RESMED INC 10-K

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET AND BUSINESS RISKS Foreign Currency Market Risk Our reporting currency is the U.S. dollar, although the financial statements of our non-U.S. subsidiaries are maintained in their respective local currencies. We transact business in various foreign currencies, including a number of major European currencies as well as the Australian dollar. We have significant foreign currency exposure through both our Australian and Singapore manufacturing activities and international sales operations. We have established a foreign currency hedging program using purchased currency options and forward contracts to hedge foreign-currency-denominated financial assets, liabilities and manufacturing cash flows. The goal of this hedging program is to economically manage the financial impact of foreign currency exposures predominantly denominated in euros, Australian dollars and Singapore dollars. Under this program, increases or decreases in our foreign-currency-denominated financial assets, liabilities, and firm commitments are partially offset by gains and losses on the hedging instruments. We do not enter into financial instruments for trading or speculative purposes. The foreign currency derivatives portfolio is recorded in the consolidated balance sheets at fair value and included in Other assets current, Other assets non-current, Accrued expenses and Other liabilities non-current. All movements in the fair value of the foreign currency derivatives are recorded within Other income, net, on our consolidated statements of income. The table below provides information (in U.S. dollars) on our significant foreign-currency-denominated financial assets by legal entity functional currency as of June 30, 2021 (in thousands): U.S. Canadian Chinese Dollar Euro Dollar Yuan (USD) (EUR) (CAD) (CNY) AUD Functional: Assets 456,660 42,975 - 13,012 Liability (259,243) (81,722) - (692) Foreign Currency Hedges (195,000) - - (12,387) Net Total 2,417 (38,747) - (67) USD Functional: Assets - - 22,396 - Liability - - (7,550) - Foreign Currency Hedges - - (20,155) - Net Total - - (5,309) - EURO Functional: Assets 2,825 - - - Liability (42,895) - - - Foreign Currency Hedges 40,000 - - - Net Total (70) - - - SGD Functional: Assets 406,966 41,001 - 899 Liability (246,243) (10,877) - - Foreign Currency Hedges (200,000) - - - Net Total (39,277) 30,124 - 899 - 54 - Table of Contents PART II Item 7A RESMED INC. AND SUBSIDIARIES Quantitative and Qualitative Disclosures About Market and Business Risks The table below provides information about our foreign currency derivative financial instruments and presents the information in U.S. dollar equivalents. The table summarizes information on instruments and transactions that are sensitive to foreign currency exchange rates, including foreign currency call options, collars and forward contracts held at June 30, 2021. The table presents the notional amounts and weighted average exchange rates by contractual maturity dates for our foreign currency derivative financial instruments. These notional amounts generally are used to calculate payments to be exchanged under the options contracts (in thousands, except exchange rates): Fair Value Assets / (Liabilities) Foreign Exchange Contracts Year 1 Year 2 Total June 30, ‎ 2021 June 30, ‎ 2020 AUD/USD Contract amount 195,000 - 195,000 (652) - Ave. contractual exchange rate AUD 1 = ‎ USD 0.7521 AUD 1 = ‎ USD 0.7521 AUD/Euro Contract amount 47,406 11,851 59,257 1,172 886 Ave. contractual exchange rate AUD 1 = ‎ Euro 0.6307 AUD 1 = ‎ Euro 0.6700 AUD 1 = ‎ Euro 0.6382 SGD/Euro Contract amount 29,629 - 29,629 (88) 126 Ave. contractual exchange rate SGD 1 = ‎ Euro 0.6379 - SGD 1 = ‎ Euro 0.6379 SGD/USD Contract amount 200,000 - 200,000 (177) (183) Ave. contractual exchange rate SGD 1 = ‎ USD 0.7440 SGD 1 = ‎ USD 0.7440 AUD/CNY Contract amount 12,387 - 12,387 (130) (161) Ave. contractual exchange rate AUD 1 = ‎ CNY 5.0312 AUD 1 = ‎ CNY 5.0312 EUR/USD Contract amount 40,000 - 40,000 169 - Ave. contractual exchange rate EUR 1 = ‎ USD 1.912 EUR 1 = ‎ USD 1.912 USD/CAD Contract amount 20,155 - 20,155 (44) (83) Ave. contractual exchange rate USD 1 = ‎ CAD 1.2431 USD 1 = ‎ CAD 1.2431 Interest Rate Risk We are exposed to risk associated with changes in interest rates affecting the return on our cash and cash equivalents and debt. At June 30, 2021, we held cash and cash equivalents of $295.3 million principally comprising of bank term deposits and at-call accounts and are invested at both short-term fixed interest rates and variable interest rates. At June 30, 2021, there was $158.0 million outstanding under the revolving credit and term loan facilities, which were subject to variable interest rates. A hypothetical 10% change in interest rates during the year ended June 30, 2021, would not have had a material impact on pretax income. We have no interest rate hedging agreements. On July 10, 2019, we entered into the Note Purchase Agreement with the purchasers to that agreement, in connection with the issuance and sale of $250.0 million principal amount of our 3.24% senior notes due July 10, 2026, and $250.0 million principal amount of our 3.45% senior notes due July 10, 2029. The interest rate on these notes is fixed and not subject to fluctuation. Proceeds from the issuance and sale of the notes were used to repay borrowings under the revolving credit facility. - 55 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is incorporated by reference to the financial statements set forth in Item 15 of Part IV of this report, “Exhibits and Consolidated Financial Statement Schedules.” (a) Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm 57 Consolidated Balance Sheets as of June 30, 2021 and 2020 59 Consolidated Statements of Income for the years ended June 30, 2021, 2020 and 2019 60 Consolidated Statements of Comprehensive Income for the years ended June 30, 2021, 2020 and 2019 61 Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2021, 2020 and 2019 62 Consolidated Statements of Cash Flows for the years ended June 30, 2021, 2020 and 2019 63 Notes to Consolidated Financial Statements 64 Schedule II – Valuation and Qualifying Accounts and Reserves 85 (b) Supplementary Data Quarterly Financial Information (unaudited)—The quarterly results for the years ended June 30, 2021 and 2020 are summarized below (in thousands, except per share amounts): 2021 First ‎ Quarter Second ‎ Quarter Third ‎ Quarter Fourth ‎ Quarter Fiscal ‎ Year Net revenue $ 751,944 $ 800,011 $ 768,767 $ 876,103 $ 3,196,825 Gross profit 438,661 462,483 447,258 490,696 1,839,100 Net income (loss) 178,372 179,514 (78,481) 195,098 474,505 Basic earnings (loss) per share 1.23 1.24 (0.54) 1.34 3.27 Diluted earnings (loss) per share 1.22 1.23 (0.54) 1.33 3.24 2020 First ‎ Quarter Second ‎ Quarter Third ‎ Quarter Fourth ‎ Quarter Fiscal ‎ Year Net revenue $ 681,056 $ 736,157 $ 769,455 $ 770,343 $ 2,957,013 Gross profit 391,619 427,130 449,662 449,372 1,717,786 Net income 120,148 160,554 163,137 177,835 621,674 Basic earnings per share 0.84 1.11 1.13 1.23 4.31 Diluted earnings per share 0.83 1.10 1.12 1.22 4.27 Note: the amounts for each quarter are computed independently and, due to the computation formula, the sum of the four quarters may not equal the year. - 56 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors ‎ ResMed Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of ResMed Inc. and subsidiaries (the Company) as of June 30, 2021 and 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended June 30, 2021, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated August 16, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Change in Accounting Principle The Company has changed its method of accounting for leases as of July 1, 2019 due to the adoption of the FASB’s Accounting Standards Codification Topic 842, Leases . Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Evaluation of the uncertain tax position related to Australian Tax Office audits As discussed in Note 14 to the consolidated financial statements, the Company’s tax filings in Australia for the years 2009 through 2018 (the Audit Period) are under audit by the Australian Tax Office (ATO). The Company believes it is more likely than not (greater than a 50% likelihood) that its tax position would be upheld in litigation. However, the Company is engaged - 57 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES in advanced discussions with the ATO to settle the dispute for the entire Audit Period and has recorded $395.3 million of gross unrecognized tax benefits, adjusted for tax credits and deductions of $146.6 million. We identified the evaluation of the uncertain tax position and related tax credits and deductions related to the ATO audits as a critical audit matter. This critical audit matter required challenging auditor judgment due to the nature and the complexity of the applicable tax laws and regulations and involved tax professionals with specialized skills and knowledge. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the uncertain tax position related to the ATO audits, including the gross unrecognized tax benefits and related tax credits and deductions. We involved tax professionals with specialized skills and knowledge, who assisted in:  reading notices, assessments, and other correspondence between the Company and the ATO in connection with the Audit Period  evaluating the Company’s analysis of the applicable tax laws with the facts, assumptions, and representations made by the Company  recalculating the Company’s determination of the gross unrecognized tax benefits and the related tax credits and deductions  inquiring of third-party legal and tax advisors about the Company’s determination to adjust the gross unrecognized tax benefit related to the ATO audits for certain tax credits and deductions. /s/ KPMG LLP We have served as the Company’s auditor since 1994. San Diego, California ‎ August 16, 2021 - 58 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Consolidated Balance Sheets June 30, 2021 and 2020 (In thousands, except share and per share data) June 30, ‎ 2021 June 30, ‎ 2020 Assets Current assets: Cash and cash equivalents $ 295,278 $ 463,156 Accounts receivable, net of allowances of $ 32,138 and $ 28,508 ‎ at June 30, 2021 and June 30, 2020, respectively 614,292 474,643 Inventories (note 4) 457,033 416,915 Prepaid taxes 72,409 93,484 Prepaid expenses and other current assets 135,745 75,261 Total current assets 1,574,757 1,523,459 Non-current assets: Property, plant and equipment, net (note 4) 463,490 417,335 Operating lease right-of-use assets (note 10) 128,575 118,348 Goodwill (note 5) 1,927,901 1,890,324 Other intangible assets, net (note 5) 392,582 448,168 Deferred income taxes (note 14) 79,904 41,065 Prepaid taxes and other non-current assets 160,916 148,677 Total non-current assets 3,153,368 3,063,917 Total assets $ 4,728,125 $ 4,587,376 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 138,008 $ 135,786 Accrued expenses (note 7) 320,599 270,353 Operating lease liabilities, current (note 10) 23,585 21,263 Deferred revenue 109,611 98,617 Income taxes payable (note 14) 307,963 64,755 Short-term debt, net (note 9) 12,000 11,987 Total current liabilities 911,766 602,761 Non-current liabilities: Deferred revenue 91,496 87,307 Deferred income taxes (note 14) 11,319 13,011 Operating lease liabilities, non-current (note 10) 114,779 101,880 Other long-term liabilities 6,802 8,347 Long-term debt, net (note 9) 643,351 1,164,133 Long-term income taxes payable (note 14) 62,933 112,910 Total non-current liabilities 930,680 1,487,588 Total liabilities 1,842,446 2,090,349 Commitments and contingencies (note 17) Stockholders’ equity: Preferred stock, $ 0.01 par value, 2,000,000 shares authorized; none issued - - Common stock, $ 0.004 par value, 350,000,000 shares authorized; ‎ 187,484,592 