ITEM 1A
RISK FACTORS
Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other cautionary statements and risks described elsewhere, and the other information contained, in this Report and in our other filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on us, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our common stock will likely decline, and you may lose all or part of your investment.
Our inability to compete successfully in our markets may harm our business.
The markets for our products are highly competitive and are characterized by frequent product improvements and evolving technology. Our ability to compete successfully depends, in part, on our ability to develop, manufacture and market innovative new products. The development of innovative new products by our competitors or the discovery of alternative treatments or potential cures for the conditions that our products treat could make our products noncompetitive or obsolete. Current competitors, new entrants, academics, and others are trying to develop new devices, alternative treatments or cures, and pharmaceutical solutions to the conditions our products treat.
Additionally, some of our competitors have greater financial, research and development, manufacturing and marketing resources than we do. The past several years have seen a trend towards consolidation in the healthcare industry and in the markets for our products. Industry consolidation could result in greater competition if our competitors combine their resources, if our competitors are acquired by other companies with greater resources than ours, or if our competitors become affiliated with customers of ours. This competition could increase pressure on us to reduce the selling prices of our products or could cause us to increase our spending on research and development and sales and marketing. If we are unable to develop innovative new products, maintain competitive pricing, and offer products that consumers perceive to be as good as those of our competitors, our sales or gross margins could decrease which would harm our business.
Our business depends on our ability to market effectively to dealers of home healthcare products and sleep clinics.
We market our products primarily to home healthcare dealers and to sleep clinics that diagnose OSA and other sleep disorders, as well as to non-sleep specialist physician practices that diagnose and treat sleep disorders. We believe that these groups play a significant role in determining which brand of product a patient will use. The success of our business depends on our ability to market effectively to these groups to ensure that our products are properly marketed and sold by these third-parties.
We have limited resources to market to the sleep clinics, home healthcare dealer branch locations and to the non-sleep specialists, most of whom use, sell or recommend several brands of products. In addition, home healthcare dealers have experienced price pressures as government and third-party reimbursement has declined for home healthcare products, and home healthcare dealers are requiring price discounts and longer periods of time to pay for products purchased from us. We cannot assure you that physicians will continue to prescribe our products, or that home healthcare dealers or patients will not substitute competing products when a prescription specifying our products has been written.
We have expanded our marketing activities in some markets to target the population with a predisposition to sleep-disordered breathing as well as primary care physicians and various medical specialists. We cannot assure you that these marketing efforts will be successful in increasing awareness or sales of our products.
Consolidation in the health care industry could have an adverse effect on our revenues and results of operations.
Many home health care dealers are consolidating, which may result in greater concentration of market power. As the health care industry consolidates, competition to provide goods and services to industry participants may become more intense. These industry participants may try to use their market power to negotiate price concessions or reductions for medical devices and components produced by us. If we are forced to reduce our prices because of consolidation in the health care industry, our revenues may decrease and our consolidated earnings, financial condition, and/or cash flows may suffer.
If we are unable to support our continued growth, our business could suffer.
As we continue to grow, the complexity of our operations increases, placing greater demands on our management. Our ability to manage our growth effectively depends on our ability to implement and improve our financial and management information systems on a timely basis and to effect other changes in our business including, the ability to monitor and improve manufacturing systems, information technology, and quality and regulatory compliance systems, among others. Unexpected difficulties during expansion, the failure to attract and retain qualified employees, the failure to successfully replace or upgrade our management information systems, the failure to manage costs or our inability to respond effectively to growth or plan for future expansion could cause our growth to stop. If we fail to manage our growth effectively and efficiently, our costs could increase faster than our revenues and our business results could suffer.
If we fail to integrate our acquisitions with our operations, our business could suffer.
Part of our growth strategy includes acquiring businesses consistent with our commitment to innovation in developing products for the diagnosis and treatment of SDB and respiratory care as well as our SaaS business. For example, we acquired MatrixCare in November 2018 and Propeller Health in January 2019. The success of our
acquisitions, including MatrixCare, will depend, in part, on our ability to successfully
integrate the
business and
operations
of the acquired companies
. Additionally, our management may have their attention diverted while trying to integrate these businesses. If we are not able to successfully integrate the operations, we may not realize the anticipated benefits of the acquisitions fully or at all, or may take longer to realize than expected.
We have made certain assumptions relating to our recent acquisitions that may prove to be materially inaccurate.
We have made certain assumptions relating to our recent acquisitions, including MatrixCare, such as:
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projections of each acquired company’s future revenue
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the amount of goodwill and intangibles that will result from our acquisitions;
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acquisition costs, including transaction, contingent consideration and integration costs
; and
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other financial and strategic rationales and risks of the acquisitions
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While management has made such assumptions in good faith and believes them to be reasonable, the assumptions may turn out to be materially inaccurate, including for reasons beyond our control. If these assumptions are incorrect we may change or modify our assumptions, and such change or modification could have a material adverse effect on our financial condition or results of operations.
We are subject to various risks relating to international activities that could affect our overall profitability.
We manufacture substantially all of our products outside the United States and sell a significant portion of our products in non-U.S. markets.
Sales in combined Europe, Asia and other markets accounted for approximately
35%
and
38%
of our net revenues in the years ended
June 30, 2019 and June 30, 2018
respectively.
We expect that sales within these areas will account for approximately
35%
of our net revenues in the foreseeable future. Our sales and operations outside of the U.S. are subject to several difficulties and risks that are separate and distinct from those we face in the U.S., including:
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fluctuations
in currency exchange rates;
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tariffs
and other trade barriers;
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compliance
with foreign medical device manufacturing regulations;
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difficulty
in enforcing agreements and collecting receivables through foreign legal systems;
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reduction
in third-party payor reimbursement for our products;
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inability
to obtain import licenses;
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changes
in trade policies and in U.S. and foreign tax policies;
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possible
changes in export or import restrictions; and
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the
modification
or introduction of other governmental policies with potentially adverse effects.
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Any of the above factors may have a material adverse effect on our ability to increase or maintain our non-U.S. sales.
Government and private insurance plans may not adequately reimburse our customers for our products, which could result in reductions in sales or selling prices for our products.
Our ability to sell our products depends in large part on the extent to which coverage and adequate reimbursement for our products will be available from government health administration authorities, private health insurers and other organizations. These third-party payers are increasingly challenging the prices charged for medical products and services and can, without notice, deny coverage for our products or treatments that may include the use of our products. Therefore, even if a product is approved for marketing, we cannot make assurances that coverage and reimbursement will be available for the product, that the reimbursement amount will be adequate or that the reimbursement amount, even if initially adequate, will not be subsequently reduced. For example, in some markets, such as Spain, France and Germany, government coverage and reimbursement are currently available for the purchase or rental of our products but are subject to constraints such as price controls or unit sales limitations. In other markets, such as Australia, there is currently limited or no reimbursement for devices that treat SDB conditions. As we continue to develop new products, those products will generally not qualify for coverage and reimbursement until they are approved for marketing, if at all.
In the United States, we sell our products primarily to home healthcare dealers, hospitals and sleep clinics. Reductions in reimbursement to our customers by third-party payers, if they occur, may have a material impact on our customers and, therefore, may indirectly affect our pricing and sales to, or the collectability of receivables we have from, those customers. A development negatively affecting reimbursement stems from the Medicare competitive bidding program mandated by the MMA. Under the program, our customers who provide home medical equipment must compete to offer products in designated competitive bidding areas, or CBAs.
In addition, under the ACA, in 2016, CMS adjusted the
prices in non-competitive bidding areas to match competitive bidding prices.
CMS phased in the new rates beginning January 1, 2016, and were fully effective July 1, 2016.
This program has significantly reduced the Medicare reimbursement to our customers compared with reimbursement in 2011, at the beginning of the program. The 21st Century Cures Act retroactively adjusted rates in non-bid areas to allow for the higher phase-in rates to be paid for items furnished between July 1, 2016 and December 31, 2016, rather than the lower fully-adjusted rates. Rules issued by CMS in 2018 resumed the higher phase-in rates in rural and non-contiguous non-competitive bidding areas for items furnished between June 1, 2018 and December 31, 2020. On March 7, 2019, CMS announced it would initiate a new round of competitive bidding, named Round 2021, with contracts expected to become effective on January 1, 2021, and extend through December 31, 2023. In addition to adopting new bidding processes, CMS expanded the product categories included in competitive bidding to include non-invasive ventilators, in addition to oxygen. CPAP, and respiratory assist devices, and related supplies and accessories, which had been included in prior rounds of competitive bidding.
We cannot predict at this time the full impact the competitive bidding program and the developments in the competitive bidding program will have on our business and financial condition.
If changes are made to this program in the future, it could affect amounts being recovered by our customers.
Healthcare reform may have a material adverse effect on our industry and our results of operations.
In March 2010, the
ACA
was signed into law in the United States. The ACA made changes that
significantly impacted the healthcare industry, including
medical device
manufacturers
. One of the principal purposes of the ACA was to expand health insurance coverage to millions of Americans who were uninsured. The ACA required adults not covered by an employer or government-sponsored insurance plan to maintain health insurance coverage or pay a penalty, a provision commonly referred to as the individual mandate.
The ACA also contained a number of provisions designed to generate the revenues necessary to fund the coverage expansions. This included new fees or taxes on certain health-related industries, including medical device manufacturers. Beginning in 2013, entities that manufacture, produce or import medical devices were required to pay an excise tax in an amount equal to 2.3% of the price for which such devices are sold in the United States. This excise tax is applicable to our products that are primarily used in hospitals and sleep labs, which includes the ApneaLink, VPAP Tx, certain Respiratory Care and dental sleep products. Through a series of legislative amendments, the tax was suspended for 2016 through 2019
, but is scheduled to return beginning in 2020, absent further Congressional action.
In addition to the competitive bidding changes discussed above, the ACA also included, among other things, demonstrations to develop organizations that are paid under a new payment methodology for voluntary coordination of care by groups of providers, such as physicians and hospitals, and the establishment of a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research. The increased funding and focus on comparative clinical effectiveness research, which compares and evaluates the risks and benefits, clinical outcomes, effectiveness and appropriateness of products, may result in lower reimbursements by payors for our products and decreased profits to us.
Other federal legislative changes have been proposed and adopted since the ACA was enacted. These changes included an aggregate reduction in Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and will remain in effect through 2027 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012, was signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.
The full impact on our business of the ACA and other new laws is uncertain. Nor is it clear whether other legislative changes will be adopted, if any, or how such changes would affect the demand for our products. Future actions by the administration and the U.S. Congress including, but not limited to, repeal or replacement of the ACA could have a material adverse impact on our results of operations or financial condition. Additionally, all or a portion of the ACA and related subsequent legislation may be modified, repealed or otherwise invalidated through other judicial challenge.
For example, on December 14, 2018, a U.S. District Court Judge in the Northern District of Texas, or Texas District Court Judge, ruled that the individual mandate is a critical and inseverable feature of the ACA, and therefore, because it was repealed as part of the U.S. Tax Act, the remaining provisions of the ACA are invalid as well. While the Texas District Court Judge, as well as the Trump Administration and CMS, have stated that the ruling will have no immediate effect, it is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the ACA will impact the ACA and our business.
Various healthcare reform proposals have also emerged at the state level within the United States. The ACA as well as other federal and/or state healthcare reform measures that may be adopted in the future, singularly or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations.
Failure to comply with anti-kickback and fraud regulations could result in substantial penalties and changes in our business operations.
Although in the United States we do not provide healthcare services, submit claims for third-party reimbursement, or receive payments directly from Medicare, Medicaid or other third-party payors for our products, we are subject to healthcare fraud and abuse regulation and enforcement by federal, state and foreign governments, which could significantly impact our business. We also are subject to foreign fraud and abuse laws, which vary by country.
In the United States, the laws that may affect our ability to operate include, but are not limited to:
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the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, receiving, offering, or paying remuneration, directly or indirectly, in cash or in kind, in exchange for or to induce either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of this statute or specific intent to violate the Anti-Kickback statute itself to have committed a violation. The U.S. government has interpreted this law broadly to apply to the marketing and sales activities of manufacturers and distributors like us.
Violations of the federal Anti-Kickback Statute may result in civil monetary penalties up to $100,000 for each violation, plus up to three times the remuneration involved. Violations of the Federal Anti-Kickback Statute can also result in criminal penalties, including criminal fines of up to $100,000 and imprisonment of up to 10 years. In addition, violations can result in exclusion from participation in government healthcare programs, including Medicare and Medicaid;
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federal civil and criminal false claims laws and civil monetary penalty laws, that prohibit, among other things, knowingly presenting, or causing to be presented, claims for payment or approval to the federal government that are false or fraudulent, knowingly making a false statement material to an obligation to pay or transmit money or property to the federal government or knowingly concealing or knowingly and improperly avoiding or decreasing an obligation to pay or transmit money or property to the federal government. These laws may apply to manufacturers and distributors who provide information on
coverage
, coding, and
reimbursement
of their products to persons who do bill third-party payors. When an entity is determined to have violated the federal civil False Claims Act, the government may impose civil fines and penalties ranging from $11,463 to $22,927 for each false claim, plus treble damages, and exclude the entity from participation in Medicare, Medicaid and other federal healthcare programs.
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HIPAA, which created federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters. A person or entity does not need to have actual knowledge of these statutes or specific intent to violate them to have committed a violation. Further, failure to comply with the HIPAA privacy and security standards can result in civil monetary penalties up to $57,051 per violation, not to exceed $1.7 million per calendar year for non-compliance of an identical provision and, in certain circumstances, criminal penalties with fines up to $1.5 million and/or imprisonment;
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the federal Physician Sunshine Act requirements under the ACA, which impose reporting and disclosure requirements on device and drug manufacturers for any “transfer of value” made or distributed by certain manufacturers of drugs, devices,
biologics
, and medical supplies to physicians (including doctors, dentists, optometrists,
podiatrists and chiropractors),
physician assistants, nurse practitioners, other practitioners, teaching
hospitals, and ownership and investment interests held by physicians and their immediate family members;
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federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that
potentially
harm customers; and
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state and foreign law equivalents of each of the above federal laws, such as state anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payor, including commercial insurers; state laws that require device companies to comply with the industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures.
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The scope and enforcement of these laws are uncertain and subject to rapid change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and regulations. Federal and state enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. For example, from 2016 through 2019, the Office of Inspector General, or OIG, of the Department of Health and Human Services has sent us subpoenas, informal requests and a civil investigative demand, requesting documents and other materials that relate to our business practices, marketing programs, promotional activities, and leasing programs with home medical equipment providers, medical providers, sleep labs, and physicians. Responding to investigations can be time-and resource-consuming and can divert management’s attention from the business. Additionally, as a result of these types of investigations, healthcare providers and entities may face litigation or have to agree to settlements that can include monetary penalties and onerous compliance and reporting requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business.
We have tentatively agreed with the government to civilly resolve the 2016
to 20
19 government investigations described above for a payment of $39.5
million
and we expect to also incur additional fees and administrative costs that typically accompany such a resolution. As a result, we have reserved $41.2
million
for the expenses we expect to incur in connection with this settlement. A resolution may also include ongoing obligations
, such as any imposed
under a corporate integrity agreement.
However,
we have not yet completed negotiations, and there can be no assurance as to whether or when the parties will finalize any such negotiated resolution
or what the final terms of such a resolution will be
.
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us now or in the future, we may be subject to penalties, including civil and criminal penalties, damages, fines, disgorgement, exclusion from governmental health care programs,
additional compliance and reporting obligations, imprisonment
and the curtailment or restructuring of our ope
rations, any of which could adversely affect our ability to operate our business and our financial results.
Our use and disclosure of individually identifiable information, including health information, is subject to federal, state and foreign privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm.
The privacy and security of personally identifiable information stored, maintained, received or transmitted electronically is a major issue in the United States and abroad. While we strive to comply with all applicable privacy and security laws and regulations, as well as our own posted privacy policies, legal standards for privacy, including but not limited to ‘‘unfairness’’ and ‘‘deception,’’ as enforced by the FTC and state attorneys general, continue to evolve and any failure or perceived failure to comply may result in proceedings or actions against us by government entities or others, or could cause us to lose audience and customers, which could have a material adverse effect on our business. Recently, there has been an increase in public awareness of privacy issues in the wake of revelations about the activities of various government agencies and in the number of private privacy-related lawsuits filed against companies. Concerns about our practices with regard to the collection, use, disclosure, or security of personally identifiable information or other privacy-related matters, even if unfounded and even if we are in compliance with applicable laws, could damage our reputation and harm our business.
Numerous foreign, federal and state laws and regulations govern collection, dissemination, use and confidentiality of personally identifiable health information, including (i) state privacy and confidentiality laws (including state laws requiring disclosure of breaches); (ii) HIPAA; and (iii) European and other foreign data protection laws, including the GDPR.
HIPAA establishes a set of national privacy and security standards for the protection of individually identifiable health information, including what is known as protected health information, by health plans, healthcare clearinghouses and healthcare providers that submit certain covered transactions electronically, or covered entities, and their ‘‘business associates,’’ which are persons or entities that perform certain services for, or on behalf of, a covered entity that involve the use or disclosure of protected health information. Certain portions of our business, such as the cloud-based software digital health applications, are subject to HIPAA as a business associate of our covered entities clients. To provide our covered entity clients with services that involve the use or disclosure of PHI, HIPAA requires us to enter into business associate agreements that require us to safeguard PHI in accordance with HIPAA. As a business associate, we are also directly liable for compliance with HIPAA. Penalties for violations of HIPAA regulations include civil and criminal penalties.
HIPAA authorizes state attorneys general to file suit under HIPAA on behalf of state residents. Courts can award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for HIPAA violations, its standards have been used as the basis for a duty of care claim in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI.
HIPAA further requires business associates like us to notify our covered entity clients “without unreasonable delay and in no case later than 60 calendar days after discovery of the breach.” Covered entities must notify affected individuals “without unreasonable delay and in no case later than 60 calendar days after discovery of the breach” if their unsecured PHI is subject to an unauthorized access, use or disclosure. If a breach affects 500 patients or more, covered entities must report it to HHS and local media without unreasonable delay, and HHS will post the name of the breaching entity on its public website. If a breach affects fewer than 500 individuals, the covered entity must log it and notify HHS at least annually.
If we are unable to properly protect the privacy and security of health information entrusted to us, our solutions may be perceived as not secure, we may incur significant liabilities and customers may curtail their use of or stop using our solutions. In addition, if we fail to comply with the terms of our business associate agreements with our clients, we are liable not only contractually but also directly under HIPAA.
We are also subject to laws and regulations in non-U.S. countries covering data privacy and the protection of health-related and other personal information. EU member states and other jurisdictions have adopted data protection laws and regulations, which impose significant compliance obligations. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of personal information that identifies or may be used to identify an individual, such as names, contact information, and sensitive personal data such as health data. These laws and regulations are subject to frequent revisions and differing interpretations, and have generally become more stringent over time.
In addition, as of May 25, 2018, the General Data Protection Regulation, or GDPR, has replaced the Data Protection Directive with respect to the processing of personal data in the Economic Area, or EEA. The GDPR imposes several stringent requirements for controllers and processors of personal data, including, for example, higher standards for obtaining consent from individuals to process their personal data, more robust disclosures to individuals and a strengthened individual data rights regime, shortened timelines for data breach notifications, limitations on retention and secondary use of information
(including for research purposes)
, increased requirements pertaining to health data and pseudonymised (i.e., key-coded) data and additional obligations when we contract third party processors in connection with the processing of the personal data. The GDPR
also imposes strict rules on the transfer of personal data out of the EEA, including to the United States, and could be impacted by changes in law as a result of a future review of these transfer mechanisms by European regulators under the GDPR, as well as current challenges to these mechanisms in the European courts. European data protection law
provides that EEA member states may make their own further laws and regulations limiting the processing of genetic, biometric or health data, which could limit our ability to use and share personal data or could cause our costs could increase, and harm our business and financial condition.
The GDPR and other similar regulations impose additional conditions in order to satisfy such consent for electronic marketing, such as a prohibition on pre-checked tick boxes and bundled consents, thereby requiring customers to affirmatively consent for a given purpose through separate tick boxes or other affirmative action.
Failure to comply with the requirements of GDPR and the applicable national data protection
and marketing
laws of the EEA member states may result in fines of up to €20,000,000 or up to 4% of the total worldwide annual turnover of the preceding financial year, whichever is higher, and other administrative penalties
as well as individual claims for compensation
. To comply with the new data protection rules imposed by GDPR we may be required to put in place additional mechanisms ensuring compliance. This may be onerous and adversely affect our business, financial condition, results of operations and prospects. Compliance with such laws and regulations causes our costs to increase and harms our business and financial condition. Additionally, limitations on our ability to use and share personal data could adversely affect our business.
In addition, Brexit could also lead to further legislative and regulatory changes by the planned exit date of October 2019. It remains unclear how the United Kingdom data protection laws or regulations will develop in the medium to longer term and how data transfer to the United Kingdom from the European Union will be regulated, especially if the United Kingdom leaves the European Union without a deal. However, the United Kingdom has transposed the GDPR into domestic law with the Data Protection Act 2018 which will remain in force, even if and when the United Kingdom leaves the EU.
Any failure or perceived failure by us to comply with privacy or security laws, policies, legal obligations or industry standards or any security incident that results in the unauthorized release or transfer of personally identifiable information may result in governmental enforcement actions and investigations, fines and penalties, litigation and/or adverse publicity, including by consumer advocacy groups, and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business. Such failures could have a material adverse effect on our financial condition and operations. If the third parties we work with violate applicable laws, contractual obligations or suffer a security breach, such violations may also put us in breach of our obligations under privacy laws and regulations and/or could in turn have a material adverse effect on our business.
Our business activities are subject to extensive regulation, and any failure to comply could have a materially adverse effect on our business, financial condition, or results of operations.
We are subject to extensive U.S. federal, state, local and international regulations regarding our business activities. Failure to comply with these regulations could result in, among other things, recalls of our products, substantial fines and criminal charges against us or against our employees. Furthermore, certain of our products could be subject to recall if the Food and Drug Administration, or the FDA, other regulators or we determine, for any reason, that those products are not safe or effective. Any recall or other regulatory action could increase our costs, damage our reputation, affect our ability to supply customers with the quantity of products they require and materially affect our operating results.
Actual or attempted breaches of security, unauthorized disclosure of information, denial of service attacks or the perception that personal and/or other sensitive or confidential information in our possession is not secure, could result in a material loss of business, substantial legal liability or significant harm to our reputation.
We receive, collect, process, use and store a large amount of information from clients and our own employees, including personally identifiable, protected health and other sensitive and confidential information. This data is often accessed by us through transmissions over public and private networks, including the Internet. The secure transmission of such information over the Internet and other mechanisms is essential to maintain confidence in our information technology systems. We have implemented security measures, technical controls and contractual precautions designed to identify, detect and prevent unauthorized access, alteration, use or disclosure of our and our clients’ and employees’ data. However, there is no guarantee that these measures can provide absolute security. Beyond external criminal activity, systems that access or control access to our services and databases may be compromised as a result of human error, fraud or malice on the part of employees or third parties, or may result from accidental technological failure. Because the techniques used to circumvent security systems can be highly sophisticated and change frequently, often are not recognized until launched against a target and may originate from less regulated and remote areas around the world, we may be unable to proactively address all possible techniques or implement adequate preventive measures for all situations.
If someone is able to circumvent or breach our security systems, they could steal any information located therein or cause interruptions to our operations. Security breaches or attempts thereof could also damage our reputation and expose us to a risk of monetary loss and/or litigation, fines and sanctions. We also face risks associated with security breaches affecting third parties that conduct business with us or our clients and others who interact with our data. While we maintain insurance that covers certain security and privacy breaches, we may not carry appropriate insurance or maintain sufficient coverage to compensate for all potential liability.
We are subject to diverse laws and regulations relating to data privacy and security, including HIPAA and European data privacy laws. Complying with these numerous and complex regulations is expensive and difficult, and failure to comply with these regulations could result in regulatory scrutiny, fines and civil liability. In addition, any security breach or attempt thereof could result in liability for stolen assets or information, additional costs associated with repairing any system damage, incentives offered to clients or other business partners to maintain business relationships after a breach, and implementation of measures to prevent future breaches, including organizational changes, deployment of additional personnel and protection technologies, employee training and engagement of third-party experts and consultants. Furthermore, these rules are constantly changing; for example, as stated above, the GDPR has been adopted, the EU-U.S. Safe Harbor Framework has been declared invalid and the EU-U.S. Privacy Shield Framework has recently been formally adopted by the European Commission while the standard contractual clauses are being challenged in the European courts. Additionally, the costs incurred to remediate any data security or privacy incident could be substantial.
We cannot assure you that any of our third-party service providers with access to our or our clients and/or employees’ personally identifiable and other sensitive or confidential information will maintain appropriate policies and practices regarding data privacy and security in compliance with all applicable laws or that they will not experience data security breaches or attempts thereof, which could have a corresponding effect on our business.
Product sales, introductions or modifications may be delayed or canceled as a result of FDA regulations or similar foreign regulations, which could cause our sales and profits to decline.
Unless a product is exempt, before we can market or sell a new medical device in the United States, we must obtain FDA clearance or approval, which can be a lengthy and time-consuming process. We generally receive clearance from the FDA to market our products in the United States under Section 510(k) of the Federal Food, Drug, and Cosmetic Act or our products are exempt from the Section 510(k) clearance process. The 510(k) clearance process can be expensive, time-consuming and uncertain. In the 510(k) clearance process, the FDA must determine that a proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use, technology and safety and effectiveness, in order to clear the proposed device for marketing. The FDA has a high degree of latitude when evaluating submissions and may determine that a proposed device submitted for 510(k) clearance is not substantially equivalent to a predicate device. After a device receives 510(k) premarket notification clearance from the FDA, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in the intended use of the device, technology, materials, packaging, and certain manufacturing processes may require a new 510(k) clearance or premarket approval. We have modified some of our Section 510(k) approved products without submitting new Section 510(k) notices, which we do not believe were required. However, if the FDA disagrees with us and requires us to submit new Section 510(k) notifications for modifications to our existing products, we may be required to stop marketing the products while the FDA reviews the Section 510(k) notification.
Any new product introduction or existing product modification could be subjected to a lengthier, more rigorous FDA examination process. For example, in certain cases we may need to conduct clinical trials of a new product before submitting a 510(k) notice. We may also be required to obtain premarket approvals for certain of our products. Indeed, recent trends in the FDA’s review of premarket notification submissions suggest that the FDA is often requiring manufacturers to provide new, more expansive, or different information regarding a particular device than what the manufacturer anticipated upon 510(k) submission. This has resulted in increasing uncertainty and delay in the premarket notification review process. For example, in November 2018, FDA officials announced forthcoming steps that the FDA intends to take to modernize the 510(k) premarket notification pathway. Among other things, the FDA announced that it plans to develop proposals to drive manufacturers utilizing the 510(k) pathway toward the use of newer predicates. These proposals include plans to potentially sunset certain older devices that were used as predicates under the 510(k) clearance pathway, and to potentially publish a list of devices that have been cleared on the basis of demonstrated substantial equivalence to predicate devices that are more than 10 years old. In February 2019, the FDA also finalized guidance establishing a “Safety and Performance Based Pathway” for “manufacturers of certain well-understood device types” allowing manufacturers to rely on objective safety and performance criteria recognized by the FDA to demonstrate substantial equivalence, obviating the need for manufacturers to compare the safety and performance of their medical devices to specific predicate devices in the clearance process. Some of these proposals have not yet been finalized or adopted, and the FDA announced that it would seek public feedback prior to publication of any such proposals, and may work with Congress to implement such proposals through legislation. Accordingly, it is unclear the extent to which any proposals, if adopted, could impose additional regulatory requirements on us that could delay our ability to obtain new 510(k) clearances, increase the costs of compliance, or restrict our ability to maintain our current clearances, or otherwise create competition that may negatively affect our business.
In addition, the FDA recently evaluated its guidance describing when it believes a manufacturer is obligated to submit a new 510(k) for modifications or changes to a previously cleared device. Although the FDA had historically proposed a number of changes to a long-standing guidance from 1997 on this topic, the FDA concluded that manufacturers should continue adhering to the principles in the 1997 guidance. In October 2017, the FDA issued final guidance superseding the 1997 guidance, which FDA believes preserves the basic format and content of the 1997 guidance with updates to enhance predictability, consistency, and transparency of the decision-making process. The FDA’s ongoing review of the 510(k) program may make it more difficult for us to make modifications to our previously cleared products, either by imposing stricter requirements on when a manufacturer must submit a new 510(k) for a modification to a previously cleared product, or by applying more onerous review criteria to such submissions. FDA continues to review its 510(k) clearance process which could result in additional changes to regulatory requirements or guidance documents which could increase the costs of compliance, or restrict our ability to maintain current clearances. The requirements of the more rigorous premarket approval process and/or significant changes to the 510(k) clearance process could delay product introductions and increase the costs associated with FDA compliance. Marketing and sale of our products outside the United States are also subject to regulatory clearances and approvals, and if we fail to obtain these regulatory approvals, our sales could suffer. We cannot assure you that any new products we develop will receive required regulatory approvals from U.S. or foreign regulatory agencies.
We are subject to substantial regulation related to quality standards applicable to our manufacturing and quality processes. Our failure to comply with these standards could have an adverse effect on our business, financial condition, or results of operations.
The FDA regulates the approval, manufacturing, and sales and marketing of many of our products in the United States. Significant government regulation also exists in Canada, Japan, Europe, and other countries in which we conduct business. As a device manufacturer, we are required to register with the FDA and are subject to periodic inspection by the FDA for compliance with the FDA’s Quality System Regulation requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures. In addition, the federal Medical Device Reporting regulations require us to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA. In the European Community, we are required to maintain certain ISO certifications in order to sell our products and must undergo periodic inspections by notified bodies to obtain and maintain these certifications. Failure to comply with current governmental regulations and quality assurance guidelines could lead to temporary manufacturing shutdowns, product recalls or related field actions, product shortages or delays in product manufacturing. Efficacy or safety concerns, an increase in trends of adverse events in the marketplace, and/or manufacturing quality issues with respect to our products could lead to product recalls or related field actions, withdrawals, and/or declining sales.
Changes in funding for the FDA and other government agencies could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new products and services from being developed or commercialized in a timely manner, which could negatively impact our business.
The ability of the FDA to review and clear or approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new drugs, biologics, or devices to be reviewed and/or cleared or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
Laws regulating consumer contacts could adversely affect our business operations or create liabilities.
Our business activities include contacts with consumers in different parts of the world. Certain laws, such as the U.S. Telephone Consumer Protection Act, regulate telemarketing practices and certain automated outbound contacts with consumers, such as phone calls, texts or emails. Our use of outbound contacts may be restricted by existing laws, or by laws, regulations, or regulatory decisions that may be adopted in the future. If we are found to have violated these laws or regulations, we may be subjected to substantial fines, penalties, or liabilities to consumers.
Our products are the subject of clinical trials conducted by us, our competitors, or other third parties, the results of which may be unfavorable, or perceived as unfavorable, and could have a material adverse effect on our business, financial condition, and results of operations.
As a part of the regulatory process to obtain marketing clearance for new products and new indications for existing products, or for other reasons, we conduct and participate in numerous clinical trials with a variety of study designs, patient populations, and trial endpoints. We, our competitors, or other third parties may also conduct clinical trials involving our commercially marketed products. The results of clinical trials may be unfavorable or inconsistent with previous findings, or could identify safety signals associated with our products. Current or future clinical trials may not meet primary endpoints, may reveal disadvantages of our products and solutions for various markets we address, or could generate unfavorable or inconsistent clinical data. Clinical data, or the market’s or regulatory bodies’ perception of the clinical data, may adversely impact our ability to obtain product clearances or approvals, and our position in, and share of, the markets in which we participate. Moreover, if these clinical trials identify serious safety issues associated with our marketed products, potentially adverse consequences could result, including that regulatory authorities could withdraw clearances or approvals of our products, we could be required to halt the marketing and sales of our products or recall our products, we could be required to update our product labeling with additional warnings, we could be sued and held liable for harm caused to patients, and our reputation may suffer. Any of these could have a material adverse impact on our business, financial condition, and results of operations.
Off-label marketing of our products could result in substantial penalties.
The FDA strictly regulates the promotional claims that may be made about FDA-cleared products. In particular, clearance under Section 510(k) only permits us to market our products for the uses indicated on the labeling cleared by the FDA. We may request additional label indications for our current products, and the FDA may deny those requests outright, require additional expensive clinical data to support any additional indications or impose limitations on the intended use of any cleared products as a condition of clearance. If the FDA determines that we have marketed our products for off-label use, we could be subject to fines, injunctions or other penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs, and the curtailment of our operations. Any of these events could significantly harm our business and results of operations and cause our stock price to decline.
Disruptions in the supply of components from our suppliers could result in a significant reduction in sales and profitability.
We purchase configured components for our devices from various suppliers, including some who are single-source suppliers for us. We cannot assure you that a replacement supplier would be able to configure its components for our devices on a timely basis or, in the alternative, that we would be able to reconfigure our devices to integrate the replacement part. A reduction or halt in supply while a replacement supplier reconfigures its components, or while we reconfigure our devices for the replacement part, would limit our ability to manufacture our devices in a timely or cost-effective manner, which could result in a significant reduction in sales and profitability. We cannot assure you that our inventories would be adequate to meet our production needs during any prolonged interruption of supply.
If we fail to attract develop and retain key employees our business may suffer.
Our ability to compete effectively depends on our ability to attract and retain key employees, including people in senior management, sales, marketing, technology and R&D positions. Competition for top talent in the healthcare industry can be intense. Our ability to recruit and retain such talent will depend on a number of factors, including hiring practices of our competitors, compensation and benefits, work location, work environment and industry economic conditions. If we cannot effectively recruit, develop and retain qualified employees to drive our strategic goals, our business could suffer.
We are subject to potential product liability claims that may exceed the scope and amount of our insurance coverage, which would expose us to liability for uninsured claims.
We are subject to potential product liability claims as a result of the design, manufacture and marketing of medical devices. Any product liability claim brought against us, with or without merit, could result in the increase of our product liability insurance rates. In addition, we would have to pay any amount awarded by a court in excess of our policy limits. Our insurance policies have various exclusions, and thus we may be subject to a product liability claim for which we have no insurance coverage, in which case, we may have to pay the entire amount of any award. We cannot assure you that our insurance coverage will be adequate or that all claims brought against us will be covered by our insurance and we cannot assure you that we will be able to obtain insurance in the future on terms acceptable to us or at all. A successful product liability claim brought against us in excess of our insurance coverage, if any, may require us to pay substantial amounts, which could harm our business.
Our intellectual property may not protect our products, and/or our products may infringe on the intellectual property rights of third-parties.
We rely on a combination of patents, trade secrets and non-disclosure agreements to protect our intellectual property. Our success depends, in part, on our ability to obtain and maintain United States and foreign patent protection for our products, their uses and our processes to preserve our trade secrets and to operate without infringing on the proprietary rights of third-parties. We have a number of pending patent applications, and we do not know whether any patents will issue from any of these applications. We do not know whether any of the claims in our issued patents or pending applications will provide us with any significant protection against competitive products or otherwise be commercially valuable. Legal standards regarding the validity of patents and the proper scope of their claims are still evolving, and there is no consistent law or policy regarding the valid breadth of claims. Additionally, there may be third-party patents, patent applications and other intellectual property relevant to our products and technology which are not known to us and that block or compete with our products. We face the risks that:
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third-parties will infringe our intellectual property rights;
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our non-disclosure agreements will be breached;
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we will not have adequate remedies for infringement;
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our trade secrets will become known to or independently developed by our competitors; or
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third-parties will be issued patents that may prevent the sale of our products or require us to license and pay fees or royalties in order for us to be able to market some of our products.
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Litigation may be necessary to enforce patents issued to us, to protect our proprietary rights, or to defend third-party claims that we have infringed on proprietary rights of others. If the outcome of any litigation or proceeding brought against us were adverse, we could be subject to significant liabilities to third-parties, could be required to obtain licenses from third-parties, could be forced to design around the patents at issue or could be required to cease sales of the affected products. A license may not be available at all or on commercially viable terms, and we may not be able to redesign our products to avoid infringement. Additionally, the laws regarding the enforceability of patents vary from country to country, and we cannot assure you that any patent issues we face will be uniformly resolved, or that local laws will provide us with consistent rights and benefits.
Tax laws, regulations, and enforcement practices are evolving and may have a material adverse effect on our results of operations, cash flows and financial position.
Tax laws, regulations, and administrative practices in various jurisdictions are evolving and may be subject to significant changes due to economic, political, and other conditions. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain, and significant judgment is required in evaluating and estimating our provision and accruals for taxes. Governments are increasingly focused on ways to increase tax revenues, particularly from multinational corporations, which may lead to an increase in audit activity and aggressive positions taken by tax authorities.
Changes or clarifications to U.S. tax laws could materially affect the tax treatment of our domestic and foreign earnings. The Organisation for Economic Co-operation and Development, an international association of 34 countries, including the United States, released the final reports from its Base Erosion and Profit Shifting, or BEPS, Action Plans, which aim to standardize and modernize global tax policies. The BEPS Action Plans propose revisions to numerous tax rules, including country-by-country reporting, permanent establishment, hybrid entities and instruments, transfer pricing, and tax treaties. The BEPS Action Plans have been or are being enacted by countries where we have operations.
In December 2017,
the Tax Cuts and Jobs Act, or the U.S. Tax Act
, was signed into law. The U.S. Tax Act significantly revise
d
the U.S. corporate income tax by, among other things, imposing a one-time transition tax on unremitted foreign earnings, lowering the corporate income tax rate from 35 percent to 21 percent and implementing a territorial tax system in regard to foreign earnings. T
his resulted in the recognition of a
dditional income tax expense of $138.0
million during the year ended June 30, 2018, which consisted of $126.9 million for a transition tax imposed on all non-U.S. historical earnings that is payable over the
follow
ing eight years and $11.1 million in tax expense due to the expected limitation of future deductions of our net deferred tax assets. Effective December 31, 2018, the accounting relating to the impact of changes to U.S.
Tax Act
was no longer considered provisional. However, further adjustments could be required as a result of future legislation, amended tax returns, or tax examinations of the years impacted by the calculation.
