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Item 7. Management’s Discussion and Analysis

2021-08-17 compared with 2020-08-13 · 164 added, 126 removed, 194 unchanged (60% of the section changed)

ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of financial condition and results of operations is intended to help the reader understand the results of operations and financial condition of ResMed Inc.

and subsidiaries.

It is provided as a supplement to, and should be read together with the selected financial data and consolidated financial statements and notes included elsewhere in this report.

We are a global leader in the development, manufacturing, distribution and marketing of medical devices and cloud-based software applications that diagnose, treat and manage respiratory disorders, including sleep apnea, COPD, neuromuscular disease and other chronic diseases.

Sleep apnea includes obstructive sleep apnea and other respiratory disorders that occur during sleep.

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.

It is provided as a supplement to, and should be read in conjunction with the selected financial data and 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 SDB, COPD, 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 digital health applications, along with our devices, are designed to provide connected care to improve patient outcomes and efficiencies for our customers.

Since the development of continuous positive airway pressure therapy, we have expanded our business by developing or acquiring a number of products and solutions for a broader range of respiratory disorders including technologies to be applied in medical and consumer products, ventilation devices, diagnostic products, mask systems, headgear and other accessories, dental devices, portable oxygen concentrators and cloud-based software informatics solutions to manage patient outcomes and customer and provider business processes.

Our growth has been fueled by geographic expansion, our research and product development efforts, acquisitions and an increasing awareness of sleep apnea and other respiratory conditions like chronic obstructive pulmonary disease as significant health concerns.

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, 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 other respiratory conditions like chronic obstructive pulmonary disease as significant health concerns.

We are committed to ongoing investment in research and development and product enhancements.

During fiscal year 2021, we invested $225.3 million on research and development activities, which represents 7.0% of net revenues with a continued focus on the development and commercialization of new, innovative products and solutions that improve patient outcomes, create efficiencies for our customers and help physicians and providers better manage chronic disease and lower healthcare costs.

During fiscal year 2020, we released new products including AirFit N30, a nasal cradle mask with a front-facing tube, and AirFit F30i, a top-of-head connected full face mask as well as expanded our AirView offering to include certain respiratory care devices.

Due to multiple acquisitions, including of Brightree in April 2016, HEALTHCAREfirst in July 2018 and MatrixCare in November 2018, our operations now include out-of-hospital software platforms designed to support the professionals and caregivers who help people stay healthy in the home or care setting of their choice.

During fiscal year 2021 we commenced a controlled product launch of AirSense 11, which will be followed by a broader launch throughout fiscal year 2022.

AirSense 11 will introduce new features such as a touch screen, algorithms for patients new to therapy and digital enhancements, such as over-the-air update capabilities.

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.

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Our net income for the year ended June 30, 2021 was $474.5 million or $3.24 per diluted share compared to net income of $621.7 million or $4.27 per diluted share for the year ended June 30, 2020.

Unrecognized tax benefits as described at note 14 – Income Taxes impacted our diluted earnings per share by $1.70 for the year ended June 30, 2021.

Total operating cash flow for fiscal year 2021 was $736.7 million and at June 30, 2021, our cash and cash equivalents totaled $295.3 million.

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However, constant currency measures should not be considered in isolation or as an alternative to U.S.

dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with U.S.

generally accepted accounting principles.

For discussion related to the results of operations and changes in financial condition for the fiscal year ended June 30, 2019 compared to fiscal year June 30, 2018, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report for the Year Ended June 30, 2019, which was filed with the United States Securities and Exchange Commission on August 18, 2019.

dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with accounting principles generally accepted in the United States (“GAAP”).

AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations

For discussion related to the results of operations and changes in financial condition for the fiscal year ended June 30, 2020 compared to fiscal year June 30, 2019, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report for the Year Ended June 30, 2020, which was filed with the United States Securities and Exchange Commission on August 13, 2020.

Impact of COVID-19

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We have prioritized protecting the health and safety of our employees and continuing to use our employees’ talents and our resources to help society meet and overcome the challenges the pandemic poses.

