RESMED, INC. Special 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 our annual report on Form 10-K for the fiscal year endedJune 30, 2019 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. Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described in our annual report on Form 10-K for the fiscal year endedJune 30, 2019 , in addition to the other cautionary statements and risks described elsewhere in this report and in our other filings with theSecurities and Exchange Commission ("SEC"), including our subsequent reports on Forms 10-Q and 8-K. These risks and uncertainties 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. ? 23
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PART I - FINANCIAL INFORMATION Item 2
RESMED INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The following is an overview of our results of operations for the three and nine
months ended March 31, 2020 . Management's discussion and analysis of financial
condition and results of operations is intended to help the reader understand
our results of operations and financial condition. Management's discussion and
analysis is provided as a supplement to, and should be read in conjunction with,
the condensed consolidated financial statements and notes included 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 disordered
breathing ("SDB"), chronic obstructive pulmonary disease, neuromuscular disease
and other chronic diseases. SDB 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 software 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 for use in the hospital and home, 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 SDB and 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 the three months ended March 31, 2020 , we invested
$51.4 million on research and development activities 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. Due to multiple acquisitions, including 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").
During the three months ended March 31, 2020 , our net revenue increased by 16%
compared to the three months ended March 31, 2019 . Gross margin was 58.4% for
the three months ended March 31, 2020 compared to 57.5% for the three months
ended March 31, 2019 . Diluted earnings per share for the three months ended
March 31, 2020 was $1.12 per share, compared to $0.73 per share for the three
months ended March 31, 2019 .
At
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 toU.S. dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance withU.S. GAAP. In order to assist readers of our consolidated financial statements in understanding the operating results that management uses to evaluate the business and for financial planning purposes, we present the following non-GAAP measures as a complement to financial results prepared in accordance withU.S. GAAP: gross profit and gross margin. The non-GAAP financial measures presented herein should not be considered in isolation or as a substitute for operating income and net income prepared in accordance with GAAP.
Impact of COVID-19
InMarch 2020 , theWorld 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. 24
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PART I - FINANCIAL INFORMATION Item 2
RESMED INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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 has been impacted as has the availability of raw materials and
components, which are constraining our manufacturing capacity and restricting
our ability to 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. The increase in our sales for
these respiratory care products during the three months ended March 31, 2020 ,
includes numerous countries and regions where COVID-19 infection levels were
increasing, particularly in China and Europe . We expect to see continued
increased demand for ventilator products for the remainder of the fiscal year
ending June 30, 2020 .
While demand for our sleep devices and masks was not materially impacted for the
three months ended March 31, 2020 , we expect COVID-19 will lead to a temporary
decrease in demand for these products from new patients. Specifically,
diagnostic pathways for sleep apnea treatment, including home medical equipment
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. We
expect the impact on these diagnostic and prescription pathways will likely
result in a decrease in demand from new patients for our products designed to
treat SDB. 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
home medical equipment 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 for the three months ended March 31, 2020 ,
we were able to broadly maintain our operations, and the pandemic has not
negatively impacted our liquidity position.
For additional information, please refer to "Risk Factors" in Part II, Item 1A of this Form 10-Q.
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PART I - FINANCIAL INFORMATION Item 2
RESMED INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Net Revenue for the Three Months Ended
Net revenue for the three months endedMarch 31, 2020 increased to$769.5 million from$662.2 million for the three months endedMarch 31, 2019 , an increase of$107.2 million or 16% (a 17% increase on a constant currency basis). The following table summarizes our net revenue disaggregated by segment, product and region for the three months endedMarch 31, 2020 compared toMarch 31, 2019 (in thousands): Three Months Ended March 31, Constant 2020 2019 % Change Currency*U.S. ,Canada andLatin America Devices$ 196,497 $ 181,269 8
%
Masks and other 197,052 168,726 17
Total Sleep and Respiratory Care
89,560 79,942 12
Total $ 483,109 $ 429,937 12
Combined Europe , Asia and other markets
Devices $ 195,038 $ 155,178 26 % 29 %
Masks and other 91,308 77,113 18 22
Total Sleep and Respiratory Care
27
Global revenue
Devices $ 391,535 $ 336,447 16 % 18 %
Masks and other 288,360 245,839 17 18
Total Sleep and Respiratory Care
18
Software as a Service 89,560 79,942 12 12
Total $ 769,455 $ 662,228 16 17
*Constant currency numbers exclude the impact of movements in international currencies.
