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, 2020 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, 2020 , 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. ? 18
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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, 2021 . Management's discussion and analysis of financial
condition and results of operations ("MD&A") 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, 2021 , we invested
$55.9 million on research and development activities, which represents 7.3% 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. 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, 2021 , our net revenue was consistent
with the three months ended March 31, 2020 . Gross margin was 58.2% for the three
months ended March 31, 2021 compared to 58.4% for the three months ended
March 31, 2020 . Diluted loss per share was $0.54 for the three months ended
March 31, 2021 , compared to diluted earnings per share of $1.12 for the three
months ended March 31, 2020 . Unrecognized tax benefits as described at note 6 -
Income Taxes impacted our diluted loss per share by $1.74 per share for the
three months ended March 31, 2021 .
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 with accounting principles generally accepted inthe United States ("GAAP"). 19
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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
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.
During the three months ended March 31, 2021 , we did not observe material
incremental demand for our ventilator devices and masks associated with the
COVID-19 pandemic. Although there is still substantial uncertainty, we believe
the global demand for ventilators and other respiratory support devices, used to
treat COVID-19 patients, has largely been met. As such, we do not expect
material COVID-19-generated demand for our ventilator products for the remainder
of the fiscal year ending June 30, 2021 .
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 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 the impact on demand for our sleep devices. However, due
to the nature of the installed base of existing patients using our devices, we
have not seen any significant adverse impact on demand for re-supply of our
masks.
Our SaaS business has also been 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 believe businesses have been less willing to
adopt new or change SaaS platforms, which has adversely impacted 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
some of our offices around the world. The pandemic has not negatively impacted
our liquidity position.
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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
Three Months Ended
Net Revenue
Net revenue for the three months ended
Three Months Ended
?March 31,
Constant
2021 2020 % Change Currency*
U.S. , Canada and Latin America
Devices $ 192,897 $ 196,497 (2) %
Masks and other 209,984 197,052 7
Total Sleep and Respiratory Care$ 402,881 $ 393,549 2 Software as a Service 93,836 89,560 5 Total$ 496,717 $ 483,109 3 CombinedEurope ,Asia and other markets Devices$ 172,838 $ 195,038 (11) % (18) % Masks and other 99,212 91,308 9 0 Total Sleep and Respiratory Care$ 272,050 $ 286,346 (5) (13) Global revenue Devices$ 365,735 $ 391,535 (7) % (10) % Masks and other 309,196 288,360 7 4 Total Sleep and Respiratory Care$ 674,931 $ 679,895 (1) (4) Software as a Service 93,836 89,560 5 5 Total$ 768,767 $ 769,455 (0) (3)
*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 three months endedMarch 31, 2021 was$674.9 million , a decrease of 1% compared to net revenue for the three months endedMarch 31, 2020 . Movements in international currencies against theU.S. dollar positively impacted net revenue by approximately$23.1 million for the three months endedMarch 31, 2021 . Excluding the impact of currency movements, total Sleep and Respiratory Care net revenue for the three months endedMarch 31, 2021 decreased by 4% compared to the three months endedMarch 31, 2020 . The decrease in net revenue was primarily attributable to a decrease in unit sales of our devices, including as a result of decreased COVID-19-related demand for our ventilators, partially offset by an increase in unit sales of our masks. Net revenue from our Sleep and Respiratory Care business in theU.S. ,Canada andLatin America for the three months endedMarch 31, 2021 increased to$402.9 million from$393.5 million for the three months endedMarch 31, 2020 , an increase of$9.3 million or 2%. The increase was primarily due to an increase in unit sales of our masks, partially offset by a decrease in unit sales of our devices. Net revenue in combinedEurope ,Asia and other markets decreased for the three months endedMarch 31, 2021 to$272.1 million from$286.3 million for the three months endedMarch 31, 2020 , a decrease of$14.3 million or 5% (a 13% decrease on a constant currency basis). The constant currency decrease in sales in combinedEurope ,Asia and other markets predominantly reflects a decrease in unit sales of our devices, including as a result of decreased COVID-19-related demand for our ventilators, partially offset by an increase in unit sales of our masks. Net revenue from devices for the three months endedMarch 31, 2021 decreased to$365.7 million from$391.5 million for the three months endedMarch 31, 2020 , a decrease of$25.8 million or 7%, including a decrease of 2% in theU.S. ,Canada andLatin America and a decrease of 11% in combinedEurope ,Asia and other markets (a 18% decrease on a constant currency basis). Excluding the impact of foreign currency movements, device sales for the three months endedMarch 31, 2021 decreased by 10%. Net revenue from masks and other for the three months endedMarch 31, 2021 increased to$309.2 million from$288.4 million for the three months endedMarch 31, 2020 , an increase of$20.8 million or 7%, including an increase of 7% in theU.S. ,Canada andLatin America and an increase of 9% in combinedEurope ,Asia and other markets (consistent with the prior year on a constant currency basis). Excluding the impact of foreign currency movements, masks and other sales increased by 4%, compared to the three months endedMarch 31, 2020 .
