Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

January 25, 2024

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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 December 31, 2023
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 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 x Accelerated Filer o
Non-Accelerated Filer o Smaller Reporting Company o
Emerging Growth Company o
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 January 22, 2024 there were 147,088,888 shares of Common Stock ($0.004 par value) outstanding. This number excludes 42,171,708 shares held by the registrant as treasury shares.


Table of Contents
RESMED INC. AND SUBSIDIARIES
INDEX
Part I
   
Item 1
   
 
   
 
   
 
   
 
   
 
   
 
   
   
   
   
   
   
   
   
   
   
   
   
 


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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)
  December 31,
2023
June 30,
2023
Assets
Current assets:
Cash and cash equivalents $ 210,247  $ 227,891 
Accounts receivable, net of allowances of $21,822 and $23,603 at December 31, 2023 and June 30, 2023, respectively
729,740  704,909 
Inventories (note 3) 933,214  998,012 
Prepaid expenses and other current assets (note 3) 504,876  437,018 
Total current assets 2,378,077  2,367,830 
Non-current assets:
Property, plant and equipment, net (note 3) 551,734  537,856 
Operating lease right-of-use assets 153,473  127,955 
Goodwill (note 4) 2,861,854  2,770,299 
Other intangible assets, net (note 3) 528,178  552,341 
Deferred income taxes 155,955  132,974 
Prepaid taxes and other non-current assets 275,817  262,453 
Total non-current assets 4,527,011  4,383,878 
Total assets $ 6,905,088  $ 6,751,708 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 202,395  $ 150,756 
Accrued expenses 332,136  365,660 
Operating lease liabilities, current 24,057  21,919 
Deferred revenue 148,897  138,072 
Income taxes payable 46,690  72,224 
Short-term debt, net (note 7) 9,898  9,902 
Total current liabilities 764,073  758,533 
Non-current liabilities:
Deferred revenue 127,410  119,186 
Deferred income taxes 89,282  90,650 
Operating lease liabilities, non-current 140,649  116,853 
Other long-term liabilities 72,894  68,166 
Long-term debt, net (note 7) 1,216,769  1,431,234 
Long-term income taxes payable 12,157  37,183 
Total non-current liabilities 1,659,161  1,863,272 
Total liabilities 2,423,234  2,621,805 
Commitments and contingencies (note 9)
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; 189,259,220 issued and 147,087,512 outstanding at December 31, 2023 and 188,900,583 issued and 147,064,349 outstanding at June 30, 2023
588  588 
Additional paid-in capital 1,822,918  1,772,083 
Retained earnings 4,539,963  4,253,016 
Treasury stock, at cost, 42,171,708 shares at December 31, 2023 and 41,836,234 shares at June 30, 2023
(1,673,263) (1,623,256)
Accumulated other comprehensive loss (208,352) (272,528)
Total stockholders’ equity 4,481,854  4,129,903 
Total liabilities and stockholders’ equity $ 6,905,088  $ 6,751,708 
See the accompanying notes to the unaudited condensed consolidated financial statements.

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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
December 31,
Six Months Ended
December 31,
  2023 2022 2023 2022
Net revenue - Sleep and Respiratory Care products $ 1,017,855  $ 916,981  $ 1,980,892  $ 1,761,424 
Net revenue - Software as a Service 144,946  116,763  284,230  222,614 
Net revenue 1,162,801  1,033,744  2,265,122  1,984,038 
 
Cost of sales - Sleep and Respiratory Care products 460,721  406,303  905,182  770,146 
Cost of sales - Software as a Service 46,889  40,421  95,782  79,688 
Cost of sales (exclusive of amortization shown separately below) 507,610  446,724  1,000,964  849,834 
 