We have observed increased demand for our ventilator devices and masks, which can be used to treat COVID-19 patients.

Due to governments’ varying restrictions on international and domestic travel, access to labor for our manufacturing facilities was impacted as was the availability of raw materials and components, which constrained our manufacturing capacity and restricted our ability to initially meet the substantial demand for ventilators.

Our primary focus is maximizing the availability of our ventilators and other respiratory support devices for the patients that need them the most in the countries facing the greatest challenges.

The global increase in our sales for these respiratory care products during fiscal year 2020 generally followed infection patterns around the world.

We believe the global demand for these devices has largely been met, however, this may change depending on the ability for regions to contain and control infection rates, which remains highly uncertain.

Additionally, as more becomes known about the virus and as governments pursue testing and vaccines, we may see an overall reduction in demand, and then face a corresponding risk of oversupply by us and by our competitors.

While further outbreaks in the future are highly uncertain, we expect lower demand for ventilator products for the fiscal year ending June 30, 2021.

As anticipated, we observed lower demand for our sleep devices and masks during the three months ended June 30, 2020, and we continue to expect COVID-19 will lead to a temporary decrease in demand for these products from new patients for some or all of our fiscal year 2021.

Specifically, diagnostic pathways for sleep apnea treatment, including HME suppliers and sleep clinics, have been impacted and, in some instances, been required, or in the future may be required, to temporarily close due to governments’ “shelter-in-place” orders, quarantines or similar orders or restrictions enacted to control the spread of COVID-19.

During the year ended June 30, 2021, we observed immaterial 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 fiscal year ending June 30, 2022.

Diagnostic pathways for sleep apnea treatment, including physician practices, HME suppliers and sleep clinics, have been impacted and, in some instances, been required, to temporarily close due to governments’ “shelter-in-place” orders, quarantines or similar orders or restrictions enacted to control the spread of COVID-19.

In some countries, new patients are prescribed sleep apnea treatment through hospitals that are directing their resources to critical care, including COVID-19 treatment.

The impact on these diagnostic and prescription pathways has likely resulted in a decrease in demand from new patients for our products designed to treat sleep apnea.

Given the ongoing uncertainty regarding the duration and extent of the COVID-19 pandemic and measures taken to control the spread of COVID-19, we are uncertain as to the duration and extent of decreased demand for our sleep devices.

However, due to the nature of the installed base of existing patients using our devices, we expect the demand for re-supply of our masks to be less impacted compared to devices.

Our SaaS business may also be affected by COVID-19 and measures taken to control the spread of COVID-19.

Some of our existing and potential SaaS customers are HME distributors and, therefore, have been impacted, or may be impacted, by the same temporary business closures noted above.

We also have existing and potential SaaS customers that operate care facilities and are either receiving and treating patients infected with COVID-19 or are implementing significant measures to safeguard their facilities against a potential COVID-19 outbreak.

Given these challenging business conditions and the uncertain economic environment, we expect businesses will be deterred from adopting new or changing SaaS platforms, which may adversely impact our ability to engage new customers for our SaaS businesses, or expand the services used by existing customers.

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.

Although certain governments have begun to reduce or remove COVID-19 restrictions and implement vaccination programs to varying degrees, 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 have been 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 have implemented significant measures to safeguard their facilities against a potential COVID-19 outbreak.

Given these challenging business conditions, businesses may be deterred from adopting new or changing SaaS platforms, which may adversely impact our ability to engage new customers for our SaaS businesses, or expand the services used by existing customers.

Our ability to continue to operate without any significant negative impacts will in part depend on our ability to protect our employees.

We have endeavored and continue to follow recommended actions of government and health authorities to protect our employees worldwide, but since COVID-19 was declared a pandemic in March 2020, we were able to broadly maintain our operations, and we are beginning the slow and careful process of progressively returning to work in our offices around the world.

The pandemic has not negatively impacted our liquidity position.

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Movements in international currencies against the U.S.

dollar negatively impacted net revenues by approximately $29.9 million for the year ended June 30, 2020.

dollar positively impacted net revenues by approximately $75.2 million for the year ended June 30, 2021.