Software as a Service
Net revenue from our SaaS business for the three months endedMarch 31, 2021 was$93.8 million , an increase of 5% compared to the three months endedMarch 31, 2020 . The increase was predominantly due to continued growth in resupply service offerings. 21
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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
Nine Months Ended
Net Revenue Net revenue for the nine months endedMarch 31, 2021 increased to$2,320.7 million from$2,186.7 million for the nine months endedMarch 31, 2020 , an increase of$134.1 million or 6% (a 4% increase on a constant currency basis). The following table summarizes our net revenue disaggregated by segment, product and region for the nine months endedMarch 31, 2021 compared toMarch 31, 2020 (in thousands): Nine Months Ended ?March 31, Constant 2021 2020 % Change Currency*U.S. ,Canada andLatin America Devices$ 595,287 $ 586,907 1 % Masks and other 637,507 584,901
9
Total Sleep and Respiratory Care$ 1,232,794 $ 1,171,808 5 Software as a Service 277,813 263,156 6 Total$ 1,510,607 $ 1,434,964 5 CombinedEurope ,Asia and other markets Devices$ 536,856 $ 509,274 5 % (1) % Masks and other 273,259 242,431 13 6 Total Sleep and Respiratory Care$ 810,115 $ 751,705 8 2 Global revenue Devices$ 1,132,143 $ 1,096,181 3 % 0 % Masks and other 910,766 827,332 10 8 Total Sleep and Respiratory Care$ 2,042,909 $ 1,923,513 6 4 Software as a Service 277,813 263,156 6 6 Total$ 2,320,722 $ 2,186,669 6 4
*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 nine months endedMarch 31, 2021 was$2,042.9 million , an increase of 6% compared to net revenue for the nine months endedMarch 31, 2020 . Movements in international currencies against theU.S. dollar positively impacted net revenues by approximately$47.7 million for the nine months endedMarch 31, 2021 . Excluding the impact of currency movements, total Sleep and Respiratory Care net revenue for the nine months endedMarch 31, 2021 increased by 4% compared to the nine months endedMarch 31, 2020 . The increase in net revenue was primarily attributable to an increase in unit sales of our devices and masks. Net revenue from our Sleep and Respiratory Care business in theU.S. ,Canada andLatin America for the nine months endedMarch 31, 2021 increased to$1,232.8 million from$1,171.8 million for the nine months endedMarch 31, 2020 , an increase of$61.0 million or 5%. The increase was primarily due to an increase in unit sales of our masks. Net revenue in combinedEurope ,Asia and other markets increased for the nine months endedMarch 31, 2021 to$810.1 million from$751.7 million for the nine months endedMarch 31, 2020 , an increase of$58.4 million or 8% (a 2% increase on a constant currency basis). The constant currency increase in sales in combinedEurope ,Asia and other markets predominantly reflects an increase in unit sales of our devices and masks, partially offset by decreased COVID-19-related demand for our ventilators. Net revenue from devices for the nine months endedMarch 31, 2021 increased to$1,132.1 million from$1,096.2 million for the nine months endedMarch 31, 2020 , an increase of$36.0 million or 3%, including an increase of 1% in theU.S. ,Canada andLatin America and an increase of 5% in combinedEurope ,Asia and other markets (a 1% decrease on a constant currency basis). Excluding the impact of foreign currency movements, device sales for the nine months endedMarch 31, 2021 were consistent with the nine months endedMarch 31, 2020 . Net revenue from masks and other for the nine months endedMarch 31, 2021 increased to$910.8 million from$827.3 million for the nine months endedMarch 31, 2020 , an increase of$83.4 million or 10%, including an increase of 9% in theU.S. ,Canada andLatin America and an increase of 13% in combinedEurope ,Asia and other markets (a 6% increase on a constant currency basis). Excluding the impact of foreign currency movements, masks and other sales increased by 8%, compared to the nine months endedMarch 31, 2020 .