Amortization of acquired intangible assets - Sleep and Respiratory Care products 1,324  1,343  3,240  2,572 
Amortization of acquired intangible assets - Software as a Service 6,933  5,962  13,924  11,108 
Amortization of acquired intangible assets 8,257  7,305  17,164  13,680 
Total cost of sales 515,867  454,029  1,018,128  863,514 
Gross profit 646,934  579,715  1,246,994  1,120,524 
 
Selling, general, and administrative 222,155  211,672  445,029  404,860 
Research and development 73,880  69,874  149,590  133,062 
Amortization of acquired intangible assets 11,577  9,563  24,056  17,513 
Restructuring expenses (note 11) 64,228    64,228   
Acquisition related expenses   8,412    9,157 
Total operating expenses 371,840  299,521  682,903  564,592 
Income from operations 275,094  280,194  564,091  555,932 
Other income (loss), net:
Interest (expense) income, net (13,805) (10,338) (28,762) (17,472)
Gain (loss) attributable to equity method investments (note 5) 739  (2,826) (3,156) (4,853)
Gain (loss) on equity investments (note 5) (1,888) 8,368  (2,491) 5,088 
Other, net (686) (1,707) 1,963  (3,211)
Total other income (loss), net (15,640) (6,503) (32,446) (20,448)
Income before income taxes 259,454  273,691  531,645  535,484 
Income taxes 50,654  48,777  103,423  100,092 
Net income $ 208,800  $ 224,914  $ 428,222  $ 435,392 
Basic earnings per share (note 8) $ 1.42  $ 1.53  $ 2.91  $ 2.97 
Diluted earnings per share (note 8) $ 1.42  $ 1.53  $ 2.90  $ 2.95 
Dividend declared per share $ 0.48  $ 0.44  $ 0.96  $ 0.88 
Basic shares outstanding (000's) 147,132  146,704  147,104  146,568 
Diluted shares outstanding (000's) 147,545  147,405  147,572  147,367 
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
December 31,
Six Months Ended
December 31,
  2023 2022 2023 2022
Net income $ 208,800  $ 224,914  $ 428,222  $ 435,392 
Other comprehensive income, net of taxes:
Unrealized losses on designated hedging instruments (19,891) (20,203) (36,984) (20,203)
Foreign currency translation gain adjustments 131,687  156,163  101,160  62,782 
Comprehensive income $ 320,596  $ 360,874  $ 492,398  $ 477,971 
See the accompanying notes to the unaudited condensed consolidated financial statements.