Excluding the impact of currency movements, total net revenue from our Sleep and Respiratory Care business for the year ended June 30, 2021 increased by 6% compared to the year ended June 30, 2020.

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.

The increase in net revenue was primarily attributable to an increase in unit sales of our devices and masks, including recovery of core sleep patient flow that was previously impacted by the pandemic and increased demand following a recent product recall by one of our competitors, partially offset by decreased COVID-19 related demand for our ventilators.

Net revenue from our Sleep and Respiratory Care business in the United States, Canada and Latin America for the year ended June 30, 2021 increased to $1,705.1 million from $1,572.3 million for the year ended June 30, 2020, an increase of $132.8 million or 8%.

The increase was primarily due to an increase in unit sales of our devices and masks, including as a result of increased demand for our ventilators due to COVID-19.

Net revenue from our Sleep and Respiratory Care business in markets in combined Europe, Asia and other markets increased for the year ended June 30, 2020 to $1,030.1 million from $910.3 million for the year ended June 30, 2019, an increase of $119.8 million or 13% (an increase of 16% on a constant currency basis).

The constant currency increase in sales in combined Europe, Asia and other markets predominantly reflects an increase in unit sales of our devices and masks, including as a result of increased demand for our ventilators due to COVID-19.

Net revenue from devices for the year ended June 30, 2020 increased to $1,507.8 million from $1,361.6 million for the year ended June 30, 2019, an increase of $146.2 million or 11%, including an increase of 7% in the United States, Canada and Latin America and an increase of 16% in combined Europe, Asia and other markets (a 19% increase on a constant currency basis).

The increase was primarily due to an increase in unit sales of our devices and masks, including recovery of core sleep patient flow that was previously impacted by the pandemic and increased demand following a recent product recall by one of our competitors, partially offset by decreased COVID-19 related demand for our ventilators.

Net revenue from our Sleep and Respiratory Care business in combined Europe, Asia and other markets increased for the year ended June 30, 2021 to $1,118.1 million from $1,030.1 million for the year ended June 30, 2020, an increase of $88.1 million or 9% (an increase of 2% on a constant currency basis).

The constant currency increase in sales in combined Europe, Asia and other markets predominantly reflects an increase in unit sales of our devices and masks, including recovery of core sleep patient flow that was previously impacted by the pandemic, partially offset by decreased COVID-19-related demand for our ventilators.

Net revenue from devices for the year ended June 30, 2021 increased to $1,610.0 million from $1,507.8 million for the year ended June 30, 2020, an increase of $102.2 million or 7%, including an increase of 9% in the United States, Canada and Latin America and an increase of 4% in combined Europe, Asia and other markets (a 2% decrease on a constant currency basis).

Excluding the impact of foreign currency movements, device sales for the year ended June 30, 2021 increased by 3%.

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Net revenue from our SaaS business for the year ended June 30, 2021 was $373.6 million, compared to $354.6 million for the year ended June 30, 2020, an increase of $19.0 million or 5%.

The increase was predominantly due to revenue attributable to MatrixCare, which was acquired on November 13, 2018, and continued growth in our SaaS product offerings.

The increase was predominantly due to continued growth in resupply service offerings.

Gross Profit and Gross Margin.

Within our consolidated statements of income for the years ended June 30, 2020, 2019 and 2018, cost of sales has been adjusted to include amortization of acquired intangible assets directly applicable to revenue.

As a result, gross profit now includes amortization of acquired intangible assets relating to cost of sales and operating expenses have been reduced by this amount.

There was no impact on income from operations, income before taxes or net income, as a result of this reclassification.

The adjustments to the previously reported amounts are not material.

