8)
Consulting and professional fees
Value added taxes and other taxes due
Employee related costs
Hedging instruments
Liability on receivables sold with recourse (note 17)
Accrued interest
Logistics and occupancy costs
Inventory in transit
Business acquisition contingent consideration
Litigation settlement expenses (note 20)
Restructuring expenses (note 19)
Other
(8) Product Warranties
2020
2019
21,667 $
17,500
(25,058)
14,109
30,436 $
14,116
(14,519)
-
30,033
44,142 $
-
37,500
(15,833)
21,667
41,226
9,217
(15,007)
(5,000)
30,436
52,103
2020
2019
21,132 $
18,740
26,627
148,383
427
6,647
8,313
6,350
21,679
3,500
-
-
8,555
270,353 $
19,625
12,726
25,555
123,446
244
1,752
1,683
8,137
15,175
-
41,199
5,432
11,385
266,359
$
$
$
$
$
We include the liability for warranty costs in accrued expenses in our consolidated balance sheets. Changes in the liability for product
warranty for the years ended June 30, 2020 and June 30, 2019 are as follows (in thousands):
Balance at the beginning of the period
Warranty accruals for the period
Warranty costs incurred for the period
Foreign currency translation adjustments
Balance at the end of the period
2020
2019
$
$
19,625 $
14,167
(12,229)
(431)
21,132 $
19,227
15,416
(14,634)
(384)
19,625
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PART II
(9) Debt
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
Debt at June 30, 2020 and June 30, 2019 consists of the following (in thousands):
Short-term debt
Deferred borrowing costs
Short-term debt, net
Long-term debt
Deferred borrowing costs
Long-term debt, net
Total debt
Credit Facility
2020
2019
$
$
$
$
12,000 $
(13)
11,987
-
1,168,000 $
(3,867)
1,164,133 $
1,176,120 $
12,012
(20)
11,992
1,262,000
(3,139)
1,258,861
1,270,853
On April 17, 2018, we entered into an amended and restated credit agreement (the “Revolving Credit Agreement”), as borrower, with
lenders MUFG Union Bank, N.A., as administrative agent, joint lead arranger, joint book runner, swing line lender and letter of credit
issuer, and Westpac Banking Corporation, as syndication agent, joint lead arranger and joint book runner. The Revolving Credit
Agreement, among other things, provided a senior unsecured revolving credit facility of $800.0 million, with an uncommitted option to
increase the revolving credit facility by an additional $300.0 million.
Additionally, on April 17, 2018, ResMed Limited entered into a Syndicated Facility Agreement (the “Term Credit Agreement”), as
borrower, with lenders MUFG Union Bank, N.A., as administrative agent, joint lead arranger and joint book runner, and Westpac
Banking Corporation, as syndication agent, joint lead arranger and joint book runner. The Term Credit Agreement, among other things,
provides ResMed Limited a senior unsecured term credit facility of $200.0 million.
On November 5, 2018, we entered into a first amendment to the Revolving Credit Agreement to, among other things, increase the size
of our senior unsecured revolving credit facility from $800.0 million to $1.6 billion, with an uncommitted option to increase the
revolving credit facility by an additional $300.0 million.
Our obligations under the Revolving Credit Agreement are guaranteed by certain of our direct and indirect U.S. subsidiaries, and ResMed
Limited’s obligations under the Term Credit Agreement are guaranteed by us and certain of our direct and indirect U.S. subsidiaries.
The Revolving Credit Agreement and Term Credit Agreement contain customary covenants, including, in each case, a financial covenant
that requires that we maintain a maximum leverage ratio of funded debt to EBITDA (as defined in the Revolving Credit Agreement and
Term Credit Agreement, as applicable). The entire principal amounts of the revolving credit facility and term credit facility, and, in each
case, any accrued but unpaid interest may be declared immediately due and payable if an event of default occurs, as defined in the
Revolving Credit Agreement and the Term Credit Agreement, as applicable. Events of default under the Revolving Credit Agreement
and the Term Credit Agreement include, in each case, failure to make payments when due, the occurrence of a default in the performance
of any covenants in the respective agreements or related documents, or certain changes of control of us, or the respective guarantors of
the obligations borrowed under the Revolving Credit Agreement and Term Credit Agreement.
The Revolving Credit Agreement and Term Credit Agreement each terminate on April 17, 2023, when all unpaid principal and interest
under the loans must be repaid. Amounts borrowed under the Term Credit Agreement will also amortize on a semi-annual basis, with a
$6.0 million principal payment required on each such semi-annual amortization date. The outstanding principal amounts will bear
interest at a rate equal to LIBOR plus 0.75% to 1.50% (depending on the then-applicable leverage ratio) or the Base Rate (as defined in
the Revolving Credit Agreement and the Term Credit Agreement, as applicable) plus 0.0% to 0.50% (depending on the then-applicable
leverage ratio). At June 30, 2020, the interest rate that was being charged on the outstanding principal amounts was 1.2%. An applicable
commitment fee of 0.100% to 0.175% (depending on the then-applicable leverage ratio) applies on the unused portion of the revolving
credit facility. As of June 30, 2020, we had $1.1 billion available for draw down under the revolving credit facility.
We are required to disclose the fair value of financial instruments for which it is practicable to estimate the value, even though these
instruments are not recognized at fair value in the consolidated balance sheets. As the Revolving Credit and Term Credit Agreements’
interest rate is calculated as LIBOR plus the spreads described above, its carrying amount is equivalent to its fair value as at June 30,
2020 and June 30, 2019, which was $680.0 million and $1,274.0 million, respectively. Quoted market prices in active markets for
identical liabilities based inputs (Level 1) were used to estimate fair value.
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PART II
Senior Notes
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
On July 10, 2019, we entered into a Note Purchase Agreement with the purchasers to that agreement, in connection with the issuance
and sale of $250.0 million principal amount of our 3.24% senior notes due July 10, 2026, and $250.0 million principal amount of our
3.45% senior notes due July 10, 2029 (collectively referred to as the “Senior Notes”). Our obligations under the Note Purchase
Agreement and the Senior Notes are unconditionally and irrevocably guaranteed by certain of our direct and indirect U.S. subsidiaries,
including ResMed Corp., ResMed Motor Technologies Inc., Birdie Inc., Inova Labs, Inc., Brightree LLC, Brightree Home Health &
Hospice LLC, Brightree Patient Collections LLC, ResMed Operations Inc., HEALTHCAREfirst Holding Company, HCF Holdco
Company, HEALTHCAREfirst, Inc., CareFacts Information Systems, LLC and Lewis Computer Services, LLC, MatrixCare Holdings
Inc., MatrixCare, Inc., Reciprocal Labs Corporation and ResMed SaaS Inc., under a Subsidiary Guaranty Agreement dated as of July 10,
2019. The net proceeds from this transaction were used to pay down borrowings on our Revolving Credit Agreement.
Under the terms of the Note Purchase Agreement, we agreed to customary covenants including with respect to our corporate existence,
transactions with affiliates, and mergers and other extraordinary transactions. We also agreed that, subject to limited exceptions, we will
maintain a ratio of consolidated funded debt to consolidated EBITDA of no more than 3.50 to 1.00 as of the last day of any fiscal quarter,
and will not at any time permit the amount of all priority secured and unsecured debt of us and our subsidiaries to exceed 10% of our
consolidated tangible assets, determined as of the end of our most recently ended fiscal quarter.
We are required to disclose the fair value of financial instruments for which it is practicable to estimate the value, even though these
instruments are not recognized at fair value in the consolidated balance sheets. As of June 30, 2020, the Senior Notes have a carrying
amount of $500.0 million, excluding deferred borrowing costs, and an estimated fair value of $538.9 million. Quoted market prices in
active markets for identical liabilities based inputs (Level 1) were used to estimate fair value.
At June 30, 2020, we were in compliance with our debt covenants and there was $1,180.0 million outstanding under the Revolving
Credit Agreement, Term Credit Agreement and Senior Notes.