Software as a Service
Net revenue from our SaaS business for the nine months endedMarch 31, 2021 was$277.8 million , an increase of 6% compared to the nine months endedMarch 31, 2020 . The increase was predominantly due to continued growth in resupply service offerings. 22
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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
Gross profit decreased for the three months ended
The decrease in gross margin for the three months endedMarch 31, 2021 compared to three months endedMarch 31, 2020 was due primarily to additional manufacturing costs associated with our newSingapore site commencing operations during the quarter, higher freight costs and geographic mix changes, partially offset by lower amortization of acquired intangibles.
Gross profit increased for the nine months ended
The increase in gross margin for the nine months endedMarch 31, 2021 compared to the nine months endedMarch 31, 2020 was due primarily to favorable product mix, foreign currency movements and lower amortization of acquired intangibles, partially offset by restructuring expense of$5.2 million associated with inventory write-downs following the closure of the POC business.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased for the three months endedMarch 31, 2021 to$160.4 million from$172.4 million for the three months endedMarch 31, 2020 , a decrease of$12.0 million or 7%. Selling, general, and administrative expenses were unfavorably impacted by the movement of international currencies against theU.S. dollar, which increased our expenses by approximately$7.0 million , as reported inU.S. dollars. Excluding the impact of foreign currency movements, selling, general, and administrative expenses for the three months endedMarch 31, 2021 decreased by 11% compared to the three months endedMarch 31, 2020 . As a percentage of net revenue, selling, general, and administrative expenses were 20.9% for the three months endedMarch 31, 2021 , compared to 22.4% for the three months endedMarch 31, 2020 . The constant currency decrease in selling, general, and administrative expenses was primarily due to decreases in travel, marketing and bad debt expenses during the three months endedMarch 31, 2021 compared to three months endedMarch 31, 2020 . Selling, general, and administrative expenses decreased for the nine months endedMarch 31, 2021 to$488.9 million from$511.3 million for the nine months endedMarch 31, 2020 , a decrease of$22.4 million or 4%. Selling, general, and administrative expenses were unfavorably impacted by the movement of international currencies against theU.S. dollar, which increased our expenses by approximately$13.5 million , as reported inU.S. dollars. Excluding the impact of foreign currency movements, selling, general, and administrative expenses for the nine months endedMarch 31, 2021 decreased by 7% compared to the nine months endedMarch 31, 2020 . As a percentage of net revenue, selling, general, and administrative expenses were 21.1% for the nine months endedMarch 31, 2021 , compared to 23.4% for the nine months endedMarch 31, 2020 . The constant currency decrease in selling, general, and administrative expenses was primarily due to decreases in travel, marketing and bad debt expenses during the nine months endedMarch 31, 2021 compared to nine months endedMarch 31, 2020 .