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Table of Contents
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, 2023
188,901  $ 588  $ 1,772,083  (41,836) $ (1,623,256) $ 4,253,016  $ (272,528) $ 4,129,903 
Common stock issued on exercise of options
17  —  983  —  —  —  —  983 
Common stock issued on vesting of restricted stock units, net of shares withheld for tax 3  —  (225) —  —  —  —  (225)
Stock-based compensation costs —  —  18,510  —  —  —  —  18,510 
Other comprehensive loss —  —  —  —  —  —  (47,620) (47,620)
Net income —  —  —  —  —  219,422  —  219,422 
Dividends declared ($0.48 per common share)
—  —  —  —  —  (70,597) —  (70,597)
Balance, September 30, 2023
188,921  $ 588  $ 1,791,351  (41,836) $ (1,623,256) $ 4,401,841  $ (320,148) $ 4,250,376 
Common stock issued on exercise of options 24  —  1,557  —  —  —  —  1,557 
Common stock issued on vesting of restricted stock units, net of shares withheld for tax 163  1  (7,798) —  —  —  —  (7,797)
Common stock issued on employee stock purchase plan 151  1  17,966  —  —  —  —  17,967 
Treasury stock purchases —  (2) 2  (336) (50,007) —  —  (50,007)
Stock-based compensation costs —  —  19,840  —  —  —  —  19,840 
Other comprehensive income —  —  —  —  —  —  111,796  111,796 
Net income —  —  —  —  —  208,800  —  208,800 
Dividends declared ($0.48 per common share)
—  —  —  —  —  (70,678) —  (70,678)
Balance, December 31, 2023
189,259  $ 588  $ 1,822,918  (42,172) $ (1,673,263) $ 4,539,963  $ (208,352) $ 4,481,854 
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, 2022
188,247  $ 586  $ 1,682,432  (41,836) $ (1,623,256) $ 3,613,736  $ (312,747) $ 3,360,751 
Common stock issued on exercise of options
45  —  2,610  —  —  —  —  2,610 
Common stock issued on vesting of restricted stock units, net of shares withheld for tax 3  —  (59) —  —  —  —  (59)
Stock-based compensation costs —  —  16,919  —  —  —  —  16,919 
Other comprehensive loss —  —  —  —  —  —  (93,381) (93,381)
Net income —  —  —  —  —  210,478  —  210,478 
Dividends declared ($0.44 per common share)
—  —  —  —  —  (64,431) —  (64,431)
Balance, September 30, 2022
188,295  $ 586  $ 1,701,902  (41,836) $ (1,623,256) $ 3,759,783  $ (406,128) $ 3,432,887 
Common stock issued on exercise of options 77  —  5,120  —  —  —  —  5,120 
Common stock issued on vesting of restricted stock units, net of shares withheld for tax 265  1  (29,655) —  —  —  —  (29,654)
Common stock issued on employee stock purchase plan 100  1  16,935  —  —  —  —  16,936 
Stock-based compensation costs —  —  16,464  —  —  —  —  16,464 
Other comprehensive income (loss) —  —  —  —  —  —  135,960  135,960 
Net income —  —  —  —  —  224,914  —  224,914 
Dividends declared ($0.44 per common share)
—  —  —  —  —  (64,500) —  (64,500)
Balance, December 31, 2022
188,737  $ 588  $ 1,710,766  (41,836) $ (1,623,256) $ 3,920,197  $ (270,168) $ 3,738,127 
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)
  Six Months Ended
December 31,
  2023 2022
Cash flows from operating activities:
Net income $ 428,222  $ 435,392 
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 89,718  74,040 
Amortization of right-of-use assets 17,094  15,533 
Stock-based compensation costs 38,350  33,383 
Loss attributable to equity method investments (note 5) 3,156  4,853 
(Gain) loss on equity investments (note 5) 2,491  (5,088)
Non-cash restructuring expenses (note 11) 33,239   
Changes in operating assets and liabilities:
Accounts receivable (20,269) (75,823)
Inventories 77,095  (233,116)