(10) Leases
(a) Leases where ResMed is the Lessee
We determine whether a contract is, or contains, a lease at inception. ROU assets represent our right to use an underlying asset during
the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities
are recognized at lease commencement based upon the estimated present value of unpaid lease payments over the lease term. We use
our incremental borrowing rate based on the information available at lease commencement in determining the present value of unpaid
lease payments. ROU assets also include any lease payments made at or before lease commencement and any initial direct costs incurred,
and exclude any lease incentives received.
We determine the lease term as the non-cancellable period of the lease, and may include options to extend or terminate the lease when
it is reasonably certain that we will exercise that option. Leases with a term of 12 months or less are not recognized on the balance sheet.
Some of our leases include variable lease payments that are based on costs incurred or actual usage, or adjusted periodically based on
an index or a rate. Our leases do not contain any residual value guarantees and we do not account for lease and non-lease components
as a single lease component. Operating leases are included in operating lease right-of-use assets and operating lease liabilities on our
consolidated balance sheets. We lease certain office space, warehouses and distribution centers, manufacturing facilities, vehicles, and
equipment with remaining lease terms ranging from less than 1 year to 15 years, some of which include options to extend or terminate
the leases.
Operating lease costs for the year ended June 30, 2020 were $26.5 million. Short-term and variable lease costs were not material for the
year ended June 30, 2020.
Future minimum lease payments under non-cancellable leases as of June 30, 2020 and for the periods ending June 30 of the years
indicated below were as follows (in thousands):
Total
2021
2022
2023
2024
2025
Thereafter
Minimum lease payments
Less: imputed interest
Total lease liabilities
$
$
143,774 $
(20,631)
123,143
24,810 $
18,084 $
14,853 $
12,075 $
10,493 $
63,459
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Table of Contents
PART II
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
As of June 30, 2020, we had additional operating lease commitments of $14.1 million for office space that have not yet commenced.
These leases will commence during the year ended June 30, 2021 with lease terms of 1 years to 11 years.
The supplemental information related to operating leases for the year ended June 30, 2020 was as follows (in thousands):
Weighted-average inputs:
Weighted-average remaining lease term (years)
Weighted-average discount rate
Cash flow information:
Operating cash flows paid for amounts included in the measurement of lease liabilities
Right of use assets obtained in exchange for new lease liabilities:
Disclosures related to periods prior to adopting the new lease guidance
2020
9.1
3.2 %
$
$
24,104
51,663
We lease certain facilities and equipment under operating leases expiring at various dates and most contain renewal options. Total
expense for all operating leases was $23.4 million, $21.1 million, and $20.1 million for the years ended June 30, 2019, 2018, and 2017,
respectively. Future minimum lease payments (including interest) under non-cancellable operating leases at June 30, 2019 were as
follows (in thousands):
Remaining operating lease payments
$
98,013 $
23,500 $
17,161 $
12,403 $
9,478 $
7,916 $
27,555
Total
2020
2021
2022
2023
2024
Thereafter
(b) Leases where ResMed is the Lessor
We lease sleep and respiratory medical devices to customers primarily as a means to comply with local health insurer requirements in
certain foreign geographies. Device rental contracts include sales-type and operating leases, and contract terms vary by customer and
include options to terminate or extend the contract. When lease contracts also include the sale of masks and accessories, we allocate
contract consideration to those items on a relative standalone price basis and recognize revenue when control transfers to the customer.
The components of lease revenue for the year ended June 30, 2020 were as follows (in thousands):
Sales-type lease revenue
Operating lease revenue
Total lease revenue
$
$
2020
13,457
87,874
101,331
Our net investment in sales-type leases were classified in the accompanying consolidated balance sheets captions as of June 30, 2020
as follows (in thousands):
Accounts receivable, net
Prepaid taxes and other non-current assets
Total
$
$
2020
7,697
6,957
14,654
Maturities of sales-type leases as of June 30, 2020 were as follows (in thousands):
Remaining lease payments
Less: imputed interest
Present value of remaining lease payments
$
$
16,074 $
(1,420)
14,654
8,034 $
5,759 $
2,281 $
- $
- $
-
Total
2021
2022
2023
2024
2025
Thereafter
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Table of Contents
PART II
(11) Stockholders’ Equity
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
Common Stock. On February 21, 2014, our board of directors approved a new share repurchase program, authorizing us to acquire
up to an aggregate of 20.0 million shares of our common stock. The program allows us to repurchase shares of our common stock from
time to time for cash in the open market, or in negotiated or block transactions, as market and business conditions warrant and subject
to applicable legal requirements. The 20.0 million shares the new program authorizes us to purchase are in addition to the shares we
repurchased on or before February 21, 2014 under our previous programs. There is no expiration date for this program, and the program
may be accelerated, suspended, delayed or discontinued at any time at the discretion of our board of directors. All share repurchases
since February 21, 2014 have been executed in accordance with this program.
We have temporarily suspended our repurchase program and, accordingly, did not repurchase any shares during fiscal year 2020. During
fiscal year 2019, we repurchased 200,000 shares at a cost of $22.8 million shares under our share repurchase program. As of June 30,
2020, we have repurchased a total of 41.8 million shares at a cost of $1.6 billion. Shares that are repurchased are classified as “treasury
stock pending future use” and reduce the number of shares outstanding used in calculating earnings per share. At June 30, 2020, 12.9
million additional shares can be repurchased under the approved share repurchase program.
Preferred Stock. In April 1997, our board of directors authorized 2,000,000 shares of $0.01 par value preferred stock. No such shares
were issued or outstanding at June 30, 2020.
Stock Options and Restricted Stock Units. We have granted stock options, restricted stock units (“RSUs”) and performance
restricted stock units (“PRSUs”) to personnel, including officers and directors, in accordance with the ResMed Inc. 2009 Incentive
Award Plan (the “2009 Plan”). Options and restricted stock units vest over one year to four years and the options have expiration dates
of seven years from the date of grant. We have granted the options with an exercise price equal to the market value as determined at the
date of grant. We have granted PRSUs that are subject to a market condition, with the ultimate realizable number of PRSUs dependent
on relative total stockholder return over a period of three years, up to a maximum amount to be issued under the award of 225% of the
original grant.
At the annual meeting of our stockholders in November 2017, our stockholders approved an amendment and restatement to the 2009
Plan to increase the number of shares of common stock that may be issued or transferred pursuant to awards under the 2009 Plan by 7.4
million. The amendment and restatement imposes a maximum award amount which may be granted under the 2009 Plan to non-
employee director in a calendar year, which when taken together with any other cash fees earned for services as a non-employee director
during the calendar year, has a total value of $0.7 million, or $1.2 million in the case of a non-employee director who is also serving as
chairman of our board of directors. The amendment and restatement also increased the maximum amount payable pursuant to cash-
denominated performance awards granted in any calendar year from $3.0 million to $5.0 million. In addition, the amendment and
restatement extended the existing prohibition on the payment of dividends or dividend equivalents on unvested awards to apply to all
awards, including time-based restricted stock, deferred stock and stock payment. The term of the 2009 Plan was extended by four years
so that the plan expires on September 11, 2027.
The maximum number of shares of our common stock authorized for issuance under the 2009 Plan is 51.1 million. The number of
securities remaining available for future issuance under the 2009 Plan at June 30, 2020 is 15.8 million. The number of shares of our
common stock available for issuance under the 2009 Plan will be reduced by (i) 2.8 shares for each one share of common stock delivered
in settlement of any “full-value award,” which is any award other than a stock option, stock appreciation right or other award for which
the holder pays the intrinsic value and (ii) one share for each share of common stock delivered in settlement of all other awards. The
maximum number of shares, which may be subject to awards granted under the 2009 Plan to any individual during any calendar year,
may not exceed 3 million shares of our common stock (except in a participant’s initial year of hiring up to 4.5 million shares of our
common stock may be granted).