Research and Development Expenses
Research and development expenses increased for the three months endedMarch 31, 2021 to$55.9 million from$51.4 million for the three months endedMarch 31, 2020 , an increase of$4.5 million , or 9%. Research and development expenses were unfavorably impacted by the movement of international currencies against theU.S. dollar, which increased our expenses by approximately$3.0 million for the three months endedMarch 31, 2021 , as reported inU.S. dollars. Excluding the impact of foreign currency movements, research and development expenses increased by 3% compared to the three months endedMarch 31, 2020 . As a percentage of net revenue, research and development expenses were 7.3% for the three months endedMarch 31, 2021 , compared to 6.7% for the three months endedMarch 31, 2020 . The increase in research and development expenses in constant currency terms was primarily due to increased investment in our digital health technologies and SaaS solutions. Research and development expenses increased for the nine months endedMarch 31, 2021 to$165.4 million from$149.4 million for the nine months endedMarch 31, 2020 , an increase of$16.0 million , or 11%. Research and development expenses were unfavorably impacted by the movement of international currencies against theU.S. dollar, which increased our expenses by approximately$5.3 million for the nine months endedMarch 31, 2021 , as reported inU.S. dollars. Excluding the impact of foreign currency movements, research and development expenses increased by 7% compared to the nine months endedMarch 31, 2020 . As a percentage of net revenue, research and development expenses were 7.1% for the nine months endedMarch 31, 2021 , compared to 6.8% for the nine months endedMarch 31, 2020 . The increase in research and development expenses in constant currency terms was primarily due to increased investment in our digital health technologies and SaaS solutions. 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
Amortization of Acquired Intangible Assets
Amortization of acquired intangible assets for the three months endedMarch 31, 2021 totaled$7.4 million compared to$8.3 million for the three months endedMarch 31, 2020 . Amortization of acquired intangible assets for the nine months endedMarch 31, 2021 totaled$23.4 million compared to$21.9 million for the nine months endedMarch 31, 2020 .
Restructuring Expenses
InNovember 2020 , we closed our POC business, which was part of the Sleep and Respiratory Care segment. During the nine months endedMarch 31, 2021 , we recognized restructuring expenses of$13.9 million primarily related to inventory write-downs of$5.2 million , accelerated amortization of acquired intangible assets of$5.1 million , asset impairments of$2.3 million , employee-related costs of$0.7 million and contract cancellation costs of$0.6 million . Of the total expense recognized during the nine months endedMarch 31, 2021 , the inventory write-down of$5.2 million is presented within cost of sales and the remaining$8.7 million in restructuring costs is separately disclosed as restructuring expenses on the condensed consolidated statements of operations. We do not expect to incur additional expenses in connection with this activity in the future.
Total Other Income (Loss), Net
Total other income (loss), net for the three months endedMarch 31, 2021 was a loss of$5.4 million compared to a loss of$25.8 million for the three months endedMarch 31, 2020 . The decrease was partially due to a decrease in interest expense to$5.9 million for the three months endedMarch 31, 2021 compared to$10.0 million for the three months endedMarch 31, 2020 . Additionally, we recognized an unrealized gain of$4.7 million on our marketable and non-marketable equity securities for the three months endedMarch 31, 2021 , whereas during the three months endedMarch 31, 2020 , we recorded an impairment of$9.1 million on our non-marketable equity securities. We also recorded losses attributable to equity method investments for the three months endedMarch 31, 2021 of$5.0 million compared to$5.3 million for the three months endedMarch 31, 2020 . 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, 2021 was a loss of$17.6 million compared to a loss of$65.4 million for the nine months endedMarch 31, 2020 . The decrease was partially due to a decrease in interest expense to$18.6 million for the nine months endedMarch 31, 2021 compared to$31.2 million for the nine months endedMarch 31, 2020 . Additionally, we recognized an unrealized gain of$9.4 million on our marketable and non-marketable securities for the nine months endedMarch 31, 2021 , whereas during the nine months endedMarch 31, 2020 , we recorded an impairment of$14.5 million on our non-marketable equity securities. We also recorded lower losses attributable to equity method investments for the nine months endedMarch 31, 2021 of$9.9 million compared to$19.1 million for the nine months endedMarch 31, 2020 . 