Sleep and Respiratory Care
Net revenue for the three months endedMarch 31, 2020 was$679.9 million , an increase of 17% compared to net revenue for the three months endedMarch 31, 2019 . Movements in international currencies against theU.S. dollar negatively impacted net revenues by approximately$8.5 million for the three months endedMarch 31, 2020 . Excluding the impact of currency movements, total Sleep and Respiratory Care net revenue for the three months endedMarch 31, 2020 increased 18% compared to the three months endedMarch 31, 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 inU.S. ,Canada andLatin America for the three months endedMarch 31, 2020 increased to$393.5 million from$350.0 million for the three months endedMarch 31, 2019 , an increase of$43.6 million or 12%. The increase was primarily due to an increase in unit sales of our devices and masks. Net revenue in combinedEurope ,Asia and other markets increased for the three months endedMarch 31, 2020 to$286.3 million from$232.3 million for the three months endedMarch 31, 2019 , an increase of$54.1 million or 23% (a 27% increase on a constant currency basis). The constant currency increase in sales in combinedEurope ,Asia and other markets 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 devices for the three months endedMarch 31, 2020 increased to$391.5 million from$336.4 million for the three months endedMarch 31, 2019 , an increase of$55.1 million or 16%, including an increase of 8% inthe United States ,Canada andLatin America and an increase of 26% in combinedEurope ,Asia and other markets (a 29% increase on a constant currency basis). Excluding the impact of foreign currency movements, device sales for the three months endedMarch 31, 2020 increased by 18%. Net revenue from masks and other for the three months endedMarch 31, 2020 increased to$288.4 million from$245.8 million for the three months endedMarch 31, 2019 , an increase of$42.5 million or 17%, including an increase of 17% inthe United States ,Canada andLatin America and an increase of 18% in combinedEurope ,Asia and other markets (a 22% increase on a constant currency basis). Excluding the impact of foreign currency movements, masks and other sales increased by 18%, compared to the three months endedMarch 31, 2019 .
Software as a Service
Net revenue from our SaaS business for the three months endedMarch 31, 2020 was$89.6 million , an increase of 12% compared to the three months endedMarch 31, 2019 . The increase was predominantly due to continued growth in our software-as-a-service product offerings. 26
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PART I - FINANCIAL INFORMATION Item 2
RESMED INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Net Revenue for the Nine Months Ended
Net revenue for the nine months endedMarch 31, 2020 increased to$2,186.7 million from$1,901.6 million for the nine months endedMarch 31, 2019 , an increase of$285.1 million or 15% (a 16% increase on a constant currency basis). The following table summarizes our net revenue disaggregated by segment, product and region for the nine months endedMarch 31, 2020 compared toMarch 31, 2019 (in thousands): Nine Months Ended March 31, Constant 2020 2019 % Change Currency*U.S. ,Canada andLatin America Devices$ 586,907 $ 540,190 9 % Masks and other 584,901 494,792
18
Total Sleep and Respiratory Care
13 Software as a Service 263,156 190,614 38 Total$ 1,434,964 $ 1,225,596 17 CombinedEurope ,Asia and other markets Devices$ 509,274 $ 463,053 10 % 13 % Masks and other 242,431 212,959 14 17
Total Sleep and Respiratory Care
11 15 Global revenue Devices$ 1,096,181 $ 1,003,243 9 % 11 % Masks and other 827,332 707,751 17 18
Total Sleep and Respiratory Care
12 14 Software as a Service 263,156 190,614 38 38 Total$ 2,186,669 $ 1,901,608 15 16
*Constant currency numbers exclude the impact of movements in international currencies.
