What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-08-12 compared with 2021-08-17 · 194 added, 155 removed, 203 unchanged (63% of the section changed)

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During fiscal year 2022, we invested $253.6 million on research and development activities, which represents 7.1% of net revenues with a continued focus on the development and commercialization of new, innovative products and solutions that improve patient outcomes, create efficiencies for our customers and help physicians and providers better manage chronic disease and lower healthcare costs.

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

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

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

During fiscal year 2022 we continued the launch of AirSense 11, which introduces new features such as a touch screen, algorithms for patients new to therapy and digital enhancements and over-the-air update capabilities.

Due to multiple acquisitions, including Brightree in April 2016, HEALTHCAREfirst in July 2018 and MatrixCare in November 2018, and our pending acquisition of MEDIFOX DAN which is expected to close during fiscal year 2023 subject to regulatory clearances, our operations now include out-of-hospital software platforms designed to support the professionals and caregivers who help people stay healthy in the home or care setting of their choice.

These platforms comprise our SaaS business.

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Net revenue in fiscal year 2022 increased to $3,578.1 million, an increase of 12% compared to fiscal year 2021.

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

Gross profit increased for the year ended June 30, 2022 to $2,024.3 million, from $1,839.1 million for the year ended June 30, 2021, an increase of $185.2 million or 10%.

Our net income for the year ended June 30, 2022 was $779.4 million or $5.30 per diluted share compared to net income of $474.5 million or $3.24 per diluted share for the year ended June 30, 2021.

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We paid a quarterly dividend of $0.42 per share during fiscal 2022 with a total amount of $245.3 million paid to stockholders.

PART II Item 7

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

In order to provide a framework for assessing how our underlying businesses performed, excluding the effect of foreign currency fluctuations, we provide certain financial information on a “constant currency basis”, which is in addition to the actual financial information presented.

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

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

For discussion related to the results of operations and changes in financial condition for the fiscal year ended June 30, 2021 compared to fiscal year June 30, 2020, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report for the Year Ended June 30, 2021, which was filed with the United States Securities and Exchange Commission on August 16, 2021.

Impact of COVID-19

In March 2020, the World Health Organization declared the outbreak of a novel strain of coronavirus (“COVID-19”) as a pandemic.

Our primary goal during the COVID-19 pandemic is the preservation of life.

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

During the year ended June 30, 2021, we observed immaterial incremental demand for our ventilator devices and masks associated with the COVID-19 pandemic.

Although there is still substantial uncertainty, we believe the global demand for ventilators and other respiratory support devices used to treat COVID-19 patients has largely been met.

As such, we do not expect material COVID-19-generated demand for our ventilator products for the fiscal year ending June 30, 2022.

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

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

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

Although certain governments have begun to reduce or remove COVID-19 restrictions and implement vaccination programs to varying degrees, we are uncertain as to the duration and extent of the impact on demand for our sleep devices.

However, due to the nature of the installed base of existing patients using our devices, we have not seen any significant adverse impact on demand for re-supply of our masks.

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

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

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

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

Key Trends and Economic Factors Affecting Our Business

Supply Chain Disruptions

The COVID-19 pandemic has continued to impact the global supply chain, primarily through a lack of availability of raw materials and electronic components.

The lack of raw materials and electronic components is also impacting companies outside of our direct industry, which is resulting in a competitive supply environment causing higher costs, requiring us to commit to minimum purchase obligations as well as make upfront payments to our suppliers.

Additionally, we have observed a reduction in both inbound and outbound transportation capacity as a result of port closures and delays associated with the pandemic, which is causing longer lead times in receiving raw materials into and distributing finished goods out of our manufacturing facilities, in addition to increased freight costs.

These highly competitive and constrained supply chain conditions are increasing our cost of sales, which has and may continue to decrease our gross margin.

Given the ongoing uncertainty regarding the duration and extent of the COVID-19 pandemic, we are uncertain as to the duration and extent of constraint on our supply chain.

Competitor Recall

An ongoing product recall by one of our competitors, Philips, has resulted in increased demand for our sleep and respiratory care devices.

The supply chain disruptions outlined above have constrained and restricted our ability to meet this increased demand and we expect these constraints will continue into the fiscal year ending June 30, 2023.

Although there is still substantial uncertainty associated with the COVID-19 pandemic, we believe the global demand for ventilators and other respiratory support devices used to treat COVID-19 patients has largely been met.

We did not observe material incremental demand for our ventilator devices and masks associated with the pandemic during the twelve months ended June 30, 2022.