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, 2021 was 136.0% and 56.6%, respectively, as compared to 14.9% and 14.8% for the three and nine months endedMarch 31, 2020 , respectively. The increase to our effective tax rate was primarily the result of an increase in unrecognized tax benefits as outlined below. Excluding the impact of the unrecognized tax benefit, our effective income tax rate for the three and nine months endedMarch 31, 2021 was 19.1% and 17.1%, respectively. The increase in our effective tax rate, excluding the impact of the unrecognized tax benefit, was due to the geographic mix of earnings and lower windfall tax benefits related to the vesting or settlement of employee share-based awards, which reduced our income tax expense by$0.6 million and$12.6 million for the three and nine months endedMarch 31, 2021 , respectively, as compared to$2.4 million and$24.8 million for the three and nine months endedMarch 31, 2020 , respectively. We are under audit by theAustralian Taxation Office (the "ATO") for the years 2009 to 2018 (the "Audit Period"). The audits primarily involve a transfer pricing dispute in which the ATO asserts we should have paid additional Australian taxes on income derived from ourSingapore operations. The ATO issued Notices of Amended Assessments for the tax years 2009 to 2013 seeking a total of$266.0 million , consisting of$151.7 million in additional income tax and$114.3 million in penalties and interest. The 2014 to 2018 periods are still under audit and we have not yet received any Notices of Amended Assessments relative to those periods. A total of$98.8 million in tax has been prepaid in relation to the Audit Period, which is consistent with ATO procedural audit practice. 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 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 if the matter
progresses to litigation. However, if we are not successful, we will be required
to pay some or all of the additional income tax, accrued interest and penalties,
including potential additional amounts relating to the 2014 to 2018 periods. To
that end, we are engaged in ongoing discussions with the ATO to resolve the
dispute for the entire Audit Period. Given the stage of those discussions,
during the three and nine months ended March 31, 2021 , we recorded $395.9
million of gross unrecognized tax benefits, including $53.3 million of accrued
interest and penalties, associated with the ATO audits for the Audit Period.
This amount reflects our estimate of the potential tax liability and is subject
to change. If recognized, we estimate that approximately $254.8 million of
unrecognized tax benefits would affect our effective tax rate, which represents
the $395.9 million of gross unrecognized tax benefits noted previously, adjusted
for tax credits and deductions of $141.1 million . We have elected to recognize
interest and penalties related to unrecognized tax benefits as a component of
income taxes. The timing and resolution of the ATO audits are inherently
uncertain, and the amounts we might ultimately pay, if any, upon resolution of
issues raised by the ATO may differ materially from the amounts accrued.
Although it is expected that the amount of unrecognized tax benefits may change
in the next 12 months, an estimate of the range of the possible change cannot be
made.
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, effective as of the year ended June 30, 2018 . Therefore,
future repatriation of cash held by our non-U.S. subsidiaries, if any, will
generally not be subject to U.S. federal tax.
Net Income (Loss) and Earnings (Loss) per Share
As a result of the factors above, our net loss for the three months endedMarch 31, 2021 was$78.5 million compared to net income of$163.1 million for the three months endedMarch 31, 2020 , a decrease of 148%. Our net income for the nine months endedMarch 31, 2021 was$279.4 million compared to net income of$443.8 million for the nine months endedMarch 31, 2020 , a decrease of 37%. Our diluted loss per share for the three months endedMarch 31, 2021 was$0.54 per diluted share compared to diluted earnings per share of$1.12 for the three months endedMarch 31, 2020 , a decrease of 148%. Our diluted earnings per share for the nine months endedMarch 31, 2021 was$1.91 per diluted share compared to$3.05 for the nine months endedMarch 31, 2020 , a decrease of 37%. Unrecognized tax benefits as described at note 6 - Income Taxes impacted our diluted loss per share for the three months endedMarch 31, 2021 and diluted earnings per share for the nine months endedMarch 31, 2021 by$1.74 per share.