In certain regions, shares are withheld on behalf of employees to satisfy statutory tax withholding requirements upon exercise or vesting
of awards. The number of shares withheld is based upon the closing price of our common stock on the trading day of the applicable
settlement date. The remaining shares are delivered to the recipient as shares of our common stock. The amount remitted to the tax
authorities for the employees’ tax obligation is reflected as a financing activity on our consolidated statements of cash flows. Shares
withheld by us as a result of the net settlement are not considered issued and outstanding and are added to the reserves of the 2009 Plan.
The total fair value of RSUs and PRSUs that vested during the years ended June 30, 2020, 2019 and 2018, was $56.8 million, $52.3
million and $34.6 million, respectively.
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Table of Contents
PART II
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
The following table summarizes the activity of RSUs, including PRSUs, during year ended June 30, 2020 (in thousands, except years
and per share amounts):
Outstanding at beginning of period
Granted
Vested*
Performance factor adjustment
Expired / cancelled
Forfeited
Outstanding at end of period
* Includes 312 thousand shares netted for tax.
Restricted
Stock
Units
Weighted
Average
Grant-Date
Fair Value
1,446 $
363
(929)
294
(37)
(5)
1,132 $
77.21
141.00
61.13
-
91.66
91.66
103.77
Weighted
Average
Remaining
Contractual
Term in Years
1.6
1.6
The following table summarizes option activity during the year ended June 30, 2020 (in thousands, except years and per share
amounts):
Outstanding at beginning of period
Granted
Exercised
Forfeited
Outstanding at end of period
Options exercisable at end of period
Options vested and expected to vest at end of period
Weighted
Average
Exercise
Price
72.91
146.34
57.17
110.19
89.05
71.18
88.32
Weighted
Average
Remaining
Contractual
Term in Years
4.4
4.4
3.7
4.4
Options
1,260 $
162
(350)
(4)
1,068 $
641 $
1,046 $
The aggregate intrinsic value of options exercised during the fiscal years 2020, 2019 and 2018, was $31.2 million, $15.1 million and
$27.5 million, respectively. As at June 30, 2020, the aggregate intrinsic value of options outstanding, exercisable, and vested and
expected to vest were $110.0 million, $77.4 million and $108.5 million respectively.
Employee Stock Purchase Plan (the “ESPP”). Under the ESPP, we offer participants the right to purchase shares of our common
stock at a discount during successive offering periods. Each offering period under the ESPP will be for a period of time determined by
the board of directors’ compensation committee of no less than 3 months and no more than 27 months. The purchase price for our
common stock under the ESPP will be the lower of 85% of the fair market value of our common stock on the date of grant or 85% of
the fair market value of our common stock on the date of purchase. An individual participant cannot subscribe for more than $25,000 in
common stock during any calendar year. At June 30, 2020, the number of shares remaining available for future issuance under the ESPP
is 2.0 million shares.
During years ended June 30, 2020, 2019 and 2018, we issued 265,000, 285,000 and 302,000 shares to our employees in two offerings
and we recognized $8.0 million, $6.4 million and $5.2 million, respectively, of stock compensation expense associated with the ESPP.
Stock–based Employee compensation. We measure the compensation expense of all stock-based awards at fair value on the grant
date. We estimate the fair value of stock options and purchase rights granted under the ESPP using the Black-Scholes valuation model.
The fair value of restricted stock units is equal to the market value of the underlying shares as determined at the grant date less the fair
value of dividends that holders are not entitled to, during the vesting period. The fair value of performance restricted stock units is
measured using a Monte-Carlo simulation valuation model. We recognize the fair value as compensation expense using the straight-line
method over the service period for awards expected to vest.
We estimate the fair value of stock options granted under our stock option plans and purchase rights granted under the ESPP using the
assumptions in the following tables. The risk-free interest rate is estimated using the U.S. Treasury yield curve and is based on the term
of the award. The expected term of awards is estimated from the vesting period of the award, as well as historical exercise behavior, and
represents the period of time the awards granted are expected to be outstanding. Expected volatility is estimated based upon the historical
volatility of ResMed stock.
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Table of Contents
PART II
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
We estimate the fair value of stock options granted under our stock option plans and purchase rights granted under the ESPP using the
following assumptions for the years ended June 30, 2020, 2019 and 2018:
Stock options:
Weighted average grant date fair value
Weighted average risk-free interest rate
Expected life in years
Dividend yield
Expected volatility
ESPP purchase rights:
Weighted average grant date fair value
Weighted average risk-free interest rate
Expected life in years
Dividend yield
Expected volatility
$
2020
32.14
1.58%
4.9
1.07%
25%
2019
2018
$
$
21.92
2.96%
4.9
1.34% - 1.46%
23%
16.68
2.08%
4.9
1.46% - 1.65%
23%
$
$
31.82
1.6%
6 months
0.98% - 1.42%
23% - 60%
$
22.12
2.4%
6 months
1.40% - 1.47%
23%
17.44
0.8%
6 months
1.47% - 1.92%
23%
The following table summarizes the total stock-based compensation costs incurred and the associated tax benefit recognized during the
years ended June 30, 2020, 2019 and 2018 (in thousands):
Cost of sales - capitalized as part of inventory
Selling, general and administrative expenses
Research and development expenses
Stock-based compensation costs
Tax benefit
Stock-based compensation costs, net of tax benefit
$
$
2020
2019
2018
3,703 $
47,265
6,591
57,559
(39,534)
18,025 $
3,043 $
42,700
6,330
52,073
(26,658)
25,415 $
2,990
39,754
5,668
48,412
(17,078)
31,334
At June 30, 2020, there was $92.6 million in unrecognized compensation costs related to unvested stock-based compensation
arrangements. This is expected to be recognized over a weighted average period of 2.2 years.
(12) Earnings Per Share
We compute basic earnings per share by dividing the net income available to common stockholders by the weighted average number of
shares of common stock outstanding. For purposes of calculating diluted earnings per share, the denominator includes both the weighted
average number of shares of common stock outstanding and the number of dilutive common stock equivalents such as stock options and
restricted stock units. The weighted average number of outstanding stock options and restricted stock units not included in the
computation of diluted earnings per share were 164,000, 200,000 and 153,000 for the years ended June 30, 2020, 2019 and 2018,
respectively, as the effect would have been anti-dilutive.
Basic and diluted earnings per share for the years ended June 30, 2020, 2019 and 2018 are calculated as follows (in thousands except
per share data):
Numerator:
Net income
Denominator:
Basic weighted-average common shares outstanding
Effect of dilutive securities:
Stock options and restricted stock units
Diluted weighted average shares
Basic earnings per share
Diluted earnings per share
(13) Other, net
2020
2019
2018
$
621,674 $
404,592 $
315,588
144,338
143,111
142,764
1,314
145,652
4.31 $
4.27 $
1,373
144,484
2.83 $
2.80 $
1,223
143,987
2.21
2.19
$
$
Other, net, in the consolidated statements of income is comprised of the following for the years ended June 30, 2020, 2019 and 2018 (in
thousands):
Gain (loss) on foreign currency transactions and hedging, net
Impairment of equity investments (note 6)
Other
$
$
2020
2019
2018
1,331 $
(14,519)
1,031
(12,157) $
1,712 $
(15,007)
2,569
(10,726) $
(1,546)
(11,593)
4,597
(8,542)
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Table of Contents
PART II
(14) Income Taxes
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
Income before income taxes for the years ended June 30, 2020, 2019 and 2018, was taxed under the following jurisdictions (in
thousands):
U.S.
Non-U.S.
The provision for income taxes is presented below (in thousands):
Current:
Deferred:
Federal
State
Non-U.S.
Federal
State
Non-U.S.