In most markets, diagnostic pathways for sleep apnea treatment, including physician practices, home medical equipment (“HME”) distributors, and sleep clinics have largely recovered towards pre-pandemic levels as vaccines and boosters roll out globally.

Likewise, we have continued to observe stabilizing patient flow in our out-of-hospital care settings within our SaaS business.

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

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

We have endeavored and continue to follow recommended actions of government and health authorities to protect our employees worldwide as we progressively reopen our offices around the world.

The pandemic has not negatively impacted our liquidity position.

Impact on Our Business

As a result of these trends, we were not able to meet all the demand available in the market during the twelve months ended June 30, 2022.

We are being allocated components from our suppliers, particularly semiconductor chips, and we are thus being forced to allocate our outbound products to our customers.

We have established an allocation process with clear

PART II Item 7

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

guiding principles that give priority to the production and delivery of devices to meet the needs of the highest acuity patients first.

Fiscal Year Ended June 30, 2022 Compared to Fiscal Year Ended June 30, 2021

Net Revenues.

Net revenue for the year ended June 30, 2022 increased to $3,578.1 million from $3,196.8 million for the year ended June 30, 2021, an increase of $381.3 million or 12% (a 13% increase on a constant currency basis).

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Year Ended June 30,

Constant Currency*

2022 2021 % Change Constant

U.S., Canada and Latin America

Devices $ 1,070,420 $ 863,661 24 %

Masks and other 911,387 841,452 8

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Software as a Service 400,829 373,590 7

Total $ 2,382,636 $ 2,078,703 15

Combined Europe, Asia and other markets

Devices $ 796,488 $ 746,379 7 % 10 %

Masks and other 399,003 371,743 7 12

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Global revenue

Devices $ 1,866,908 $ 1,610,040 16 % 17 %

Masks and other 1,310,390 1,213,195 8 9

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Software as a Service 400,829 373,590 7 7

Total $ 3,578,127 $ 3,196,825 12 13

* Constant currency numbers exclude the impact of movements in international currencies.

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Movements in international currencies against the U.S.

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

dollar negatively impacted net revenues by approximately $43.0 million for the year ended June 30, 2022.

Excluding the impact of currency movements, total net revenue from our Sleep and Respiratory Care business for the year ended June 30, 2022 increased by 14% compared to the year ended June 30, 2021.

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Net revenue from our Sleep and Respiratory Care business in combined Europe, Asia and other markets increased for the year ended June 30, 2022 to $1,195.5 million from $1,118.1 million for the year ended June 30, 2021, an increase of $77.4 million or 7% (an increase of 11% on a constant currency basis).

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

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

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

Net revenue from masks and other for the year ended June 30, 2021 increased to $1,213.2 million from $1,094.6 million for the year ended June 30, 2020, an increase of 11%, including an increase of 8% in the United States, Canada and Latin America and an increase of 18% in combined Europe, Asia and other markets (an 11% increase on a constant currency basis).

Excluding the impact of foreign currency movements, masks and other sales increased by 9%, compared to the year ended June 30, 2020.

The constant currency increase in sales in combined Europe, Asia and other markets predominantly reflects an increase in unit sales of our devices and masks, including

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

recovery of core sleep patient flow that was previously impacted by the pandemic, partially offset by decreased COVID-19-related demand for our ventilators.

Net revenue from devices for the year ended June 30, 2022 increased to $1,866.9 million from $1,610.0 million for the year ended June 30, 2021, an increase of $256.9 million or 16%, including an increase of 24% in the United States, Canada and Latin America and an increase of 7% in combined Europe, Asia and other markets (a 10% increase on a constant currency basis).

Excluding the impact of foreign currency movements, device sales for the year ended June 30, 2022 increased by 17%.

Net revenue from masks and other for the year ended June 30, 2022 increased to $1,310.4 million from $1,213.2 million for the year ended June 30, 2021, an increase of 8%, including an increase of 8% in the United States, Canada and Latin America and an increase of 7% in combined Europe, Asia and other markets (a 12% increase on a constant currency basis).

Excluding the impact of foreign currency movements, masks and other sales increased by 9%, compared to the year ended June 30, 2021.

Software as a Service

Net revenue from our SaaS business for the year ended June 30, 2022 was $400.8 million, compared to $373.6 million for the year ended June 30, 2021, an increase of $27.2 million or 7%.

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

The increase was predominantly due to continued growth in our HME and Home Health and Hospice verticals, in addition to stabilizing patient flow in our Facilities vertical.