issued and 145,648,358 outstanding at June 30, 2021 and ‎ 186,723,407 issued and 144,887,175 outstanding at June 30, 2020 583 580 Additional paid-in capital 1,622,199 1,570,694 Retained earnings 3,079,640 2,832,991 Treasury stock, at cost, 41,836,234 shares at June 30, 2021 and June 30, 2020 ( 1,623,256 ) ( 1,623,256 ) Accumulated other comprehensive loss ( 193,487 ) ( 283,982 ) Total stockholders’ equity 2,885,679 2,497,027 Total liabilities and stockholders’ equity $ 4,728,125 $ 4,587,376 See accompanying notes to consolidated financial statements. ‎ - 59 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Consolidated Statements of Income Years Ended June 30, 2021, 2020 and 2019 (In thousands, except per share data) June 30, 2021 June 30, 2020 June 30, 2019 Net revenue - Sleep and Respiratory Care products $ 2,823,235 $ 2,602,381 $ 2,330,783 Net revenue - Software as a Service 373,590 354,632 275,789 Net revenue 3,196,825 2,957,013 2,606,572 Cost of sales - Sleep and Respiratory Care products 1,177,309 1,067,967 977,223 Cost of sales - Software as a Service 135,289 121,657 92,764 Cost of sales (exclusive of amortization shown separately below) 1,312,598 1,189,624 1,069,987 Amortization of acquired intangible assets - Sleep and Respiratory Care products 4,895 8,584 8,591 Amortization of acquired intangible assets - Software as a Service 40,232 41,019 33,923 Amortization of acquired intangible assets 45,127 49,603 42,514 Total cost of sales 1,357,725 1,239,227 1,112,501 Gross profit 1,839,100 1,717,786 1,494,071 Selling, general, and administrative 670,387 676,689 645,010 Research and development 225,284 201,946 180,651 Amortization of acquired intangible assets 31,078 30,092 32,424 Restructuring expenses (note 19) 8,673 - 9,401 Litigation settlement expenses (note 20) - ( 600 ) 41,199 Acquisition related expenses (note 18) - - 6,123 Total operating expenses 935,422 908,127 914,808 Income from operations 903,678 809,659 579,263 Other income (loss), net: Interest income 362 1,021 2,299 Interest expense ( 23,989 ) ( 40,377 ) ( 36,156 ) Loss attributable to equity method investments (note 6) ( 11,205 ) ( 25,058 ) ( 15,833 ) Other, net (note 13) 14,816 ( 12,157 ) ( 10,726 ) Total other income (loss), net ( 20,016 ) ( 76,571 ) ( 60,416 ) Income before income taxes 883,662 733,088 518,847 Income taxes (note 14) 409,157 111,414 114,255 Net income $ 474,505 $ 621,674 $ 404,592 Basic earnings per share (note 12) $ 3.27 $ 4.31 $ 2.83 Diluted earnings per share (note 12) $ 3.24 $ 4.27 $ 2.80 Dividend declared per share $ 1.56 $ 1.56 $ 1.48 Basic shares outstanding (000's) 145,313 144,338 143,111 Diluted shares outstanding (000's) 146,451 145,652 144,484 See accompanying notes to consolidated financial statements. ‎ - 60 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Years Ended June 30, 2021, 2020 and 2019 (In US$ thousands) 2021 2020 2019 Net income $ 474,505 621,674 404,592 Other comprehensive (loss) income: Foreign currency translation (loss) gain adjustments 90,495 ( 30,973 ) ( 28,681 ) Comprehensive income $ 565,000 $ 590,701 $ 375,911 See accompanying notes to consolidated financial statements. ‎ - 61 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity Years ended June 30, 2021, 2020 and 2019 (In thousands) Common Stock Additional ‎ Paid-in Treasury Stock Retained Accumulated ‎ Other ‎ Comprehensive Shares Amount Capital Shares Amount Earnings Income (Loss) Total Balance, June 30, 2018 184,316 $ 571 $ 1,450,821 ( 41,636 ) $ ( 1,600,412 ) $ 2,432,328 $ ( 224,328 ) $ 2,058,980 Common stock issued on exercise of options (note 11) 252 1 12,329 - - - - 12,330 Common stock issued on vesting of restricted stock units, net of shares withheld for tax (note 11) 638 3 ( 28,104 ) - - - - ( 28,101 ) Common stock issued on employee stock purchase plan (note 11) 285 1 24,364 - - - - 24,365 Treasury stock purchases - ( 1 ) - ( 200 ) ( 22,844 ) - - ( 22,845 ) Stock-based compensation costs - - 52,063 - - - - 52,063 Other comprehensive income (loss) - - - - - - ( 28,681 ) ( 28,681 ) Net income - - - - - 404,592 - 404,592 Cumulative effect of change in accounting standards - - - - - ( 188,798 ) - ( 188,798 ) Dividends declared - - - - - ( 211,712 ) - ( 211,712 ) Balance, June 30, 2019 185,491 $ 575 $ 1,511,473 ( 41,836 ) $ ( 1,623,256 ) $ 2,436,410 $ ( 253,009 ) $ 2,072,193 Common stock issued on exercise of options (note 11) 350 1 19,986 - - - - 19,987 Common stock issued on vesting of restricted stock units, net of shares withheld for tax (note 11) 617 3 ( 46,061 ) - - - - ( 46,058 ) Common stock issued on employee stock purchase plan (note 11) 265 1 28,196 - - - - 28,197 Stock-based compensation costs - - 57,100 - - - - 57,100 Other comprehensive income (loss) - - - - - - ( 30,973 ) ( 30,973 ) Net income - - - - - 621,674 - 621,674 Dividends declared - - - - - ( 225,093 ) - ( 225,093 ) Balance, June 30, 2020 186,723 $ 580 $ 1,570,694 ( 41,836 ) $ ( 1,623,256 ) $ 2,832,991 $ ( 283,982 ) $ 2,497,027 Common stock issued on exercise of options (note 11) 64 - 3,954 - - - - 3,954 Common stock issued on vesting of restricted stock units, net of shares withheld for tax (note 11) 469 2 ( 50,209 ) - - - - ( 50,207 ) Common stock issued on employee stock purchase plan (note 11) 229 1 33,833 - - - - 33,834 Stock-based compensation costs - - 63,927 - - - - 63,927 Other comprehensive income (loss) - - - - - - 90,495 90,495 Net income - - - - - 474,505 - 474,505 Cumulative effect adjustment from adoption of the credit loss standard, net of tax - - - - - ( 1,143 ) - ( 1,143 ) Dividends declared - - - - - ( 226,713 ) - ( 226,713 ) Balance, June 30, 2021 187,485 $ 583 $ 1,622,199 ( 41,836 ) $ ( 1,623,256 ) $ 3,079,640 $ ( 193,487 ) $ 2,885,679 See accompanying notes to consolidated financial statements. ‎ - 62 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended June 30, 2021, 2020 and 2019 (In thousands) June 30, 2021 June 30, 2020 June 30, 2019 Cash flows from operating activities: Net income $ 474,505 $ 621,674 $ 404,592 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization 156,758 154,850 150,795 Amortization of right-of-use assets 34,760 26,523 - Stock-based compensation costs (note 11) 63,927 57,559 52,073 Loss attributable to equity method investments (note 6) 11,205 25,058 15,833 (Gain) loss on equity investments (note 6) ( 14,515 ) 14,519 15,007 Restructuring expenses (note 19) 8,673 - - Gain on previously held equity interest - - ( 1,909 ) Changes in fair value of business combination contingent consideration - ( 7 ) ( 286 ) Changes in operating assets and liabilities: Accounts receivable ( 129,195 ) 54,383 ( 18,013 ) Inventories ( 21,954 ) ( 69,881 ) ( 84,188 ) Prepaid expenses, net deferred income taxes and other current assets ( 58,154 ) ( 58,999 ) ( 47,575 ) Accounts payable, accrued expenses and other 210,708 ( 23,424 ) ( 27,278 ) Net cash provided by operating activities 736,718 802,255 459,051 Cash flows from investing activities: Purchases of property, plant and equipment ( 102,712 ) ( 95,330 ) ( 68,710 ) Patent registration costs ( 14,114 ) ( 10,608 ) ( 8,632 ) Business acquisitions, net of cash acquired ( 39,067 ) ( 27,910 ) ( 951,383 ) Purchases of investments (note 6) ( 21,788 ) ( 31,616 ) ( 46,717 ) Proceeds on maturity of foreign currency contracts 19,219 ( 14,397 ) ( 264 ) Net cash used in investing activities ( 158,462 ) ( 179,861 ) ( 1,075,706 ) Cash flows from financing activities: Proceeds from issuance of common stock, net 37,790 48,182 36,727 Taxes paid related to net share settlement of equity awards ( 50,209 ) ( 46,061 ) ( 28,104 ) Purchases of treasury stock - - ( 22,844 ) Payments of business combination contingent consideration ( 3,500 ) ( 302 ) ( 909 ) Proceeds from borrowings, net of borrowing costs 90,000 1,190,000 1,519,230 Repayment of borrowings ( 612,000 ) ( 1,284,012 ) ( 711,745 ) Dividends paid ( 226,713 ) ( 225,093 ) ( 211,712 ) Net cash used in financing activities ( 764,632 ) ( 317,286 ) 580,643 Effect of exchange rate changes on cash 18,498 10,920 ( 5,561 ) Net increase (decrease) in cash and cash equivalents ( 167,878 ) 316,028 ( 41,573 ) Cash and cash equivalents at beginning of period 463,156 147,128 188,701 Cash and cash equivalents at end of period $ 295,278 $ 463,156 $ 147,128 Supplemental disclosure of cash flow information: Income taxes paid, net of refunds $ 221,359 $ 180,359 $ 242,860 Interest paid $ 23,989 $ 40,377 $ 36,156 Fair value of assets acquired, excluding cash $ 16,671 $ 14,919 $ 429,522 Liabilities assumed ( 1,543 ) ( 4,292 ) ( 265,217 ) Goodwill on acquisition 24,671 20,375 794,320 Deferred payments 3,768 408 ( 7,242 ) Fair value of contingent consideration - ( 3,500 ) - Cash paid for acquisitions $ 43,567 $ 27,910 $ 951,383 See accompanying notes to consolidated financial statements. - 63 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (1) Organization and Basis of Presentation ResMed Inc. (referred to herein as “we”, “us”, “our” or the “Company”) is a Delaware corporation formed in March 1994 as a holding company for the ResMed Group. Through our subsidiaries, we design, manufacture and market equipment for the diagnosis and treatment of sleep-disordered breathing and other respiratory disorders, including obstructive sleep apnea. Our manufacturing operations are located in Australia, Singapore, Malaysia, France, China and the United States. Major distribution and sales sites are located in the United States, Germany, France, the United Kingdom, Switzerland, Australia, Japan, China, Finland, Norway and Sweden. We also operate a Software as a Service (“SaaS”) business in the United States that includes out-of-hospital software platforms designed to support the professionals and caregivers who help people stay healthy in the home or care setting of their choice. (2) Summary of Significant Accounting Policies (a) Basis of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management estimates and assumptions that affect amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from management’s estimates. (b) Revenue Recognition In accordance with Accounting Standard Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”, we account for a contract with a customer when there is a legally enforceable contract, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. We have determined that we have two operating segments, which are the sleep and respiratory disorders sector of the medical device industry (“Sleep and Respiratory Care”) and the supply of business management software as a service to out-of-hospital health providers (“SaaS”). Our Sleep and Respiratory Care revenue relates primarily to the sale of our products that are therapy-based equipment. Some contracts include additional performance obligations such as the provision of extended warranties and data for patient monitoring. Our SaaS revenue relates to the provision of software access with ongoing support and maintenance services as well as professional services such as training and consulting. Disaggregation of revenue See note 15 – Segment Information for our net revenue disaggregated by segment, product and region for the years ended June 30, 2021, 2020 and 2019. Performance obligations and contract balances Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied; generally, this occurs with the transfer of risk and/or control of our products are provided at a point in time. For products in our Sleep and Respiratory Care business, we transfer control and recognize a sale when products are shipped to the customer in accordance with the contractual shipping terms. For our SaaS business, revenue associated with professional services are recognized as they are provided. We defer the recognition of a portion of the consideration received when performance obligations are not yet satisfied. Consideration received from customers in advance of revenue recognition is classified as deferred revenue. Performance obligations resulting