Provision for income taxes
$
$
$
$
2020
2019
2018
60,548 $
672,540
733,088 $
(34,468) $
553,315
518,847 $
42,627
478,685
521,312
2020
2019
2018
9,790 $
6,898
124,602
141,290
(13,000)
(3,335)
(13,541)
(29,876)
111,414 $
28,658 $
7,595
127,540
163,793
(30,456)
(5,408)
(13,674)
(49,538)
114,255 $
128,971
948
68,858
198,777
9,488
(350)
(2,191)
6,947
205,724
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. federal income tax
rate of 21% for the years ended June 30, 2020 and June 30, 2019 and 28% for the year ended June 30, 2018, to pretax income as a result
of the following (in thousands):
Taxes computed at statutory U.S. rate
Increase (decrease) in income taxes resulting from:
Transition tax
State income taxes, net of U.S. tax benefit
Research and development credit
Change in statutory tax rates
Change in valuation allowance
Effect of non-U.S. tax rates
Foreign tax credits (1)
Stock-based compensation expense
Other
2020
2019
2018
$
153,949 $
108,958 $
146,280
-
3,563
(13,595)
-
7,216
(20,935)
(4,026)
(20,696)
5,938
111,414 $
6,038
2,186
(12,953)
-
(1,118)
25,045
(7,806)
(11,534)
5,439
114,255 $
126,753
2,427
(4,089)
16,685
(2,962)
(70,250)
(6,473)
(7,045)
4,398
205,724
$
(1)
In fiscal year 2018, $75.5 million of the foreign tax credit is included as a reduction in the transition tax.
The components of our deferred tax assets and liabilities at June 30, 2020 and June 30, 2019, are as follows (in thousands):
Deferred tax assets:
Employee liabilities
Tax credit carry overs
Inventories
Provision for warranties
Provision for doubtful debts
Net operating loss carryforwards
Capital loss carryover
Property, plant and equipment
Stock-based compensation expense
Deferred revenue
Research and development capitalization
Other
Less valuation allowance
Deferred tax assets
Deferred tax liabilities:
Goodwill and other intangibles
Deferred tax liabilities
Net deferred tax asset
2020
2019
$
21,272 $
9,295
9,129
3,585
6,594
38,035
10,864
(724)
6,035
15,343
39,195
(2,282)
156,341
(16,891)
139,450
(111,396)
(111,396)
$
28,054 $
18,104
15,666
4,905
3,551
5,532
53,315
6,640
3,002
10,769
9,619
17,910
(332)
148,681
(11,644)
137,037
(102,939)
(102,939)
34,098
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PART II
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
We reported the net deferred tax assets and liabilities in our consolidated balance sheets at June 30, 2020 and June 30, 2019, as follows
(in thousands):
Non-current deferred tax asset
Non-current deferred tax liability
Net deferred tax asset
$
$
2020
2019
41,065 $
(13,011)
28,054 $
45,478
(11,380)
34,098
As of June 30, 2020, we had $30.4 million of U.S. federal and state net operating loss carryforwards and $6.8 million of non-U.S. net
operating loss carryforwards, which expire in various years beginning in 2020 or carry forward indefinitely.
The valuation allowance at June 30, 2020 relates to a provision for uncertainty of the utilization of net operating loss carryforwards of
$1.6 million and capital loss and other items of $15.3 million. We believe that it is more likely than not that the benefits of deferred tax
assets, net of any valuation allowance, will be realized.
A substantial portion of our manufacturing operations and administrative functions in Singapore operate under various tax holidays and
tax incentive programs that will expire in whole or in part at various dates through June 30, 2030. The end of certain tax holidays may
be extended if specific conditions are met. The net impact of these tax holidays and tax incentive programs increased our net earnings
by $43.8 million ($0.30 per diluted share) for the year ended June 30, 2020 and $20.3 million ($0.14 per diluted share) for the year
ended June 30, 2019.
As a result of the U.S. Tax Act, we have treated all non-U.S. historical earnings as taxable, which resulted in additional tax expense of
$126.9 million during the year ended June 30, 2018 and $6.0 million during the year ended June 30, 2019, which was payable over eight
years. Therefore, future repatriation of cash held by our non-U.S. subsidiaries will generally not be subject to U.S. federal tax if
repatriated. The total amount of these undistributed earnings at June 30, 2020 amounted to approximately $3.0 billion. On June 14,
2019, the U.S. Treasury Department issued final and temporary regulations relating to the repatriation of non-U.S. earnings. As a result,
in the event our non-U.S. earnings had not been permanently reinvested, deferred taxes of approximately $194.4 million in U.S. federal
deferred tax and $5.2 million in U.S. state deferred taxes would have been recognized in the consolidated financial statements.
In accounting for uncertainty in income taxes, we recognize a tax benefit in the financial statements for an uncertain tax position only if
management’s assessment is that the position is “more likely than not” (that is, a likelihood greater than 50 percent) to be allowed by
the tax jurisdiction based solely on the technical merits of the position. The term “tax position” refers to a position in a previously filed
tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and
liabilities for annual periods. The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax
expense line in the accompanying consolidated statements of income. Accrued interest and penalties are included within the related tax
liability line in the consolidated balance sheets. Based on all known facts and circumstances and current tax law, we believe the total
amount of unrecognized tax benefits on June 30, 2020, is not material to our results of operations, financial condition or cash flows, and
if recognized, would not have a material impact on our effective tax rate.
Our income tax returns are based on calculations and assumptions subject to audit by various tax authorities. In addition, the calculation
of our tax liabilities involves dealing with uncertainties in the application of complex tax laws. We regularly assess the potential
outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes. Any final assessment
resulting from tax audits may result in material changes to our past or future taxable income, tax payable or deferred tax assets, and may
require us to pay penalties and interest that could materially adversely affect our financial results.
In connection with the audit by the Australian Taxation Office (“ATO”) for the tax years 2009 to 2013, we received Notices of Amended
Assessments in March 2018. Based on these assessments, the ATO asserted that we owe $151.7 million in additional income tax and
$38.4 million in accrued interest, of which $75.9 million was paid in April 2018 under a payment arrangement with the ATO. In June
2018, we received a notice from the ATO claiming penalties of 50% of the additional income tax that was assessed or $75.9 million. As
of June 30, 2020, we recorded a receivable in prepaid taxes and other non-current assets for the amount paid as we ultimately expect
this will be refunded by the ATO. The ATO is currently auditing tax years 2014 to 2018. We do not agree with the ATO’s assessments
and continue to believe we are more likely than not to be successful in defending our position.
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Table of Contents
PART II
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
Our income tax expense, short-term income taxes payable and long-term income taxes payable were impacted by charges associated
with the U.S. Tax Act enacted on December 22, 2017, which resulted in additional income tax expense of $138.0 million during the
year ended June 30, 2018. Specifically, the income tax expense includes the transition tax imposed on our accumulated foreign earnings,
which resulted in additional income tax expense of $126.9 million for the year ended June 30, 2018. Additionally, it resulted in the write
down in the carrying value of our net deferred tax assets due to the lower corporate tax rate and the reduction in the future value of
deferred tax assets, which resulted in additional income tax expense of $11.1 million recorded in the year ended June 30, 2018. During
the year ended June 30, 2019, we recorded additional tax expense of $6.0 million in transition tax imposed on our accumulated foreign
earnings, which related to final treasury regulations issued and temporary guidance published during the year.
On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the
Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the U.S. Tax Act as “provisional” when it does not
have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting
for the change in tax law. Effective December 31, 2018, the accounting relating to the impact of U.S. legislation was no longer considered
provisional. During the year ended June 30, 2018, we recorded additional tax expense of $138.0 million relating to changes in U.S. tax
legislation. During the year ended June 30, 2019, we recorded additional tax expense of $6.0 million in additional transition tax, which
related to final treasury regulations issued and temporary guidance published during the year. However, further adjustments could be
required as a result of future legislation, amended tax returns, or tax examinations of the years impacted by the calculation.
(15) Segment Information
We have two operating segments, which are the Sleep and Respiratory Care segment and the SaaS segment. We evaluate the performance
of our segments based on net sales and income from operations. The accounting policies of the segments are the same as those described
in note 2 – significant accounting policies. Segment net sales and segment income from operations do not include inter-segment profits
and revenue is allocated to a geographic area based on where the products are shipped to or where the services are performed.