Summary of Non-GAAP Financial Measures
In addition to financial information prepared in accordance with GAAP, our
management uses certain non-GAAP financial measures, such as non-GAAP revenue,
non-GAAP cost of sales, non-GAAP gross profit, non-GAAP gross margin, non-GAAP
income from operations, non-GAAP net income, and non-GAAP diluted earnings per
share, in evaluating the performance of our business. We believe that these
non-GAAP financial measures, when reviewed in conjunction with GAAP financial
measures, can provide investors better insight when evaluating our performance
from core operations and can provide more consistent financial reporting across
periods. For these reasons, we use non-GAAP information internally in planning,
forecasting, and evaluating the results of operations in the current period and
in comparing it to past periods. These non-GAAP financial measures should be
considered in addition to, and not superior to or as a substitute for, GAAP
financial measures. We strongly encourage investors and shareholders to review
our financial statements and publicly-filed reports in their entirety and not to
rely on any single financial measure. Non-GAAP financial measures as presented
herein may not be comparable to similarly titled measures used by other
companies.
The measure "non-GAAP revenue" is equal to GAAP net revenue once adjusted for
deferred revenue fair value adjustments applied in the purchase accounting for
previous business combinations. The measure "non-GAAP cost of sales" is equal to
GAAP cost of sales less amortization of acquired intangible assets relating to
cost of sales and restructuring expense associated with inventory write-downs
following the closure of the POC business. The measure "non-GAAP gross profit"
is the difference between non-GAAP revenue and non-GAAP cost of sales, and
"non-GAAP gross margin" is the ratio of non-GAAP gross profit to non-GAAP
revenue.
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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
These non-GAAP measures are reconciled to their most directly comparable GAAP financial measures below (in thousands, except percentages):
Three Months Ended Nine Months Ended
March 31, March 31, March 31, March 31,
?2021 ?2020 ?2021 ?2020
GAAP Net revenue $ 768,767 $ 769,455 $ 2,320,722 $ 2,186,669
Add back: Deferred revenue fair - - - 2,102
value adjustment
Non-GAAP revenue $ 768,767 $ 769,455 $ 2,320,722 $ 2,188,771
GAAP Cost of sales $ 321,509 $ 319,793 $ 972,319 $ 918,256
Less: Amortization of acquired (10,924) (12,136) (34,066) (37,623)
intangibles
Less: Restructuring - cost of - - (5,232) - sales Non-GAAP cost of sales$ 310,585 $ 307,657 $ 933,021 $ 880,633 GAAP gross profit$ 447,258 $ 449,662 $ 1,348,403 $ 1,268,413 GAAP gross margin 58.2 % 58.4 % 58.1 % 58.0 % Non-GAAP gross profit$ 458,182 $ 461,798 $ 1,387,701 $ 1,308,138 Non-GAAP gross margin 59.6 % 60.0 % 59.8 % 59.8 % The measure "non-GAAP income from operations" is equal to GAAP income from operations once adjusted for amortization of acquired intangibles, restructuring expense associated with the closure of the POC business, deferred revenue fair value adjustments applied in the purchase accounting for previous business combinations and litigation settlement expenses. Non-GAAP income from operations is reconciled with GAAP income from operations below (in thousands): Three Months Ended Nine Months Ended March 31, March 31, March 31, March 31, ?2021 ?2020 ?2021 ?2020 GAAP income from operations$ 223,426 $ 217,500 $ 662,040 $ 586,412 Amortization of acquired 10,924 12,136 34,066 37,623 intangibles - cost of sales Amortization of acquired 7,445 8,272 23,377 21,872 intangibles - operating expenses Restructuring - cost of sales - - 5,232 - Restructuring - operating expenses - - 8,673 - Deferred revenue fair value - - -
2,102
adjustment
Litigation settlement expenses - - -
(600)
Non-GAAP income from operations
The measure "non-GAAP net income" is equal to GAAP net income (loss) once
adjusted for amortization of acquired intangibles (net of tax), reserve for
disputed tax positions, restructuring expense associated with the closure of the
POC (net of tax), (gain) loss on marketable equity securities, fair value
adjustments recognized on non-marketable equity securities, deferred revenue
fair value adjustments applied in the purchase accounting for previous business