in deferred revenue in our Sleep and Respiratory Care business relate primarily to extended warranties on our devices and the provision of data for patient monitoring. Performance obligations resulting in deferred revenue in our SaaS business relate primarily to the provision of software access with maintenance and support over an agreed term and material rights associated with future discounts upon renewal of some SaaS contracts. Generally, deferred revenue will be recognized over a period of one year to five years . Our contracts do not contain significant financing components. - 64 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements The following table summarizes our contract balances as of June 30, 2021 and 2020 (in thousands): 2021 2020 Balance sheet caption Contract assets Accounts receivable, net $ 614,292 $ 474,643 Accounts receivable, net Unbilled revenue, current 10,893 9,452 Prepaid expenses and other current assets Unbilled revenue, non-current 6,214 6,957 Prepaid taxes and other non-current assets Contract liabilities Deferred revenue, current ( 109,611 ) ( 98,617 ) Deferred revenue (current liabilities) Deferred revenue, non-current ( 91,496 ) ( 87,307 ) Deferred revenue (non-current liabilities) Transaction price determination Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. In our Sleep and Respiratory Care segment, the amount of consideration received and revenue recognized varies with changes in marketing incentives (e.g., rebates, discounts, free goods) and returns offered to customers and their customers. When we give customers the right to return eligible products and receive credit, returns are estimated based on an analysis of historical experience. However, returns of products, excluding warranty-related returns, are infrequent and insignificant. We adjust the estimate of revenue at the earlier of when the most likely amount of consideration can be estimated, the amount expected to be received changes, or when the consideration becomes fixed. We offer our Sleep and Respiratory Care customers cash or product rebates based on volume or sales targets measured over quarterly or annual periods. We estimate rebates based on each customer’s expected achievement of its targets. In accounting for these rebate programs, we reduce revenue ratably as sales occur over the rebate period by the expected value of the rebates to be returned to the customer. Rebates measured over a quarterly period are updated based on actual sales results and, therefore, no estimation is required to determine the reduction to revenue. For rebates measured over annual periods, we update our estimates on a quarterly basis based on actual sales results and updated forecasts for the remaining rebate periods. We also offer discounts to both our Sleep and Respiratory Care as well as our SaaS customers as part of normal business practice and these are deducted from revenue when the sale occurs. When Sleep and Respiratory Care or SaaS contracts have multiple performance obligations, we generally use an observable price to determine the stand-alone selling price by reference to pricing and discounting practices for the specific product or service when sold separately to similar customers. Revenue is then allocated proportionately, based on the determined stand-alone selling price, to each performance obligation. An allocation is not required for many of our Sleep and Respiratory Care contracts that have a single performance obligation, which is the shipment of our therapy-based equipment. Accounting and practical expedient elections We have elected to account for shipping and handling activities associated with our Sleep and Respiratory Care segment as a fulfillment cost within cost of sales, and record shipping and handling costs collected from customers in net revenue. We have also elected for all taxes assessed by government authorities that are imposed on and concurrent with revenue-producing transactions, such as sales and value added taxes, to be excluded from revenue and presented on a net basis. We have adopted two practical expedients including the “right to invoice” practical expedient, which allows us to recognize revenue in the amount of the invoice when it corresponds directly with the value of performance completed to date and which is relevant for some of our SaaS contracts. The second practical expedient adopted permits relief from considering a significant financing component when the payment for the good or service is expected to be one year or less. (c) Concentration of Credit Risk and Significant Customers Financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, derivatives and trade receivables. Our cash and cash equivalents are generally held with large, diverse financial institutions to reduce the amount of exposure to any single financial institution. Our derivative contracts are transacted with various financial institutions with high credit standings and any exposure to counterparty credit-related losses in these contracts is largely mitigated with collateralization and master-netting agreements. The risk with respect to trade receivables is mitigated by credit evaluations we perform on our customers, the short duration of our payment terms for the significant majority of our customer contracts and by the diversification of our customer base. No single customer accounted for 10% or more of our total revenues for any of the periods presented. - 65 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (d) Fair Value of Financial Instruments The fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We measure our financial instruments at fair value at each reporting period using a fair value hierarchy that requires that we maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value: Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 - Other inputs that are directly or indirectly observable in the marketplace. Level 3 - Unobservable inputs that are supported by little or no market activity. The carrying value of cash equivalents, accounts receivable and accounts payable, approximate their fair value because of their short-term nature. The carrying value of long-term debt related to our Revolving Credit and Term Credit Agreements approximates its fair value as the principal amounts outstanding are subject to variable interest rates that are based on market rates which are regularly reset. The carrying value of long-term debt related to our Senior Notes can differ to its fair value as the principal amounts outstanding are subject to fixed interest rates as outlined in note 9 - Debt. Foreign currency hedging instruments are marked to market and therefore reflect their fair value. In addition, we measure investments in publicly held equity securities and privately held equity securities for which there has been an observable price change in an identical or similar security, at fair value. We do not hold or issue financial instruments for trading purposes. (e) Cash and Cash Equivalents Cash equivalents include certificates of deposit and other highly liquid investments and we state them at cost, which approximates market. We consider investments with original maturities of 90 days or less to be cash equivalents for purposes of the consolidated statements of cash flows. (f) Inventories We state inventories at the lower of cost (determined principally by the first-in, first-out method) or net realizable value. We include material, labor and manufacturing overhead costs in finished goods and work-in-process inventories. We review and provide for any product obsolescence in our manufacturing and distribution operations by assessing throughout the year individual products and components (based on estimated future usage and sales). ( g) Property, Plant and Equipment We record property, plant and equipment, including rental and demonstration equipment at cost. We compute depreciation expense using the straight-line method over the estimated useful lives of the assets. Useful lives are generally two years to ten years except for buildings which are depreciated over an estimated useful life of 40 years and leasehold improvements, which we amortize over the shorter of the useful life or the lease term. We charge maintenance and repairs to expense as we incur them. Depreciation expense for property, plant, and equipment was $ 78.4 million, $ 65.6 million, and $ 65.9 million for the years ended June 30, 2021, 2020 and 2019, respectively. (h) Intangible Assets We capitalize the registration costs for new patents and amortize the costs over the estimated useful life of the patent, which is generally ten years. If a patent is superseded or a product is retired, any unamortized costs are written off immediately. We amortize all of our other intangible assets on a straight-line basis over their estimated useful lives, which range from two years to fifteen years . We take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists and, at least annually, evaluate the recoverability of intangible assets. We have no t identified any impairment of intangible assets during any of the periods presented. - 66 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (i) Goodwill We conduct our annual review for goodwill impairment during the final quarter of the fiscal year. Our goodwill impairment review is performed at our reporting unit level, which is one level below our operating segments and involves the following steps: Step 0 or Qualitative assessment – Evaluate qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. The factors we consider include, but are not limited to, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance or events-specific to that reporting unit. If or when we determine it is more likely than not that the fair value of a reporting unit is less than the carrying amount, including goodwill, we would move to Step 1 of the quantitative method. Step 1 – Compare the fair value for each reporting unit to its carrying value, including goodwill. Fair value is determined based on estimated discounted cash flows. A goodwill impairment charge is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. If a reporting unit’s fair value exceeds the carrying value, no further work is performed and no impairment charge is necessary. During the annual reviews for the years ended June 30, 2021, 2020 and 2019, we completed a Step 0 or Qualitative assessment and determined it was more likely than not that the fair value of our reporting units exceeded their carrying amounts, including goodwill, and therefore goodwill was no t impaired. (j) Equity investments We have equity investments in privately and publicly held companies that are unconsolidated entities. The following discusses our accounting for investments in marketable equity securities, non-marketable equity securities, and investments accounted for under the equity method. Our marketable equity securities are publicly traded stocks measured at fair value and classified within Level 1 in the fair value hierarchy because we use quoted prices for identical assets in active markets. Marketable equity securities are recorded in prepaid expenses and other current assets on the consolidated balance sheets. Non-marketable equity securities consist of investments in privately held companies without readily determinable fair values and are recorded in prepaid taxes and other non-current assets on the consolidated balance sheets. Non-marketable equity securities are reported at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. We assess non-marketable equity securities at least quarterly for impairment and consider qualitative and quantitative factors including the investee's financial metrics, product and commercial outlook and cash usage . All gains and losses on marketable and non-marketable equity securities, realized and unrealized, are recognized in other, net on the consolidated statements