Certain items are maintained at the corporate level and are not allocated to the segments. The non-allocated items include corporate
headquarters costs, stock-based compensation, amortization expense from acquired intangibles, acquisition related expenses, net interest
expense and other, net. We neither discretely allocate assets to our operating segments, nor does our Chief Operating Decision Maker
evaluate the operating segments using discrete asset information.
The table below presents a reconciliation of net revenues, depreciation and amortization and net operating profit by reportable segments
for the years ended June 30, 2020, 2019 and 2018 (in thousands):
Revenue by segment
Total Sleep and Respiratory Care
Software as a Service
Deferred revenue fair value adjustment*
Total Software as a Service
Total
Depreciation and amortization by segment
Sleep and Respiratory Care
Software as a Service
Amortization of acquired intangible assets and corporate costs
Total
Net operating profit by segment
Sleep and Respiratory Care
Software as a Service
Total
Reconciling items
Corporate costs
Amortization of acquired intangible assets
Litigation settlement expenses
Restructuring expenses
Acquisition related expenses
Deferred revenue fair value adjustment*
Interest expense (income), net
Loss attributable to equity method investments
Other, net
Income before income taxes
*
2020
2019
2018
$
2,602,381 $
2,330,783 $
2,183,193
356,734
(2,102)
354,632
2,957,013 $
281,137
(5,348)
275,789
2,606,572 $
157,003
-
157,003
2,340,196
69,444 $
3,850
81,556
154,850 $
934,697 $
82,152
1,016,849 $
125,993 $
79,695
(600)
-
-
2,102
39,356
25,058
12,157
733,088 $
70,094 $
3,250
77,451
150,795 $
766,068 $
74,886
840,954 $
124,682 $
74,938
41,199
9,401
6,123
5,348
33,857
15,833
10,726
518,847 $
70,366
809
48,785
119,960
656,311
55,224
711,535
104,889
46,383
-
18,432
-
-
11,977
-
8,542
521,312
$
$
$
$
$
$
$
The deferred revenue fair value adjustment is a purchase price accounting adjustment related to MatrixCare which was acquired on November 13, 2018.
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Table of Contents
PART II
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
The following table summarizes our net revenue disaggregated by segment, product and region for the years ended June 30, 2020, 2019
and 2018 (in thousands):
U.S., Canada and Latin America
Devices
Masks and other
Total Sleep and Respiratory Care
Software as a Service
Total
Combined Europe, Asia and other markets
Devices
Masks and other
Total Sleep and Respiratory Care
Global revenue
Devices
Masks and other
Total Sleep and Respiratory Care
Software as a Service
Total
2020
2019
2018
$
$
$
$
$
$
$
$
792,766 $
779,561
1,572,327 $
354,632
1,926,959 $
715,056 $
314,998
1,030,054 $
1,507,822 $
1,094,559
2,602,381 $
354,632
2,957,013 $
743,066 $
677,430
1,420,496 $
275,789
1,696,285 $
618,525 $
291,762
910,287 $
1,361,591 $
969,192
2,330,783 $
275,789
2,606,572 $
689,603
600,480
1,290,083
157,003
1,447,086
613,978
279,133
893,111
1,303,581
879,613
2,183,194
157,003
2,340,197
Revenue information by geographic area for the years ended June 30, 2020, 2019 and 2018 is summarized below (in thousands):
United States
Rest of the World
Total
2020
2019
$
$
1,828,575 $
1,128,438
2,957,013 $
1,588,655 $
1,017,917
2,606,572 $
2018
1,345,212
994,984
2,340,196
Long-lived assets of geographic areas are those assets used in our operations in each geographical area, and excludes goodwill, other
intangible assets, and deferred tax assets. Long-lived assets by geographic area as of June 30, 2020, 2019 and 2018, is summarized
below (in thousands):
United States
Australia
Singapore
Rest of the World
Total
(16) Employee Retirement Plans
2020
2019
2018
$
$
164,155 $
162,490
39,977
50,713
417,335 $
149,706 $
165,425
19,465
52,864
387,460 $
142,337
173,394
17,657
53,162
386,550
We contribute to a number of employee retirement plans for the benefit of our employees. Details of the main plans are as follows:
Australia We contribute to defined contribution plans for each employee resident in Australia at the rate of approximately 9.5% of
salaries. Employees may contribute additional funds to the plans. All Australian employees, after serving a qualifying period, are
entitled to benefits on retirement, disability or death. Our total contributions to the plans for the years ended June 30, 2020, 2019 and
2018, were $9.5 million, $10.0 million and $10.5 million, respectively.
United States We sponsor a defined contribution plan available to substantially all domestic employees. Company contributions to
this plan are based on a percentage of employee contributions to a maximum of 4.0% of the employee’s salary. Our total contributions
to the plan were $9.3 million, $6.7 million and $5.0 million in fiscal 2020, 2019 and 2018, respectively.
Singapore We sponsor a defined contribution plan available to substantially all domestic employees. Company contributions to this
plan are based on a percentage of employee contributions to a maximum of 17.0% of the employee’s salary. Our total contributions to
the plan were $2.9 million, $2.6 million and $2.2 million in fiscal 2020, 2019 and 2018, respectively.
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PART II
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
(17) Legal Actions, Contingencies and Commitments
Litigation
In the normal course of business, we are subject to routine litigation incidental to our business. While the results of this litigation cannot
be predicted with certainty, we believe that their final outcome will not, individually or in aggregate, have a material adverse effect on
our consolidated financial statements taken as a whole.
Taxation Matters
As described in note 14 – Income Taxes, we received Notices of Amended Assessments from the ATO for the tax years 2009 to 2013.
Based on these assessments, the ATO asserted that we owe $151.7 million in additional income tax and $38.4 million in accrued interest,
of which $75.9 million was paid in April 2018 under a payment arrangement with the ATO. In June 2018, we received a notice from
the ATO claiming penalties of 50% of the additional income tax that was assessed, or $75.9 million. As of June 30, 2020, we recorded
a receivable in prepaid taxes and other non-current assets for the amount paid as we ultimately expect this will be refunded by the ATO.
The ATO is currently auditing tax years 2014 to 2018. We do not agree with the ATO’s assessments and continue to believe we are
more likely than not to be successful in defending our position.
Contingent Obligations Under Recourse Provisions
We use independent financing institutions to offer some of our customers financing for the purchase of some of our products. Under
these arrangements, if the customer qualifies under the financing institutions’ credit criteria and finances the transaction, the customers
repay the financing institution on a fixed payment plan. For some of these arrangements, the customer’s receivable balance is with
recourse, either limited or full, whereby we are responsible for repaying the financing company should the customer default. We record
a contingent provision, which is estimated based on historical default rates. This is applied to receivables sold with recourse and is
recorded in accrued expenses.
The following table summarizes the amount of total receivables sold with recourse during the years ended June 30, 2020 and June 30,
2019 (in thousands):
Full recourse
Limited recourse
Total
2020
2019
$
$
- $
154,529
154,529 $
33,954
98,123
132,077
The following table summarizes the maximum exposure on outstanding receivables sold with recourse and provision for doubtful
accounts as at June 30, 2020 and June 30, 2019 (in thousands):
Full recourse
Limited recourse
Total
Contingent provision for receivables with recourse
Commitments
2020
2019
$
$
$
916 $
21,890
22,806 $
(6,647) $
19,209
10,241
29,450
(1,752)
In the normal course of business, we enter into agreements to purchase goods or services that are not cancelable without penalty,
primarily related to supply arrangements. Obligations under our purchase agreements at June 30, 2020 were as follows (in thousands):
Minimum purchase obligations
$
462,996 $
458,623 $
3,678 $
518 $
111 $
66 $
-
Total
2021
2022
2023
2024
2025
Thereafter
Fiscal Years Ending June 30
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PART II
(18) Business Combinations
Fiscal year ended June 30, 2020
RESMED INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Item 8
On January 31, 2020, we completed the acquisition of 100% of the membership interests in SnapWorx, LLC (“SnapWorx”), a software
company providing patient contact management and workflow optimization for the sleep apnea resupply market. This acquisition has
been accounted for as a business combination using purchase accounting and the results of SnapWorx are included in our consolidated
financial statements from the acquisition date. This acquisition is not considered a material business combination and accordingly pro
forma information is not provided. The acquisition was funded by drawing on our existing revolving credit facility and through cash
on-hand.