combinations (net of tax) and litigation settlement expenses (net of tax). The
measure "non-GAAP diluted earnings per share" is the ratio of non-GAAP net
income to diluted shares outstanding. These non-GAAP measures are reconciled to
their most directly comparable GAAP financial measures below (in thousands,
except for per share amounts):
Three Months Ended Nine Months Ended
March 31, March 31, March 31, March 31,
?2021 ?2020 ?2021 ?2020
GAAP net income (loss) $ (78,481) $ 163,137 $ 279,405 $ 443,839
Amortization of acquired
intangibles - cost of sales, net of 8,395 9,287 26,136 28,765
tax
Amortization of acquired intangibles - operating expenses, 5,721 6,330 17,936
16,723
net of tax Reserve for disputed tax positions 254,776 - 254,776 - Restructuring - cost of sales, net - - 4,663 - of tax Restructuring - operating expenses, - - 7,730 - net of tax (Gain) loss on equity investments - - (8,476) - Fair value impairment of investment - 9,100 -
9,100
Deferred revenue fair value - - -
1,610
adjustment, net of tax Litigation settlement expenses, net - - -
(528)
of tax Non-GAAP net income$ 190,411 $ 187,854 $ 582,170 $ 499,509 GAAP diluted shares outstanding 145,513 145,680 146,394
145,490
Anti-dilutive shares excluded from 858 - - -
GAAP
Non-GAAP diluted shares outstanding 146,371 145,680 146,394
145,490
GAAP diluted earnings (loss) per
$ 3.05 share Non-GAAP diluted earnings per share$ 1.30 $ 1.29 $ 3.98 $ 3.43 26
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Table of Contents
PART I - FINANCIAL INFORMATION Item 2
RESMED INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Liquidity and Capital Resources
As ofMarch 31, 2021 andJune 30, 2020 , we had cash and cash equivalents of$230.6 million and$463.2 million , respectively. In response to the uncertainty associated with the COVID-19 pandemic, we had previously increased our cash and cash equivalents position by drawing down from our Revolving Credit Agreement. As we have not observed a significant impact to our cash flows due the pandemic, we have reduced our cash and cash equivalents and accordingly repaid our Revolving Credit Agreement. Working capital was$589.6 million and$920.7 million atMarch 31, 2021 andJune 30, 2020 , respectively. As ofMarch 31, 2021 , we had$0.7 billion of borrowings compared to$1.2 billion of borrowings atJune 30, 2020 . As ofMarch 31, 2021 , we had$1.5 billion available for draw down under the revolver credit facility and a combined total of$1.7 billion in cash and available liquidity under the revolving credit facility. We believe that cash generated from operations and available borrowings under our credit facility will be sufficient to fund our operations, including expected capital expenditures, for the next 12 months and beyond. As ofMarch 31, 2021 andJune 30, 2020 , our cash and cash equivalent balances held withinthe United States amounted to$42.6 million and$158.8 million , respectively. Our remaining cash and cash equivalent balances atMarch 31, 2021 andJune 30, 2020 , were$188.0 million and$304.4 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 theU.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 toU.S. federal tax if repatriated. Inventories atMarch 31, 2021 were$484.1 million , an increase of$67.1 million or 16% from theJune 30, 2020 balance of$416.9 million . The increase in inventories was required to respond to additional complexity and elongation of our supply chain resulting from ongoing COVID-19 impacts. Accounts receivable atMarch 31, 2021 were$525.0 million , an increase of$50.4 million or 11% compared to theJune 30, 2020 , balance of$474.6 million . Accounts receivable days outstanding of 60 days atMarch 31, 2021 , were lower than days outstanding of 65 days atJune 30, 2020 . Our allowance for doubtful accounts as a percentage of total accounts receivable atMarch 31, 2021 , was 5.9%, compared to 5.7% atJune 30, 2020 . We recognize right-of-use assets and lease liabilities on the balance sheet for all operating leases except those that meet the definition of a short-term lease. As ofMarch 31, 2021 andJune 30, 2020 , our right-of-use assets were$128.8 million and$118.3 million , respectively and our lease liabilities were$137.8 million and$123.1 million , respectively. During the nine months endedMarch 31, 2021 , we generated cash of$510.2 million from