Gross Profit and Gross Margin.

Gross profit increased for the year ended June 30, 2022 to $2,024.3 million from $1,839.1 million for the year ended June 30, 2021, an increase of $185.2 million or 10%.

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

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

Gross margin, which is gross profit as a percentage of net revenue, was 56.6% for the year ended June 30, 2022, compared with the 57.5% for the year ended June 30, 2021.

The decrease in gross margin was due primarily to higher logistics and manufacturing costs, partially offset by favorable changes in product mix as we sold an increased proportion of higher acuity devices, in addition to higher average selling prices.

Operating Expenses

The following table summarizes our operating expenses (in thousands):

Year Ended June 30, Change % Change Constant Currency

Selling, general, and administrative $ 739,372 $ 670,387 $ 68,985 10 % 12 %

as a % of net revenue 20.7 % 21.0 %

Research and development 253,575 225,284 28,291 13 % 14 %

as a % of net revenue 7.1 % 7.0 %

Amortization of acquired intangible assets 31,078 31,078 Nil Nil Nil

Selling, General and Administrative Expenses

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

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

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

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

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

Selling, general and administrative expenses increased for the year ended June 30, 2022 to $739.4 million from $670.4 million for the year ended June 30, 2021, an increase of $69.0 million or 10%.

Selling, general and administrative expenses, as reported in U.S.

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

dollar, which decreased our expenses by approximately $13.3 million.

Excluding the impact of foreign currency movements, selling, general and administrative expenses for the year ended June 30, 2022 increased by 12% compared to the year ended June 30, 2021.

As a percentage of net revenue, selling, general and administrative expenses for the year ended June 30, 2022 improved to 20.7% compared to 21.0% for the year ended June 30, 2021.

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

The constant currency increase in selling, general and administrative expenses was primarily due to increases in employee-related costs for the year ended June 30, 2022 compared to the year ended June 30, 2021.

Research and Development Expenses

Research and development expenses increased for the year ended June 30, 2022 to $253.6 million from $225.3 million for the year ended June 30, 2021, an increase of $28.3 million or 13%.

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

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

Research and development expenses were favorably

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

impacted by the movement of international currencies against the U.S.

dollar, which decreased our expenses by approximately $3.0 million, as reported in U.S.

Excluding the impact of foreign currency movements, research and development expenses for the year ended June 30, 2022 increased by 14% compared to the year ended June 30, 2021.

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Amortization of Acquired Intangible Assets

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

Amortization of acquired intangible assets was consistent at $31.1 million for the years ended the year ended June 30, 2022 and June 30, 2021.

Restructuring Expenses

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

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.

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Total Other Income (Loss), Net

The following table summarizes our other income (loss) (in thousands):

Year Ended June 30,

2022 2021 Change

Interest (expense) income, net $ (22,312) $ (23,627) $ 1,315

Loss attributable to equity method investments (8,486) (11,205) 2,719

Gain (loss) on equity investments (12,202) 14,515 (26,717)

Other, net 3,197 301 2,896

Total other income (loss), net $ (39,803) $ (20,016) $ (19,787)

Total other income (loss), net for the year ended June 30, 2022 was a loss of $39.8 million, compared to a loss of $20.0 million for the year ended June 30, 2021.

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

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

We also recorded lower losses attributable to equity method investments for the year ended June 30, 2021 of $11.2 million compared to $25.1 million for the year ended June 30, 2020.

Income Taxes.

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

The increase in our effective income tax rate was primarily the result of an increase in unrecognized tax benefits as outlined below.

The increase in loss was primarily due to losses associated with our investments in marketable and non-marketable equity securities, which were a loss of $12.2 million for the year ended June 30, 2022 compared to a gain of $14.5 million for the year ended June 30, 2021.

This was partially offset by lower losses attributable to equity method investments for the year ended June 30, 2022 of $8.5 million compared to $11.2 million for the year ended June 30, 2021.

Additionally, interest expense, net, decreased to $22.3 million for the year ended June 30, 2022 compared to $23.6 million for the year ended June 30, 2021.

Our effective income tax rate decreased to 18.8% for the year ended June 30, 2022 from 46.3% for the year ended June 30, 2021.

Our effective rate of 18.8% for the year ended June 30, 2022 differs from the statutory rate of 21.0% primarily due to research credits, foreign operations and windfall tax benefits related to the vesting or settlement of employee share-based awards.

The decrease in our effective tax rate for the year ended June 30, 2022 was primarily related to the decrease in unrecognized tax benefits recorded in connection with the Australian Tax Office ("ATO") transfer pricing dispute, outlined below.

Excluding the impact of the unrecognized tax benefit, our effective income tax rate for the year ended June 30, 2021 was 18.2%.

The increase in our effective tax rate, excluding the impact of the unrecognized tax benefit, was due to the geographic mix of earnings and lower windfall tax benefits related to the vesting or settlement of employee share-based awards, which reduced our income tax expense by $12.1 million for the year ended June 30, 2021, as compared to $24.8 million for the year ended June 30, 2020.

The increase in our effective tax rate, excluding the impact of the unrecognized tax benefit for the year ended June 30, 2021, was due to a change in the geographic mix of earnings for the year ended June 30, 2022.

PART II Item 7

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

We are under audit by the Australian Taxation Office (the “ATO”) for the years 2009 to 2018 (the “Audit Period”).

The audits primarily involve a transfer pricing dispute in which the ATO asserts we should have paid additional Australian taxes on income derived from our Singapore operations.

The ATO issued Notices of Amended Assessments for the tax years 2009 to 2013 seeking a total of $266.0 million, consisting of $151.7 million in additional income tax and $114.3 million in penalties and interest.

The 2014 to 2018 periods are still under audit and we have not yet received any Notices of Amended Assessments relative to those periods.

A total of $98.8 million in tax has been prepaid in relation to the Audit Period, which is consistent with ATO procedural audit practice.

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

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

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

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

If we are not successful in litigation, we will be required to pay some or all of the additional income tax, accrued interest and penalties, including potential additional amounts relating to the 2014 to 2018 periods.

On September 19, 2021, we concluded the settlement agreement with the ATO in relation to the previously disclosed transfer pricing dispute for the tax years 2009 through 2018 (“ATO settlement”).

The ATO settlement fully resolved the dispute for all prior years, with no admission of liability and provides clarity in relation to certain future taxation principles.

The final net impact of the ATO settlement was $238.7 million, which represents a gross amount of $381.7 million, including interest and penalties of $48.1 million, and adjustments for credits and deductions of $143.0 million.

As a result of the ATO settlement and due to movements in foreign currencies, we recorded a benefit of $14.1 million within other comprehensive income, and a $4.1 million reduction of tax credits, which was recorded to income tax expense.

As a result of the ATO settlement, we reversed our previously recorded uncertain tax position.

On September 28, 2021, we remitted final payment to the ATO of $284.8 million, consisting of the agreed settlement amount of $381.7 million less prior remittances made to the ATO of $96.9 million.

Our Singapore operations operate under certain tax holidays and tax incentive programs that will expire in whole or in part at various dates through June 30, 2030.

Also, as a result of the U.S.

As a result of the U.S.

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

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

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

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

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

subsidiaries will generally not be subject to U.S.

federal tax, if repatriated.

Net Income and Earnings per Share

As a result of the factors above, our net income for the year ended June 30, 2022 was $779.4 million compared to net income of $474.5 million for the year ended June 30, 2021.

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

Our earnings per diluted share for the year ended June 30, 2022 was $5.30 compared to $3.24 for the year ended June 30, 2021, an increase of 64%.

Unrecognized tax benefits as described at Note 13 – Income Taxes reduced our diluted earnings per share for the year ended June 30, 2021 by $1.70 per share.

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Non-GAAP financial measures as presented herein may not be comparable to similarly titled measures used by other companies.

The measure “non-GAAP revenue” is equal to GAAP net revenue once adjusted for deferred revenue fair value adjustments applied in the purchase accounting for previous business combinations.

The measure “non-GAAP cost of sales” is equal to GAAP cost of sales less amortization of acquired intangible assets relating to cost of sales and restructuring expense associated with inventory write-downs following the closure of the POC business.

The measure “non-GAAP gross profit” is the difference between non-GAAP revenue and non-GAAP cost of sales, and “non-GAAP gross margin” is the ratio of non-GAAP gross profit to non-GAAP revenue.

The measure “non-GAAP gross profit” is the difference between GAAP net revenue and non-GAAP cost of sales, and “non-GAAP gross margin” is the ratio of non-GAAP gross profit to GAAP net revenue.

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GAAP Net revenue $ 3,578,127 $ 3,196,825

Deferred revenue fair value adjustment

Non-GAAP revenue

GAAP Cost of sales $ 1,553,816 $ 1,357,725

Amortization of acquired intangibles

(39,650) (45,127)

Restructuring - cost of sales

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Non-GAAP gross margin 57.7 % 59.1 %

The measure “non-GAAP income from operations” is equal to GAAP income from operations once adjusted for amortization of acquired intangibles, restructuring expense associated with the closure of the POC business, deferred revenue fair value adjustments applied in the purchase accounting for previous business combinations and litigation settlement expenses.

The measure “non-GAAP income from operations” is equal to GAAP income from operations once adjusted for amortization of acquired intangibles, acquisition-related expenses and restructuring expense associated with the closure of the portable oxygen concentrator business.

Non-GAAP income from operations is reconciled with GAAP income from operations below (in thousands):

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Amortization of acquired intangibles - operating expenses 31,078 31,078

Acquisition-related expenses 1,864 —

Restructuring - cost of sales — 5,232

Restructuring - operating expenses — 8,673

Deferred revenue fair value adjustment

Litigation settlement expenses

Non-GAAP income from operations $ 1,072,878 $ 993,788

The measure “non-GAAP net income” is equal to GAAP net income once adjusted for amortization of acquired intangibles (net of tax), reserve for disputed tax positions, restructuring expense associated with the closure of the POC (net of tax), (gain) loss on marketable equity securities, fair value adjustments recognized on non-marketable equity securities, deferred revenue fair value adjustments applied in the purchase accounting for previous business combinations (net of tax) and litigation settlement expenses (net of tax).

The measure “non-GAAP net income” is equal to GAAP net income once adjusted for amortization of acquired intangibles (net of tax), acquisition-related expenses, reserve for disputed tax positions, restructuring expenses (net of tax) and (gain) loss on equity investments.

The measure “non-GAAP diluted earnings per share” is the ratio of non-GAAP net income to diluted shares outstanding.

These non-GAAP measures are reconciled to their most directly comparable GAAP financial measures below (in thousands, except for per share amounts):

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

Year Ended June 30,

GAAP net income (loss)

GAAP net income $ 779,437 $ 474,505

Amortization of acquired intangibles - cost of sales, net of tax 30,095 34,642

Amortization of acquired intangibles - operating expenses, net of tax 23,589 23,857

Acquisition-related expenses 1,864 —

Reserve for disputed tax positions 4,111 248,773

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(Gain) loss on equity investments 11,675 (13,549)

Fair value impairment of investment

Deferred revenue fair value adjustment, net of tax

Litigation settlement expenses, net of tax

Non-GAAP net income $ 850,771 $ 780,621

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Non-GAAP diluted earnings per share $ 5.79 $ 5.33

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

Liquidity and Capital Resources

Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from operations and access to our revolving credit facility.

Our primary uses of cash have been for research and development activities, selling and marketing activities, capital expenditures, strategic acquisitions and investments, dividend payments and repayment of debt obligations.

We expect that cash provided by operating activities may fluctuate in future periods as a result of several factors, including fluctuations in our operating results, which include impacts from the COVID-19 pandemic, supply chain disruptions, working capital requirements and capital deployment decisions.

Our future capital requirements will depend on many factors including our growth rate in net revenue, third-party reimbursement of our products for our customers, the timing and extent of spending to support research development efforts, the expansion of selling, general and administrative activities, the timing of introductions of new products, the expenditures associated with possible future acquisitions, investments or other business combination transactions, including our pending acquisition of MEDIFOX DAN, and impacts from the COVID-19 pandemic.

As we assess inorganic growth strategies, we may need to supplement our internally generated cash flow with outside sources.

If we are required to access the debt market, we believe that we will be able to secure reasonable borrowing rates.

As part of our liquidity strategy, we will continue to monitor our current level of earnings and cash flow generation as well as our ability to access the market considering those earning levels.

As of June 30, 2022 and June 30, 2021, we had cash and cash equivalents of $273.7 million and $295.3 million, respectively.

Working capital was $663.0 million and $920.7 million, at June 30, 2021 and June 30, 2020, respectively.

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

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

We believe that cash generated from operations and available borrowings under our credit facility will be sufficient to fund our operations, including expected capital expenditures, for the next 12 months and beyond.

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

Our remaining cash and cash equivalent balances at June 30, 2021 and June 30, 2020, of $188.6 million and $304.4 million, respectively, were held by our non-U.S.

subsidiaries.

Our cash and cash equivalents held within the United States at June 30, 2022 and June 30, 2021 were $70.0 million and $106.7 million, respectively.

Our remaining cash and cash equivalent balances at June 30, 2022 and June 30, 2021, were $203.7 million and $188.6 million, respectively.

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

As of June 30, 2022, we had $1.4 billion available for draw down under the revolving credit facility and a combined total of $1.7 billion in cash and available liquidity under the revolving credit facility.

We repatriated $100.0 million and $560.1 million to the United States during the years ended June 30, 2022 and 2021, respectively, from earnings generated in each of those years.

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

historical earnings prior to 2018 as taxable.

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

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

the additional tax expense associated with the U.S.

Tax Act was reduced to $94.2 million during the current year as a result of the ATO Settlement discussed in Note 13 – Income Taxes of the Notes to the Consolidated Financial Statements (Part II, Item 8).

Therefore, future repatriation of

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

cash held by our non-U.S.

subsidiaries will generally not be subject to U.S.

federal tax if repatriated, except as discussed in Note 13 – Income Taxes of the Notes to the Consolidated Financial Statements (Part II, Item 8).

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

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

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

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

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

We recognize right-of-use assets and lease liabilities on the balance sheet for all operating leases except those that meet the definition of a short-term lease.

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

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

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

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

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

We have temporarily suspended our share repurchase program due to acquisitions, and more recently, as a response to the COVID-19 pandemic.

Accordingly, we did not repurchase any shares during the years ended June 30, 2021 and 2020.

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

We believe that our current sources of liquidity will be sufficient to fund our operations, including expected capital expenditures, for the next 12 months and beyond.

Revolving Credit Agreement, Term Credit Agreement and Senior Notes

On June 29, 2022, we entered into a second amended and restated credit agreement (as amended from time to time, the “Revolving Credit Agreement”).

The Revolving Credit Agreement, among other things, provided a senior unsecured revolving credit facility of $1,500.0 million, with an uncommitted option to increase the revolving credit facility by an additional amount equal to the greater of $1,000.0 million and 1.00 times the EBITDA for the trailing twelve-month measurement period.

Additionally, on June 29, 2022, ResMed Pty Limited entered into a Second Amendment to the Syndicated Facility Agreement (the “Term Credit Agreement”).

The Term Credit Agreement, among other things, provides ResMed Limited a senior unsecured term credit facility of $200.0 million.

The Revolving Credit Agreement and Term Credit Agreement each terminate on Jun 29, 2027, when all unpaid principal and interest under the loans must be repaid.

As of June 30, 2022, we had $1.4 billion available for draw down under the revolving credit facility.

On July 10, 2019, we entered into a Note Purchase Agreement with the purchasers to that agreement, in connection with the issuance and sale of $250.0 million principal amount of our 3.24% senior notes due July 10, 2026, and $250.0 million principal amount of our 3.45% senior notes due July 10, 2029 (“Senior Notes”).

On June 30, 2022, there was a total of $780.0 million outstanding under the Revolving Credit Agreement, Term Credit Agreement and Senior Notes.

We expect to satisfy all of our liquidity and long-term debt requirements through a combination of cash on hand, cash generated from operations and debt facilities.

Cash Flow Summary

The following table summarizes our cash flow activity (in thousands):

Year Ended June 30,

Net cash provided by operating activities $ 351,147 $ 736,718

Net cash used in investing activities (229,918) (158,462)

Net cash used in financing activities (128,363) (764,632)

Effect of exchange rate changes on cash (14,434) 18,498

Net decrease in cash and cash equivalents $ (21,568) $ (167,878)

Operating Activities

Cash provided by operating activities was $351.1 million for the twelve months ended June 30, 2022, compared to cash provided of $736.7 million for the twelve months ended June 30, 2021.

The $385.6 million decrease in cash flow from operations was primarily due to the payment of our tax settlement with the ATO of $284.8 million and greater purchases and prepayments of inventory to secure adequate components for the increasing sales demand, partly offset by an increase in operating profit and other net changes in working capital balances compared to the twelve months ended June 30, 2021.

Investing Activities

Cash used in investing activities was $229.9 million for the twelve months ended June 30, 2022, compared to cash used of $158.5 million for the twelve months ended June 30, 2021.

The $71.5 million increase in cash flow used in investing activities was primarily due to an increase in purchases of property, plant and equipment and an increase in payments on maturity of foreign currency contracts compared to the twelve months ended June 30, 2021.

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

Financing Activities

Cash used in financing activities was $128.4 million for the twelve months ended June 30, 2022, compared to cash used of $764.6 million for the twelve months ended June 30, 2021.

The $636.3 million decrease in cash flow used in financing activities was primarily due to borrowing activity under our Revolving Credit Agreement.

During the twelve months ended June 30, 2022, we paid cash dividends of $1.68 per common share totaling $245.3 million.

On August 11, 2022, our board of directors declared a cash dividend of $0.44 per common share, to be paid on September 22, 2022, to shareholders of record as of the close of business on August 18, 2022.

Future dividends are subject to approval by our board of directors.

Contractual Obligations and Commitments

Details of contractual obligations at June 30, 2022 are as follows (in thousands):

Payments Due by June 30,

Total 2023 2024 2025 2026 2027 Thereafter

Debt $ 781,946 $ 11,946 $ 10,000 $ 10,000 $ 10,000 $ 490,000 $ 250,000

Interest on debt 141,599 26,211 26,211 26,211 26,211 18,786 17,969

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Purchase obligations 1,707,951 1,251,476 440,067 13,152 1,431 — 1,825

MEDIFOX DAN acquisition consideration 994,245 994,245 — — — — —

Total $ 3,754,388 $ 2,311,530 $ 497,898 $ 65,923 $ 50,027 $ 520,504 $ 308,506

Details of other commercial commitments at June 30, 2022 are as follows (in thousands):

Amount of Commitment Expiration Per Period

Total 2023 2024 2025 2026 2027 Thereafter

Standby letter of credit $ 15,672 $ 3,827 $ 116 $ 56 $ — $ — $ 11,673

Guarantees* 2,007 1,516 79 57 316 — 39

Total $ 17,679 $ 5,343 $ 195 $ 113 $ 316 $ — $ 11,712

* These guarantees mainly relate to requirements under contractual obligations with insurance companies transacting with our German subsidiaries and guarantees provided under our facility leasing obligations.

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Financial information about our revenues from and assets located in foreign countries is also included in the notes to the consolidated financial statements included in this report.

Credit Facility

On April 17, 2018, we entered into an amended and restated credit agreement, or the Revolving Credit Agreement, as borrower, with lenders MUFG Union Bank, N.A., as administrative agent, joint lead arranger, joint book runner, swing line lender and letter of credit issuer, and Westpac Banking Corporation, as syndication agent, joint lead arranger and joint book runner.

The Revolving Credit Agreement, among other things, provided a senior unsecured revolving credit facility of $800.0 million, with an uncommitted option to increase the revolving credit facility by an additional $300.0 million.

Additionally, on April 17, 2018, ResMed Limited entered into a syndicated facility agreement, or the Term Credit Agreement, as borrower, with lenders MUFG Union Bank, N.A., as administrative agent, joint lead arranger and joint book runner, and Westpac Banking Corporation, as syndication agent, joint lead arranger and joint book runner.

The Term Credit Agreement, among other things, provides ResMed Limited a senior unsecured term credit facility of $200.0 million.

On November 5, 2018, we entered into a first amendment to the Revolving Credit Agreement to, among other things, increase the size of our senior unsecured revolving credit facility from $800.0 million to $1.6 billion, with an uncommitted option to increase the revolving credit facility by an additional $300.0 million.

Our obligations under the Revolving Credit Agreement are guaranteed by certain of our direct and indirect U.S.

subsidiaries, and ResMed Limited’s obligations under the Term Credit Agreement are guaranteed by us and certain of our direct and indirect U.S.

subsidiaries.

The Revolving Credit Agreement and Term Credit Agreement contain customary covenants, including, in each case, a financial covenant that requires that we maintain a maximum leverage ratio of funded debt to EBITDA (as defined in the Revolving Credit Agreement and Term Credit Agreement, as applicable).

The entire principal amounts of the revolving credit facility and term credit facility, and, in each case, any accrued but unpaid interest may be declared immediately due and payable if an event of default occurs, as defined in the Revolving Credit Agreement and the Term Credit Agreement, as applicable.

Events of default under the Revolving Credit Agreement and the Term Credit Agreement include, in each case, failure to make payments when due, the occurrence of a default in the performance of any covenants in the respective agreements or related documents, or certain changes of control of us, or the respective guarantors of the obligations borrowed under the Revolving Credit Agreement and Term Credit Agreement.

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

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

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.