The table below presents a reconciliation of amortization of acquired intangible assets by income statement caption summing to total amortization of acquired intangible assets as previously reported for the year ended June 30, 2019 (in thousands):

Amortization of acquired intangible assets related to cost of sales

Amortization of acquired intangible assets related to operating expenses

Total as previously reported

The table below presents a reconciliation of gross profit as previously reported for the year ended June 30, 2019 adjusted for the amortization of acquired intangible assets now included in cost of sales (in thousands):

Gross profit as previously reported

Amortization of acquired intangible assets related to cost of sales

Gross profit increased for the year ended June 30, 2021 to $1,839.1 million from $1,717.8 million for the year ended June 30, 2020, an increase of $121.3 million or 7%.

Gross profit as a percentage of net revenue was 57.5% for the year ended June 30, 2021, compared with the 58.1% for the year ended June 30, 2020.

The increase in gross margin was due primarily to favorable product mix, which was partially offset by an increase in manufacturing and logistics costs as a result of the COVID-19 pandemic and an increase in amortization of intangible assets associated with MatrixCare and Propeller Health, which were acquired in November 2018 and January 2019, respectively.

The decrease in gross margin was due primarily to product mix changes, declines in average selling prices and geographic mix changes, partially offset by lower amortization of acquired intangibles.

Selling, General and Administrative Expenses.

Selling, general and administrative expenses increased for the year ended June 30, 2020 to $676.7 million from $645.0 million for the year ended June 30, 2019, an increase of $31.7 million or 5%.

Selling, general and administrative expenses decreased for the year ended June 30, 2021 to $670.4 million from $676.7 million for the year ended June 30, 2020, a decrease of $6.3 million or 1%.

The selling, general and administrative expenses, as reported in U.S.

dollars, were favorably impacted by the movement of international currencies against the U.S.

dollar, which decreased our expenses by approximately $15.1 million.

Excluding the impact of foreign currency movements, selling, general and administrative expenses for the year ended June 30, 2020 increased by 7% compared to the year ended June 30, 2019.

dollars, were unfavorably impacted by the movement of international currencies against the U.S.

dollar, which increased our expenses by approximately $22.4 million.

Excluding the impact of foreign currency movements, selling, general and administrative expenses for the year ended June 30, 2021 decreased by 4% compared to the year ended June 30, 2020.

As a percentage of net revenue, selling, general and administrative expenses for the year ended June 30, 2021 improved to 21.0% compared to 22.9% for the year ended June 30, 2020.

The constant currency increase in selling, general and administrative expenses was primarily due to additional personnel to support our commercial activities and additional expenses associated with the consolidation of our acquisitions of MatrixCare and Propeller Health, partially offset by a decrease in legal costs and travel, marketing and consulting expenses, either as a direct or indirect result of the COVID-19 pandemic.

The constant currency decrease in selling, general and administrative expenses was primarily due to decreases in travel and entertainment and bad debt expenses, partially offset by increases in employee-related expenses.

Research and Development Expenses.

Research and development expenses increased for the year ended June 30, 2021 to $225.3 million from $201.9 million for the year ended June 30, 2020, an increase of $23.3 million or 12%.

The research and development expenses were favorably impacted by the movement of international currencies against the U.S.

dollar, which decreased our expenses by approximately $4.4 million, as reported in U.S.

The research and development expenses were unfavorably impacted by the movement of international currencies against the U.S.

dollar, which increased our expenses by approximately $8.1 million, as reported in U.S.

Excluding the impact of foreign currency movements, research and development expenses for the year ended June 30, 2021 increased by 8% compared to the year ended June 30, 2020.

As a percentage of net revenue, research and development expenses were 7.0% for the year ended June 30, 2021 compared to 6.8% for the year ended June 30, 2020.

The constant currency increase in research and development expenses was primarily due to additional expenses associated with the consolidation of our acquisitions of MatrixCare and Propeller Health as well as additional personnel to facilitate development of new products and solutions.

AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The constant currency increase in research and development expenses was primarily due to increased investment in our digital health technologies and SaaS solutions.

Amortization of Acquired Intangible Assets.

Amortization of acquired intangible assets for the year ended June 30, 2021 totaled $31.1 million compared to $30.1 million for the year ended June 30, 2020.

The decrease in amortization expense was attributable to our historical intangible assets becoming fully amortized during the fiscal year.