We completed our purchase price allocation during the quarter ending June 30, 2020, which was not materially different from the
preliminary purchase price allocation. The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on
estimates of their fair values at the date of acquisition. The goodwill recognized as part of the acquisition is reflected in the Software as
a Service segment and is deductible for tax purposes. It mainly represents the synergies that are unique to our combined businesses and
the potential for new products and services to be developed in the future.
During the year ended June 30, 2020 we did not record any material acquisition-related expenses.
Fiscal year ended June 30, 2019
MatrixCare
On November 13, 2018, we completed the acquisition of 100% of the shares in MatrixCare, Inc. and its subsidiaries (“MatrixCare”), a
provider of software solutions for skilled nursing, life plan communities, senior living and private duty, for base purchase consideration
paid of $750.0 million. This acquisition has been accounted for as a business combination using purchase accounting and included in
our consolidated financial statements from November 13, 2018. The acquisition was paid for using borrowings under our revolving
credit facility.
We completed the purchase price allocation in relation to this acquisition during the quarter ended December 31, 2019. The cost of the
acquisition was allocated to the assets acquired and liabilities assumed based on estimates of their fair values at the date of acquisition.
The goodwill recognized as part of the acquisition is reflected in the Software as a Service segment and is not deductible for tax purposes.
It mainly represents the synergies that are unique to our combined businesses and the potential for new products and services to be
developed in the future. The fair values of assets acquired and liabilities assumed, and the estimated useful lives of intangible assets
acquired are as follows (in thousands):
Current assets
Property, plant and equipment
Trade names
Developed technology
Customer relationships
Goodwill
Assets acquired
Current liabilities
Deferred revenue
Deferred tax liabilities
Debt assumed
Total liabilities assumed
Net assets acquired
Intangible
assets -
useful life
7 years
7 years
15 years
Preliminary as of
June 30, 2019
Adjustments
Final
$
$
$
$
50,325 $
4,401
18,000
133,000
114,000
517,995
837,721 $
(13,751)
(18,339)
(41,570)
(151,665)
(225,325) $
612,396 $
- $
-
-
-
2,000
5,664
7,664 $
(255)
(166)
(7,243)
-
(7,664) $
- $
50,325
4,401
18,000
133,000
116,000
523,659
845,385
(14,006)
(18,505)
(48,813)
(151,665)
(232,989)
612,396
A reconciliation of the base consideration to the net consideration is as follows (in thousands):
Base consideration
Cash acquired
Debt assumed
Net working capital and other adjustments
Net consideration
$
$
750,000
15,873
(151,665)
(1,812)
612,396
During the year ended June 30, 2019, revenues of $79.2 million and losses from operations of $9.1 million related to MatrixCare were
included in the consolidated statement of comprehensive income. The losses from operations for the year ended June 30, 2019 was
negatively impacted by $19.0 million of amortization of acquired intangible assets and fair value purchase price adjustments relating to
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PART II
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Notes to the Consolidated Financial Statements
Item 8
deferred revenue of $5.3 million. Excluding the impact of these items, revenue for the year ended June 30, 2019 was $84.6 million and
income from operations was $15.3 million.
The acquisition is considered a material business combination and accordingly unaudited pro forma information presented below for
the year ended June 30, 2019, includes the effects of pro forma adjustments as if the acquisition of MatrixCare occurred on July 1, 2017.
The pro forma results were prepared using the acquisition method of accounting and combine our historical results and MatrixCare’s
for the years ended June 30, 2019 and June 30, 2018, including the effects of the business combination, primarily amortization expense
related to the fair value of identifiable intangible assets acquired, interest expense associated with the financing obtained by us in
connection with the acquisition, and the elimination of incurred acquisition-related costs.
The pro forma financial information presented below is not necessarily indicative of the results of operations that would have been
achieved if the acquisition occurred at the beginning of the earliest period presented, nor is it intended to be a projection of future results.
The following table summarized unaudited pro forma consolidated results for the years ended June 30, 2019 and 2018 (in thousands,
except per share information):
Revenue
Net income
Basic earnings per share
Diluted earnings per share
$
$
$
$
2019
2018
2,652,059 $
446,721 $
3.12 $
3.09 $
2,457,242
295,628
2.07
2.05
The unaudited pro forma consolidated results for the years ended June 30, 2019 and June 30, 2018 reflect primarily the following pro
forma pre-tax adjustments:
• Net amortization expense related to the fair value of identifiable intangible assets acquired of $0.6 million and $8.3 million for
the years ended June 30, 2019 and June 30, 2018, respectively.
• Net interest expense associated with debt that was issued to finance the acquisition of $2.6 million and $12.7 million for the
years ended June 30, 2019 and June 30, 2018, respectively.
• Elimination of pre-tax acquisition-related costs incurred by ResMed and MatrixCare of $3.7 million and $16.7 million,
respectively, for the year ended June 30, 2019.
• Net income tax expense of $1.8 million and $3.2 million for the years ended June 30, 2019 and June 30, 2018, respectively.
Other acquisitions
During the year ended June 30, 2019, we also completed the following acquisitions:
• On July 6, 2018, we completed the acquisition of 100% of the shares in HEALTHCAREfirst Holding Company
(“HEALTHCAREfirst”), a provider of software solutions and services for home health and hospice agencies, for a total
purchase consideration of $126.3 million.
• On October 15, 2018, we completed the acquisition of 100% of the shares in HB Healthcare, a homecare provider in South
Korea.
• On December 11, 2018, we completed the acquisition of assets in Interactive Health Network, a provider of integrated clinical
and financial management software solution for long-term care companies.
• On December 13, 2018, we completed the acquisition of assets in Apacheta, a provider of cloud-based SaaS software that
manages the medical equipment delivery process for HME dealers.
• On January 6, 2019, we completed the acquisition of Propeller Health, a digital therapeutics company providing connected
health solutions for people living with chronic obstructive pulmonary disease and asthma, for a total purchase consideration of
$242.9 million, which adjusts for cash acquired and debt assumed at the time of acquisition. We previously held a non-
controlling interest in Propeller Health’s outstanding shares. As a result of the acquisition, we recognized a fair value gain of
$1.9 million in other income during the year ended June 30, 2019 associated with the previous equity investment.
These acquisitions have been accounted for as business combinations using purchase accounting and are included in our consolidated
financial statements from the acquisition dates. These acquisitions, individually and collectively, are not considered a material business
combination and accordingly pro forma information is not provided. The acquisitions were funded by drawing on our existing revolving
credit facility and through cash on-hand.
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PART II
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Notes to the Consolidated Financial Statements
Item 8
We have completed the purchase price allocation in relation to all of these acquisitions. The cost of the share acquisitions was allocated
to the assets acquired and liabilities assumed based on estimates of their fair values at the date of acquisition. The goodwill recognized
as part of these acquisitions, which is predominantly not deductible for tax purposes, mainly represents the synergies that are unique to
our combined businesses and the potential for new products and services to be developed in the future. Goodwill from these acquisitions
has been reflected in the Software as a Service segment except for the goodwill resulting from the HB Healthcare and Propeller Health
acquisitions, which have been recorded in the Sleep and Respiratory Care segment.