of operations. Equity investments whereby we have significant influence but not control over the investee, and are not the primary beneficiary of the investee’s activities, are accounted for under the equity method. Under this method, we record our share of gains or losses attributable to equity method investments as a component of other, net on the consolidated statements of operations. (k) Research and Development We record all research and development expenses in the period we incur them. (l) Foreign Currency The consolidated financial statements of our non-U.S. subsidiaries, whose functional currencies are other than the U.S. dollar, are translated into U.S. dollars for financial reporting purposes. We translate assets and liabilities of non-U.S. subsidiaries whose functional currencies are other than the U.S. dollar at period end exchange rates, but translate revenue and expense transactions at average exchange rates for the period. We recognize cumulative translation adjustments as part of comprehensive income, as detailed in the consolidated statements of comprehensive income, and include those adjustments in accumulated other comprehensive income in the consolidated balance sheets until such time the relevant subsidiary is sold or substantially or completely liquidated. We reflect gains and losses on transactions denominated in other than the functional currency of an entity in our results of operations. - 67 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (m) Foreign Exchange Risk Management We transact business in various foreign currencies, including a number of major European currencies as well as the Australian and Singapore dollars. We have significant foreign currency exposure through both our Australian and Singaporean manufacturing activities, and international sales operations. We have established a foreign currency hedging program using purchased currency options and forward contracts to hedge foreign-currency-denominated financial assets, liabilities and manufacturing cash flows. The terms of such foreign currency hedging contracts generally do not exceed three years. The goal of this hedging program is to economically manage the financial impact of foreign currency exposures denominated mainly in Euros, Australian and Singapore dollars. Under this program, increases or decreases in our foreign currency denominated financial assets, liabilities, and firm commitments are partially offset by gains and losses on the hedging instruments. We do not designate these foreign currency contracts as hedges. We have determined our hedge program to be a non-effective hedge as defined under the FASB issued authoritative guidance. All movements in the fair value of the foreign currency instruments are recorded within other income, net in our consolidated statements of income and through changes in our operating assets and liabilities within our consolidated statements of cash flows. We classify purchases of foreign currency derivatives and proceeds received from the exercise of foreign currency derivatives as an investing activity within our consolidated statements of cash flows. We do not enter into financial instruments for trading or speculative purposes. We held foreign currency instruments with notional amounts totaling $ 556.4 million and $ 495.2 million at June 30, 2021 and June 30, 2020, respectively, to hedge foreign currency fluctuations. These contracts mature at various dates prior to June 30, 2023. (n) Income Taxes We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using the enacted tax rates we expect to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We recognize the impact of a tax position in the consolidated financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Any interest and penalties related to uncertain tax positions are reflected in income tax expense. (o) Provision for Warranty We provide for the estimated cost of product warranties on our Sleep and Respiratory Care products at the time the related revenue is recognized. We determine the amount of this provision by using a financial model, which takes into consideration actual historical expenses and potential risks associated with our different products. We use this financial model to calculate the future probable expenses related to warranty and the required level of the warranty provision. Although we engage in product improvement programs and processes, our warranty obligation is affected by product failure rates and costs incurred to correct those product failures. Should actual product failure rates or estimated costs to repair those product failures differ from our estimates, we would be required to revise our estimated warranty provision. (p) Allowance for Credit Losses We maintain an allowance for credit losses on customer receivables based on our historical write-off experience, an assessment of our customers’ financial conditions and available information that is relevant to assessing the collectability of cash flows, which includes current conditions and forecasts about future economic conditions. Customer receivables are charged against the allowance when they are deemed uncollectible. Refer to Note 3(b) below for information regarding our adoption of the credit loss standard effective July 1, 2020 . We are also contingently liable, within certain limits, in the event of a customer default, to independent financing companies in connection with customer financing programs. We monitor the collection status of these installment receivables and provide for estimated losses separately under accrued expenses within our consolidated balance sheets based upon our historical collection experience with such receivables and a current assessment of our credit exposure. - 68 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (q) Impairment of Long-Lived Assets We periodically evaluate the carrying value of long-lived assets to be held and used, including certain identifiable intangible assets, when events and circumstances indicate that the carrying amount of an asset may not be recovered. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If assets are considered to be impaired, we recognize as the impairment the amount by which the carrying amount of the assets exceeds the fair value of the assets. We report assets to be disposed of at the lower of the carrying amount or fair value less costs to sell. We did not recognize impairment charges in relation to long-lived assets during the fiscal years ended June 30, 2021, 2020 and 2019. (r) Contingencies We record a liability in the consolidated financial statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. (3) New Accounting Pronouncements (a) Recently issued accounting standards not yet adopted ASU No. 2020-04 “Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting” In March 2020, the FASB issued ASU No. 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (Topic 848), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance is effective for us as of March 12, 2020 through December 31, 2022. We will evaluate transactions or contract modifications occurring as a result of reference rate reform and determine whether to apply the optional guidance on an ongoing basis. The ASU is currently not expected to have a material impact on our consolidated financial statements. (b) Recently adopted accounting pronouncements ASU No. 2016-13 “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments” In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments” (Topic 326), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. The guidance was adopted effective July 1, 2020 using the modified retrospective approach. We recognized the cumulative effect of adopting this guidance as an adjustment to the opening balance of retained earnings of $1.1 million, net of tax, related to our allowance for credit losses for accounts receivable. The adoption of this ASU did not have a material impact on our consolidated financial statements. ASU No. 2018-15 “Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (Subtopic 350-40), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance was adopted effective July 1, 2020 and applied prospectively. Under the new ASU, capitalized implementation costs are presented as other non-current assets on our consolidated balance sheets and within operating cash flows on our consolidated statements of cash flows. The adoption of this ASU did not have a material impact on our consolidated financial statements. - 69 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (4) Supplemental Balance Sheet Information Components of selected captions in the consolidated balance sheets consisted of the following as of June 30, 2021 and June 30, 2020 (in thousands): Inventories 2021 2020 Raw materials $ 155,419 $ 128,096 Work in progress 4,647 2,807 Finished goods 296,967 286,012 Total inventories $ 457,033 $ 416,915 Property, Plant and Equipment 2021 2020 Machinery and equipment $ 349,022 $ 285,287 Computer equipment 194,386 188,036 Furniture and fixtures 54,435 54,275 Vehicles 5,959 5,513 Clinical, demonstration and rental equipment 110,620 95,860 Leasehold improvements 77,392 60,490 Land 54,458 51,803 Buildings 239,357 227,902 Property, plant and equipment, at cost $ 1,085,629 $ 969,166 Accumulated depreciation and amortization ( 622,139 ) ( 551,831 ) Property, plant and equipment, net $ 463,490 $ 417,335 (5) Goodwill and Other Intangible Assets, net Goodwill For each of the years ended June 30, 2021 and June 30, 2020, we have no t recorded any goodwill impairments. Changes in the carrying amount of goodwill is comprised of the following for the year ended June 30, 2021 (in thousands): 2021 Sleep and ‎ Respiratory Care SaaS Total Balance at the beginning of the period $ 614,448 $ 1,275,876 $ 1,890,324 Business acquisitions 5,829 18,842 24,671 Foreign currency translation adjustments 12,906 - 12,906 Balance at the end of the period $ 633,183 $ 1,294,718 $ 1,927,901 Other Intangible Assets Other intangibles, net are comprised of the following as of June 30, 2021 and June 30, 2020 (in thousands): 2021 2020 Developed/core product technology $ 383,319 $ 382,806 Accumulated amortization ( 239,049 ) ( 197,670 ) Developed/core product technology, net 144,270 185,136 Customer relationships 272,703 279,370 Accumulated amortization ( 90,976 ) ( 80,922 ) Customer relationships, net 181,727 198,448 Other intangibles 197,662 177,091 Accumulated amortization ( 131,077 ) ( 112,507 ) Other intangibles, net 66,585 64,584 Total other intangibles, net $ 392,582 $ 448,168 Intangible assets consist of developed/core product technology, trade names, non-compete agreements, customer relationships, and patents, and we amortize them over the estimated useful life of the assets, generally between two years and fifteen years . There are no expected residual values related to these intangible assets. - 70 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements Amortization expense related to identified intangible assets for the years ended June 30, 2021 and June 30, 2020 was $ 76.2 million and $ 79.7 million, respectively. Amortization expense related to patents for the years ended June 30, 2021 and June 30, 2020 was $ 5.3 million and $ 8.3 million, respectively. Total estimated annual amortization expense for the years ending June 30, 2022 through June 30, 2026, is shown below (in thousands): Fiscal Years Ending June 30 2022 2023 2024 2025 2026 Estimated amortization expense $ 75,009 $ 58,028 $ 54,211 $ 49,741 $ 44,556 (6) Investments Equity investments by measurement category as of June 30, 2021 and June 30, 2020 were as follows (in thousands): Measurement category 2021 2020 Fair value $ 29,084 $ - Measurement alternative 23,002 30,033 Equity method 17,154 14,109 Total $ 69,240 $ 44,142 The following table shows a reconciliation of the changes in our equity investments for the year ended June 30, 2021 (in thousands): Non-marketable securities Marketable securities Equity method investments Total Balance at the beginning of the period $ 30,033 $ - $ 14,109 $ 44,142 Investments 2,538 5,000 14,250 21,788 Observable price adjustments on non-marketable equity securities 1,000 - - 1,000 Ongoing mark-to-market adjustments on marketable equity securities - 13,515 - 13,515 Reclassifications (1) ( 10,569 ) 10,569 - - Loss attributable to equity method investments - - ( 11,205 ) ( 11,205 ) Carrying value at the end of the period $ 23,002 $ 29,084 $ 17,154 $ 69,240 (1) During the year ended June 30, 2021, one of our investments, which was previously accounted for under the measurement alternative, completed its initial public offering which resulted in a change of accounting methodology to fair value. The following table shows a reconciliation of the changes in our equity investments for the year ended June 30, 2020 (in thousands): Non-marketable securities Marketable securities Equity method investments Total Balance at the beginning of the period $ 30,436 $ - $ 21,667 $ 52,103 Investments 14,116 - 17,500 31,616 Impairment of investments ( 14,519 ) - - ( 14,519 ) Loss attributable to equity method investments - - ( 25,058 ) ( 25,058 ) Carrying value at the end of the period $ 30,033 $ - $ 14,109 $ 44,142 Net unrealized gains and losses recognized in the years ended June 30, 2021, 2020 and 2019 for equity investments in non-marketable and marketable securities still held as of those respective dates were a gain of $14.5 million, a loss of $14.5 million, and a loss of $15.0 million, respectively. (7) Accrued Expenses Accrued expenses at June 30, 2021 and June 30, 2020 consist of the following (in thousands): 2021 2020 Product warranties (note 8) $ 22,032 $ 21,132 Consulting and professional fees 21,246 18,740 Value added taxes and other taxes due 26,542 26,627 Employee related costs 199,917 148,383 Liability on receivables sold with recourse (note 17) 8,163 6,647 Accrued interest 8,338 8,313 Logistics and occupancy costs 14,954 6,350 Inventory in transit 7,146 21,679 Other 12,261 12,482 Total accrued expenses $ 320,599 $ 270,353 - 71 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (8) Product Warranties We include the liability for warranty costs in accrued expenses in our consolidated balance sheets. Changes in the liability for product warranty for the years ended June 30, 2021 and June 30, 2020 are as follows (in thousands): 2021 2020 Balance at the beginning of the period $ 21,132 $ 19,625 Warranty accruals for the period 14,366 14,167 Warranty costs incurred for the period ( 14,858 ) ( 12,229 ) Foreign currency translation adjustments 1,392 ( 431 ) Balance at the end of the period $ 22,032 $ 21,132 (9) Debt Debt at June 30, 2021 and June 30, 2020 consists of the following (in thousands): 2021 2020 Short-term debt $ 12,000 $ 12,000 Deferred borrowing costs - ( 13 ) Short-term debt, net 12,000 11,987 - Long-term debt $ 646,000 $ 1,168,000 Deferred borrowing costs ( 2,649 ) ( 3,867 ) Long-term debt, net $ 643,351 $ 1,164,133 Total debt $ 655,351 $ 1,176,120 Credit Facility On April 17, 2018, we entered into an amended and restated credit agreement (the “Revolving Credit Agreement”), as borrower, with lenders MUFG Union Bank, N.A., as administrative agent, joint lead arranger, joint book runner, swing line lender and letter of credit issuer, and Westpac Banking Corporation, as syndication agent, joint lead arranger and joint book runner. The Revolving Credit Agreement, among other things, provided a senior unsecured revolving credit facility of $ 800.0 million, with an uncommitted option to increase the revolving credit facility by an additional $ 300.0 million. Additionally, on April 17, 2018, ResMed Limited entered into a Syndicated Facility Agreement (the “Term Credit Agreement”), as borrower, with lenders MUFG Union Bank, N.A., as administrative agent, joint lead arranger and joint book runner, and Westpac Banking Corporation, as syndication agent, joint lead arranger and joint book runner. The Term Credit Agreement, among other things, provides ResMed Limited a senior unsecured term credit facility of $ 200.0 million. On November 5, 2018, we entered into a first amendment to the Revolving Credit Agreement to, among other things, increase the size of our senior unsecured revolving credit facility from $ 800.0 million to $ 1.6 billion, with an uncommitted option to increase the revolving credit facility by an additional $ 300.0 million. Our obligations under the Revolving Credit Agreement are guaranteed by certain of our direct and indirect U.S. subsidiaries, and ResMed Limited’s obligations under the Term Credit Agreement are guaranteed by us and certain of our direct and indirect U.S. subsidiaries. The Revolving Credit Agreement and Term Credit Agreement contain customary covenants, including, in each case, a financial covenant that requires that we maintain a maximum leverage ratio of funded debt to EBITDA (as defined in the Revolving Credit Agreement and Term Credit Agreement, as applicable). The entire principal amounts of the revolving credit facility and term credit facility, and, in each case, any accrued but unpaid interest may be declared immediately due and payable if an event of default occurs, as defined in the Revolving Credit Agreement and the Term Credit Agreement, as applicable. Events of default under the Revolving Credit Agreement and the Term Credit Agreement include, in each case, failure to make payments when due, the occurrence of a default in the performance of any covenants in the respective agreements or related documents, or certain changes of control of us, or the respective guarantors of the obligations borrowed under the Revolving Credit Agreement and Term Credit Agreement. - 72 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements The Revolving Credit Agreement and Term Credit Agreement each terminate on April 17, 2023, when all unpaid principal and interest under the loans must be repaid. Amounts borrowed under the Term Credit Agreement will also amortize on a semi-annual basis, with a $ 6.0 million principal payment required on each such semi-annual amortization date. The outstanding principal amounts will bear interest at a rate equal to LIBOR plus 0.75 % to 1.50 % (depending on the then-applicable leverage ratio) or the Base Rate (as defined in the Revolving Credit Agreement and the Term Credit Agreement, as applicable) plus 0.0 % to 0.50 % (depending on the then-applicable leverage ratio). At June 30, 2021, the interest rate that was being charged on the outstanding principal amounts was 0.9 %. An applicable commitment fee of 0.100 % to 0.175 % (depending on the then-applicable leverage ratio) applies on the unused portion of the revolving credit facility. As of June 30, 2021, we had $ 1.6 billion available for draw down under the revolving credit facility. We are required to disclose the fair value of financial instruments for which it is practicable to estimate the value, even though these instruments are not recognized at fair value in the consolidated balance sheets. As the Revolving Credit and Term Credit Agreements’ interest rate is calculated as LIBOR plus the spreads described above, its carrying amount is equivalent to its fair value as at June 30, 2021 and June 30, 2020, which was $ 158.0 million and $ 680.0 million, respectively. Quoted market prices in active markets for identical liabilities based inputs (Level 1) were used to estimate fair value. 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 (collectively referred to as the “Senior Notes”). Our obligations under the Note Purchase Agreement and the Senior Notes are unconditionally and irrevocably guaranteed by certain of our direct and indirect U.S. subsidiaries, including ResMed Corp., ResMed Motor Technologies Inc., Birdie Inc., Inova Labs, Inc., Brightree LLC, Brightree Home Health & Hospice LLC, Brightree Patient Collections LLC, ResMed Operations Inc., HEALTHCAREfirst Holding Company, HCF Holdco Company, HEALTHCAREfirst, Inc., CareFacts Information Systems, LLC and Lewis Computer Services, LLC, MatrixCare Holdings Inc., MatrixCare, Inc., Reciprocal Labs Corporation and ResMed SaaS Inc., under a Subsidiary Guaranty Agreement dated as of July 10, 2019. The net proceeds from this transaction were used to pay down borrowings on our Revolving Credit Agreement. Under the terms of the Note Purchase Agreement, we agreed to customary covenants including with respect to our corporate existence, transactions with affiliates, and mergers and other extraordinary transactions. We also agreed that, subject to limited exceptions, we will maintain a ratio of consolidated funded debt to consolidated EBITDA (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. We are required to disclose the fair value of financial instruments for which it is practicable to estimate the value, even though these instruments are not recognized at fair value in the consolidated balance sheets. As of June 30, 2021, the Senior Notes have a carrying amount of $ 500.0 million, excluding deferred borrowing costs, and an estimated fair value of $ 530.4 million. Quoted market prices in active markets for identical liabilities based inputs (Level 1) were used to estimate fair value. At June 30, 2021, we were in compliance with our debt covenants and there was $ 658.0 million outstanding under the Revolving Credit Agreement, Term Credit Agreement and Senior Notes. (10) Leases (a) Leases where ResMed is the Lessee We determine whether a contract is, or contains, a lease at inception. ROU assets represent our right to use an underlying asset during the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at lease commencement based upon the estimated present value of unpaid lease payments over the lease term. We use our incremental borrowing rate based on the information available at lease commencement in determining the present value of unpaid lease payments. ROU assets also include any lease payments made at or before lease commencement and any initial direct costs incurred, and exclude any lease incentives received. - 73 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements We determine the lease term as the non-cancellable period of the lease, and may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Leases with a term of 12 months or less are not recognized on the balance sheet. Some of our leases include variable lease payments that are based on costs incurred or actual usage, or adjusted periodically based on an index or a rate. Our leases do not contain any residual value guarantees and we do not account for lease and non-lease components as a single lease component. Operating leases are included in operating lease right-of-use assets and operating lease liabilities on our consolidated balance sheets. We lease certain office space, warehouses and distribution centers, manufacturing facilities, vehicles, and equipment with remaining lease terms ranging from less than 1 year to 15 years, some of which include options to extend or terminate the leases. Operating lease costs were $ 35.5 million for the year ended June 30, 2021 and $ 26.5 million for the year ended June 30, 2020. Short-term and variable lease costs were not material for the years ended June 30, 2021 and June 30, 2020. Future lease payments under non-cancellable leases as of June 30, 2021 and for the periods ending June 30 of the years indicated below were as follows (in thousands): Total 2022 2023 2024 2025 2026 Thereafter Minimum lease payments $ 158,247 $ 27,272 $ 23,163 $ 16,680 $ 13,564 $ 13,168 $ 64,400 Less: imputed interest ( 19,883 ) Total lease liabilities $ 138,364 As of June 30, 2021, we had additional operating lease commitments of $ 0.6 million for office space that have not yet commenced. These leases will commence during the year ended June 30, 2022 with lease terms of 2 years to 