Restructuring Expenses.

During the year ended June 30, 2020, we did not incur material restructuring expenses.

During the year ended June 30, 2019, we incurred restructuring expenses of $9.4 million associated with the reorganization, rationalization and relocation of some of our research and development and SaaS operations including the closure of our German research and development site.

We recorded the full amount of $9.4 million during the year ended June 30, 2019, within our operating expenses, which was separately disclosed as restructuring expenses.

The restructuring expenses consisted primarily of severance payments to employees and contract exit costs associated with several impacted sites.

Acquisition Related Expenses.

During the year ended June 30, 2020, we did not incur material acquisition related expenses.

During the year ended June 30, 2019, we recognized acquisition related expenses of $6.1 million associated primarily with our acquisition of MatrixCare.

Litigation Settlement Expenses.

During the year ended June 30, 2020, we did not incur material litigation settlement expenses.

During the year ended June 30, 2019, we recognized litigation settlement expenses of $41.2 million on account of a tentative agreement with the Department of Justice to resolve an ongoing investigation by the government into certain of our product offerings.

The final agreement, entered into in December 2019, included payment by us of $39.5 million, and additional fees and administrative costs raising the overall total to $41.2 million.

In November 2020, we closed our POC business, which was part of the Sleep and Respiratory Care segment.

During the year ended June 30, 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 year ended June 30, 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 consolidated statements of income.

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 year ended June 30, 2021 was a loss of $20.0 million, compared to a loss of $76.6 million for the year ended June 30, 2020.

The change was due primarily to an increase in losses attributable to equity method investments for the year ended June 30, 2020 of $25.1 million, compared to $15.8 million for the year ended June 30, 2019.

The losses attributable to equity method investments relate to our joint venture with Verily whereby we recognize our share of the joint venture’s losses.

Additionally, interest expense increased to $40.4 million for the year ended June 30, 2020 compared to interest expense of $36.2 million for the year ended June 30, 2019.

The decrease was partially due to a decrease in interest expense to $24.0 million for the year ended June 30, 2021 compared to $40.3 million for the year ended June 30, 2020.

Additionally, we recognized an unrealized gain of $14.5 million on our marketable and non-marketable securities for the year ended June 30, 2021, whereas during the year ended June 30, 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 year ended June 30, 2021 of $11.2 million compared to $25.1 million for the year ended June 30, 2020.

Income Taxes.

Our effective income tax rate decreased to 15.2% for the year ended June 30, 2020 from 22.0% for the year ended June 30, 2019.

Our effective income tax rate was affected by the geographic mix of our earnings and windfall tax benefits related to the vesting or settlement of employee share-based awards.

Our effective income tax rate increased to 46.3% for the year ended June 30, 2021 from 15.2% for the year ended June 30, 2020.

The increase in our effective income 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 year ended June 30, 2021 was 18.2%.

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 $12.1 million for the year ended June 30, 2021, as compared to $24.8 million for the year ended June 30, 2020.

AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations

We are under audit by the Australian 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 our Singapore 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.

We are engaged in advanced discussions with the ATO to settle the dispute for the entire Audit Period.

Given the stage of those discussions, during the year ended June 30, 2021, we recorded $395.3 million of gross unrecognized tax benefits, including $47.5 million of accrued interest and penalties.

This translates to a net amount of $ 248.7 million of net unrecognized tax benefits after taking into account tax credits and deductions of $146.6 million.

If the matter were to progress to litigation, we continue to believe we are more likely than not to be successful in defending our position.

If we are not successful in litigation, 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.

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.

Also, as a result of the U.S.

Tax Act, we treated all non-U.S.

historical earnings as taxable during the year ended June 30, 2018.

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 will generally not be subject to U.S.

federal tax, if repatriated.

Finally, in connection with the audit by the Australian Tax Office (the “ATO”) for the tax years 2009 to 2013, we received Notices of Amended Assessments in March 2018.