operations compared to$472.0 million for the nine months endedMarch 31, 2020 . The increase in cash generated from operations during the nine months endedMarch 31, 2021 , as compared to the nine months endedMarch 31, 2020 was primarily due to the increase in operating profit, partially offset by the increase in working capital driven by higher inventory levels. Movements in foreign currency exchange rates during the nine months endedMarch 31, 2021 , had the effect of increasing our cash and cash equivalents by$18.3 million , as reported inU.S. dollars. We have temporarily suspended our share repurchase program due to acquisitions, and more recently, as a response to the COVID-19 pandemic. Accordingly, we did not repurchase any shares during the three and nine months endedMarch 31, 2021 and 2020. In addition, during the nine months endedMarch 31, 2021 and 2020, we paid dividends to holders of our common stock totaling$169.9 million and$168.6 million , respectively. Capital expenditures for the nine months endedMarch 31, 2021 and 2020, amounted to$74.8 million and$77.4 million , respectively. The capital expenditures for the nine months endedMarch 31, 2021 , primarily reflected investment in production tooling, equipment and machinery, and computer hardware and software. AtMarch 31, 2021 , our balance sheet reflects net property, plant and equipment of$455.1 million compared to$417.3 million atJune 30, 2020 . 27
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Table of Contents
PART I - FINANCIAL INFORMATION Item 2
RESMED INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Contractual Obligations
Details of contractual obligations at March 31, 2021 , are as follows (in
thousands):
Payments Due by March 31,
Total 2022 2023 2024 2025 2026 Thereafter
Debt $ 734,000 $ 12,000 $ 12,000 $ 210,000 $ - $ - $ 500,000
Interest on debt 122,274 20,602 20,602 17,048 16,725 16,725 30,572
Operating leases 130,293 26,835 22,487 16,709 12,936 10,937 40,389
Purchase obligations 547,101 546,028 576 497 - - -
Total $ 1,533,668 $ 605,465 $ 55,665 $ 244,254 Details of other commercial commitments atMarch 31, 2021 , are as follows (in thousands): Amount of Commitment Expiration Per Period Total 2022 2023 2024 2025 2026 Thereafter Standby letter of credit$ 17,162 $ 3,759 $ 47 $ 480 $ - $ -$ 12,876 Guarantees* 5,813 2,266 75 62 73 36 3,301 Total$ 22,975 $ 6,025 $ 122 $ 542 $ 73 $ 36 $ 16,177
* 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$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). OnMarch 31, 2021 , the interest rate that was being charged on the outstanding principal amounts was 1.0%. 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 ofMarch 31, 2021 , we had$1.5 billion available for draw down under the revolving credit facility. 28
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Table of Contents
PART I - FINANCIAL INFORMATION Item 2
RESMED INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Senior Notes
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 ("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 (as defined in the Note Purchase Agreement) 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. This ratio is calculated at
the end of each reporting period for which the Note Purchase Agreement requires
us to deliver financial statements, using the results of the 12 consecutive
month period ending with such reporting period.
On March 31, 2021 , we were in compliance with our debt covenants and there was a
total of $734.0 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, 2021 , 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, and more recently, as a response to the COVID-19 pandemic. Accordingly, we did not repurchase any shares during the three and nine months endedMarch 31, 2021 and 2020. Shares that are repurchased are classified as treasury stock pending future use and reduce the number of shares outstanding used in calculating earnings (loss) 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, 2021 , 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.
Off-Balance Sheet Arrangements
As ofMarch 31, 2021 , 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 . 29
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Table of Contents
PART I - FINANCIAL INFORMATION Item 3
RESMED INC. AND SUBSIDIARIES
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