3 years. The supplemental information related to operating leases for the years ended June 30, 2021 and June 30, 2020 was as follows (in thousands): 2021 2020 Weighted-average inputs: Weighted-average remaining lease term (years) 8.5 9.1 Weighted-average discount rate 3.0 % 3.2 % Cash flow information: Operating cash flows paid for amounts included in the measurement of lease liabilities $ 27,734 $ 24,104 Right of use assets obtained in exchange for new lease liabilities: $ 36,130 $ 51,663 (b) Leases where ResMed is the Lessor We lease sleep and respiratory medical devices to customers primarily as a means to comply with local health insurer requirements in certain foreign geographies. Device rental contracts include sales-type and operating leases, and contract terms vary by customer and include options to terminate or extend the contract. When lease contracts also include the sale of masks and accessories, we allocate contract consideration to those items on a relative standalone price basis and recognize revenue when control transfers to the customer. The components of lease revenue for the years ended June 30, 2021 and June 30, 2020 were as follows (in thousands): 2021 2020 Sales-type lease revenue $ 9,758 $ 13,457 Operating lease revenue 93,431 87,874 Total lease revenue $ 103,189 $ 101,331 Our net investment in sales-type leases were classified in the consolidated balance sheets as of June 30, 2021 and June 30, 2020 as follows (in thousands): 2021 2020 Accounts receivable, net $ 8,026 $ 7,697 Prepaid taxes and other non-current assets 6,214 6,957 Total $ 14,240 $ 14,654 - 74 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements Maturities of sales-type leases as of June 30, 2021 were as follows (in thousands): Total 2022 2023 2024 2025 2026 Thereafter Remaining lease payments $ 15,596 $ 8,378 $ 5,173 $ 1,699 $ 174 $ 172 $ - Less: imputed interest ( 1,356 ) Present value of remaining lease payments $ 14,240 (11) Stockholders’ Equity Common Stock. On February 21, 2014, our board of directors approved a new share repurchase program, authorizing us to acquire up to an aggregate of 20.0 million shares of our common stock. The program allows us to repurchase shares of our common stock from time to time for cash in the open market, or in negotiated or block transactions, as market and business conditions warrant and subject to applicable legal requirements. The 20.0 million shares the new program authorizes us to purchase are in addition to the shares we repurchased on or before February 21, 2014 under our previous programs. There is no expiration date for this program, and the program may be accelerated, suspended, delayed or discontinued at any time at the discretion of our board of directors. All share repurchases since February 21, 2014 have been executed in accordance with this program. We have temporarily suspended our repurchase program and, accordingly, did not repurchase any shares during fiscal years 2021 or 2020. As of June 30, 2021, we have repurchased a total of 41.8 million shares at a cost of $ 1.6 billion . Shares that are repurchased are classified as “treasury stock pending future use” and reduce the number of shares outstanding used in calculating earnings per share. At June 30, 2021, 12.9 million additional shares can be repurchased under the approved share repurchase program. Preferred Stock. In April 1997, our board of directors authorized 2,000,000 shares of $ 0.01 par value preferred stock. No such shares were issued or outstanding at June 30, 2021. Stock Options and Restricted Stock Units. We have granted stock options, restricted stock units (“RSUs”) and performance restricted stock units (“PRSUs”) to personnel, including officers and directors, in accordance with the ResMed Inc. 2009 Incentive Award Plan (the “2009 Plan”). Options and restricted stock units vest over one year to four years and the options have expiration dates of seven years from the date of grant. We have granted the options with an exercise price equal to the market value as determined at the date of grant. We have granted PRSUs that are subject to a market condition, with the ultimate realizable number of PRSUs dependent on relative total stockholder return over a period of three years , up to a maximum amount to be issued under the award of 225 % of the original grant. At the annual meeting of our stockholders in November 2017, our stockholders approved an amendment and restatement to the 2009 Plan to increase the number of shares of common stock that may be issued or transferred pursuant to awards under the 2009 Plan by 7.4 million. The amendment and restatement imposes a maximum award amount which may be granted under the 2009 Plan to non-employee director in a calendar year, which when taken together with any other cash fees earned for services as a non-employee director during the calendar year, has a total value of $ 0.7 million, or $ 1.2 million in the case of a non-employee director who is also serving as chairman of our board of directors. The amendment and restatement also increased the maximum amount payable pursuant to cash-denominated performance awards granted in any calendar year from $ 3.0 million to $ 5.0 million. In addition, the amendment and restatement extended the existing prohibition on the payment of dividends or dividend equivalents on unvested awards to apply to all awards, including time-based restricted stock, deferred stock and stock payment. The term of the 2009 Plan was extended by four years so that the plan expires on September 11, 2027 . The maximum number of shares of our common stock authorized for issuance under the 2009 Plan is 51.1 million. The number of securities remaining available for future issuance under the 2009 Plan at June 30, 2021 is 15.5 million. The number of shares of our common stock available for issuance under the 2009 Plan will be reduced by (i) 2.8 shares for each one share of common stock delivered in settlement of any “full-value award,” which is any award other than a stock option, stock appreciation right or other award for which the holder pays the intrinsic value and (ii) one share for each share of common stock delivered in settlement of all other awards. The maximum number of shares, which may be subject to awards granted under the 2009 Plan to any individual during any calendar year, may not exceed 3 million shares of our common stock (except in a participant’s initial year of hiring up to 4.5 million shares of our common stock may be granted). In certain regions, shares are withheld on behalf of employees to satisfy statutory tax withholding requirements upon exercise or vesting of awards. The number of shares withheld is based upon the closing price of our common stock on the trading day of the applicable settlement date. The remaining shares are delivered to the recipient as shares of our common stock. The amount remitted to the tax authorities for the employees’ tax obligation is reflected as a financing activity on our consolidated statements of cash flows. Shares withheld by us as a result of the net settlement are not considered issued and outstanding and are added to the reserves of the 2009 Plan. - 75 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements The total fair value of RSUs and PRSUs that vested during the years ended June 30, 2021, 2020 and 2019, was $ 59.6 million, $ 56.8 million and $ 52.3 million, respectively. The following table summarizes the activity of RSUs, including PRSUs, during year ended June 30, 2021 (in thousands, except years and per share amounts) : Restricted ‎ Stock ‎ Units Weighted ‎ Average ‎ Grant-Date ‎ Fair Value Weighted ‎ Average ‎ Remaining ‎ Contractual ‎ Term in Years Outstanding at beginning of period 1,132 $ 103.77 1.6 Granted 277 209.02 Vested* ( 704 ) 84.87 Performance factor adjustment 209 - Expired / cancelled ( 34 ) 119.64 Forfeited ( 5 ) 119.64 Outstanding at end of period 875 $ 145.19 1.5 * Includes 235 thousand shares netted for tax. The following table summarizes option activity during the year ended June 30, 2021 (in thousands, except years and per share amounts) : Options Weighted ‎ Average ‎ Exercise ‎ Price Weighted ‎ Average ‎ Remaining ‎ Contractual ‎ Term in Years Outstanding at beginning of period 1,068 $ 89.05 4.4 Granted 56 210.18 Exercised ( 64 ) 62.05 Forfeited - - Outstanding at end of period 1,060 $ 97.01 3.7 Options exercisable at end of period 804 $ 82.11 3.2 Options vested and expected to vest at end of period 1,050 $ 96.37 3.7 The aggregate intrinsic value of options exercised during the fiscal years 2021, 2020 and 2019, was $ 8.9 million, $ 31.2 million and $ 15.1 million, respectively. As at June 30, 2021, the aggregate intrinsic value of options outstanding, exercisable, and vested and expected to vest were $ 158.5 million, $ 132.1 million and $ 157.6 million respectively. Employee Stock Purchase Plan (the “ESPP”). Under the ESPP, we offer participants the right to purchase shares of our common stock at a discount during successive offering periods. Each offering period under the ESPP will be for a period of time determined by the board of directors’ compensation committee of no less than 3 months and no more than 27 months. The purchase price for our common stock under the ESPP will be the lower of 85 % of the fair market value of our common stock on the date of grant or 85 % of the fair market value of our common stock on the date of purchase. An individual participant cannot subscribe for more than $ 25,000 in common stock during any calendar year. At June 30, 2021, the number of shares remaining available for future issuance under the ESPP is 1.8 million shares. During years ended June 30, 2021, 2020 and 2019, we issued 229,000 , 265,000 and 285,000 shares to our employees in two offerings and we recognized $ 10.9 million, $ 8.0 million and $ 6.4 million, respectively, of stock compensation expense associated with the ESPP. Stock–based Employee compensation. We measure the compensation expense of all stock-based awards at fair value on the grant date. We estimate the fair value of stock options and purchase rights granted under the ESPP using the Black-Scholes valuation model. The fair value of restricted stock units is equal to the market value of the underlying shares as determined at the grant date less the fair value of dividends that holders are not entitled to, during the vesting period. The fair value of performance restricted stock units is measured using a Monte-Carlo simulation valuation model. We recognize the fair value as compensation expense using the straight-line method over the service period for awards expected to vest. - 76 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements We estimate the fair value of stock options granted under our stock option plans and purchase rights granted under the ESPP using the assumptions in the following tables. The risk-free interest rate is estimated using the U.S. Treasury yield curve and is based on the term of the award. The expected term of awards is estimated from the vesting period of the award, as well as historical exercise behavior, and represents the period of time the awards granted are expected to be outstanding. Expected volatility is estimated based upon the historical volatility of ResMed stock. We estimate the fair value of stock options granted under our stock option plans and purchase rights granted under the ESPP using the following assumptions for the years ended June 30, 2021, 2020 and 2019: 2021 2020 2019 Stock options: Weighted average grant date fair value $ 53.67 $ 32.14 $ 21.92 Weighted average risk-free interest rate 0.37 % 1.58 % 2.96 % Expected life in years 4.9 4.9 4.9 Dividend yield 0.75 % 1.07 % 1.34 % - 1.46 % Expected volatility 31 % 25 % 23 % ESPP purchase rights: Weighted average grant date fair value $ 48.18 $ 31.82 $ 22.12 Weighted average risk-free interest rate 0.1 % 1.6 % 2.4 % Expected