Based on these assessments, the ATO asserted that we owe $151.7 million in additional income tax and $38.4 million in accrued interest, of which $75.9 million was paid in April 2018 under a payment arrangement with the ATO.

As of June 30, 2020, we have recorded a receivable in prepaid taxes and other non-current assets for the amount paid as we ultimately expect this will be refunded by the ATO.

In June 2018, we received a notice from the ATO claiming penalties of 50% of the additional income tax that was assessed or $75.9 million.

The ATO is currently auditing tax years 2014 to 2018.

We do not agree with the ATO’s assessments and continue to believe we are more likely than not to be successful in defending our position.

subsidiaries, if any, will generally not be subject to U.S.

Net Income and Earnings per Share.

As a result of the factors above, our net income for the year ended June 30, 2021 was $474.5 million compared to net income of $621.7 million for the year ended June 30, 2020.

Our earnings per diluted share for the year ended June 30, 2020 was $4.27 compared to $2.80 for the year ended June 30, 2019, an increase of 53%.

Our earnings per diluted share for the year ended June 30, 2021 was $3.24 compared to $4.27 for the year ended June 30, 2020, a decrease of 24%.

Unrecognized tax benefits as described at note 14 – Income Taxes reduced our diluted earnings per share for the year ended June 30, 2021 by $1.70 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.

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):

Year Ended June 30

GAAP Net revenue

Deferred revenue fair value adjustment

Non-GAAP revenue

GAAP Cost of sales

Amortization of acquired intangibles

Restructuring - cost of sales

Non-GAAP cost of sales

GAAP gross profit

GAAP gross margin

Non-GAAP gross profit

Non-GAAP gross margin

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):

Year Ended June 30

GAAP income from operations

Amortization of acquired intangibles - cost of sales

Amortization of acquired intangibles - operating expenses

Restructuring - cost of sales

Restructuring - operating expenses

Deferred revenue fair value adjustment

Litigation settlement expenses

Non-GAAP income from operations

The measure “non-GAAP net income” is equal to GAAP net income 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):

Year Ended June 30

GAAP net income (loss)

Amortization of acquired intangibles - cost of sales, net of tax

Amortization of acquired intangibles - operating expenses, net of tax

Reserve for disputed tax positions

Restructuring - cost of sales, net of tax

Restructuring - operating expenses, net of tax

(Gain) loss on equity investments

Fair value impairment of investment

Deferred revenue fair value adjustment, net of tax

Litigation settlement expenses, net of tax

Non-GAAP net income

Diluted shares outstanding

GAAP diluted earnings per share

Non-GAAP diluted earnings per share

AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources

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As of June 30, 2021 we had $0.7 billion of borrowings under our revolving credit facility, term credit facility and senior notes as compared to $1.2 billion at June 30, 2020.

In response to the uncertainty associated with the COVID-19 pandemic, we increased our cash and cash equivalents position during the year by drawing down from our revolving credit facility.

As of June 30, 2021, we had $1.6 billion available for draw down under the revolving credit facility and a combined total of $1.9 billion in cash and available liquidity under the revolving credit facility.

AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 of June 30, 2021 and June 30, 2020, our cash and cash equivalent balances held within the United States amounted to $106.7 million and $158.8 million, respectively.

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Our cash and cash equivalent balances are held at highly rated financial institutions.

We repatriated $400.0 million and $360.0 million to the United States during both the years ended June 30, 2020 and 2019, respectively, from earnings generated in each of those years.

We repatriated $560.1 million and $400.0 million to the United States during the years ended June 30, 2021 and 2020, respectively, from earnings generated in each of those years.

The amount of the current year foreign earnings that we have repatriated to the United States in the past has been determined, and the amount that we expect to repatriate during fiscal year 2022 will be determined, based on a variety of factors, including current year earnings of our foreign subsidiaries, foreign investment needs and the cash flow needs we have in the United States, such as for the repayment of debt, dividend distributions, and other domestic obligations.

During the year ended June 30, 2018, as a result of the U.S.

As a result of the U.S.