The fair values of assets acquired and liabilities assumed of acquisitions during the year ended June 30, 2019, excluding MatrixCare,
and the estimated useful lives of intangible assets acquired are as follows (in thousands):
Current assets
Property, plant and equipment
Deferred tax assets
Trade names
Non-compete
Developed technology
Customer relationships
Goodwill
Assets acquired
Current liabilities
Deferred revenue
Deferred tax liabilities
Debt assumed
Total liabilities assumed
Net assets acquired
Intangible
assets -
useful life
10 years
3 years
5 to 6 years
5 to 15 years
$
$
$
$
Final
31,648
2,290
5,211
7,828
1,000
48,280
53,712
287,469
437,438
(7,648)
(3,619)
(2,367)
(35,104)
(48,738)
388,700
During the year ended June 30, 2019, we recorded acquisition-related expenses of $6.1 million.
(19) Restructuring Expenses
During the year ended June 30, 2020, we did not incur material restructuring expenses.
During the year ended June 30, 2019, we incurred restructuring expenses of $9.4 million associated with the reorganization,
rationalization and relocation of some of our research and development and SaaS operations including the closure of our German
research and development site. We recorded the full amount of $9.4 million during the year ended June 30, 2019, within our operating
expenses, which was separately disclosed as restructuring expenses and had $5.4 million remaining in our accruals at year end, which
was paid during the year ended June 30, 2020. The restructuring expenses consisted primarily of severance payments to employees and
contract exit costs associated with several impacted sites.
During the year ended June 30, 2018, we incurred restructuring expenses within the Sleep and Respiratory Care segment of $18.4 million
associated with a global strategic workforce planning review, which resulted in a reduction in headcount across most of our functions
and locations and closure of our Paris site. We recorded the full amount of $18.4 million during the year ended June 30, 2018, within
our operating expenses which was separately disclosed as restructuring expenses. We had $1.5 million remaining in our employee
related costs accrual at June 30, 2018, which was paid during the year ended June 30, 2019. The restructuring expenses consisted
primarily of severance payments to employees and the remaining expense relating to legal and consulting services associated with the
completion of the employee severances and contract exit costs associated with the Paris site.
(20) Litigation Settlement Expenses
We did not recognize any material litigation settlement expenses during the years ended June 30, 2020 and 2018.
During the year ended June 30, 2019 we recognized litigation settlement expenses of $41.2 million associated with a tentative agreement
with the United States Department of Justice to civilly resolve the investigation of certain marketing practices. We finalized the
settlement in December 2019, and announced it in January 2020 on terms that were consistent with our prior reserve. The settlement
amount consisted of the payment to the United States and to various states that joined the action, as well as attorneys’ fees and other
costs to the private litigants that filed the suits that the Department of Justice pursued. We also entered into a corporate integrity
agreement with the Office of the Inspector General of the U.S. Department of Health and Human Services with accompanying oversight
of our sales and marketing practices in the United States for five years.
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PART II
Year ended June 30, 2020
Applied against asset account
Allowance for doubtful accounts
Year ended June 30, 2019
Applied against asset account
Allowance for doubtful accounts
Year ended June 30, 2018
Applied against asset account
Allowance for doubtful accounts
SCHEDULE II
RESMED INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
June 30, 2020, 2019 and 2018
(in thousands)
Item 8
Balance at
Beginning
of Period
Charged to costs
and expenses
Other
(deductions)
Balance at
End of
Period
$
$
$
25,171 $
18,283 $
(14,946) $
28,508
19,258 $
12,379 $
(6,466) $
25,171
11,150 $
15,189 $
(7,081) $
19,258
See accompanying report of independent registered public accounting firm.
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PART II
Items 9 – 9B
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
RESMED INC. AND SUBSIDIARIES
DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that
such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer,
as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls
and procedures as of June 30, 2020. Based on the foregoing, our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2020.
There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
RESMED INC. AND SUBSIDIARIES
Items 9 – 9B
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles in the United States of America. Our internal control
over financial reporting includes those policies and procedures that:
(i) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
our assets;
(ii) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and
(iii) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2020. In making this assessment,
management used the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of our internal control over
financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the
results of its assessment with the audit committee of our board of directors.
Based on that assessment under the framework in Internal Control-Integrated Framework (2013), management concluded that the
company’s internal control over financial reporting was effective as of June 30, 2020.
KPMG LLP, independent registered public accounting firm, who audited and reported on the consolidated financial statements of
ResMed, Inc. included in this report, has issued an attestation report on the effectiveness of internal control over financial reporting.
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PART II
RESMED INC. AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
Items 9 – 9B
To the Stockholders and Board of Directors
ResMed Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited ResMed Inc. and subsidiaries’ (the Company) internal control over financial reporting as of June 30,
2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of the Company as of June 30, 2020 and 2019, the related
consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in
the three-year period ended June 30, 2020, and the related notes and financial statement schedule II (collectively, the
consolidated financial statements), and our report dated August 12, 2020 expressed an unqualified opinion on those
consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
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PART II
RESMED INC. AND SUBSIDIARIES
Items 9 – 9B
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
San Diego, California
August 12, 2020
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PART II
ITEM 9B OTHER INFORMATION
None.
RESMED INC. AND SUBSIDIARIES
Items 9 – 9B
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Table of Contents
PART III
RESMED INC. AND SUBSIDIARIES
PART III
Items 10 – 14
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this Item is incorporated by reference from our definitive proxy statement for our next annual meeting of
stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30, 2020.
We have filed as exhibits to this report for the year ended June 30, 2020, the certifications of our chief executive officer and chief
financial officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
ITEM 11 EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference from our definitive proxy statement for our next annual meeting of
stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30, 2020.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information required by this Item is incorporated by reference from our definitive proxy statement for our next annual meeting of
stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30, 2020.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by this Item is incorporated by reference from our definitive proxy statement for our next annual meeting of
stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30, 2020.
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this Item is incorporated by reference from our definitive proxy statement for our next annual meeting of
stockholders, which will be filed with the Securities and Exchange Commission within 120 days after June 30, 2020.
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PART IV
Items 15 – 16
RESMED INC. AND SUBSIDIARIES
PART IV
ITEM 15 EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
(a)
(b)
2.1
3.1
3.2
4.1
4.2
10.1
Consolidated Financial Statements and Schedules – The index to our consolidated financial statements and schedules are
set forth in the “Index to Consolidated Financial Statements” under Item 8 of this report.