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

Our obligations under the Note Purchase Agreement and the Notes are unconditionally and irrevocably guaranteed by certain of our direct and indirect U.S.

subsidiaries, including ResMed Corp., ResMed Motor Technologies Inc., Birdie Inc., Inova Labs, Inc., Brightree LLC, Brightree Home Health & Hospice LLC, Brightree Patient Collections LLC, ResMed Operations Inc., HEALTHCAREfirst Holding Company, HCF Holdco Company, HEALTHCAREfirst, Inc., CareFacts Information Systems, LLC and Lewis Computer Services, LLC, MatrixCare Holdings Inc., MatrixCare, Inc., Reciprocal Labs Corporation and ResMed SaaS Inc., under a Subsidiary Guaranty Agreement dated as of July 10, 2019.

The net proceeds from this transaction were used to pay down borrowings on our Revolving Credit Agreement.

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

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

This ratio is calculated at the end of each reporting period for which the Note Purchase Agreement requires us to deliver financial statements, using the results of the 12 consecutive month period ending with such reporting period.

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

We expect to satisfy all of our liquidity and long-term debt requirements through a combination of cash on hand, cash generated from operations and undrawn debt facilities.

Critical Accounting Principles and Estimates

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On an ongoing basis we evaluate our estimates, including those related to allowance for doubtful accounts, inventory reserves, warranty obligations, goodwill, potentially impaired assets, intangible assets, income taxes and contingencies.

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

We state these accounting policies in the notes to the financial statements and at relevant sections in this discussion and analysis.

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

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

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

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The criteria used for these evaluations include management’s estimate of the asset’s continuing ability to generate positive income from operations and positive cash flow in future periods compared to the carrying value of the asset, as well as the strategic significance of any identifiable intangible asset in our business objectives.

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

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

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

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If 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, 2022, 2021 and 2020, we completed a Step 0 or Qualitative assessment and determined it was more likely than not that the fair value of our reporting units exceeded their carrying amounts, including goodwill, and therefore goodwill was not impaired.

(2) Income Tax.

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While we believe we have appropriate support for the positions taken on our tax returns, we regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes.

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

We are under audit by the Australian Taxation Office (the “ATO”) for the years 2009 to 2018 (the “Audit Period”).

The audits primarily involve a transfer pricing dispute in which the ATO asserts we should have paid additional Australian taxes on income derived from our Singapore operations.

The 2014 to 2018 periods are still under audit and we have not yet received any Notices of Amended Assessments relative to those periods.

A total of $98.8 million in tax has been prepaid in relation to the Audit Period, which is consistent with ATO procedural audit practice.

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

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

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

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

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

Based on our regular

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

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

The timing and resolution of the ATO audits are inherently uncertain, and the amounts we might ultimately pay or receive in credits and deductions, if any, upon resolution of issues raised by the ATO may differ materially from the amounts accrued.

Although it is expected that the amount of unrecognized tax benefits may change in the next 12 months, an estimate of the range of the possible change cannot be made.

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

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

On September 19, 2021, we concluded the settlement agreement with the Australian Taxation Office (“ATO”) in relation to the previously disclosed transfer pricing dispute for the tax years 2009 through 2018 (“ATO settlement”).

The ATO settlement fully resolved the dispute for all prior years, with no admission of liability and provides clarity in relation to certain future taxation principles.

As a result of the ATO settlement, we reversed our previously recorded uncertain tax position.

On September 28, 2021, we remitted final payment to the ATO of $284.8 million, consisting of the agreed settlement amount of $381.7 million less prior remittances made to the ATO of $96.9 million.

Tax years 2018 to 2021 remain subject to future examination by the major tax jurisdictions in which we are subject to tax.

(3) Revenue Recognition.

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Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services.

In our Sleep and Respiratory Care business, the amount of consideration received and revenue recognized varies with changes in marketing incentives (e.g., rebates, discounts, free goods) and returns offered to customers.

In accounting for these rebate programs, we reduce revenue ratably as sales occur over the rebate period by the expected value of the rebates to be returned to the customer.

We also recognize discount on products as a reduction to revenue when control is transferred.

We adjust the estimate of revenue for the impact of returned items at the earlier of when the most likely amount of consideration can be estimated, the amount expected to be received changes, or when the consideration becomes fixed.

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 our 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 participate in programs where we issue credits to our Sleep and Respiratory Care distributors when they are required to sell our products below negotiated list prices if we have preexisting contracts with the distributors' customers.

We reduce revenue for future credits at the time of sale to the distributor, which we estimate based on historical experience using the expected value method.

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.

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

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.

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As of June 30, 2022, we are not involved in any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC.

PART II Item 7A

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

What changed 10-K

Item 7. Management’s Discussion and Analysis