Tax Act, we treated all non-U.S.

historical earnings as taxable, which resulted in additional tax expense of $126.9 million which was payable over the proceeding eight years.

historical earnings prior to 2018 as taxable.

Therefore, future repatriation of cash held by our non-U.S.

subsidiaries will generally not be subject to U.S.

federal tax if repatriated.

On June 14, 2019, the U.S.

Treasury Department issued final and temporary regulations relating to the repatriation of non-U.S.

As a result, in the event our non-U.S.

earnings had not been permanently reinvested, deferred taxes of approximately $194.4 million in U.S.

federal deferred tax and $5.2 million in U.S.

state deferred taxes would have been recognized in the consolidated financial statements.

federal tax if repatriated, except as discussed in Note 14 – Income Taxes of the Notes to the Consolidated Financial Statements (Part II, Item 8).

Inventories at June 30, 2021 were $457.0 million, an increase of $40.1 or 10% over the balance at June 30, 2020 of $416.9 million.

The increase in inventories was required primarily to support our revenue growth, including increased demand for our ventilators due to COVID-19.

Accounts receivable, net of allowance for doubtful accounts, at June 30, 2020 were $474.6 million, a decrease of $53.9 million or 10% over the June 30, 2019 accounts receivable balance of $528.5 million.

Accounts receivable days’ sales outstanding of 65 days at June 30, 2020 decreased by 2 days compared to 67 days at June 30, 2019.

The increase in inventories was required to respond to the increase in unit volumes and the additional complexity and elongation of our supply chain resulting from ongoing COVID-19 impacts.

Accounts receivable, net of allowance for doubtful accounts, at June 30, 2021 were $614.3 million, an increase of $139.6 million or 29% over the June 30, 2020 accounts receivable balance of $474.6 million.

Accounts receivable days’ sales outstanding of 68 days at June 30, 2021 increased by 3 days compared to 65 days at June 30, 2020.

Our allowance for doubtful accounts as a percentage of total accounts receivable at June 30, 2021 and 2020 was 5.0% and 5.7%, respectively.

Effective July 1, 2019, we adopted the Accounting Standards Update (“ASU”) No.

2016-02, “Leases” (Topic 842).

As of June 30, 2020, and in accordance with the new guidance , we have recognized a right-of-use asset (“ROU”) of $118.3 million and a lease liability of $123.1 million on the balance sheet for all operating leases, other than those that meet the definition of a short-term lease.

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 of June 30, 2021 and 2020 our right-of-use assets were $128.6 million and $118.3 million, respectively and our lease liabilities were $138.4 million and $123.1 million, respectively.

During the year ended June 30, 2021, we generated cash of $736.7 million from operations compared to $802.3 million for the year ended June 30, 2020.

The increase in cash generated from operations during the year ended June 30, 2020 was primarily due to the increase in operating profit and improvement in working capital, partially offset by higher inventory levels.

The decrease in cash generated from operations during the year ended June 30, 2021 was primarily due to the increase in working capital balances and income tax payments.

Movements in foreign currency exchange rates during the year ended June 30, 2021 had the effect of increasing our cash and cash equivalents by $18.5 million, as reported in U.S.

During the year ended June 30, 2021, we paid $43.5 million associated with business acquisitions, net of cash acquired, compared to $27.9 million during the year ended June 30, 2020.

We have temporarily suspended our share repurchase program and, accordingly, did not repurchase any shares during year ended June 30, 2020.

During the year ended June 30, 2019, we repurchased 200,000 shares at a cost of $22.8 million under our share repurchase program.

During fiscal years 2020 and 2019, we also paid dividends totaling $225.1 million and $211.7 million, respectively.

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 years ended June 30, 2021 and 2020.

In addition, during fiscal years 2021 and 2020, we paid to holders of our common stock dividends totaling $226.7 million and $225.1 million, respectively.

AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Details of contractual obligations at June 30, 2021 are as follows (in thousands):

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Purchase obligations

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

Details of other commercial commitments at June 30, 2021 are as follows (in thousands):

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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.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Revolving Credit Agreement and Term Credit Agreement each terminate on April 17, 2023, when all unpaid principal and interest under the loans must be repaid.