Exhibit Lists
Agreement and Plan of Merger, dated November 5, 2018, by and among ResMed Operations Inc., Evolved Sub, Inc.,
ResMed Inc., OPEL GI Holdings Limited, in its capacity as the agent acting on behalf of the holders of common stock of
MatrixCare Holdings, Inc., and MatrixCare Holdings, Inc. (Incorporated by reference to Exhibit 2.1 to the Registrant’s
Report on Form 8-K filed on November 8, 2018)
First Restated Certificate of Incorporation of ResMed Inc., as amended. (Incorporated by reference to Exhibit 3.1 to the
Registrant’s Report on Form 10-Q for the quarter ended September 30, 2013)
Sixth Amended and Restated Bylaws of ResMed Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Report
on Form 8-K filed on February 26, 2020)
Form of certificate evidencing shares of Common Stock. (Incorporated by reference to Exhibit 4.1 to the Registrant’s
Registration Statement on Form S-1 (No. 33-91094) declared effective on June 1, 1995)
Description of ResMed Inc.’s securities registered pursuant to Section 12 of the Securities Exchange Act of 1934
Licensing Agreement between the University of Sydney and ResMed Ltd dated May 17, 1991, as amended. (Incorporated
by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1 (No. 33-91094) declared effective on
June 1, 1995)
10.2* ResMed Inc. 2006 Incentive Award Plan. (Incorporated by reference to Exhibit 99.1 to the Registrant’s Report on Form 8-
K filed on November 15, 2006)
10.3* Amendment No. 1 to the ResMed Inc. 2006 Incentive Award Plan. (Incorporated by reference to Exhibit 10.24 to the
10.4*
10.5*
10.6*
10.7*
Registrant’s Report on Form 10-Q for the quarter ended December 31, 2006, filed on February 8, 2007)
2006 Grant agreement for Board of Directors. (Incorporated by reference to Exhibit 10.25 to the Registrant’s Report on
Form 10-Q for the quarter ended December 31, 2006 filed on February 8, 2007)
2006 Grant agreement for Executive Officers. (Incorporated by reference to Exhibit 10.26 to the Registrant’s Report on
Form 10-K for the year ended June 30, 2007, filed on August 28, 2007)
2006 Grant agreement for Australian Executive Officers. (Incorporated by reference to Exhibit 10.27 to the Registrant’s
Report on Form 10-K for the year ended June 30, 2007, filed on August 28, 2007)
Form of Executive Agreement. (Incorporated by reference to Exhibit 99.1 to the Registrant’s Report on Form 8-K filed on
July 13, 2007)
10.8* Amended and Restated 2006 Incentive Award Plan dated November 20, 2008. (Incorporated by reference to Appendix 1 of
10.9
10.10
the Registrant’s Definitive Proxy Statement filed on October 15, 2008)
Form of Indemnification Agreements for our directors and officers. (Incorporated by reference to Exhibit 10.1 the
Registrant’s Report on Form 8-K filed on June 24, 2009)
Form of Access Agreement for directors. (Incorporated by reference to Exhibit 10.2 the Registrant’s Report on Form 8-K
filed on June 24, 2009)
10.11* Updated Form of Executive Agreement. (Incorporated by reference to Exhibit 99.1 to the Registrant’s Report on Form 8-K
filed on July 2, 2012)
10.12 Amendment and Restatement to the ResMed Inc. 2009 Incentive Award Plan. (Incorporated by reference to Appendix B of
ResMed Inc.’s Proxy Statement filed with the Securities and Exchange Commission on September 25, 2017.)
10.13 ResMed Inc. 2009 Incentive Award Plan. (Incorporated by reference to Exhibit 10.1 the Registrant’s Report on Form 8-K
filed on November 23, 2009)
10.14 ResMed Inc. Deferred Compensation Plan. (Incorporated by reference to Exhibit 10.1 the Registrant’s Report on Form 8-K
10.15
10.16
10.17
filed on May 28, 2010)
Form of Restricted Stock Unit Award Agreement for Executive Officers. (Incorporated by reference to Exhibit 10.1 to the
Registrant’s Report on Form 10-Q for the quarter ended September 30, 2011, filed on November 3, 2011)
Form of Restricted Stock Unit Award Agreement for Directors. (Incorporated by reference to Exhibit 10.2 to the
Registrant’s Report on Form 10-Q for the quarter ended September 30, 2011, filed on November 3, 2011)
Form of Stock Option Grant for Executive Officers. (Incorporated by reference to Exhibit 10.3 to the Registrant’s Report
on Form 10-Q for the quarter ended September 30, 2011, filed on November 3, 2011)
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PART IV
Items 15 – 16
RESMED INC. AND SUBSIDIARIES
10.18
10.19
Form of Stock Option Grant for Directors. (Incorporated by reference to Exhibit 10.4 to the Registrant’s Report on Form
10-Q for the quarter ended September 30, 2011, filed on November 3, 2011)
Form of Performance-Based Restricted Stock Unit Award Agreement for Executive Officers. (Incorporated by reference to
Appendix A of the Registrant’s Proxy Statement filed October 4, 2012)
10.20 Amended and Restated Credit Agreement dated as of April 17, 2018, by and among ResMed Inc., as borrower, each of the
lenders identified on the Revolving Credit Agreement’s signature pages as a lender, MUFG Union Bank, N.A., as
administrative agent, joint lead arranger, joint book runner, swing line lender and l/c issuer, and Westpac Banking
Corporation, as syndication agent, joint lead arranger and joint book runner. (Incorporated by reference to Exhibit 10.1 to
the Registrant’s Report on Form 8-K filed on April 19, 2018)
10.21 Amended and Restated Unconditional Guaranty dated as of April 17, 2018, by each of the guarantors identified on the
Revolving Facility Guaranty’s signature pages as a guarantor, in favor of MUFG Union Bank, N.A., in its capacity as
administrative agent under the Revolving Credit Agreement. (Incorporated by reference to Exhibit 10.2 to the Registrant’s
Report on Form 8-K filed on April 19, 2018)
Syndicated Facility Agreement, dated as of April 17, 2018, by and among ResMed Limited, as borrower, the other parties
party thereto, each of the lenders identified on the Term Credit Agreement’s signature pages as a lender, MUFG Union
Bank, N.A., as administrative agent, joint lead arranger and joint book runner, and Westpac Banking Corporation, as
syndication agent, joint lead arranger and joint book runner. (Incorporated by reference to Exhibit 10.3 to the Registrant’s
Report on Form 8-K filed on April 19, 2018)
10.22
10.23 Unconditional Guaranty dated as of April 17, 2018, by each of the guarantors identified on the Term Facility Guaranty’s
10.24
signature pages as a guarantor, in favor of MUFG Union Bank, N.A., in its capacity as administrative agent under the Term
Credit Agreement. (Incorporated by reference to Exhibit 10.4 to the Registrant’s Report on Form 8-K filed on April 19,
2018)
First Amendment to Amended and Restated Credit Agreement, dated November 5, 2018, by and among ResMed Inc., as
borrower, each of the lenders identified in the First Amendment, MUFG Union Bank, N.A., as administrative agent, joint
lead arranger, joint book runner, swing line lender and letter of credit issuer, and Westpac Banking Corporation, as
syndication agent, joint lead arranger and joint book runner. (Incorporated by reference to Exhibit 10.1 to the Registrant’s
Report on Form 8-K filed on November 8, 2018)
10.25 The ResMed Inc. 2018 Employee Stock Purchase Plan. (Incorporated by reference to Appendix B of ResMed Inc.’s Proxy
Statement filed with the Securities and Exchange Commission on October 3, 2018.)
10.26 Note Purchase Agreement, dated July 10, 2019 among ResMed Inc. and the purchasers party to that agreement (including
21.1
23.1
31.1
31.2
32.1
101
form of 3.24% Series A Senior Note due 2026, form of Series B 3.45% Senior Note due 2029, and form of Subsidiary
Guaranty Agreement). (Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 8-K filed on July 15,
2019)
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
The following materials from ResMed Inc.’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020
formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated
Statements of Income, (iii) the Consolidated Statements of Stockholders’ Equity and Comprehensive Income, (iv) the
Consolidated Statements of Cash Flows and (v) related notes.
* Management contract or compensatory plan or arrangement
ITEM 16 FORM 10-K SUMMARY
None.
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Table of Contents
PART IV
RESMED INC. AND SUBSIDIARIES
SIGNATURES
Signatures
Under the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be
signed on its behalf by the authorized persons below.
DATED August 12, 2020
ResMed Inc.
/s/ MICHAEL J. FARRELL
Michael J. Farrell
Chief executive officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE
TITLE
/S/ MICHAEL J. FARRELL
Michael J. Farrell
Chief executive officer and director
(Principal Executive Officer)
/S/ BRETT A. SANDERCOCK
Brett A. Sandercock
Chief financial officer
(Principal Financial Officer and
Principal Accounting Officer)
DATE
August 12, 2020
August 12, 2020
/S/ PETER C. FARRELL
Peter C. Farrell
/S/ CAROL J. BURT
Carol J. Burt
/S/ JAN De WITTE
Jan De Witte
/S/ RICHARD SULPIZIO
Richard Sulpizio
/S/ RON TAYLOR
Ron Taylor
/S/ KAREN DREXLER
Karen Drexler
/S/ HARJIT GILL
Harjit Gill
Non-executive chairman
August 12, 2020
August 12, 2020
August 12, 2020
August 12, 2020
August 12, 2020
August 12, 2020
August 12, 2020
Director
Director
Director
Director
Director
Director
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