life in years 6 months 6 months 6 months Dividend yield 0.79 % - 0.98 % 0.98 % - 1.42 % 1.40 % - 1.47 % Expected volatility 30 % - 60 % 23% - 60% 23 % The following table summarizes the total stock-based compensation costs incurred and the associated tax benefit recognized during the years ended June 30, 2021, 2020 and 2019 (in thousands): 2021 2020 2019 Cost of sales $ 4,153 $ 3,703 $ 3,043 Selling, general and administrative expenses 51,727 47,265 42,700 Research and development expenses 8,047 6,591 6,330 Stock-based compensation costs 63,927 57,559 52,073 Tax benefit ( 23,346 ) ( 39,534 ) ( 26,658 ) Stock-based compensation costs, net of tax benefit $ 40,581 $ 18,025 $ 25,415 At June 30, 2021, there was $ 94.3 million in unrecognized compensation costs related to unvested stock-based compensation arrangements. This is expected to be recognized over a weighted average period of 2.2 years. (12) Earnings Per Share We compute basic earnings per share by dividing the net income available to common stockholders by the weighted average number of shares of common stock outstanding. For purposes of calculating diluted earnings per share, the denominator includes both the weighted average number of shares of common stock outstanding and the number of dilutive common stock equivalents such as stock options and restricted stock units. The weighted average number of outstanding stock options and restricted stock units not included in the computation of diluted earnings per share were 141,000 , 164,000 and 200,000 for the years ended June 30, 2021, 2020 and 2019, respectively, as the effect would have been anti-dilutive. Basic and diluted earnings per share for the years ended June 30, 2021, 2020 and 2019 are calculated as follows (in thousands except per share data): 2021 2020 2019 Numerator: Net income $ 474,505 $ 621,674 $ 404,592 Denominator: Basic weighted-average common shares outstanding 145,313 144,338 143,111 Effect of dilutive securities: Stock options and restricted stock units 1,138 1,314 1,373 Diluted weighted average shares 146,451 145,652 144,484 Basic earnings per share $ 3.27 $ 4.31 $ 2.83 Diluted earnings per share $ 3.24 $ 4.27 $ 2.80 - 77 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (13) Other, net Other, net, in the consolidated statements of income is comprised of the following for the years ended June 30, 2021, 2020 and 2019 (in thousands): 2021 2020 2019 Gain (loss) on foreign currency transactions and hedging, net $ ( 753 ) $ 1,331 $ 1,712 Unrealized gains (losses) on investments (note 6) 14,515 (14,519) (15,007) Other 1,054 1,031 2,569 Total Other, net $ 14,816 $ ( 12,157 ) $ ( 10,726 ) (14) Income Taxes Income before income taxes for the years ended June 30, 2021, 2020 and 2019, was taxed under the following jurisdictions (in thousands): 2021 2020 2019 U.S. $ 71,867 $ 60,548 $ ( 34,468 ) Non-U.S. 811,795 672,540 553,315 Income before income taxes $ 883,662 $ 733,088 $ 518,847 The provision for income taxes is presented below (in thousands): 2021 2020 2019 Current: Federal $ ( 115,109 ) $ 9,790 $ 28,658 State 9,041 6,898 7,595 Non-U.S. 531,812 124,602 127,540 425,744 141,290 163,793 Deferred: Federal ( 22,791 ) ( 13,000 ) ( 30,456 ) State ( 4,205 ) ( 3,335 ) ( 5,408 ) Non-U.S. 10,409 ( 13,541 ) ( 13,674 ) ( 16,587 ) ( 29,876 ) ( 49,538 ) Provision for income taxes $ 409,157 $ 111,414 $ 114,255 The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. federal income tax rate of 21 % for the years ended June 30, 2021, 2020 and 2019, to pretax income as a result of the following (in thousands): 2021 2020 2019 Taxes computed at statutory U.S. rate $ 185,569 $ 153,949 $ 108,958 Increase (decrease) in income taxes resulting from: State income taxes, net of U.S. tax benefit 4,836 3,563 2,186 Research and development credit ( 20,257 ) ( 13,595 ) ( 12,953 ) Change in valuation allowance ( 3,785 ) 7,216 ( 1,118 ) Effect of non-U.S. tax rates ( 12,130 ) ( 20,935 ) 25,045 Foreign tax credits ( 7,210 ) ( 4,026 ) ( 7,806 ) Stock-based compensation expense ( 4,498 ) ( 20,696 ) ( 11,534 ) Uncertain tax position 248,773 - - Transition tax - - 6,038 Other 17,859 5,938 5,439 Provision for income taxes $ 409,157 $ 111,414 $ 114,255 We reported net deferred tax assets and liabilities in our consolidated balance sheets at June 30, 2021 and June 30, 2020, as follows (in thousands): 2021 2020 Non-current deferred tax asset $ 79,904 $ 41,065 Non-current deferred tax liability ( 11,319 ) ( 13,011 ) Net deferred tax asset $ 68,585 $ 28,054 - 78 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements The components of our deferred tax assets and liabilities at June 30, 2021 and June 30, 2020, are as follows (in thousands): 2021 2020 Deferred tax assets: Employee liabilities $ 30,080 $ 21,272 Tax credit carry overs 13,753 9,295 Inventories 11,734 9,129 Provision for warranties 4,149 3,585 Provision for doubtful debts 7,334 6,594 Net operating loss carryforwards 33,377 38,035 Capital loss carryover 6,912 10,864 Stock-based compensation expense 6,080 6,035 Deferred revenue 17,839 15,343 Research and development capitalization 58,789 39,195 Lease liabilities 25,751 - Other ( 5,851 ) ( 3,006 ) 209,947 156,341 Less valuation allowance ( 13,106 ) ( 16,891 ) Deferred tax assets 196,841 139,450 Deferred tax liabilities: Goodwill and other intangibles ( 104,563 ) ( 111,396 ) Right of use assets ( 23,693 ) - Deferred tax liabilities ( 128,256 ) ( 111,396 ) Net deferred tax asset $ 68,585 $ 28,054 As of June 30, 2021, we had $ 25.1 million of U.S. federal and state net operating loss carryforwards and $ 7.6 million of non-U.S. net operating loss carryforwards, which expire in various years beginning in 2022 or carry forward indefinitely. The valuation allowance at June 30, 2021 relates to a provision for uncertainty of the utilization of net operating loss carryforwards of $ 0.8 million and capital loss and other items of $ 12.3 million. We believe that it is more likely than not that the benefits of deferred tax assets, net of any valuation allowance, will be realized. A substantial portion of our manufacturing operations and administrative functions in Singapore operate under certain tax holidays and tax incentive programs that will expire in whole or in part at various dates through June 30, 2030. The end of certain tax holidays may be extended if specific conditions are met. The net impact of these tax holidays and tax incentive programs increased our net income by $ 33.6 million ($ 0.23 per diluted share) for the year ended June 30, 2021, $ 43.8 million ($ 0.30 per diluted share) for the year ended June 30, 2020, and $ 20.3 million ($ 0.14 per diluted share) for the year ended June 30, 2019. As a result of the Tax Cuts and Jobs Act of 2017 (the ”U.S. Tax Act”), we have treated all non-U.S. historical earnings as taxable, which resulted in additional tax expense of $ 6.0 million during the year ended June 30, 2019, which related to final treasury regulations issued and temporary guidance published during the year and is payable over eight years . Therefore, future repatriation of cash held by our non-U.S. subsidiaries will generally not be subject to U.S. federal tax if repatriated. The total amount of these undistributed earnings at June 30, 2021 amounted to approximately $ 3.2 billion. On June 14, 2019, the U.S. Treasury Department issued final and temporary regulations relating to the repatriation of non-U.S. earnings. As a result, in the event our non-U.S. earnings had not been permanently reinvested, approximately $ 202.6 million in U.S. federal deferred taxes and $ 5.1 million in U.S. state deferred taxes would have been recognized in the consolidated financial statements. In accounting for uncertainty in income taxes, we recognize a tax benefit in the financial statements for an uncertain tax position only if management’s assessment is that the position is “more likely than not” (that is, a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term “tax position” refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for annual periods. We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statements of income. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets. Our income tax returns are based on calculations and assumptions subject to audit by various tax authorities. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws. We regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes. Any final assessment resulting from tax audits may result in material changes to our past or future taxable income, tax payable or deferred tax assets, and may require us to pay penalties and interest that could materially adversely affect our financial results . - 79 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements 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 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. 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. 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 described above, tax years 2017 to 2020 remain subject to future examination by the major tax jurisdictions in which we are subject to tax. (15) Segment Information We have two operating segments, which are the Sleep and Respiratory Care segment and the SaaS segment. We evaluate the performance of our segments based on net sales and income from operations. The accounting policies of the segments are the same as those described in note 2 – significant accounting policies. Segment net sales and segment income from operations do not include inter-segment profits and revenue is allocated to a geographic area based on where the products are shipped to or where the services are performed. Certain items are maintained at the corporate level and are not allocated to the segments. The non-allocated items include corporate headquarters costs including stock-based compensation, amortization expense of acquired intangibles, restructuring expenses, litigation settlement expenses, acquisition related expenses, deferred revenue fair value adjustment, net interest expense, loss attributable to equity method investments, and other, net. We neither discretely allocate assets to our operating segments, nor does our Chief Operating Decision Maker evaluate the operating segments using discrete asset information. - 80 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements The table below presents a reconciliation of net revenues, depreciation and amortization and net operating profit by reportable segments for the years ended June 30, 2021, 2020 and 2019 (in thousands): 2021 2020 2019 Net revenue by segment Total Sleep and Respiratory Care $ 2,823,235 $ 2,602,381 $ 2,330,783 Software as a Service 373,590 356,734 281,137 Deferred revenue fair value adjustment (1) - ( 2,102 ) ( 5,348 ) Total Software as a Service 373,590 354,632 275,789 Total $ 3,196,825 $ 2,957,013 $ 2,606,572 Depreciation and amortization by segment Sleep and Respiratory Care $ 73,151 $ 69,444 $ 70,094 Software as a Service 5,230 3,850 3,250 Amortization of acquired intangible assets and corporate assets 78,377 81,556 77,451 Total $ 156,758 $ 154,850 $ 150,795 Net operating profit by segment Sleep and Respiratory Care $ 1,036,712 $ 934,697 $ 766,068 Software as a Service 93,037 82,152 74,886 Total $ 1,129,749 $ 1,016,849 $ 840,954 Reconciling items Corporate costs $ 141,193 $ 125,993 $ 124,682 Amortization of acquired intangible assets 76,205 79,695 74,938 Restructuring expenses 8,673 - 9,401 Litigation settlement expenses - ( 600 ) 41,199 Acquisition related expenses - - 6,123 Deferred revenue fair value adjustment (1) - 2,102 5,348 Interest expense (income), net 23,627 39,356 33,857 Loss attributable to equity method investments 11,205 25,058 15,833 Other, net ( 14,816 ) 12,157 10,726 Income before income taxes $ 883,662 $ 733,088 $ 518,847 (1) The deferred revenue fair value adjustment is a purchase price accounting adjustment related to MatrixCare which was acquired on November 13, 2018. The following table summarizes our net revenue disaggregated by segment, product and region for the years ended June 30, 2021, 2020 and 2019 (in thousands): 2021 2020 2019 U.S., Canada and Latin America Devices $ 863,661 $ 792,766 $ 743,066 Masks and other 841,452 779,561 677,430 Total Sleep and Respiratory Care $ 1,705,113 $ 1,572,327 $ 1,420,496 Software as a Service 373,590 354,632 275,789 Total $ 2,078,703 $ 1,926,959 $ 1,696,285 Combined Europe, Asia and other markets Devices $ 746,379 $ 715,056 $ 618,525 Masks and other 371,743 314,998 291,762 Total Sleep and Respiratory Care $ 1,118,122 $ 1,030,054 $ 910,287 Global revenue Devices $ 1,610,040 $ 1,507,822 $ 1,361,591 Masks and other 1,213,195 1,094,559 969,192 Total Sleep and Respiratory Care $ 2,823,235 $ 2,602,381 $ 2,330,783 Software as a Service 373,590 354,632 275,789 Total $ 3,196,825 $ 2,957,013 $ 2,606,572 Revenue information by geographic area for the years ended June 30, 2021, 2020 and 2019 is summarized below (in thousands): 2021 2020 2019 United States $ 1,962,721 $ 1,828,575 $ 1,588,655 Rest of the World 1,234,104 1,128,438 1,017,917 Total $ 3,196,825 $ 2,957,013 $ 2,606,572 - 81 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements Long-lived assets of geographic areas are those assets used in our operations in each geographical area, and excludes goodwill, other intangible assets, and deferred tax assets. Long-lived assets by geographic area as of June 30, 2021, 2020 and 2019, is summarized below (in thousands): 2021 2020 Australia 186,289 162,490 United States $ 159,815 $ 164,155 Singapore 64,182 39,977 Rest of the World 53,204 50,713 Total $ 463,490 $ 417,335 (16) Employee Retirement Plans We contribute to a number of employee retirement plans for the benefit of our employees. Details of the main plans are as follows: Australia We contribute to defined contribution plans for each employee resident in Australia at the rate of approximately 9.5 % of salaries. Employees may contribute additional funds to the plans. All Australian employees, after serving a qualifying period, are entitled to benefits on retirement, disability or death. Our total contributions to the plans for the years ended June 30, 2021, 2020 and 2019, were $ 10.7 million, $ 9.5 million and $ 10.0 million, respectively. United States We sponsor a defined contribution plan available to substantially all domestic employees. Company contributions to this plan are based on a percentage of employee contributions to a maximum of 4.0 % of the employee’s salary. Our total contributions to the plan were $ 9.6 million, $ 9.3 million and $ 6.7 million in fiscal 2021, 2020 and 2019, respectively. Singapore We sponsor a defined contribution plan available to substantially all domestic employees. Company contributions to this plan are based on a percentage of employee contributions to a maximum of 17.0 % of the employee’s salary. Our total contributions to the plan were $ 2.5 million, $ 2.9 million and $ 2.6 million in fiscal 2021, 2020 and 2019, respectively. (17) Legal Actions, Contingencies and Commitments Litigation In the normal course of business, we are subject to routine litigation incidental to our business. While the results of this litigation cannot be predicted with certainty, we believe that their final outcome will not, individually or in aggregate, have a material adverse effect on our consolidated financial statements taken as a whole. Taxation Matters We are under audit by the ATO in three different cycles: tax years 2009 to 2013, tax years 2014 to 2017 and tax year 2018. Please refer to note 14 – Income Taxes, where we have provided an update in relation to this tax dispute in accordance with ASC 740 Income Taxes . Contingent Obligations Under Recourse Provisions We use independent financing institutions to offer some of our customers financing for the purchase of some of our products. Under these arrangements, if the customer qualifies under the financing institutions’ credit criteria and finances the transaction, the customers repay the financing institution on a fixed payment plan. For some of these arrangements, the customer’s receivable balance is with limited recourse whereby we are responsible for repaying the financing company should the customer default. We record a contingent provision, which is estimated based on historical default rates. This is applied to receivables sold with recourse and is recorded in accrued expenses. During the year ended June 30, 2021 and 2020, receivables sold with limited recourse were $ 153.0 million and $ 154.5 million, respectively. As of June 30, 2021, the maximum exposure on outstanding receivables sold with recourse and contingent provision were $ 30.2 million and $ 8.2 million, respectively. As of June 30, 2020, the maximum exposure on outstanding receivables sold with recourse and contingent provision were $ 22.8 million and $ 6.6 million, respectively. - 82 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements Commitments In the normal course of business, we enter into agreements to purchase goods or services that are not cancelable without penalty, primarily related to supply arrangements. Obligations under our purchase agreements at June 30, 2021 were as follows (in thousands): Fiscal Years Ending June 30 Total 2022 2023 2024 2025 2026 Thereafter Minimum purchase obligations $ 1,100,839 $ 1,099,419 $ 994 $ 426 $ - $ - $ - (18) Business Combinations Fiscal years ended June 30, 2021 and June 30, 2020 During the years ended June 30, 2021 and 2020 we did no t complete any material business combinations or record material acquisition-related expenses. Fiscal year ended June 30, 2019 MatrixCare On November 13, 2018, we completed the acquisition of 100 % of the shares in MatrixCare, Inc. and its subsidiaries (“MatrixCare”), a provider of software solutions for skilled nursing, life plan communities, senior living and private duty, for base purchase consideration paid of $ 750.0 million. This acquisition has been accounted for as a business combination using purchase accounting and included in our consolidated financial statements from November 13, 2018. The acquisition was paid for using borrowings under our revolving credit facility. During the year ended June 30, 2019, revenues of $ 79.2 million and losses from operations of $ 9.1 million related to MatrixCare were included in the consolidated statement of comprehensive income. The losses from operations for the year ended June 30, 2019 was negatively impacted by $ 19.0 million of amortization of acquired intangible assets and fair value purchase price adjustments relating to deferred revenue of $ 5.3 million. Excluding the impact of these items, revenue for the year ended June 30, 2019 was $ 84.6 million and income from operations was $ 15.3 million. The acquisition is considered a material business combination and accordingly unaudited pro forma information is presented below for the year ended June 30, 2019. The pro forma results were prepared using the acquisition method of accounting and combine our historical results and MatrixCare’s for the year ended June 30, 2019, including the effects of the business combination, primarily amortization expense related to the fair value of identifiable intangible assets acquired, interest expense associated with the financing obtained by us in connection with the acquisition, and the elimination of incurred acquisition-related costs. The pro forma financial information presented below is not necessarily indicative of the results of operations that would have been achieved if the acquisition occurred at the beginning of the earliest period presented, nor is it intended to be a projection of future results. The following table summarized unaudited pro forma consolidated results for the year ended June 30, 2019 (in thousands, except per share information): 2019 Revenue $ 2,652,059 Net income $ 446,721 Basic earnings per share $ 3.12 Diluted earnings per share $ 3.09 The unaudited pro forma consolidated results for the year ended June 30, 2019 reflects primarily the following pro forma pre-tax adjustments:  Net amortization expense related to the fair value of identifiable intangible assets acquired of $ 0.6 million.  Net interest expense associated with debt that was issued to finance the acquisition of $ 2.6 million.  Elimination of pre-tax acquisition-related costs incurred by ResMed and MatrixCare of $ 3.7 million and $ 16.7 million, respectively.  Net income tax expense of $ 1.8 million. - 83 - Table of Contents PART II Item 8 RESMED INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (19) Restructuring Expenses In November 2020, we closed our Portable Oxygen Concentrator 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 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 operations. The restructure was completed as of June 30, 2021. During the year ended June 30, 2020, we did no t incur material restructuring expenses. During the year ended June 30, 2019, we incurred restructuring expenses of $ 9.4 million associated with the reorganization, rationalization and relocation of some of our research and development and SaaS operations including the closure of our German research and development site. We recorded the full amount of $ 9.4 million during the year ended June 30, 2019, within our operating expenses, which was separately disclosed as restructuring expenses and had $ 5.4 million remaining in our accruals at year end, which was paid during the year ended June 30, 2020. The restructuring expenses consisted primarily of severance payments to employees and contract exit costs associated with several impacted sites. (20) Litigation Settlement Expenses We did no t recognize any material litigation settlement expenses during the years ended June 30, 2021 and 2020. During the year ended June 30, 2019 we recognized litigation settlement expenses of $ 41.2 million associated with a tentative agreement with the United States Department of Justice to civilly resolve the investigation of certain marketing practices. We finalized the settlement in December 2019 and announced it in January 2020 on terms that were consistent with our prior reserve. The settlement amount consisted of the payment to the United States and to various states that joined the action, as well as attorneys’ fees and other costs to the private litigants that filed the suits that the Department of Justice pursued. We also entered into a corporate integrity agreement with the Office of the Inspector General of the U.S. Department of Health and Human Services with accompanying oversight of our sales and marketing practices in the United States for five years. - 84 - Table of Contents PART II Item 8 SCHEDULE II RESMED INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES June 30, 2021, 2020 and 2019 (in thousands) Balance at ‎ Beginning ‎ of Period Charged to costs and expenses Other ‎ (deductions) Balance at ‎ End of ‎ Period Year ended June 30, 2021 Applied against asset account Allowance for trade accounts receivable (1) $ 30,013 $ 7,805 $ ( 5,680 ) $ 32,138 Year ended June 30, 2020 Applied against asset account Allowance for trade accounts receivable $ 25,171 $ 18,283 $ ( 14,946 ) $ 28,508 Year ended June 30, 2019 Applied against asset account Allowance for trade accounts receivable $ 19,258 $ 12,379 $ ( 6,466 ) $ 25,171 (1) Beginning balance is adjusted to reflect the cumulative pre-tax effect of adopting Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments” (Topic 326), effective July 1, 2021. Refer to Note 3 - New Accounting Pronouncements of the Notes to the Consolidated Financial Statements (Part II, Item 8) for additional information. See accompanying report of independent registered public accounting firm. - 85 - Table of Contents PART II Items 9 – 9B RESMED INC. AND SUBSIDIARIES ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.