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At June 30, 2021, we were in compliance with our debt covenants and there was $158.0 million outstanding under the Revolving Credit Agreement and Term Credit Agreement.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

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Under the terms of the Note Purchase Agreement, we agreed to customary covenants including with respect to our corporate existence, transactions with affiliates, and mergers and other extraordinary transactions.

We also agreed that, subject to limited exceptions, we will maintain a ratio of consolidated funded debt to consolidated EBITDA of no more than 3.50 to 1.00 as of the last day of any fiscal quarter, and will not at any time permit the amount of all secured and unsecured debt of us and our subsidiaries to exceed 10% of our consolidated tangible assets, determined as of the end of our most recently ended fiscal quarter.

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 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 June 30, 2021, we were in compliance with our debt covenants and there was a total of $658.0 million outstanding under the Revolving Credit Agreement, Term Credit Agreement and Senior Notes.

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We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements:

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

(1) Valuation of Goodwill, Intangible and Other Long-Lived Assets.

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If assets are considered to be impaired, we recognize as impairment the amount by which the carrying value of the assets exceeds their fair value, and for goodwill is limited to the value of goodwill allocated to the impaired reporting unit, as described in Step 1 below.

We base useful lives and related amortization or depreciation expense on our estimate of the period that the assets will generate revenues or otherwise be used by us.

Factors that would influence the likelihood of a material change in our reported results include significant changes in the asset’s ability to generate positive cash flow, loss of legal ownership or title to the asset, a significant decline in the economic and competitive environment on which the asset depends, significant changes in our strategic business objectives, utilization of the asset, and a significant change in the economic and/or political conditions in certain countries.

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If or when we determine it is more likely than not that the fair value of a reporting unit is less than the carrying amount, including goodwill, we would move to Step 1 of the quantitative method.

AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Step 1 – Compare the fair value for each reporting unit to its carrying value, including goodwill.

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In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws.

Although currently immaterial, we recognize liabilities for uncertain tax positions based on a two-step process.

We recognize liabilities for uncertain tax positions based on a two-step process.

The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any.

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Based on our regular assessment, we may adjust the income tax provision and deferred taxes in the period in which the facts that give rise to a revision become known.

In connection with the audit by the ATO for the tax years 2009 to 2013, we received Notices of Amended Assessments in March 2018.

In June 2018, we received a notice from the ATO claiming penalties of 50% of the additional income tax that was assessed or $75.9 million.

At June 30, 2020, we recorded a receivable in prepaid taxes and other non-current assets for the amount paid as we ultimately expect this will be refunded by the ATO.

The ATO is currently auditing tax years 2014 to 2018.

We do not agree with the ATO’s assessments and continue to believe we are more likely than not to be successful in defending our position.

We are under audit by the Australian 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 our Singapore operations.

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.

We are engaged in advanced discussions with the ATO to settle the dispute for the entire Audit Period.

Given the stage of those discussions, during the year ended June 30, 2021, we recorded $395.3 million of gross unrecognized tax benefits, including $47.5 million of accrued interest and penalties.

This amount reflects our estimate of the potential tax liability and is subject to change.

Included in the balance of uncertain tax positions as of June 30, 2021 were $248.7 million of net unrecognized tax benefits that, if recognized, would reduce the effective income tax rate in future periods.

This amount represents the $395.3 million of gross unrecognized tax, adjusted for tax credits and deductions of $146.6 million.

AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations

If the matter were to progress to litigation, we continue to believe we are more likely than not to be successful in defending our position.

The timing and resolution of the ATO audits are inherently uncertain, and the amounts we might ultimately pay or receive in credits and deductions, 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.

Outside the ATO audit describe above, tax years 2017 to 2020 remain subject to future examination by the major tax jurisdictions in which we are subject to tax.

(3) Revenue Recognition.

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An allocation is not required for many of our Sleep and Respiratory Care contracts that have a single performance obligation, which is the shipment of our therapy-based equipment.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

Recently Issued Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis