April 29, 2022 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

______________________________________________________________________________________________

FORM 10-Q

______________________________________________________________________________________________

(Mark One)


x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022


o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______to _______

Commission File Number: 001-15317

______________________________________________________________________________________________

ResMed Inc.

(Exact name of registrant as specified in its charter)

______________________________________________________________________________________________

Delaware

(State or other jurisdiction of incorporation or organization)

98-0152841

(I.R.S. Employer Identification No.)

9001 Spectrum Center Blvd.

San Diego, CA 92123

United States of America

(Address of principal executive offices, including zip code)

(858) 836-5000

(Registrant’s telephone number, including area code)

______________________________________________________________________________________________

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.004 per share

RMD

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller Reporting Company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

At April 25, 2022 there were 146,284,655 shares of Common Stock ($0.004 par value) outstanding. This number excludes 41,836,234 shares held by the registrant as treasury shares.

Table of Contents

RESMED INC. AND SUBSIDIARIES

INDEX


Part I	Financial Information	3

Item 1	Financial Statements	3

	Condensed Consolidated Balance Sheets (Unaudited)	3

	Condensed Consolidated Statements of Operations (Unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income (Unaudited)	5

	Condensed Consolidated Statements of Changes in Equity (Unaudited)	6

	Condensed Consolidated Statements of Cash Flows (Unaudited)	8

	Notes to the Condensed Consolidated Financial Statements (Unaudited)	9

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4	Controls and Procedures	36

Part II	Other Information	37

Item 1	Legal Proceedings	37

Item 1A	Risk Factors	37

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 3	Defaults Upon Senior Securities	37

Item 4	Mine Safety Disclosures	37

Item 5	Other Information	37

Item 6	Exhibits	38

	Signatures	39

Table of Contents


PART I – FINANCIAL INFORMATION			Item 1

Item 1. Financial Statements

RESMED INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

(In US$ and in thousands, except share and per share data)


	March 31, 2022		June 30, 2021
Assets
Current assets:
Cash and cash equivalents	$	201,769	$	295,278
Accounts receivable, net of allowances of $24,411 and $32,138 at March 31, 2022 and June 30, 2021, respectively	508,580		614,292
Inventories (note 3)	664,943		457,033
Prepaid taxes	108,898		72,409
Prepaid expenses and other current assets	220,110		135,745
Total current assets	1,704,300		1,574,757
Non-current assets:
Property, plant and equipment, net (note 3)	513,250		463,490
Operating lease right-of-use assets	141,173		128,575
Goodwill (note 4)	1,946,317		1,927,901
Other intangible assets, net (note 3)	355,984		392,582
Deferred income taxes	74,840		79,904
Prepaid taxes and other non-current assets	169,400		160,916
Total non-current assets	3,200,964		3,153,368
Total assets	$	4,905,264	$	4,728,125
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	149,797	$	138,008
Accrued expenses	326,276		320,599
Operating lease liabilities, current	24,130		23,585
Deferred revenue	112,449		109,611
Income taxes payable (note 6)	42,646		307,963
Short-term debt, net (note 8)	11,967		12,000
Total current liabilities	667,265		911,766
Non-current liabilities:
Deferred revenue	94,094		91,496
Deferred income taxes	10,711		11,319
Operating lease liabilities, non-current	127,254		114,779
Other long-term liabilities	5,103		6,802
Long-term debt, net (note 8)	668,735		643,351
Long-term income taxes payable (note 6)	53,298		62,933
Total non-current liabilities	959,195		930,680
Total liabilities	1,626,460		1,842,446
Commitments and contingencies (note 10)
Stockholders’ equity:
Preferred stock, $0.01 par value, 2,000,000 shares authorized; none issued	—		—
Common stock, $0.004 par value, 350,000,000 shares authorized; 188,102,293 issued and 146,266,059 outstanding at March 31, 2022 and 187,484,592 issued and 145,648,358 outstanding at June 30, 2021	585		583
Additional paid-in capital	1,645,453		1,622,199
Retained earnings	3,480,163		3,079,640
Treasury stock, at cost, 41,836,234 shares at March 31, 2022 and June 30, 2021	(1,623,256)		(1,623,256)
Accumulated other comprehensive loss	(224,141)		(193,487)
Total stockholders’ equity	3,278,804		2,885,679
Total liabilities and stockholders’ equity	$	4,905,264	$	4,728,125

See the accompanying notes to the unaudited condensed consolidated financial statements.

Table of Contents


PART I – FINANCIAL INFORMATION			Item 1

RESMED INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(In US$ and in thousands, except per share data)


	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021		2022		2021
Net revenue - Sleep and Respiratory Care products	$	763,358	$	674,931	$	2,365,697	$	2,042,909
Net revenue - Software as a Service	101,142		93,836		297,693		277,813
Net revenue	864,500		768,767		2,663,390		2,320,722

Cost of sales - Sleep and Respiratory Care products	324,618		270,351		1,017,494		833,203
Cost of sales - Software as a Service	37,703		40,234		110,820		105,050
Cost of sales (exclusive of amortization shown separately below)	362,321		310,585		1,128,314		938,253

Amortization of acquired intangible assets - Sleep and Respiratory Care products	1,071		900		3,043		3,995
Amortization of acquired intangible assets - Software as a Service	9,911		10,024		30,228		30,071
Amortization of acquired intangible assets	10,982		10,924		33,271		34,066
Total cost of sales	373,303		321,509		1,161,585		972,319
Gross profit	491,197		447,258		1,501,805		1,348,403

Selling, general, and administrative	182,401		160,446		544,483		488,904
Research and development	66,801		55,941		189,258		165,409
Amortization of acquired intangible assets	7,730		7,445		23,175		23,377
Restructuring expenses (note 11)	—		—		—		8,673
Total operating expenses	256,932		223,832		756,916		686,363
Income from operations	234,265		223,426		744,889		662,040
Other income (loss), net:
Interest (expense) income, net	(5,462)		(5,823)		(16,770)		(18,341)
Loss attributable to equity method investments (note 5)	(2,627)		(4,969)		(5,927)		(9,895)
Gain (loss) on equity investments (note 5)	(1,735)		4,666		(527)		9,442
Other, net	1,878		705		729		1,205
Total other income (loss), net	(7,946)		(5,421)		(22,495)		(17,589)
Income before income taxes	226,319		218,005		722,394		644,451
Income taxes	47,307		296,486		138,018		365,046
Net income (loss)	$	179,012	$	(78,481)	$	584,376	$	279,405
Basic earnings (loss) per share (note 9)	$	1.22	$	(0.54)	$	4.00	$	1.92
Diluted earnings (loss) per share (note 9)	$	1.22	$	(0.54)	$	3.97	$	1.91
Dividend declared per share	$	0.42	$	0.39	$	1.26	$	1.17
Basic shares outstanding (000's)	146,240		145,513		145,969		145,217
Diluted shares outstanding (000's)	146,962		145,513		147,034		146,394

See the accompanying notes to the unaudited condensed consolidated financial statements.

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PART I – FINANCIAL INFORMATION			Item 1

RESMED INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(In US$ and in thousands)


	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021		2022		2021
Net income (loss)	$	179,012	$	(78,481)	$	584,376	$	279,405
Other comprehensive income (loss):
Foreign currency translation (loss) gain adjustments	(1,046)		(32,822)		(30,654)		88,009
Comprehensive income (loss)	$	177,966	$	(111,303)	$	553,722	$	367,414

See the accompanying notes to the unaudited condensed consolidated financial statements.

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PART I – FINANCIAL INFORMATION			Item 1

RESMED INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Equity (Unaudited)

(In US$ and in thousands)


	Common Stock			Additional Paid-in Capital		Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
	Shares	Amount				Shares	Amount
Balance, June 30, 2021	187,485	$	583	$	1,622,199	(41,836)	$	(1,623,256)	$	3,079,640	$	(193,487)	$	2,885,679
Common stock issued on exercise of options	61	—		4,354		—	—		—		—		4,354
Common stock issued on vesting of restricted stock units, net of shares withheld for tax	1	—		(195)		—	—		—		—		(195)
Stock-based compensation costs	—	—		17,303		—	—		—		—		17,303
Other comprehensive income	—	—		—		—	—		—		(23,516)		(23,516)
Net income	—	—		—		—	—		203,613		—		203,613
Dividends declared ($0.42 per common share)	—	—		—		—	—		(61,189)		—		(61,189)
Balance, September 30, 2021	187,547	$	583	$	1,643,661	(41,836)	$	(1,623,256)	$	3,222,064	$	(217,003)	$	3,026,049
Common stock issued on exercise of options	39	—		2,378		—	—		—		—		2,378
Common stock issued on vesting of restricted stock units, net of shares withheld for tax	361	2		(49,832)		—	—		—		—		(49,830)
Common stock issued on employee stock purchase plan	101	—		16,723		—	—		—		—		16,723
Stock-based compensation costs	—	—		16,101		—	—		—		—		16,101
Other comprehensive income	—	—		—		—	—		—		(6,092)		(6,092)
Net income	—	—		—		—	—		201,751		—		201,751
Dividends declared ($0.42 per common share)	—	—		—		—	—		(61,245)		—		(61,245)
Balance, December 31, 2021	188,048	$	585	$	1,629,031	(41,836)	$	(1,623,256)	$	3,362,570	$	(223,095)	$	3,145,835
Common stock issued on exercise of options	49	—		2,814		—	—		—		—		2,814
Common stock issued on vesting of restricted stock units, net of shares withheld for tax	5	—		(2,253)		—	—		—		—		(2,253)

Stock-based compensation costs	—	—		15,861		—	—		—		—		15,861
Other comprehensive income	—	—		—		—	—		—		(1,046)		(1,046)
Net income	—	—		—		—	—		179,012		—		179,012
Dividends declared ($0.42 per common share)	—	—		—		—	—		(61,419)		—		(61,419)
Balance, March 31, 2022	188,102	$	585	$	1,645,453	(41,836)	$	(1,623,256)	$	3,480,163	$	(224,141)	$	3,278,804

See the accompanying notes to the unaudited condensed consolidated financial statements.

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PART I – FINANCIAL INFORMATION			Item 1

RESMED INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Equity (Unaudited)

(In US$ and in thousands)


	Common Stock			Additional Paid-in Capital		Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
	Shares	Amount				Shares	Amount
Balance, June 30, 2020	186,723	$	580	$	1,570,694	(41,836)	$	(1,623,256)	$	2,832,991	$	(283,982)	$	2,497,027
Common stock issued on exercise of options	18	—		1,026		—	—		—		—		1,026
Common stock issued on vesting of restricted stock units, net of shares withheld for tax	3	—		227		—	—		—		—		227
Stock-based compensation costs	—	—		16,071		—	—		—		—		16,071
Other comprehensive income (loss)	—	—		—		—	—		—		43,791		43,791
Cumulative effect adjustment from adoption of the credit loss standard, net of tax	—	—		—		—	—		(1,143)		—		(1,143)
Net income	—	—		—		—	—		178,372		—		178,372
Dividends declared ($0.39 per common share)	—	—		—		—	—		(56,511)		—		(56,511)
Balance, September 30, 2020	186,744	$	580	$	1,588,018	(41,836)	$	(1,623,256)	$	2,953,709	$	(240,191)	$	2,678,860
Common stock issued on exercise of options	29	—		1,857		—	—		—		—		1,857
Common stock issued on vesting of restricted stock units, net of shares withheld for tax	451	2		(46,734)		—	—		—		—		(46,732)
Common stock issued on employee stock purchase plan	116	—		15,729		—	—		—		—		15,729
Stock-based compensation costs	—	—		15,370		—	—		—		—		15,370
Other comprehensive income	—	—		—		—	—		—		77,040		77,040
Net income	—	—		—		—	—		179,514		—		179,514
Dividends declared ($0.39 per common share)	—	—		—		—	—		(56,654)		—		(56,654)
Balance, December 31, 2020	187,340	$	582	$	1,574,240	(41,836)	$	(1,623,256)	$	3,076,569	$	(163,151)	$	2,864,984
Common stock issued on exercise of options	1	—		139		—	—		—		—		139
Common stock issued on vesting of restricted stock units, net of shares withheld for tax	12	—		(3,431)		—	—		—		—		(3,431)
Common stock issued on employee stock purchase plan	—	—		6		—	—		—		—		6
Stock-based compensation costs	—	—		15,591		—	—		—		—		15,591
Other comprehensive income	—	—		—		—	—		—		(32,822)		(32,822)
Net income (loss)	—	—		—		—	—		(78,481)		—		(78,481)
Dividends declared ($0.39 per common share)	—	—		—		—	—		(56,752)		—		(56,752)
Balance, March 31, 2021	187,353	$	582	$	1,586,545	(41,836)	$	(1,623,256)	$	2,941,336	$	(195,973)	$	2,709,234

See the accompanying notes to the unaudited condensed consolidated financial statements.

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PART I – FINANCIAL INFORMATION			Item 1

RESMED INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In US$ and in thousands)


	Nine Months Ended March 31,
	2022		2021
Cash flows from operating activities:
Net income	$	584,376	$	279,405
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	122,198		120,034
Amortization of right-of-use assets	26,636		25,805
Stock-based compensation costs	49,265		47,032
Loss attributable to equity method investments (note 5)	5,927		9,895
(Gain) loss on equity investments (note 5)	527		(9,442)
Restructuring expenses (note 11)	—		8,673
Changes in operating assets and liabilities:
Accounts receivable	98,158		(39,899)
Inventories	(209,476)		(48,393)
Prepaid expenses, net deferred income taxes and other current assets	(127,977)		(41,036)
Accounts payable, accrued expenses, income taxes payable and other	(277,973)		158,119
Net cash provided by operating activities	271,661		510,193
Cash flows from investing activities:
Purchases of property, plant and equipment	(106,192)		(74,805)
Patent registration and acquisition costs	(17,449)		(11,149)
Business acquisitions, net of cash acquired	(35,915)		(30,704)
Purchases of investments (note 5)	(16,614)		(20,038)
Proceeds from sale of investment	6,802		—
(Payments) / proceeds on maturity of foreign currency contracts	(5,309)		26,306
Net cash used in investing activities	(174,677)		(110,390)
Cash flows from financing activities:
Proceeds from issuance of common stock, net	26,269		18,759
Taxes paid related to net share settlement of equity awards	(52,278)		(49,938)
Payments of business combination contingent consideration	—		(3,500)
Proceeds from borrowings, net of borrowing costs	160,000		90,000
Repayment of borrowings	(136,000)		(536,000)
Dividends paid	(183,853)		(169,917)
Net cash used in financing activities	(185,862)		(650,596)
Effect of exchange rate changes on cash	(4,631)		18,272
Net decrease in cash and cash equivalents	(93,509)		(232,521)
Cash and cash equivalents at beginning of period	295,278		463,156
Cash and cash equivalents at end of period	$	201,769	$	230,635
Supplemental disclosure of cash flow information:
Income taxes paid, net of refunds	$	432,268	$	180,307
Interest paid	$	16,770	$	18,644
Fair value of assets acquired, excluding cash	$	8,986	$	15,992
Liabilities assumed	(2,492)		(3,309)
Goodwill on acquisition	33,499		24,202
Previously held equity interest	(4,078)		—
Deferred payments	—		(1,681)
Cash paid for acquisitions	$	35,915	$	35,204

See the accompanying notes to the unaudited condensed consolidated financial statements.

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PART I – FINANCIAL INFORMATION			Item 1

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

(1) Summary of Significant Accounting Policies

Organization and Basis of Presentation

ResMed Inc. (referred to herein as “we”, “us”, “our” or the “Company”) is a Delaware corporation formed in March 1994 as a holding company for the ResMed Group. Through our subsidiaries, we design, manufacture and market equipment for the diagnosis and treatment of sleep-disordered breathing and other respiratory disorders, including obstructive sleep apnea. Our manufacturing operations are located in Australia, Singapore, Malaysia, France, China and the United States. Major distribution and sales sites are located in the United States, Germany, France, the United Kingdom, Switzerland, Australia, Japan, China, Finland, Norway and Sweden. We also operate a Software as a Service (“SaaS”) business in the United States that includes out-of-hospital software platforms designed to support the professionals and caregivers who help people stay healthy in the home or care setting of their choice.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and the rules of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all necessary adjustments, which consisted only of normal recurring items, have been included in the accompanying financial statements to present fairly the results of the interim periods. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2022.

The condensed consolidated financial statements for the three and nine months ended March 31, 2022 and March 31, 2021 are unaudited and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K (our “Form 10-K”) for the year ended June 30, 2021.

Revenue Recognition

In accordance with Accounting Standard Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”, we account for a contract with a customer when there is a legally enforceable contract, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. We have determined that we have two operating segments, which are the sleep and respiratory disorders sector of the medical device industry (“Sleep and Respiratory Care”) and the supply of business management software as a service to out-of-hospital health providers (“SaaS”). Our Sleep and Respiratory Care revenue relates primarily to the sale of our products that are therapy-based equipment. Some contracts include additional performance obligations such as the provision of extended warranties and provision of 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.

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PART I – FINANCIAL INFORMATION			Item 1

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Disaggregation of revenue

The following table summarizes our net revenue disaggregated by segment, product and region (in thousands):


	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021		2022		2021
U.S., Canada and Latin America
Devices	$	250,768	$	192,897	$	771,475	$	595,287
Masks and other	224,665		209,984		681,803		637,507
Total Sleep and Respiratory Care	$	475,433	$	402,881	$	1,453,278	$	1,232,794
Software as a Service	101,142		93,836		297,693		277,813
Total	$	576,575	$	496,717	$	1,750,971	$	1,510,607
Combined Europe, Asia and other markets
Devices	$	182,307	$	172,838	$	608,268	$	536,856
Masks and other	105,618		99,212		304,151		273,259
Total Sleep and Respiratory Care	$	287,925	$	272,050	$	912,419	$	810,115
Global revenue
Devices	$	433,075	$	365,735	$	1,379,743	$	1,132,143
Masks and other	330,283		309,196		985,954		910,766
Total Sleep and Respiratory Care	$	763,358	$	674,931	$	2,365,697	$	2,042,909
Software as a Service	101,142		93,836		297,693		277,813
Total	$	864,500	$	768,767	$	2,663,390	$	2,320,722

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 at a point in time. For products in our Sleep and Respiratory Care business, we transfer control and recognize a sale when products are shipped to the customer in accordance with the contractual shipping terms. For our SaaS business, revenue associated with professional services are recognized as they are provided. We defer the recognition of a portion of the consideration received when performance obligations are not yet satisfied. Consideration received from customers in advance of revenue recognition is classified as deferred revenue. Performance obligations resulting in deferred revenue in our Sleep and Respiratory Care business relate primarily to extended warranties on our devices and the provision of data for patient monitoring. Performance obligations resulting in deferred revenue in our SaaS business relate primarily to the provision of software access with maintenance and support over an agreed term and material rights associated with future discounts upon renewal of some SaaS contracts. Generally, deferred revenue will be recognized over a period of one year to five years. Our contracts do not contain significant financing components.

The following table summarizes our contract balances (in thousands):


	March 31, 2022		June 30, 2021		Balance sheet caption
Contract assets
Accounts receivable, net	$	508,580	$	614,292	Accounts receivable, net
Unbilled revenue, current	25,653		10,893		Prepaid expenses and other current assets
Unbilled revenue, non-current	7,018		6,214		Prepaid taxes and other non-current assets

Contract liabilities
Deferred revenue, current	(112,449)		(109,611)		Deferred revenue (current liabilities)
Deferred revenue, non-current	(94,094)		(91,496)		Deferred revenue (non-current liabilities)

Transaction price determination

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. In our Sleep and Respiratory Care segment, the amount of consideration received and revenue recognized varies

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with changes in marketing incentives (e.g. rebates, discounts, free goods) and returns offered to our customers and their customers. When we give customers the right to return eligible products and receive credit, returns are estimated based on an analysis of historical experience. However, returns of products, excluding warranty-related returns, are infrequent and insignificant. We adjust the estimate of revenue at the earlier of when the most likely amount of consideration can be estimated, the amount expected to be received changes, or when the consideration becomes fixed.

We offer our Sleep and Respiratory Care customers cash or product rebates based on volume or sales targets measured over quarterly or annual periods. We estimate rebates based on each customer’s expected achievement of its targets. In accounting for these rebate programs, we reduce revenue ratably as sales occur over the rebate period by the expected value of the rebates to be returned to the customer. Rebates measured over a quarterly period are updated based on actual sales results and, therefore, no estimation is required to determine the reduction to revenue. For rebates measured over annual periods, we update our estimates on a quarterly basis based on actual sales results and updated forecasts for the remaining rebate periods.

We participate in programs where we issue credits to our Sleep and Respiratory Care distributors when they are required to sell our products below negotiated list prices if we have preexisting contracts with the distributors' customers. We reduce revenue for future credits at the time of sale to the distributor, which we estimate based on historical experience using the expected value method.

We also offer discounts to both our Sleep and Respiratory Care as well as our SaaS customers as part of normal business practice and these are deducted from revenue when the sale occurs.

When Sleep and Respiratory Care or SaaS contracts have multiple performance obligations, we generally use an observable price to determine the stand-alone selling price by reference to pricing and discounting practices for the specific product or service when sold separately to similar customers. Revenue is then allocated proportionately, based on the determined stand-alone selling price, to each performance obligation. An allocation is not required for many of our Sleep and Respiratory Care contracts that have a single performance obligation, which is the shipment of our therapy-based equipment.

Accounting and practical expedient elections

We have elected to account for shipping and handling activities associated with our Sleep and Respiratory Care segment as a fulfillment cost within cost of sales, and record shipping and handling costs collected from customers in net revenue. We have also elected for all taxes assessed by government authorities that are imposed on and concurrent with revenue-producing transactions, such as sales and value added taxes, to be excluded from revenue and presented on a net basis. We have elected two practical expedients including the “right to invoice” practical expedient, which is relevant for some of our SaaS contracts as it allows us to recognize revenue in the amount of the invoice when it corresponds directly with the value of performance completed to date. 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.

Lease Revenue

We lease Sleep and Respiratory Care medical devices to customers primarily as a means to comply with local health insurer requirements in certain foreign geographies. Device rental contracts include sales-type and operating leases, and contract terms vary by customer and include options to terminate or extend the contract. When lease contracts also include the sale of masks and accessories, we allocate contract consideration to those items on a relative standalone price basis and recognize revenue when control transfers to the customer.

The components of lease revenue were as follows (in thousands):


	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021		2022		2021
Sales-type lease revenue	$	946	$	2,031	$	6,598	$	5,854
Operating lease revenue	19,797		22,746		69,380		72,551
Total lease revenue	$	20,743	$	24,777	$	75,978	$	78,405

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Provision for Warranty

We provide for the estimated cost of product warranties on our Sleep and Respiratory Care products at the time the related revenue is recognized. We determine the amount of this provision by using a financial model, which takes into consideration actual historical expenses and potential risks associated with our different products. We use this financial model to calculate the future probable expenses related to warranty and the required level of the warranty provision. Although we engage in product improvement programs and processes, our warranty obligation is affected by product failure rates and costs incurred to correct those product failures. Should actual product failure rates or estimated costs to repair those product failures differ from our estimates, we would be required to revise our estimated warranty provision.

Recently adopted accounting pronouncements

ASU No. 2021-08 “Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”

In October 2021, the FASB issued ASU No. 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (Topic 805), which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. This approach differs from the current requirement to measure contract assets and contract liabilities acquired in a business combination at fair value. The guidance is effective for us beginning in the first quarter of the year ending June 30, 2024 and early adoption is permitted. We elected to early adopt this standard in the second quarter of our fiscal year ending June 30, 2022. We do not expect the adoption of ASU 2021-08 to have a material impact on our consolidated financial statements.

(2) Segment Information

We have quantitatively and qualitatively determined that we operate in 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 revenues and income from operations. The accounting policies of the segments are the same as those described in note 2 of our consolidated financial statements included in our Form 10-K for the year ended June 30, 2021. Segment net revenues and segment income from operations do not include inter-segment profits and revenue is allocated to a geographic area based on where the products are shipped to or where the services are performed.

Certain items are maintained at the corporate level and are not allocated to the segments. The non-allocated items include corporate headquarters costs, stock-based compensation, amortization expense from acquired intangibles, net interest expense (income), loss attributable to equity method investments, gains and losses on equity investments, and other, net. We neither discretely allocate assets to our operating segments, nor does our Chief Operating Decision Maker evaluate the operating segments using discrete asset information.

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The table below presents a reconciliation of net revenues and net operating profit by reportable segments (in thousands):


	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021		2022		2021
Net revenue by segment
Total Sleep and Respiratory Care	$	763,358	$	674,931	$	2,365,697	$	2,042,909
Software as a Service	101,142		93,836		297,693		277,813
Total	$	864,500	$	768,767	$	2,663,390	$	2,320,722

Depreciation and amortization by segment
Sleep and Respiratory Care	$	21,008	$	13,589	$	58,372	$	39,979
Software as a Service	1,863		1,491		5,421		3,599
Amortization of acquired intangible assets and corporate assets	19,435		24,908		58,405		76,456
Total	$	42,306	$	39,988	$	122,198	$	120,034

Net operating profit by segment
Sleep and Respiratory Care	$	267,808	$	253,693	$	847,589	$	763,534
Software as a Service	23,649		23,052		68,668		70,929
Total	$	291,457	$	276,745	$	916,257	$	834,463

Reconciling items
Corporate costs	$	38,480	$	34,950	$	114,922	$	106,307
Amortization of acquired intangible assets	18,712		18,369		56,446		57,443
Restructuring expenses	—		—		—		8,673
Interest expense (income), net	5,462		5,823		16,770		18,341
Loss attributable to equity method investments	2,627		4,969

Form: 10-Q

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