Developments in relevant tax laws, regulations, administrative practices and enforcement practices could have a material adverse effect on our operating results, financial position and cash flows, including the need to obtain additional financing.
We are subject to tax audits by various tax authorities in many jurisdictions.
Our income tax returns are based on calculations and assumptions that require significant judgment, and are 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.
We are currently under audit by
the Australian Taxation Office, or ATO,
for the tax years 2009 to 2013, and in March 2018, we received Notices of Amended Assessments. Based on these assessments, the ATO asserted that we owe $151.7 million in additional income tax and $38.4 million in accrued interest. We agreed to a payment arrangement with the ATO, whereby an amount of $75.9 million was paid by us in April 2018, with the remaining amounts due only if we are unsuccessful in defending our position. In June 2018, we received a notice from the ATO claiming penalties of 50% of the additional income tax that was assessed. In accordance with the payment arrangement, all remaining tax, interest and penalty amounts outstanding are due only if we are unsuccessful in defending our position. We do not agree with the ATO’s assessments and intend to pursue administrative and legal steps to defend our position. We continue to believe we are more likely than not to be successful in defending our position. However, if we are not successful, there may be material changes to our past or future taxable income, tax payable or deferred tax assets, we will not receive a refund of the $75.9 million we paid in April 2018, and we will be required to pay penalties and interest that could materially adversely affect our financial results.
The ATO is currently auditing tax years 2014 to 2017, and we have also been notified by the ATO that they intend to audit tax year 2018.
Our quarterly operating results are subject to fluctuation for a variety of reasons.
Our operating results have, from time to time, fluctuated on a quarterly basis and may be subject to similar fluctuations in the future. These fluctuations may result from a number of factors, including:
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the introduction of new products by us or our competitors;
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the geographic mix of product sales;
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the success and costs of our marketing efforts in new regions;
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changes in third-party payor reimbursement;
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timing of regulatory clearances and approvals;
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costs associated with acquiring and integrating new businesses, technologies and product offerings;
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timing of orders by distributors;
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expenditures incurred for research and development;
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competitive pricing in different regions;
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the effect of foreign currency transaction gains or losses; and
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other activities of our competitors.
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Fluctuations in our quarterly operating results may cause the market price of our common stock to fluctuate.
If a natural or man-made disaster strikes our manufacturing facilities, we will be unable to manufacture our products for a substantial amount of time and our sales and profitability will decline.
Our facilities and the manufacturing equipment we use to produce our products would be costly to replace and could require substantial lead-time to repair or replace. The facilities may be affected by natural or man-made disasters and in the event they were affected by a disaster, we would be forced to rely on third-party manufacturers. Although we believe we possess adequate insurance for the disruption of our business from causalities, such insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.
Delaware law and provisions in our charter and could make it difficult for another company to acquire us.
Provisions of our certificate of incorporation may have the effect of delaying or preventing changes in control or management which might be beneficial to us or our security holders. In particular, our board of directors is divided into three classes, serving for staggered three-year terms. Because of this classification, it will require at least two annual meetings to elect directors constituting a majority of our board of directors. Additionally, our board of directors has the authority to issue up to 2,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without further vote or action by the stockholders. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control, may discourage bids for our common stock at a premium over the market price of our common stock and may adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock.
You may not be able to enforce the judgments of U.S. courts against some of our assets or officers and directors.
A substantial portion of our assets are located outside the United States. Additionally, some of our directors and executive officers reside outside the United States, along with all or a substantial portion of their assets. As a result, it may not be possible for investors to enforce judgments of U.S. courts relating to any liabilities under U.S. securities laws against our assets, those persons or their assets. In addition, investors may not be able to pursue claims based on U.S. securities laws against these assets or these persons in non-U.S. courts, where most of these assets and persons reside.
We are increasingly dependent on information technology systems and infrastructure.
Our technology systems are potentially vulnerable to breakdown or other interruption by fire, power loss, system malfunction, unauthorized access and other events. Likewise, data privacy breaches by employees and others with both permitted and unauthorized access to our systems may pose a risk that sensitive data may be exposed to unauthorized persons or to the public, or may be permanently lost. While we have invested heavily in the protection of data and information technology and in related training, there can be no assurance that our efforts will prevent significant breakdowns, breaches in our systems or other cyber incidents that could have a material adverse effect upon the reputation, business, operations or financial condition of the company. In addition, significant implementation issues may arise as we continue to consolidate and outsource certain computer operations and application support activities.
Our results of operations may be materially affected by global economic conditions generally, including conditions in the financial markets.
Recently, concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, and the ability of sovereign nations to pay their debts have contributed to increased volatility and diminished expectations for the economy and the financial markets going forward. These factors, combined with volatile commodity prices, declining business and consumer confidence and increased unemployment, have precipitated an economic slowdown. It is difficult to predict how long the current economic conditions will continue and whether the economic conditions will continue to deteriorate. If the economic climate in the United States or outside the United States continues to deteriorate or there is a shift in government spending priorities, customers or potential customers could reduce or delay their purchases, which could impact our revenue, our ability to manage inventory levels, collect customer receivables, and ultimately decrease our profitability.
Our leverage and debt service obligations could adversely affect our business.
As of
June 30, 2019
, our total consolidated debt was
$1,274.0
million. We may incur additional indebtedness in the future. Our indebtedness could have adverse consequences, including:
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making it more difficult to satisfy our financial obligations;
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increasing our vulnerability to adverse economic, regulatory and industry conditions;
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limiting our ability to compete and our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
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limiting our ability to borrow additional funds for working capital, capital expenditure, acquisitions and general corporate or other purposes; and
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exposing us to greater interest rate risk.
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Our debt service obligations will require us to use a portion of our operating cash flow to pay interest and principal in indebtedness, which could impede our growth. Our ability to make payments on, and to refinance, our indebtedness, and to fund capital expenditures will depend on our ability to generate cash in the future. This is subject to general economic, financial, competitive, legislative, regulatory, and other factors, many of which are beyond our control.
We may be adversely affected by recent proposals to reform LIBOR.
Certain of our financial arrangements, including credit facilities, are made at variable interest rates that use the London Interbank Offered Rate, or LIBOR (or metrics derived from or related to LIBOR), as a benchmark for establishing the interest rate. On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. These reforms may cause LIBOR to cease to exist, new methods of calculating LIBOR to be established, or alternative reference rates to be established. The potential consequences cannot be fully predicted and could have an adverse impact on the market value for or value of LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us. Changes in market interest rates may influence our financing costs, returns on financial investments and the valuation of derivative contracts and could reduce our earnings and cash flows.
We may write-off intangible assets, such as goodwill.
We have recorded intangible assets, including goodwill in connection with our acquisitions. At least on an annual basis, we will evaluate whether facts and circumstances indicate any impairment of the values of these intangible assets. As circumstances change, we cannot assure you that the value of these intangible assets will be realized by us. If we determine that a significant impairment has occurred, we will be required to write-off the impaired portion of intangible assets, which could have a material adverse effect on our results of operations in the period in which the write-off occurs.
Prior to our recent acquisitions, those companies were privately-held, and their new obligations of being a part of a public company may require significant resources and management attention.
Upon consummation of our recent acquisitions, the acquired entities became subsidiaries of our consolidated company, and need to comply with the Sarbanes-Oxley Act of 2002 and the rules and regulations subsequently implemented by the SEC and the Public Company Accounting Oversight Board. We will need to ensure that each of the acquired companies establishes and maintains effective disclosure controls as well as internal controls and procedures for financial reporting, and such compliance efforts may be costly and may divert the attention of management.
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed 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, China, Singapore, Malaysia, France and the United States. Major distribution and sales sites are located in the United States, Germany, France, the United Kingdom, Switzerland, Australia, Japan, China, Norway and Sweden.
(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 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
We adopted Accounting Standard Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” on July 1, 2018. 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, 2019
, 2018 and 2017
.
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 to five years. The following table summarizes our contract balances at June 30, 2019 and June 30, 2018 (in thousands):
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2019
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2018
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Balance sheet caption
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Contract assets
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Accounts receivable, net
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$
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528,484
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$
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483,681
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Accounts receivable, net
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Unbilled revenue, current
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9,834
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13,342
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Prepaid expenses and other current assets
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Unbilled revenue, non-current
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4,592
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2,973
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Prepaid taxes and other non-current assets
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Contract liabilities
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Deferred revenue, current
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(88,667)
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(60,828)
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Deferred revenue (current liabilities)
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Deferred revenue, non-current
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(81,143)
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(71,596)
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Deferred revenue (non-current liabilities)
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Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
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.
Many of our Sleep and Respiratory Care contracts have a single performance obligation which is the shipment of our therapy-based equipment. However, when the Sleep and Respiratory Care or SaaS contract has 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 the performance obligation.
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. 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)
Cash and Cash Equivalents
Cash equivalents include certificates of deposit and other highly liquid investments and we state them at co
st, 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.
(d)
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).
(
e)
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 estimat
ed useful lives of the assets.
Useful lives are generally two 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 lease term.
We charge maintenance and repairs to expense as we incur them.
(f)
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 five years. If a patent is superseded or a product is retired, any unamortized costs are written off immediately.
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
We amortize all of our other intangible assets on a straight-line basis over their estimated useful lives, which range from two to fifteen years. We evaluate the recoverability of intangible assets
at least annually
and take into account events or circumstances that warrant revised estimates of useful lives or that in
dicate that impairment exists.
We have not identified any impairment of intangible assets during any of the periods presented.
(g)
Goodwill
We conducted our annual review for goodwill impairment during the final quarter of 2019 and is performed at our reporting unit level, which is one level below our operating segments. Our goodwill impairment review 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. If the carrying value of the reporting unit, including goodwill, exceeds the reporting unit’s fair value, we would proceed to Step 2. If a reporting unit’s fair value exceeds the carrying value, no further work is performed and no impairment charge is necessary.
Step 2 – Allocate the fair value of the reporting unit to its identifiable tangible and non-goodwill intangible assets and liabilities. This will derive an implied fair value for the goodwill. Then, compare the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of its goodwill, an impairment loss must be recognized for the excess.
During the annual review, we completed a Step 0 or Qualitative assessment and determined it wa
s more likely than not that the
fair value of our reporting units exceeded their
carrying amount
s
, including goodwill
and, therefore,
goodwill was
no
t
impaired.
(h)
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 substanti
ally 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.
(i)
Research and Development
We record all research and development expenses in the period we incur them.
(j)
Financial Instruments
The carrying value of financial instruments, such as cash equivalents, accounts receivable and accounts payable, approximate their fair value because of their short-term nature. The carrying value of long-term debt approximates its fair value as the principal amounts outstanding are subject to variable interest rates that are based on market ra
tes which are regularly reset.
Foreign currency hedging instruments are marked to market and therefore reflect their fair value. We do not hold or issue financial instruments for trading purposes.
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.
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(k)
Foreign Exchange Risk Management
We enter into various types of foreign exchange contracts in managing our foreign exchange risk, including derivative financial instruments encompassing forward exchange contracts and foreign currency options.
The purpose of our foreign currency hedging activities is to protect us from adverse exchange rate fluctuations with respect to net cash movements resulting from the sales of products to foreign customers and Australian and Singapore manufacturing activities. We enter into foreign exchange contracts to hedge anticipated sales and manufacturing costs, principally denominated in Australian and Singapore dollars, and Euros. The terms of such foreign exchange contracts generally do not exceed three years.
We have determined our hedge program to be a non-effective hedge as defined. We record the foreign currency derivatives portfolio at fair value and include it in other assets and accrued expenses in our consolidated balance sheets. We do not offset the fair value amounts recognized for foreign c
urrency derivatives.
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 record all movements in the fair value of the foreign currency derivatives within other income, net in our consolidated statements of income.
(l)
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.
(m)
Provision for Warranty
We provide for the estimated cost of product warranties 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.
(n)
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, which results in bad debt expense. We determine the adequacy of this allowance by periodically evaluating individual customer receivables, considering a customer’s financial condition, credit history an
d current economic conditions.
We are also contingently liable, within certain limits, in the event of a customer default, to independent leasing companies in connection w
ith customer leasing 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.
(o)
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,
2019,
2018 and 2017
.
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(p)
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. 2016-02, “Leases”
In February 2016, the FASB issued Accounting Standard Update ASU No. 2016-02, “Leases” (Topic 842). Under the new guidance, lessees are required to recognize a right-of-use asset and a lease liability on the balance sheet for all leases, other than those that meet the definition of a
short
-term lease. This update will establish a lease asset and lease liability by lessees for those leases classified as operating under current GAAP. Leases will be classified as either operating or finance under the new guidance. Operating leases will result in straight-line expense in the income statement, similar to current operating leases, and finance leases will result in more expense being recognized in the earlier years of the lease term, similar to current capital leases. For lessors, the update will more closely align lease accounting to comparable guidance in the new revenue standards described.
The new standard is effective for us beginning in the first quarter of the fiscal year ending June 30, 2020 and early application is permitted.
ASU 2016-02 will be adopted on a modified retrospective transition basis for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.
We will make an accounting policy election to not recognize on our consolidated balance sheet right-of-use assets and lease liabilities arising from short-term leases.
In preparation for the adoption of this guidance, we have designed and operated internal controls over its implementation as well as established a system solution for lease administration as well as the preparation and disclosure of financial information surrounding our leasing arrangements
. We have substantially completed the work related to our implementation project except for finalization of discount rates as of the adoption date
, evaluation as to whether we are ‘reasonably certain’ to extend certain leases, and evaluation of several contracts to determine whether they contain an embedded lease
.
We estimate that the adoption of the guidance will result in the recognition of additional right-of-use assets and lease liabilities for operating leases of
approximately $60.0 million to $70.0 million
as of July 1, 2019, excluding the impact of our evaluation of lease terms and several contracts that may contain an embedded lease. As we are yet to finalize our work in relation to discount rates, we have used a preliminary rate of 3.5% when calculating this range. We do not believe the guidance will have a material impact on our consolidated statements of income
.
(b) Recently adopted accounting pronouncements
ASU No. 2014-09, “Revenue from Contracts with Customers”
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Since its initial release, the FASB has issued several amendments to the standard, which include clarification of accounting guidance related to identification of performance obligations, intellectual property licenses, and principal vs. agent considerations. ASU 2014-09 and all subsequent amendments (collectively, the “new revenue recognition standards”) replaced most existing revenue recognition guidance in U.S. GAAP during the current quarter when it became effective. The guidance also requires improved disclosures on the nature, amount, timing, and uncertainty of revenue that is recognized.
Effective July 1, 2018, we adopted the new revenue recognition standards and applied its provisions to all contracts using the modified retrospective method. Application of the new provisions did not have a material impact on our financial statements and no cumulative-effect adjustment was calculated or recognized. The comparative information has not been restated; however, if it were there would be no change in the accounting treatment.
Refer to the “Revenue Recognition” section above for further details about our revenue recognition following adoption of the new revenue recognition standards.
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
ASU No. 2016-01, "Financial Instruments - Overall"
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall" (Topic 825-10). The amendments address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments, and require equity investments, other than equity-method investments, to be measured at fair value with changes in fair value recognized through net income. The amendments also simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment for impairment quarterly at each reporting period. We adopted ASU 2016-01 during the quarter ended September 30, 2018 and elected to apply the practical expedient for measuring equity investments that do not have readily determinable fair market. Based on our elections, our strategic equity investments that do not have readily determinable fair values are measured at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identifiable or similar investments of the same issuer. The measurement alternative was applied prospectively and the adoption of ASU 2016-01 did not result in an adjustment to retained earnings.
ASU No. 2016-16, “Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory”
In October 2016, the FASB issued Accounting Standard Update ASU No. 2016-16, “Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory” (Topic 740). Under the new guidance, an entity is required to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. ASU 2016-16 became effective during the first quarter of the year ended June 30, 2019 and was required to be adopted on a modified retrospective basis, with a cumulative-effect adjustment recorded directly to retained earnings for intra-entity transfers that occur before the adoption date. Accordingly, we recognized the following reclassifications upon adoption (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Caption
|
|
As reported balance
June 30, 2018
|
|
Adoption of
ASU 2016-16 Increase/(Decrease)
|
|
Revised balance
July 1, 2018
|
Assets
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
$
|
124,634
|
|
$
|
(28,947)
|
|
$
|
95,687
|
Prepaid taxes and other non-current assets
|
|
|
273,710
|
|
|
(156,406)
|
|
|
117,304
|
Deferred income taxes
|
|
|
53,818
|
|
|
(3,445)
|
|
|
50,373
|
Equity
|
|
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
2,432,328
|
|
|
(188,798)
|
|
|
2,243,530
|
(4) Inventories
Inventories were comprised of the following as of
June 30, 2019 and June 30, 2018
(
in thousands):
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Raw materials
|
|
$
|
80,861
|
|
$
|
75,415
|
Work in progress
|
|
|
2,256
|
|
|
2,453
|
Finished goods
|
|
|
266,524
|
|
|
190,833
|
Total inventories
|
|
$
|
349,641
|
|
$
|
268,701
|
(5) Property, Plant and Equipment, net
Property, plant and equipment, net is comprised of the following as of
June 30, 2019 and June 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Machinery and equipment
|
|
$
|
262,010
|
|
$
|
239,671
|
Computer equipment
|
|
|
173,895
|
|
|
155,069
|
Furniture and fixtures
|
|
|
51,942
|
|
|
51,045
|
Vehicles
|
|
|
7,477
|
|
|
7,399
|
Clinical, demonstration and rental equipment
|
|
|
94,007
|
|
|
92,229
|
Leasehold improvements
|
|
|
34,210
|
|
|
32,169
|
Land
|
|
|
52,406
|
|
|
54,089
|
Buildings
|
|
|
223,028
|
|
|
229,193
|
|
|
|
898,975
|
|
|
860,864
|
Accumulated depreciation and amortization
|
|
|
(511,515)
|
|
|
(474,314)
|
Property, plant and equipment, net
|
|
$
|
387,460
|
|
$
|
386,550
|
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(6) Goodwill and Other Intangible Assets, net
Goodwill
For each of the years ended
June 30, 2019
and
June 30, 2018
, 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, 2019 (i
n thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
Sleep and
Respiratory Care
|
|
SaaS
|
|
Total
|
Balance at the beginning of the period
|
|
$
|
464,157
|
|
$
|
604,787
|
|
$
|
1,068,944
|
Business acquisition
|
|
|
159,623
|
|
|
634,697
|
|
|
794,320
|
Foreign currency translation adjustments
|
|
|
(6,815)
|
|
|
-
|
|
|
(6,815)
|
Balance at the end of the period
|
|
$
|
616,965
|
|
$
|
1,239,484
|
|
$
|
1,856,449
|
Other Intangible Assets
Other intangibles, net are comprised of the following as of
June 30, 2019 and June 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Developed/core product technology
|
|
$
|
401,842
|
|
$
|
205,149
|
Accumulated amortization
|
|
|
(157,651)
|
|
|
(115,237)
|
Developed/core product technology, net
|
|
|
244,191
|
|
|
89,912
|
Trade names
|
|
|
76,392
|
|
|
48,832
|
Accumulated amortization
|
|
|
(25,592)
|
|
|
(16,868)
|
Trade names, net
|
|
|
50,800
|
|
|
31,964
|
Non-compete agreements
|
|
|
4,218
|
|
|
3,288
|
Accumulated amortization
|
|
|
(2,783)
|
|
|
(2,283)
|
Non-compete agreements, net
|
|
|
1,435
|
|
|
1,005
|
Customer relationships
|
|
|
273,114
|
|
|
118,084
|
Accumulated amortization
|
|
|
(68,630)
|
|
|
(48,157)
|
Customer relationships, net
|
|
|
204,484
|
|
|
69,927
|
Patents
|
|
|
95,741
|
|
|
91,708
|
Accumulated amortization
|
|
|
(74,701)
|
|
|
(69,332)
|
Patents, net
|
|
|
21,040
|
|
|
22,376
|
Total other intangibles, net
|
|
$
|
521,950
|
|
$
|
215,184
|
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
and
fifteen
years. There are no expected residual values related to
these intangible assets.
Refer to note 2
1
of the consolidated financial statements for details of acquisitions.
Amortization expense related to
identified intangible assets
for
the year
s
ended
June 30, 2019
and June 30, 2018
was
$74.9
million
and $46.4 million, respectively. Amortization
expense related to
patents for the years ended June 30, 2019 and June 30, 2018 was
$8.1
million
and $8.0 million, respectively.
Total estimated annual amortization expense for the years ending
June 30,
2020
through
June 30,
2024
, is shown below (in thousands):
|
|
|
|
Fiscal Year
|
|
Amortization expense
|
2020
|
|
$
|
90,347
|
2021
|
|
|
84,424
|
2022
|
|
|
73,169
|
2023
|
|
|
53,893
|
2024
|
|
|
48,509
|
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(7) Investments
The aggregate carrying amount of our investments at
June 30, 2019
and
June 30, 2018
, which are included within our other non-current assets on our consolidated balance sheets, was
$52.1
million and
$41.2
million, respectively.
Investments whereby we do not have significant influence or control over the investee are accounted for initially at cost. These investments are not exchange traded and therefore not supported with observable market prices. We have determined that these investments do not have readily determinable fair values and are therefore revalued only when there are observable price changes
in orderly transactions for identifiable or similar investments of the same issuer.
We also estimate the fair value of our equity investments to assess whether impairment losses shall be recorded using Level 3 inputs. However, these investments are valued by reference to their net asset values that can be market supported and unobservable inputs including future cash flows. During the years ended
June 30, 2019
and
June 30, 2018
,
we recognized
$15.0
million and
$11.6
million, respectively, of impairment losses related to our equity investments, which was recorded in other, net.
The carrying value of these investments was $30.4 million and $41.2 million, at June 30, 2019 and June 30, 2018, respectively.
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, which were $15.8 million during the year ended June 30, 2019 and were recorded in l
oss attributable to equity method investments
. The carrying value of these investments was $21.7 million and $0.0 million at June 30, 2019 and June 30, 2018, respectively.
We have determined that the fair value of our investments exceed their carrying values. The following table shows a reconciliation of the changes in our investments during the years ended
June 30, 2019 and June 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Balance at the beginning of the period
|
|
$
|
41,226
|
|
$
|
38,324
|
Investments
|
|
|
46,717
|
|
|
14,495
|
Impairment of investments
|
|
|
(15,007)
|
|
|
(11,593)
|
Loss attributable to equity method investments
|
|
|
(15,833)
|
|
|
-
|
Acquisition of controlling interest in previously held investment (note 21)
|
|
|
(5,000)
|
|
|
-
|
Balance at the end of the period
|
|
$
|
52,103
|
|
$
|
41,226
|
(8) Accrued Expenses
Accrued expenses at
June 30, 2019
and
June 30, 2018
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Product warranties (note 9)
|
|
$
|
19,625
|
|
$
|
19,227
|
Consulting and professional fees
|
|
|
12,726
|
|
|
10,341
|
Value added taxes and other taxes due
|
|
|
25,555
|
|
|
20,130
|
Employee related costs
|
|
|
123,446
|
|
|
107,819
|
Hedging instruments (note 20)
|
|
|
244
|
|
|
2,373
|
Liability on receivables sold with recourse (note 19)
|
|
|
1,752
|
|
|
2,277
|
Accrued interest
|
|
|
1,683
|
|
|
120
|
Logistics and occupancy costs
|
|
|
8,137
|
|
|
5,987
|
Inventory in transit
|
|
|
15,175
|
|
|
5,081
|
Litigation settlement expenses (note 23)
|
|
|
41,199
|
|
|
-
|
Restructuring expenses (note 22)
|
|
|
5,432
|
|
|
1,461
|
Other
|
|
|
11,385
|
|
|
10,989
|
|
|
$
|
266,359
|
|
$
|
185,805
|
(9) 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, 2019
and
June 30, 2018
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Balance at the beginning of the period
|
|
$
|
19,227
|
|
$
|
19,558
|
Warranty accruals for the period
|
|
|
15,416
|
|
|
17,339
|
Warranty costs incurred for the period
|
|
|
(14,634)
|
|
|
(17,406)
|
Foreign currency translation adjustments
|
|
|
(384)
|
|
|
(264)
|
Balance at the end of the period
|
|
$
|
19,625
|
|
$
|
19,227
|
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(10) Debt
Debt at
June 30, 2019 and June 30, 2018
consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Short-term debt
|
|
$
|
12,012
|
|
$
|
12,000
|
Deferred borrowing costs
|
|
|
(20)
|
|
|
(534)
|
Short-term debt, net
|
|
|
11,992
|
|
|
11,466
|
|
|
|
-
|
|
|
|
Long-term debt
|
|
$
|
1,262,000
|
|
$
|
272,000
|
Deferred borrowing costs
|
|
|
(3,139)
|
|
|
(2,012)
|
Long-term debt, net
|
|
$
|
1,258,861
|
|
$
|
269,988
|
Total debt
|
|
$
|
1,270,853
|
|
$
|
281,454
|
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, provides 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.
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, 2019
, the interest rate that was being charged on the outstanding principal amounts was
3.4%
. 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, 2019
, we were in compliance with our debt covenants and there was
$1,274.0
million outstanding under the Revolving Credit Agreement and Term Credit Agreement. 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.
On July 10, 2019, we entered into a Note Purchase Agreement for senior notes amounting to $500.0 million. See note 24 – Subsequent Event in this report for further details.
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(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.
During fiscal year
2019
, we repurchased
200,000
shares at a cost of
$22.8
million and during fiscal year
2018
,
we repurchased 550,000 shares at a cost of
$53.8
million
shares under our share repurchase program.
As of
June 30, 2019
, 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, 2019
,
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, 2019
.
Stock Options and Restricted Stock Units.
We have granted stock options and restricted stock units to personnel, including officers and directors, in accordance with the ResMed Inc. 2009 Incentive Award Plan (the “2009 Plan”). These options and restricted stock units vest over
one
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.
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, 2019
is
16.3
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).
At
June 30, 2019
, there was
$75.9
million in unrecognized compensation costs related to unvested stock-based compensation arrangements. This is expected to be recognized over a weighted average period of
2.3
years. The aggregate intrinsic value of the stock-based compensation arrangements outstanding and exercisable at
June 30, 2019
and
June 30, 2018
was
$238.4
million and
$222.3
million, respectively. The aggregate intrinsic value of the options exercised during the fiscal years
2019, 2018 and 2017
, was
$15.1
million,
$27.5
million and
$28.1
million, respectively.
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
The following table summarizes option activity during the year ended
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term in Years
|
Outstanding at beginning of period
|
|
|
1,205,826
|
|
$
|
60.48
|
|
4.4
|
Granted
|
|
|
306,842
|
|
|
102.12
|
|
|
Exercised
|
|
|
(252,371)
|
|
|
49.04
|
|
|
Forfeited
|
|
|
(183)
|
|
|
52.02
|
|
|
Outstanding at end of period
|
|
|
1,260,114
|
|
$
|
72.91
|
|
4.4
|
Exercise price of granted options
|
|
$
|
102.12
|
|
|
|
|
|
Options exercisable at end of period
|
|
|
704,466
|
|
$
|
59.31
|
|
|
* Includes
NIL
shares netted for tax.
The following table summarizes the activity of restricted stock units, including performance restricted stock units, during year ended
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock
Units
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Weighted
Average
Remaining
Contractual
Term in Years
|
Outstanding at beginning of period
|
|
|
1,644,754
|
|
$
|
62.90
|
|
1.6
|
Granted
|
|
|
512,822
|
|
|
99.19
|
|
|
Vested
|
|
|
(909,065)
|
|
|
57.50
|
|
|
Performance factor adjustment
|
|
|
251,642
|
|
|
-
|
|
|
Expired / cancelled
|
|
|
(53,160)
|
|
|
69.55
|
|
|
Forfeited
|
|
|
(823)
|
|
|
69.55
|
|
|
Outstanding at end of period
|
|
|
1,446,170
|
|
$
|
77.21
|
|
1.6
|
* Includes
267,779
shares netted for tax.
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, 2019
, the number of shares remaining available for future issuance under the ESPP is
2.4
million shares.
During years ended
June 30, 2019
and
June 30, 2018
, we issued
285,000
and
302,000
shares to our employees in two offerings and we recognized
$6.4
million and
$5.2
million, respectively, of stock compensation expense associated with the ESPP.
(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
200,000
,
153,000
and
173,000
for the years ended
June 30, 2019, 2018 and 2017
, respectively, as the effect would have been anti-dilutive.
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
Basic and diluted earnings per share for the years ended
June 30, 2019, 2018 and 2017
are calculated as follows (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
404,592
|
|
$
|
315,588
|
|
$
|
342,284
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
143,111
|
|
|
142,764
|
|
|
141,360
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock units
|
|
|
1,373
|
|
|
1,223
|
|
|
1,093
|
Diluted weighted average shares
|
|
|
144,484
|
|
|
143,987
|
|
|
142,453
|
Basic earnings per share
|
|
$
|
2.83
|
|
$
|
2.21
|
|
$
|
2.42
|
Diluted earnings per share
|
|
$
|
2.80
|
|
$
|
2.19
|
|
$
|
2.40
|
(13) Other, net
Other, net, in the consolidated statements of income is comprised of the following for the years ended June 30,
2019, 2018 and 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Gain (loss) on foreign currency transactions and hedging, net (note 20)
|
|
$
|
1,712
|
|
$
|
(1,546)
|
|
$
|
5,434
|
Impairment of equity investments (note 7)
|
|
|
(15,007)
|
|
|
(11,593)
|
|
|
(1,955)
|
Other
|
|
|
2,569
|
|
|
4,597
|
|
|
617
|
|
|
$
|
(10,726)
|
|
$
|
(8,542)
|
|
$
|
4,096
|
(14) Income Taxes
Income before income taxes for the years ended
June 30, 2019, 2018 and 2017
, was taxed under the following jurisdictions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
U.S.
|
|
$
|
(34,468)
|
|
$
|
42,627
|
|
$
|
(4,985)
|
Non-U.S.
|
|
|
553,315
|
|
|
478,685
|
|
|
423,728
|
|
|
$
|
518,847
|
|
$
|
521,312
|
|
$
|
418,743
|
The provision for income taxes is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
Federal
|
|
$
|
28,658
|
|
$
|
128,971
|
|
$
|
16,468
|
|
State
|
|
|
7,595
|
|
|
948
|
|
|
(1,159)
|
|
Non-U.S.
|
|
|
127,540
|
|
|
68,858
|
|
|
65,612
|
|
|
|
|
163,793
|
|
|
198,777
|
|
|
80,921
|
Deferred:
|
Federal
|
|
|
(30,456)
|
|
|
9,488
|
|
|
11,385
|
|
State
|
|
|
(5,408)
|
|
|
(350)
|
|
|
2,706
|
|
Non-U.S.
|
|
|
(13,674)
|
|
|
(2,191)
|
|
|
(18,553)
|
|
|
|
|
(49,538)
|
|
|
6,947
|
|
|
(4,462)
|
Provision for income taxes
|
|
$
|
114,255
|
|
$
|
205,724
|
|
$
|
76,459
|
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 year ended June 30, 2019, 28% for the year ended June 30, 2018 and
35%
for the year ended June 30, 2017, to pretax income as a result of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Taxes computed at statutory U.S. rate
|
|
$
|
108,958
|
|
$
|
146,280
|
|
$
|
146,560
|
Increase (decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
Transition tax
|
|
|
6,038
|
|
|
126,753
|
|
|
-
|
State income taxes, net of U.S. tax benefit
|
|
|
2,186
|
|
|
2,427
|
|
|
(1,294)
|
Research and development credit
|
|
|
(12,953)
|
|
|
(4,089)
|
|
|
(2,804)
|
Change in statutory tax rates
|
|
|
-
|
|
|
16,685
|
|
|
-
|
Tax effect of dividends
|
|
|
-
|
|
|
-
|
|
|
97,662
|
Change in valuation allowance
|
|
|
(1,118)
|
|
|
(2,962)
|
|
|
4,021
|
Effect of non-U.S. tax rates
|
|
|
25,045
|
|
|
(70,250)
|
|
|
(97,141)
|
Foreign tax credits
(1)
|
|
|
(7,806)
|
|
|
(6,473)
|
|
|
(67,689)
|
Stock-based compensation expense
|
|
|
(11,534)
|
|
|
(7,045)
|
|
|
(3,107)
|
Other
|
|
|
5,439
|
|
|
4,398
|
|
|
251
|
|
|
$
|
114,255
|
|
$
|
205,724
|
|
$
|
76,459
|
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(1) In fiscal year 2018, $75.5 million of the foreign tax credit is included as a reduction in the transition tax.
The components of our deferred tax assets and liabilities at
June 30, 2019
and
June 30, 2018
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Employee liabilities
|
|
|
|
|
$
|
18,104
|
|
$
|
16,184
|
Tax credit carry overs
|
|
|
|
|
|
15,666
|
|
|
9,031
|
Inventories
|
|
|
|
|
|
4,905
|
|
|
5,840
|
Provision for warranties
|
|
|
|
|
|
3,551
|
|
|
3,904
|
Provision for doubtful debts
|
|
|
|
|
|
5,532
|
|
|
3,817
|
Net operating loss carryforwards
|
|
|
|
|
|
53,315
|
|
|
26,355
|
Capital loss carryover
|
|
|
|
|
|
6,640
|
|
|
3,932
|
Property, plant and equipment
|
|
|
|
|
|
3,002
|
|
|
6,121
|
Stock-based compensation expense
|
|
|
|
|
|
10,769
|
|
|
9,322
|
Deferred revenue
|
|
|
|
|
|
9,619
|
|
|
1,148
|
Research and development capitalization
|
|
|
|
|
|
17,910
|
|
|
-
|
Other
|
|
|
|
|
|
(332)
|
|
|
3,367
|
|
|
|
|
|
|
148,681
|
|
|
89,021
|
Less valuation allowance
|
|
|
|
|
|
(11,644)
|
|
|
(12,297)
|
Deferred tax assets
|
|
|
|
|
|
137,037
|
|
|
76,724
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangibles
|
|
|
|
|
|
(102,939)
|
|
|
(35,990)
|
Deferred tax liabilities
|
|
|
|
|
|
(102,939)
|
|
|
(35,990)
|
Net deferred tax asset
|
|
|
|
|
$
|
34,098
|
|
$
|
40,734
|
We reported the net deferred tax assets and liabilities in our consolidated balance sheets at
June 30, 2019
and
June 30, 2018
, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Non-current deferred tax asset
|
|
|
|
|
$
|
45,478
|
|
$
|
53,818
|
Non-current deferred tax liability
|
|
|
|
|
|
(11,380)
|
|
|
(13,084)
|
Net deferred tax asset
|
|
|
|
|
$
|
34,098
|
|
$
|
40,734
|
As of
June 30, 2019
, we had
$192.2
million of U.S. federal and state net operating loss carryforwards and
$86.7
million of non-U.S. net operating loss carryforwards, which expire in various years beginning in 2019 or carry forward indefinitely.
The valuation allowance at
June 30, 2019
relates to a
provision for uncertainty of the utilization of net operating loss carryforwards of
$5.0
million and capital loss and other items of
$6.6
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 various 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 earnings by
$20.3
million (
$0.14
per diluted share) for the year ended
June 30, 2019
and
$33.5
million (
$0.23
per diluted share) for the year ended
June 30, 2018
.
As a result of the U.S. Tax Act, we have treated all non-U.S. historical earnings as taxable, which resulted in additional tax expense of $126.9 million during the year ended June 30, 2018 and $6.0 million during the year ended June 30, 2019, which was 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, 2019 amounted to approximately $2.
0
billion.
On June 14, 20
1
9, the U.S. Treasury Department issued final and temporary regulations relating to the repatriati
on of non-U.S. earnings. As a r
e
sult, in the event
our non-U.S.
earnings had not been permanently reinvested, deferred taxes of approximately $201.6 million in U.S. federal deferred tax and $5.2 million in U.S. state deferred taxes would have been recognized in the consolidated financial statements.
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed 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. The Company recognizes 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. Based on all known facts and circumstances and current tax law, we believe the total amount of unrecognized tax benefits on June 30, 2019, is not material to our results of operations, financial condition or cash flows, and if recognized, would not have a material impact on our effective tax rate.
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
.
In connection with the audit by the Australian Taxation Office (“ATO”) for the tax years 2009 to 2013, we received Notices of Amended Assessments in March 2018. Based on these assessments, the ATO asserted that we owe $151.7 million in additional income tax and $38.4 million in accrued interest, of which $75.9 million was paid in April 2018 under a payment arrangement with the ATO. In June 2018, we received a notice from the ATO claiming penalties of 50% of the additional income tax that was assessed or $75.9 million
. At September 30, 2018, we recorded a receivable in prepaid taxes and other non-current assets for the amount paid as we ultimately expect this will be refunded by the ATO. The ATO is currently auditing tax years 2014 to 2017, and we have also been notified by the A
TO that they intend to audit tax year 2018. We do not agree with the ATO’s assessments and continue to believe we are more likely than not to be successful in defending our position.
Our income tax expense, short-term income taxes payable and long-term income taxes payable were impacted by charges associated with the U.S. Tax Act enacted on December 22, 2017, which resulted in additional income tax expense of
$138.0
million during the year ended June 30, 2018. Specifically, the income tax expense includes the transition tax imposed on our accumulated foreign earnings, which resulted in additional income tax expense of
$126.9
million for the year ended June 30, 2018. Additionally, it resulted in the write down in the carrying value of our net deferred tax assets due to the lower corporate tax rate and the reduction in the future value of deferred tax assets, which resulted in additional income tax expense of
$11.1
million recorded in the year ended June 30, 2018.
During the year ended June 30, 2019, we recorded additional tax expense of $6.0 million in transition tax imposed on our accumulated foreign earnings, which related to final treasury regulations issued and temporary guidance published during the year.
On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the U.S. Tax Act as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. Effective December 31, 2018, the accounting relating to the impact of U.S. legislation was no longer considered provisional.
During the year ended June 30, 2018, we recorded additional tax expense of $138.0 million relating to ch
anges in U.S. tax legislation.
During the year ended June 30, 2019, we recorded additional tax expense of $6.0 million in additional transition tax, which related to final treasury regulations issued and temporary guidance published during the year.
However, further adjustments could be required as a result of future legislation, amended tax returns, or tax examinations of the years impacted by the calculation.
(15) Segment Information
P
rior to the three months ended December 31, 2018, we had previously determined the
software-as-a-service, or SaaS, line of business
was not material to our global operations in terms of revenue and profit, and therefore had not been separately reported as a segment.
However,
f
ollowing recent acquisitions, we have quantitatively and qualitatively reassessed our segment reporting and determined the SaaS segment
is material to the group
, and now 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.
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
Certain items are maintained at the corporate level and are not allocated to the segments. The non-allocated items include corporate headquarters costs, stock-based compensation, amortization expense from acquired intangibles, acquisition related expenses, interest income, interest expense 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.
Effective July 1, 2018, we re
fine
d
our operating model to integrate our regional sales structures into our global business segments, which resulted in a reorganization of our
internal
business
reporting
.
As part of this reorganization, we redesigned our systems
and processes
in relation to the
business segment
report
ing
, including management reporting responsibilities
and
cost allocations
. The
se
changes were made prospectively
for the year ended June 30, 2018. A
s
such
,
we do not have comparable
net operating profit by reportable segment for the
year ended June 30, 2017, and recreating this reporting
is not
considered
practicabl
e given the redesign of our systems and processes
.
The
net revenues by reportable segment is available for the year ended June 30, 2017
,
and has been presented in the table summarizing
our net revenue disaggregated by segment, product and region
below.
The table below presents a reconciliation of net revenues and net operating profit by reportable segment
s for year ended June 30, 2019 compared to June 30, 2018
(in millions):
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Revenue by segment
|
|
|
|
|
|
|
Total Sleep and Respiratory Care
|
|
$
|
2,330.8
|
|
$
|
2,183.2
|
|
|
|
|
|
|
|
Software as a Service
|
|
|
281.1
|
|
|
157.0
|
Deferred revenue fair value adjustment*
|
|
|
(5.3)
|
|
|
-
|
Total Software as a Service
|
|
|
275.8
|
|
|
157.0
|
Total
|
|
$
|
2,606.6
|
|
$
|
2,340.2
|
|
|
|
|
|
|
|
Net operating profit by segment
|
|
|
|
|
|
|
Sleep and Respiratory Care
|
|
$
|
766.1
|
|
$
|
656.3
|
Software as a Service
|
|
|
74.9
|
|
|
55.2
|
Total
|
|
$
|
841.0
|
|
$
|
711.5
|
|
|
|
|
|
|
|
Reconciling items
|
|
|
|
|
|
|
Corporate costs
|
|
$
|
124.9
|
|
$
|
104.9
|
Amortization of acquired intangible assets
|
|
|
74.9
|
|
|
46.4
|
Restructuring expenses
|
|
|
9.4
|
|
|
18.4
|
Acquisition related expenses
|
|
|
6.1
|
|
|
-
|
Litigation settlement expenses
|
|
|
41.2
|
|
|
-
|
Deferred revenue fair value adjustment*
|
|
|
5.3
|
|
|
-
|
Interest income
|
|
|
(2.3)
|
|
|
(16.4)
|
Interest expense
|
|
|
36.2
|
|
|
28.4
|
Loss attributable to equity method investments
|
|
|
15.8
|
|
|
-
|
Other, net
|
|
|
10.7
|
|
|
8.5
|
Income before income taxes
|
|
$
|
518.8
|
|
$
|
521.3
|
*
The deferred revenue fair value adjustment is a purchase price accounting adjustment related to MatrixCare which was acquired on November 13, 2018.
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
The following table summarizes our net revenue disaggregated by segment, product and region for the years ended June 30, 2019
, 2018 and 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
U.S., Canada and Latin America
|
|
|
|
|
|
|
|
|
|
Devices
|
|
$
|
743.1
|
|
$
|
689.6
|
|
$
|
632.7
|
Masks and other
|
|
|
677.4
|
|
|
600.5
|
|
|
539.3
|
Total Sleep and Respiratory Care
|
|
$
|
1,420.5
|
|
$
|
1,290.1
|
|
$
|
1,172.0
|
Software as a Service
|
|
|
275.8
|
|
|
157.0
|
|
|
138.1
|
Total
|
|
$
|
1,696.3
|
|
$
|
1,447.1
|
|
$
|
1,310.1
|
|
|
|
|
|
|
|
|
|
|
Combined Europe, Asia and other markets
|
|
|
|
|
|
|
|
|
|
Devices
|
|
$
|
618.5
|
|
$
|
614.0
|
|
$
|
528.3
|
Masks and other
|
|
|
291.8
|
|
|
279.1
|
|
|
228.3
|
Total Sleep and Respiratory Care
|
|
$
|
910.3
|
|
$
|
893.1
|
|
$
|
756.6
|
|
|
|
|
|
|
|
|
|
|
Global revenue
|
|
|
|
|
|
|
|
|
|
Devices
|
|
$
|
1,361.6
|
|
$
|
1,303.6
|
|
$
|
1,161.0
|
Masks and other
|
|
|
969.2
|
|
|
879.6
|
|
|
767.6
|
Total Sleep and Respiratory Care
|
|
$
|
2,330.8
|
|
$
|
2,183.2
|
|
$
|
1,928.6
|
Software as a Service
|
|
|
275.8
|
|
|
157.0
|
|
|
138.1
|
Total
|
|
$
|
2,606.6
|
|
$
|
2,340.2
|
|
$
|
2,066.7
|
Revenue information by geographic area for the years ended June 30, 2019, 2018 and 2017
is summarized below (in million
s):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
United States
|
|
$
|
1,588.7
|
|
$
|
1,345.2
|
|
$
|
1,229.2
|
Rest of the World
|
|
|
1,017.9
|
|
|
995.0
|
|
|
837.5
|
Total
|
|
$
|
2,606.6
|
|
$
|
2,340.2
|
|
$
|
2,066.7
|
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, 2019, 2018 and 2017
, is summarized below (in
million
s):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
United States
|
|
$
|
149.7
|
|
$
|
142.3
|
|
$
|
150.7
|
Australia
|
|
|
165.5
|
|
|
173.4
|
|
|
183.1
|
Rest of the World
|
|
|
72.3
|
|
|
70.8
|
|
|
60.4
|
Total
|
|
$
|
387.5
|
|
$
|
386.5
|
|
$
|
394.2
|
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(16) 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. We recognize the fair value as compensation expense using the straight-line method over the service period for awards expected to vest.
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:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
2019
|
|
2018
|
|
2017
|
Stock options:
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value
|
|
$
|
21.92
|
|
$
|
16.68
|
|
$
|
10.89
|
Weighted average risk-free interest rate
|
|
|
2.96%
|
|
|
2.08%
|
|
|
1.61%
|
Expected life in years
|
|
|
4.9
|
|
|
4.9
|
|
|
4.9
|
Dividend yield
|
|
|
1.34% - 1.46%
|
|
|
1.46% - 1.65%
|
|
|
2.02% - 2.29%
|
Expected volatility
|
|
|
23%
|
|
|
23%
|
|
|
25%
|
ESPP purchase rights:
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value
|
|
$
|
22.12
|
|
$
|
17.44
|
|
$
|
12.50
|
Weighted average risk-free interest rate
|
|
|
2.4%
|
|
|
0.8%
|
|
|
0.5%
|
Expected life in years
|
|
|
6 months
|
|
|
6 months
|
|
|
6 months
|
Dividend yield
|
|
|
1.40% - 1.47%
|
|
|
1.47% - 1.92%
|
|
|
1.92% - 2.27%
|
Expected volatility
|
|
|
23%
|
|
|
23%
|
|
|
23%
|
During the fiscal years ended
June 30, 2019
and
June 30, 2018
, we granted
139,000
and
167,000
,
performance restricted stock units (“PRSUs”), which contain a market condition, with the ultimate realizable number of PRSUs dependent on relative total stockholder return over a
three
-year period, up to a maximum amount to be issued under the award of
2
25
% of the original grant. The weighted average grant date fair value of PRSUs granted during the fiscal years
2019 and 2018
was estimated at
$98.23
and
$76.20
per PRSU, respectively, using a Monte-Carlo simulation valuation model.
The following table summarizes the total stock-based compensation costs incurred and the associated tax benefit recognized during the years ended June 30,
2019, 2018 and 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Cost of sales - capitalized as part of inventory
|
|
$
|
3,043
|
|
$
|
2,990
|
|
$
|
2,877
|
Selling, general and administrative expenses
|
|
|
42,700
|
|
|
39,754
|
|
|
37,096
|
Research and development expenses
|
|
|
6,330
|
|
|
5,668
|
|
|
5,952
|
Stock-based compensation costs
|
|
|
52,073
|
|
|
48,412
|
|
|
45,925
|
Tax benefit
|
|
|
(26,658)
|
|
|
(17,078)
|
|
|
(20,100)
|
Stock-based compensation costs, net of tax benefit
|
|
$
|
25,415
|
|
$
|
31,334
|
|
$
|
25,825
|
(17) 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:
(1) Australia - We contribute to defined contribution plans for each employee resident in Australia. All Australian employees, after serving a qualifying period, are entitled to benefits on retirement, disability or death. Employees may contribute additional funds to the plans. We contribute to the plans at the rate of approximately
9.5
% of the salaries of all Australian employees. Our total contributions to the plans for the years ended
June 30, 2019, 2018 and 2017
, were $
10.0
million, $
10.5
million and $
9.9
million, respectively.
(2) 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 $
6.7
million, $
5.0
million and $
4.3
million in fiscal
2019, 2018 and 2017
, respectively.
(3) 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
$2.6
million, $
2.2
million and
$1.7
million in fiscal
2019
,
2018
and
2017
, respectively.
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(18) Commitments
We lease buildings, motor vehicles and office equipment under operating leases. We expense rental charges for operating leases on a straight-line basis over the lease term taking into account rent concessions or holidays. Rent expenses under operating leases for the years ended
June 30, 2019, 2018 and 2017
, were approximately $
23.4
million, $
21.1
million and $
20.1
million, respectively.
At
June 30, 2019
we had the following future minimum lease payments under non-cancelable operating leases (in thousands):
|
|
|
|
Fiscal Years
|
|
Operating Leases
|
2020
|
|
$
|
23,500
|
2021
|
|
|
17,161
|
2022
|
|
|
12,403
|
2023
|
|
|
9,478
|
2024
|
|
|
7,916
|
Thereafter
|
|
|
27,555
|
Total minimum lease payments
|
|
$
|
98,013
|
As outlined in note 3 – new accounting pronouncements, and in relation to
ASU No. 2016-02, “Leases”
, we expect to recognize
additional right-of-use assets and lease liabilities for operating leases of
approximately $
60.0 million to $7
0.0 million
as of July 1, 2019
,
excluding the impact of our evaluation of lease terms
and several contracts that may contain an embedded lease
. The table above includes operating leases that have been executed
and are non-cancelable
but will not commence in accordance with the provisions of the new leases guidance until after the adoption date and
,
therefore, will not be included in the
right-of-use assets and lease liabilities for operating leases
at the date of adoption.
(19) Legal Actions and Contingencies
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
As described in note 14 – Income Taxes,
we received Notices of Amended Assessments from the ATO for the tax years 2009 to 2013. Based on these assessments, the ATO asserted that we owe $151.7 million in additional income tax and $38.4 million in accrued interest, of which $75.9 million was paid in April 2018 under a payment arrangement with the ATO. In June 2018, we received a notice from the ATO claiming penalties of 50% of the additional income tax that was assessed, or $75.9 million.
At September 30, 2018, we recorded a receivable in prepaid taxes and other non-current assets for the amount paid as we ultimately expect this will be refunded by the ATO.
We do not agree with the ATO’s assessments and we continue to believe we are more likely than not to be successful in defending our position. However, if we are not successful, we will not receive a refund of the amount paid in April 2018 and we would be required to pay the remaining additional income tax, accrued interest and penalties, which would be recorded as income tax expense. The ATO is currently auditing tax years 2014 to 2017, and we have also been notified by the ATO that they intend to audit tax year 2018.
In connection with the recent U.S. Tax Act and the analysis of historical tax filings, we identified an administrative oversight in our prior year tax filing relating to a gain on an intern
al legal entity reorganization.
We have applied for relief from the U.S. Internal Revenue Service (“IRS”) and have amended the related tax returns required to correct the administrative oversight, which would indefinitely defer the recognition of this gain. We believe it is more likely than not that we will be granted this relief and therefore, have not recorded a reserve in relation to this matter during the
year
ended
June 30
, 2019.
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 recourse, either limited or full, 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.