Sleep and Respiratory Care
Net revenue for the nine months endedMarch 31, 2020 was$1,923.5 million , an increase of 12% compared to net revenue for the nine months endedMarch 31, 2019 . Movements in international currencies against theU.S. dollar negatively impacted net revenues by approximately$25.6 million for the nine months endedMarch 31, 2020 . Excluding the impact of currency movements, total Sleep and Respiratory Care net revenue for the nine months endedMarch 31, 2020 increased by 14% compared to the nine months endedMarch 31, 2019 . The increase in net revenue was primarily attributable to an increase in unit sales of our devices and masks. Net revenue inU.S. ,Canada andLatin America for the nine months endedMarch 31, 2020 increased to$1,171.8 million from$1,035.0 million for the nine months endedMarch 31, 2019 , an increase of$136.8 million or 13%. The increase was primarily due to an increase in unit sales of our devices and masks. Net revenue in combinedEurope ,Asia and other markets increased for the nine months endedMarch 31, 2020 to$751.7 million from$676.0 million for the nine months endedMarch 31, 2019 , an increase of$75.7 million or 11% (a 15% increase on a constant currency basis). The constant currency increase in sales in combinedEurope ,Asia and other markets 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 devices for the nine months endedMarch 31, 2020 increased to$1,096.2 million from$1,003.2 million for the nine months endedMarch 31, 2019 , an increase of$92.9 million or 9%, including an increase of 9% inthe United States ,Canada andLatin America and an increase of 10% in combinedEurope ,Asia and other markets (a 13% increase on a constant currency basis). Excluding the impact of foreign currency movements, device sales for the nine months endedMarch 31, 2020 increased by 11%. Net revenue from masks and other for the nine months endedMarch 31, 2020 increased to$827.3 million from$707.8 million for the nine months endedMarch 31, 2019 , an increase of$119.6 million or 17%, including an increase of 18% inthe United States ,Canada andLatin America and an increase of 14% in combinedEurope ,Asia and other markets (a 17% increase on a constant currency basis). Excluding the impact of foreign currency movements, masks and other sales increased by 18%, compared to the nine months endedMarch 31, 2019 .
Software as a Service
Net revenue from our SaaS business for the nine months endedMarch 31, 2020 was$263.2 million , an increase of 38% compared to the nine months endedMarch 31, 2019 . The increase was predominantly due to revenue attributable toMatrixCare , which was acquired onNovember 13, 2018 . 27
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PART I - FINANCIAL INFORMATION Item 2
RESMED INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Gross Profit and Gross Margin
The amortization of acquired intangible assets relating to developed technology was adjusted within our condensed consolidated statements of income for the three and nine months endedMarch 31, 2020 and 2019, from operating expenses to cost of sales. As a result, gross profit now includes amortization of acquired intangible assets relating to cost of sales and operating expenses are reduced by this amount. There was no impact on income from operations, income before taxes or net income, as a result of this reclassification. The adjustments to the previously reported amounts are not material. The table below presents a reconciliation of gross profit as previously reported adjusted for the amortization of acquired intangible assets now included in cost of sales (in thousands): Three Months Nine Months Ended Ended March 31, 2019 Gross profit as previously reported$ 391,910 $ 1,118,734 Amortization of intangible assets related to cost of sales (10,940) (27,095) Gross profit$ 380,970 $ 1,091,639
Gross profit increased for the three months ended
Gross profit increased for the nine months ended
The increase in gross margin for the three and nine months endedMarch 31, 2020 compared to three and nine months endedMarch 31, 2019 was primarily due to a favorable product mix, and manufacturing and procurement efficiencies, partially offset by declines in average selling prices.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased for the three months endedMarch 31, 2020 to$172.4 million from$164.5 million for the three months endedMarch 31, 2019 , an increase of$7.9 million or 5%. Selling, general and administrative expenses were favorably impacted by the movement of international currencies against theU.S. dollar, which decreased our expenses by approximately$3.4 million , as reported inU.S. dollars. Excluding the impact of foreign currency movements, selling, general and administrative expenses for the three months endedMarch 31, 2020 increased by 7% compared to the three months endedMarch 31, 2019 . As a percentage of net revenue, selling, general and administrative expenses were 22.4% for the three months endedMarch 31, 2020 , compared to 24.8% for the three months endedMarch 31, 2019 .
The constant currency increase in selling, general and administrative expenses was primarily due to additional personnel to support our
commercial activities, partially offset by a decrease in legal expenses.
Selling, general and administrative expenses increased for the nine months endedMarch 31, 2020 to$511.3 million from$473.4 million for the nine months endedMarch 31, 2019 an increase of$37.9 million or 8%. The selling, general and administrative expenses were unfavorably impacted by the movement of international currencies against theU.S. dollar, which increased our expenses by approximately$31.8 million , as reported inU.S. dollars. Excluding the impact of foreign currency movements, selling, general and administrative expenses for the nine months endedMarch 31, 2020 increased by 1% compared to the nine months endedMarch 31, 2019 . As a percentage of net revenue, selling, general and administrative expenses were 23.4% for the nine months endedMarch 31, 2020 , compared to 24.9% for the nine months endedMarch 31, 2019 . The constant currency increase in selling, general and administrative expenses was primarily due to additional expenses associated with the consolidation of recent acquisitions and additional personnel to support our commercial activities, partially offset by a decrease in legal expenses.
Research and Development Expenses
Research and development expenses increased for the three months endedMarch 31, 2020 to$51.4 million from$47.6 million for the three months endedMarch 31, 2019 , an increase of$3.8 million , or 8%. Research and development expenses were favorably impacted by the movement of international currencies against theU.S. dollar, which decreased our expenses by approximately$1.5 million for the three months endedMarch 31, 2020 , as reported inU.S. dollars. Excluding the impact of foreign currency movements, research and development expenses increased by 11% compared to the three months endedMarch 31, 2019 . As a percentage of net revenue, research and development expenses were 6.7% for the three months endedMarch 31, 2020 , compared to 7.2% for the three months endedMarch 31, 2019 . 28
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
The increase in research and development expenses in constant currency terms was
primarily due to an increase in the number of research and development personnel
to facilitate development of new products and solutions.
Research and development expenses increased for the nine months ended March 31,
2020 to $149.4 million from $129.5 million for the nine months ended March 31,
2019 , an increase of $19.9 million , or 15%. Research and development expenses
were unfavorably impacted by the movement of international currencies against
the U.S. dollar, which increased our expenses by approximately $19.9 million for
the nine months ended March 31, 2020 , as reported in U.S. dollars. Excluding the
impact of foreign currency movements, research and development expenses for the
nine months ended March 31, 2020 was consistent with the nine months ended
March 31, 2019 . As a percentage of net revenue, research and development
expenses were 6.8% for the nine months ended March 31, 2020 , consistent with the
nine months ended March 31, 2019 .
The increase in research and development expenses in constant currency terms was
primarily due additional expenses associated with the consolidation of recent
acquisitions and an increase in the number of research and development personnel
to facilitate development of new products and solutions.
Amortization of Acquired Intangible Assets
Amortization of acquired intangible assets for the three months endedMarch 31, 2020 totaled$20.4 million compared to$22.8 million for the three months endedMarch 31, 2019 . The decrease in amortization expense was primarily due to historical intangible assets becoming fully amortized during the three months endedMarch 31, 2020 . Amortization of acquired intangible assets for the nine months endedMarch 31, 2020 totaled$59.5 million compared to$51.5 million for the nine months endedMarch 31, 2019 . The increase in amortization expense was attributable to our recent acquisitions, in particularMatrixCare andPropeller Health . The table below presents a reconciliation of amortization of acquired intangible assets by income statement caption summing to total amortization of acquired intangible assets as previously reported (in thousands): Three Months Nine Months Ended Ended March 31, 2019 Amortization of intangible assets related to cost of$ 10,940 $ 27,095 sales Amortization of intangible assets related to operating 11,854 24,406 expenses Total$ 22,794 $ 51,501
Total Other Income (Loss), Net
Total other income (loss), net for the three months endedMarch 31, 2020 was a loss of$25.8 million compared to a loss of$19.0 million for the three months endedMarch 31, 2019 . The increase was due to an impairment charge of$9.1 million relating to our equity investments during the three months endedMarch 31, 2020 , partially offset by decrease in interest expense to$10.0 million for the three months endedMarch 31, 2020 compared to$12.4 million for the three months endedMarch 31, 2019 . We also recorded losses attributable to equity method investments for the three months endedMarch 31, 2020 of$5.2 million compared to$6.0 million for the three months endedMarch 31, 2019 . The losses attributable to equity method investments relate to our joint venture with Verily, which is accounted for using the equity method, whereby we recognize our share of the joint venture's losses. Total other income (loss), net for the nine months endedMarch 31, 2020 was a loss of$65.4 million compared to a loss of$35.1 million for the nine months endedMarch 31, 2019 . The increase was due to an impairment charge of$9.1 million relating to our equity investments during the nine months endedMarch 31, 2020 and an increase in interest expense to$31.2 million for the nine months endedMarch 31, 2020 compared to$23.6 million for the nine months endedMarch 31, 2019 . We also recorded losses attributable to equity method investments for the nine months endedMarch 31, 2020 of$19.1 million compared to$9.4 million for the nine months endedMarch 31, 2019 . The losses attributable to equity method investments relate to our joint venture with Verily, which is accounted for using the equity method, whereby we recognize our share of the joint venture's losses.
Income Taxes
Our effective income tax rate for the three and nine months endedMarch 31, 2020 was 14.9% and 14.8%, respectively, as compared to 23.6% and 20.6% for the three and nine months endedMarch 31, 2019 , respectively. Our effective tax rate for the three and nine months endedMarch 31, 2020 was impacted by a favorable geographic mix of earnings. In addition, our effective tax rate for the nine months endedMarch 31, 2020 was impacted by tax benefits related to the vesting or settlement of employee share-based awards, which reduced our income tax expenses by$24.5 million , for the nine months endedMarch 31, 2020 , as compared to$13.9 million for the nine months endedMarch 31, 2019 . 29
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PART I - FINANCIAL INFORMATION Item 2
RESMED INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Our
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 inMarch 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 inApril 2018 under a payment arrangement with the ATO. AtSeptember 30, 2018 , 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. InJune 2018 , we received a notice from the ATO claiming penalties of 50% of the additional income tax that was assessed or$75.9 million . 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. The ATO is currently auditing tax years 2014 to 2018.
Net Income and Earnings per Share
As a result of the factors above, our net income for the three months endedMarch 31, 2020 was$163.1 million compared to net income of$105.4 million for the three months endedMarch 31, 2019 , an increase of 55% over the three months endedMarch 31, 2019 . Our net income for the nine months endedMarch 31, 2020 was$443.8 million compared to net income of$335.8 million for the nine months endedMarch 31, 2019 , an increase of 32% over the nine months endedMarch 31, 2019 . Our diluted earnings per share for the three months endedMarch 31, 2020 were$1.12 per diluted share compared to$0.73 for the three months endedMarch 31, 2019 . Our diluted earnings per share for the nine months endedMarch 31, 2020 were$3.05 per diluted share compared to$2.33 for the nine months endedMarch 31, 2019 .
Liquidity and Capital Resources
As ofMarch 31, 2020 andJune 30, 2019 , we had cash and cash equivalents of$352.9 million and$147.1 million , respectively. Working capital was$918.2 million and$589.4 million atMarch 31, 2020 andJune 30, 2019 , respectively. As ofMarch 31, 2020 , we had$1.4 billion of borrowings compared to$1.3 billion of borrowings atJune 30, 2019 . In response to the uncertainty associated with the COVID-19 pandemic, we increased our cash and cash equivalents position during the quarter by drawing down from our Revolving Credit Agreement. As ofMarch 31, 2020 , we had$895.0 million available for draw down under the revolver credit facility and a combined total of$1.2 billion in cash and available liquidity under the revolving credit facility. As ofMarch 31, 2020 andJune 30, 2019 , our cash and cash equivalent balances held withinthe United States amounted to$105.9 million and$33.6 million , respectively. Our remaining cash and cash equivalent balances atMarch 31, 2020 andJune 30, 2019 , were$247.0 million and$113.5 million , respectively. Our cash and cash equivalent balances are held at highly rated financial institutions. During the year endedJune 30, 2018 , as a result of changes inU.S. tax laws, 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 repatriations of cash held by our non-U.S. subsidiaries will generally not be subject toU.S. federal income tax. Our non-U.S. earnings are indefinitely reinvested, and therefore, we do not provide forU.S. income tax on these earnings. In the event we were to provide for such taxes, we would recognize deferred taxes of approximately$188.8 million inU.S. federal deferred income taxes and$5.0 million inU.S. state deferred income taxes in the consolidated financial statements.
Inventories at
Accounts receivable atMarch 31, 2020 were$554.9 million , an increase of$26.4 million or 5% compared to theJune 30, 2019 , balance of$528.5 million . Accounts receivable days outstanding of 67 days atMarch 31, 2020 , were the same as the days outstanding of 67 days atJune 30, 2019 . Our allowance for doubtful accounts as a percentage of total accounts receivable atMarch 31, 2020 , was 4.9%, compared to 4.5% atJune 30, 2019 . EffectiveJuly 1, 2019 , we adopted the Accounting Standards Update ("ASU") No. 2016-02, "Leases" (Topic 842). As ofMarch 31, 2020 , and in accordance with the new guidance, we have recognized a right-of-use asset ("ROU") of$126.3 million and a lease liability of$130.0 million on the balance sheet for all operating leases, other than those that meet the definition of a short-term lease. During the three months endedMarch 31, 2020 , the lease for a new manufacturing facility inSingapore commenced, which increased our lease balances by approximately$31.9 million . During the nine months endedMarch 31, 2020 , we generated cash of$472.0 million from operations compared to$317.2 million for the nine months endedMarch 31, 2019 . The increase in cash generated from operations during the nine months endedMarch 31, 2020 , as compared to the nine months endedMarch 31, 2019 was primarily due to the increase in operating profit. Movements in foreign currency 30
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exchange rates during the nine months ended March 31, 2020 , had the effect of
decreasing our cash and cash equivalents by $8.9 million , as reported in U.S.
dollars.
We have temporarily suspended our share repurchase program due to recent
acquisitions. Accordingly, we did not repurchase any shares during the three and
nine months ended March 31, 2020 . During the nine months ended March 31, 2019 ,
we repurchased 200,000 shares of our common stock at an aggregate purchase price
of $22.8 million under our share repurchase program. In addition, during the
nine months ended March 31, 2020 and 2019, we paid dividends to holders of our
common stock totaling $168.6 million and $158.6 million , respectively.
Capital expenditures for the nine months ended March 31, 2020 and 2019, amounted
to $77.4 million and $46.5 million , respectively. The capital expenditures for
the nine months ended March 31, 2020 , primarily reflected investment in
production tooling, leasehold improvements, equipment and machinery, and
computer hardware and software. At March 31, 2020 , our balance sheet reflects
net property, plant and equipment of $397.2 million compared to $387.5 million
at June 30, 2019 .
Contractual Obligations
Details of contractual obligations at March 31, 2020 , are as follows (in
thousands):
Payments Due by March 31,
In $000 's Total 2021 2022 2023 2024 2025 Thereafter
Debt $ 1,381,000 $ 12,000 $ 12,000 $ 12,000 $ 845,000 $ - $ 500,000
Interest on debt 200,097 36,078 36,078 36,078 18,338 16,725 56,800
Operating leases 140,109 27,061 21,025 16,981 13,776 11,461 49,805
Purchase obligations 443,392 440,749 2,372 271 - - -
Total $ 2,164,598 $ 515,888 $ 71,475 $ 65,330 $ 877,114 $ 28,186 $ 606,605
Details of other commercial commitments at March 31, 2020 , are as follows (in
thousands):
Amount of Commitment Expiration Per Period
In $000 's Total 2021 2022 2023 2024 2025 Thereafter
Standby letter of credit $ 11,909 $ 3,680 $ 23 $ 45 $ 289 $ - $ 7,872
Guarantees* 6,480 172 17 18 14 37 6,222
Total $ 18,389 $ 3,852 $ 40 $ 63 $ 303 $ 37 $ 14,094 * The above guarantees mainly relate to requirements under contractual obligations with insurance companies transacting with our German subsidiaries and guarantees provided under our facility leasing obligations.
Credit Facility
OnApril 17, 2018 , we entered into an amended and restated credit agreement (as amended from time to time, the "Revolving Credit Agreement"), as borrower, with lendersMUFG 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, onApril 17, 2018 ,ResMed Limited entered into a Syndicated Facility Agreement (the "Term Credit Agreement"), as borrower, with lendersMUFG 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, providesResMed Limited a senior unsecured term credit facility of$200.0 million . OnNovember 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 indirectU.S. subsidiaries, andResMed Limited's obligations under the Term Credit Agreement are guaranteed by us and certain of our direct and indirectU.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 onApril 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 31
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Management's Discussion and Analysis of Financial Condition and Results of
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$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). On March 31, 2020 , the interest rate that was being charged on
the outstanding principal amounts was 1.9%. 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 March 31, 2020 , we
had $895.0 million available for draw down under the revolving credit facility.
Senior Notes
OnJuly 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 dueJuly 10, 2026 , and$250.0 million principal amount of our 3.45% senior notes dueJuly 10, 2029 ("Senior Notes"). Our obligations under the Note Purchase Agreement and the Senior Notes are unconditionally and irrevocably guaranteed by certain of our direct and indirectU.S. subsidiaries, includingResMed 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 andLewis Computer Services, LLC ,MatrixCare Holdings Inc. ,MatrixCare, Inc. ,Reciprocal Labs Corporation andResMed SaaS Inc. , under a Subsidiary Guaranty Agreement dated as ofJuly 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. OnMarch 31, 2020 , we were in compliance with our debt covenants and there was a total of$1,381.0 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 debt facilities.
Common Stock
Since the inception of our share repurchase programs and throughMarch 31, 2020 , we have repurchased a total of 41.8 million shares for an aggregate of$1.6 billion . We have temporarily suspended our share repurchase program due to recent acquisitions. Accordingly, we did not repurchase any shares during the three and nine months endedMarch 31, 2020 . During the nine months endedMarch 31, 2019 we repurchased 200,000 shares at an aggregate purchase price of$22.8 million under our share repurchase program. 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. 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. AtMarch 31, 2020 , 12.9 million additional shares can be repurchased under the approved share repurchase program.
Critical Accounting Principles and Estimates
The preparation of financial statements in conformity withU.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.
For a full discussion of our critical accounting policies, see our Annual Report
on Form 10-K for the year ended
Recently Issued Accounting Pronouncements
See note 1 to the unaudited condensed consolidated financial statements 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.
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Off-Balance Sheet Arrangements
As ofMarch 31, 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 theSEC . 33
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