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
The following table summarizes the amount of receivables sold with recourse during the years ended
June 30, 2019
and
June 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Total receivables sold:
|
|
|
|
|
|
|
Full recourse
|
|
$
|
33,954
|
|
$
|
25,829
|
Limited recourse
|
|
|
98,123
|
|
|
79,397
|
Total
|
|
$
|
132,077
|
|
$
|
105,226
|
The following table summarizes the maximum exposure on outstanding receivables sold with recourse and provision for doubtful accounts at
June 30, 2019
and
June 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Maximum exposure on outstanding receivables:
|
|
|
|
|
|
|
Full recourse
|
|
$
|
19,209
|
|
$
|
20,139
|
Limited recourse
|
|
|
10,241
|
|
|
9,239
|
Total
|
|
$
|
29,450
|
|
$
|
29,378
|
Contingent provision for receivables with recourse
|
|
$
|
(1,752)
|
|
$
|
(2,277)
|
(2
0
)
Derivative Instruments and Hedging Activities
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 do not enter into financial instruments for trading or speculative purposes.
We held foreign currency instruments with notional amounts totaling
$496.9
million and
$462.1
million at
June 30, 2019 and June 30, 2018
, respectively, to hedge foreign currency fluctuations. These contracts mature at various dates prior to June, 2021.
The following table summarizes the amount and location of our derivative financial instruments as of
June 30, 2019 and June 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Balance Sheet Caption
|
Foreign currency hedging instruments
|
|
$
|
371
|
|
$
|
281
|
|
Other assets - current
|
Foreign currency hedging instruments
|
|
|
(244)
|
|
|
(2,373)
|
|
Accrued expenses
|
Foreign currency hedging instruments
|
|
|
(19)
|
|
|
(607)
|
|
Other long-term liabilities
|
|
|
$
|
108
|
|
$
|
(2,699)
|
|
|
The following table summarizes the amount and location of gains (losses) associated with our derivative financial instruments and other foreign-currency-denominated transactions for the years ended
June 30, 2019 and June 30, 2018
, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain /(Loss) Recognized
|
|
Income Statement Caption
|
|
|
2019
|
|
2018
|
|
|
Foreign currency hedging instruments
|
|
$
|
1,893
|
|
$
|
(21,294)
|
|
Other, net
|
Other foreign-currency-denominated transactions
|
|
|
(181)
|
|
|
19,748
|
|
Other, net
|
|
|
$
|
1,712
|
|
$
|
(1,546)
|
|
|
We are exposed to credit-related losses in the event of non-performance by counter parties to financial instruments. We minimize counterparty credit risk by entering into derivative transactions with major financial institutions and we do not expect material losses as a result of default by our counterparties.
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(21)
Business Combinations
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.
We have not finalized the purchase price allocation in relation to this acquisition as certain appraisals associated with the valuation of intangible assets and income tax positions are not yet complete. We do not believe that the completion of this work will materially modify the preliminary purchase price allocation. We expect to complete our purchase price allocation during the quarter ending December 31, 2019. The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on estimates of their fair values at the date of acquisition. The goodwill recognized as part of the acquisition is reflected in the Software as a Service segment and is not deductible for tax purposes. It mainly represents the synergies that are unique to our combined businesses and the potential for new products and services to be developed in the future.
The preliminary fair values of assets acquired and liabilities assumed, and the estimated useful lives of intangible assets acquired are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Preliminary
|
|
Intangible
assets -
useful life
|
Current assets
|
|
$
|
50,325
|
|
|
|
Property, plant and equipment
|
|
|
4,401
|
|
|
|
Trade names
|
|
|
18,000
|
|
|
7 years
|
Developed technology
|
|
|
133,000
|
|
|
7 years
|
Customer relationships
|
|
|
114,000
|
|
|
15 years
|
Goodwill
|
|
|
517,995
|
|
|
|
Assets acquired
|
|
$
|
837,721
|
|
|
|
Current liabilities
|
|
|
(13,751)
|
|
|
|
Deferred revenue
|
|
|
(18,339)
|
|
|
|
Deferred tax liabilities
|
|
|
(41,570)
|
|
|
|
Debt assumed
|
|
|
(151,665)
|
|
|
|
Total liabilities assumed
|
|
$
|
(225,325)
|
|
|
|
Net assets acquired
|
|
$
|
612,396
|
|
|
|
A reconciliation of the base consideration to the net consideration is as follows (in thousands):
|
|
|
|
Base consideration
|
|
|
750,000
|
Cash acquired
|
|
|
15,873
|
Debt assumed
|
|
|
(151,665)
|
Net working capital and other adjustments
|
|
|
(1,812)
|
Net consideration
|
|
$
|
612,396
|
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 presented below for the
year ended June 30, 2019, include
s
the effects of
pro forma adjustments as if the acquisition of MatrixCare occurred on July 1, 2017. The pro forma results were prepared using the acquisition method of accounting and combine our historical results and MatrixCare’s for the
year
s
ended June 30, 2019
and June 30, 2018, 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.
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
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.
|
|
|
|
|
|
Unaudited Pro Forma Consolidated Results
|
|
|
|
|
|
(In thousands, except per share information)
|
|
|
|
|
|
|
2019
|
|
2018
|
Revenue
|
$
|
2,652,059
|
|
$
|
2,457,242
|
Net income
|
$
|
446,721
|
|
$
|
295,628
|
Basic earnings per share
|
$
|
3.12
|
|
$
|
2.07
|
Diluted earnings per share
|
$
|
3.09
|
|
$
|
2.05
|
The unaudited pro forma consolidated results for the
years ended June 30, 2019 and June 30, 2018
reflect 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 and
$8.3
million for the
years ended June 30, 2019 and June 30, 2018
, respectively.
|
|
·
|
|
Net interest expense associated with debt that was issued to finance the acquisition of
$2.6
million and
$12.7
million for the
years ended June 30, 2019 and June 30, 2018
, respectively.
|
|
·
|
|
Elimination of pre-tax acquisition-related costs incurred by ResMed and MatrixCare of
$3.7
million and
$16.7
million, respectively, for the year ended June 30, 2019.
|
|
·
|
|
Net income tax expense of
$1.8
million and
$3.2
million for the
years ended June 30, 2019 and June 30, 2018
, respectively.
|
Other acquisitions
During the year ended June 30, 2019 we have completed the following acquisitions:
|
·
|
|
On July 6, 2018, we completed the acquisition of
100%
of the shares in HEALTHCAREfirst Holding Company (“HEALTHCAREfirst”), a provider of software solutions and services for home health and hospice agencies, for a total purchase consideration of
$126.3
million.
|
|
·
|
|
On October 15, 2018, we completed the acquisition of
100%
of the shares in HB Healthcare, a homecare provider in South Korea.
|
|
·
|
|
On December 11, 2018, we completed the acquisition of assets in Interactive Health Network, a provider of integrated clinical and financial management software solution for long-term care companies.
|
|
·
|
|
On December 13, 2018, we completed the acquisition of assets in Apacheta, a provider of cloud-based SaaS software that manages the medical equipment delivery process for home medical equipment dealers.
|
|
·
|
|
On January 6, 2019, we completed the acquisition of Propeller Health, a digital therapeutics company providing connected health solutions for people living with chronic obstructive pulmonary disease and asthma, for a total purchase consideration of
$242.9
million, which adjusts for cash acquired and debt assumed at the time of acquisition. We previously held a non-controlling interest in Propeller Health’s outstanding shares. As a result of the acquisition, we recognized a fair value gain of
$1.9
million in other income during the year ended June 30, 2019 associated with the previous equity investment.
|
These acquisitions have been accounted for as business combinations using purchase accounting and are included in our consolidated financial statements from the acquisition dates. These acquisitions, individually and collectively, are not considered a material business combination and accordingly pro forma information is not provided. The acquisitions were funded by drawing on our existing credit facility and through cash on-hand.
We have not completed the purchase price allocation in relation to these acquisitions and we expect to complete this during the six months ending
December 31, 2019
. We do not believe that the completion of this work will materially modify the preliminary purchase price allocation for these acquisitions. The cost of the share acquisitions was allocated to the assets acquired and liabilities assumed based on estimates of their fair values at the date of acquisition. The goodwill recognized as part of these acquisitions, which is predominantly not deductible for tax purposes, mainly represents the synergies that are unique to our combined businesses and the potential for new products and services to be developed in the future. Goodwill from these acquisitions has been reflected in the Software as a Service segment except for the goodwill resulting from the HB Healthcare and Propeller Health acquisitions, which have been recorded in the Sleep and Respiratory Care segment.
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
The fair values of assets acquired and liabilities assumed of all other acquisitions, excluding MatrixCare, and the estimated useful lives of intangible assets acquired are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Preliminary
|
|
Intangible
assets -
useful life
|
Current assets
|
|
$
|
31,648
|
|
|
|
Property, plant and equipment
|
|
|
2,290
|
|
|
|
Deferred tax assets
|
|
|
5,211
|
|
|
|
Trade names
|
|
|
9,638
|
|
|
10 years
|
Non-compete
|
|
|
1,000
|
|
|
3 years
|
Developed technology
|
|
|
65,600
|
|
|
5
to
6
years
|
Customer relationships
|
|
|
42,352
|
|
|
5
to
15
years
|
Goodwill
|
|
|
276,325
|
|
|
|
Assets acquired
|
|
$
|
434,064
|
|
|
|
Current liabilities
|
|
|
(6,641)
|
|
|
|
Deferred revenue
|
|
|
(3,619)
|
|
|
|
Debt assumed
|
|
|
(35,104)
|
|
|
|
Total liabilities assumed
|
|
$
|
(45,364)
|
|
|
|
Net assets acquired
|
|
$
|
388,700
|
|
|
|
During the year ended June 30, 2019, we recorded
$6.1
million in acquisition related expenses.
Fiscal year ended June 30, 2018
During the year ended June 30, 2018, we did not complete any material acquisitions or record any acquisition related expense.
Fiscal year ended June 30, 2017
On May 31, 2017, we completed the acquisition of assets in Conduit Technology, LLC (“Conduit”), a provider of documentation and workflow solutions. On June 30, 2017, we completed the acquisition of assets in AllCall Connect, LLC (“AllCall”), a provider of a live-calling solution for CPAP patient resupply. These acquisitions have been accounted for as business combinations using purchase accounting and are included in our consolidated financial statements from their respective acquisition dates. The acquisitions, individually and collectively, are not considered a material business combination and accordingly pro forma information is not provided. The acquisitions were funded through cash on-hand.
During the year ended June 30, 2017, we recognized a charge of $10.1 million in acquisition related expenses representing additional contingent consideration associated with the previous acquisition of Curative Medical Technology Inc., following the achievement of performance milestones.
(22)
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
. The restructuring expenses consisted primarily of severance payments to employees and contract exit costs
associated with several impacted sites
.
Duri
ng the year ended June 30, 2018,
we incurred restructuring expenses of $
9.4
million associated with a global strategic workforce planning review, which resulted in a reduction in headcount across most of our functions and locations and closure of our Paris site. We recorded the full amount of $18.4 million during the year ended June 30, 2018, within our operating expenses which was separately disclosed as restructuring expenses
. We
had
$1.5
million remaining in our employee related costs accrual
at June 30, 2018, which was paid during the year ended June 30, 2019
. The restructuring expenses consisted primarily of severance payments to employees and the remaining expense relating to legal and consulting services associated with the completion of the employee severances and contract exit costs associated with the Paris site.
During the year ended June 30, 2017, we incurred restructuring expenses of $12.4 million associated with the reorganization of our Paris manufacturing activities and German research and development activities. The restructuring expenses consisted primarily of severance payments to employees, site closure costs and associated project cancellation costs.
Table of Contents
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(2
3
)
Litigation
Settlement Expenses
During the year ended June 30, 201
9
we recognized litigation settlement expenses of $
41
.
2 million associated with a tentative
agreement with
Office of Inspector General of the U.S. Department of Health and Human Services
to
civilly resolve these matter
s
. The
amount consists of the estimated payment in relation to these matters as well as additional fees and administrative costs that typically accompany such a resolution.
A resolution may also include ongoing obligations, such as any imposed under a corporate integrity agreement.
However,
we have not yet completed negotiations, and there can be no assurance as to whether or when the parties will finalize any such negotiated resolution
or what the f
inal terms of such a resolution
will be
.
During the fiscal year ended June 30, 2017 we recognized litigation settlement expenses of $8.5 million associated with an agreement with Chinese manufacturer, BMC Medical, and its U.S. distributor, 3B, to s
ettle all outstanding disputes.
(24) Subsequent Events
On July 10, 2019, we entered into a Note Purchase Agreement
(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 net proceeds from this transaction were used to pay down borrowings on our senior unsecured revolving credit facility
.
Under the terms of the Note Purchase Agreement, we agreed to customary covenants including with respect to our corporate existence, transactions with affiliates, and mergers and other extraordinary transactions. We also agreed that, subject to limited exceptions, we will maintain a ratio of consolidated funded debt to consolidated EBITDA of no more than 3.50 to 1.00 as of the last day of any fiscal quarter, and will not at any time permit the amount of all secured and unsecured debt of us and our subsidiaries to exceed 10% of our consolidated tangible assets, determined as of the end of our most recently ended fiscal quarter.