Prepaid expenses, net deferred income taxes and other current assets (74,590) (66,646)
Accounts payable, accrued expenses, income taxes payable and other (35,391) (9,230)
Net cash provided by operating activities
559,115  173,298 
Cash flows from investing activities:
Purchases of property, plant and equipment (53,388) (56,406)
Patent registration and acquisition costs (12,036) (7,636)
Business acquisitions, net of cash acquired (110,688) (1,011,225)
Purchases of investments (note 5) (7,305) (17,132)
Proceeds from exits of investments (note 5) 250   
Proceeds / (payments) on maturity of foreign currency contracts (6,956) 7,181 
Net cash used in investing activities (190,123) (1,085,218)
Cash flows from financing activities:
Proceeds from issuance of common stock, net 20,507  24,666 
Purchases of treasury stock (50,007)  
Taxes paid related to net share settlement of equity awards (8,022) (29,713)
Payments of business combination contingent consideration (1,293)  
Proceeds from borrowings, net of borrowing costs 105,000  1,070,000 
Repayment of borrowings (315,000) (45,000)
Dividends paid (141,275) (128,931)
Net cash (used in) provided by financing activities
(390,090) 891,022 
Effect of exchange rate changes on cash 3,454  387 
Net decrease in cash and cash equivalents (17,644) (20,511)
Cash and cash equivalents at beginning of period 227,891  273,710 
Cash and cash equivalents at end of period $ 210,247  $ 253,199 
Supplemental disclosure of cash flow information:
Income taxes paid, net of refunds $ 173,437  $ 107,985 
Interest paid $ 28,762  $ 17,472 
Fair value of assets acquired, excluding cash $ 38,520  $ 359,730 
Liabilities assumed (5,401) (144,778)
Goodwill on acquisition 77,712  800,003 
Deferred payments
(143) (874)
Fair value of contingent consideration
1,293  $ (2,856)
Cash paid for acquisitions $ 111,981  $ 1,011,225 
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 and Germany 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, 2024.
The condensed consolidated financial statements for the three and six months ended December 31, 2023 and December 31, 2022 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, 2023.
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 care 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
December 31,
Six Months Ended
December 31,
2023 2022 2023 2022
U.S., Canada and Latin America
Devices $ 371,336  $ 345,525  $ 717,233  $ 685,070 
Masks and other 297,994  269,733  590,455  508,293 
Total U.S., Canada and Latin America
$ 669,330  $ 615,258  $ 1,307,688  $ 1,193,363 
Combined Europe, Asia and other markets
Devices $ 234,661  $ 197,275  $ 453,492  $ 375,305 
Masks and other 113,864  104,448  219,712  192,756 
Total Combined Europe, Asia and other markets
$ 348,525  $ 301,723  $ 673,204  $ 568,061 
Global revenue
Total Devices
$ 605,997  $ 542,800  $ 1,170,725  $ 1,060,375 
Total Masks and other
411,858  374,181  810,167  701,049 
Total Sleep and Respiratory Care $ 1,017,855  $ 916,981  $ 1,980,892  $ 1,761,424 
Software as a Service 144,946  116,763  284,230  222,614 
Total $ 1,162,801  $ 1,033,744  $ 2,265,122  $ 1,984,038 
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 cloud-hosted 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):
  December 31,
2023
June 30,
2023
Balance sheet caption
Contract assets
Accounts receivable, net $ 729,740  $ 704,909  Accounts receivable, net
Unbilled revenue, current 34,577  31,521  Prepaid expenses and other current assets
Unbilled revenue, non-current 10,844  10,078  Prepaid taxes and other non-current assets
 
Contract liabilities
Deferred revenue, current (148,897) (138,072) Deferred revenue (current liabilities)
Deferred revenue, non-current (127,410) (119,186) Deferred revenue (non-current liabilities)
Transaction price determination
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. In our Sleep and Respiratory Care segment, the amount of consideration received and revenue recognized varies with changes in marketing incentives (e.g. rebates, discounts, free goods) and returns offered to our customers and their
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PART I – FINANCIAL INFORMATION Item 1
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
customers. When we give customers the right to return eligible products and receive credit, returns are estimated based on an analysis of our historical experience. However, returns of products, excluding warranty-related returns, have historically been 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 each quarter 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 are classified as 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. Operating lease revenue was $23.1 million and $45.7 million for the three and six months ended December 31, 2023 and $20.4 million and $44.1 million for the three and six months ended December 31, 2022.
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.
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PART I – FINANCIAL INFORMATION Item 1
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Recently Issued Accounting Standards Not Yet Adopted
ASU No. 2023-07 Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
In November 2023, the Financial Accounting Standards Board (FASB) issued ASU No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures," which expands segment disclosures to include significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. This ASU is applicable to our Annual Report on Form 10-K for the fiscal year ended June 30, 2025, and subsequent interim periods. Early adoption is permitted and the amendments must be applied retrospectively to all prior periods presented. We are currently evaluating the impact of adopting this ASU on our consolidated financial statements and disclosures.
ASU 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures
In December 2023, the FASB issued ASU No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures," which updates income tax disclosure requirements primarily by requiring specific categories and greater disaggregation within the rate reconciliation and disaggregation of income taxes paid. This ASU is applicable to our Annual Report on Form 10-K for the fiscal year ended June 30, 2026, with early application permitted. We are currently evaluating the impact of adopting this ASU on our consolidated financial statements and disclosures.
(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 fiscal year ended June 30, 2023. 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, restructuring expenses, field safety notification expenses, acquisition related expenses, net interest expense (income), gains and losses 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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PART I – FINANCIAL INFORMATION Item 1
RESMED INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The table below presents a reconciliation of net revenues and net operating profit by reportable segments (in thousands):
Three Months Ended
December 31,
Six Months Ended
December 31,
2023 2022 2023 2022
Net revenue by segment
Sleep and Respiratory Care
$ 1,017,855  $ 916,981  $ 1,980,892  $ 1,761,424 
Software as a Service 144,946  116,763  284,230  222,614 
Total $ 1,162,801  $ 1,033,744  $ 2,265,122  $ 1,984,038 
Depreciation and amortization by segment
Sleep and Respiratory Care $ 21,956  $ 18,533  $ 42,475  $ 38,301 
Software as a Service 2,725  2,097  5,485  4,009 
Amortization of acquired intangible assets and corporate assets 20,103  17,137  41,758  31,730 
Total $ 44,784  $ 37,767  $ 89,718  $ 74,040 
Net operating profit by segment
Sleep and Respiratory Care $ 426,393  $ 373,367  $ 816,808  $ 726,027 
Software as a Service 41,787  28,814  73,045  53,581 
Total $ 468,180  $ 402,181  $ 889,853  $ 779,608 
Reconciling items
Corporate costs $ 102,673  $ 96,707  $ 206,052  $ 183,326 
Amortization of acquired intangible assets 19,834  16,868  41,220  31,193 
Restructuring expenses 64,228    64,228   
Masks with magnets field safety notification expenses (1)
6,351    6,351   
Astral field safety notification expenses (2)
    7,911   
Acquisition related expenses
  8,412    9,157 
Interest expense (income), net 13,805  10,338  28,762  17,472 
(Gain) Loss attributable to equity method investments
(739) 2,826  3,156  4,853 
(Gain) loss on equity investments 1,888  (8,368) 2,491  (5,088)
Other, net 686  1,707  (1,963) 3,211 
Income before income taxes $ 259,454  $ 273,691  $ 531,645  $ 535,484 
(1)    The masks with magnets field safety notification expenses relate to estimated costs to provide alternative masks to patients in response to updated contraindications for use of masks that incorporate magnets.
(2)    The Astral field safety notification expenses relate to estimated costs associated with the replacement of a certain component in some of our Astral ventilation devices that were manufactured between 2013 to 2019.
(3)    Supplemental Balance Sheet Information
Components of selected captions in the condensed consolidated balance sheets consisted of the following (in thousands):
Inventories December 31,
2023
June 30,
2023
Raw materials $ 467,223  $ 459,126 
Work in progress 2,942  3,956 
Finished goods 463,049  534,930 
Total inventories $ 933,214  $ 998,012 
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Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Prepaid expenses and other current assets December 31,
2023
June 30,
2023
Prepaid taxes $ 128,649  $ 114,009 
Prepaid inventories 196,595  143,084 
Other prepaid expenses and current assets 179,632  179,925 
Total prepaid expenses and other current assets $ 504,876  $ 437,018 
Property, Plant and Equipment December 31,
2023
June 30,
2023
Property, plant and equipment, at cost $ 1,266,106  $ 1,205,868 
Accumulated depreciation and amortization (714,372) (668,012)
Property, plant and equipment, net $ 551,734  $ 537,856 
Other Intangible Assets December 31,
2023
June 30,
2023
Developed/core product technology $ 419,263  $ 398,740 
Accumulated amortization (302,043) (265,802)
Developed/core product technology, net 117,220  132,938 
Customer relationships 461,423  443,652 
Accumulated amortization (158,082) (124,220)
Customer relationships, net 303,341  319,432 
Other intangibles 263,176  244,373 
Accumulated amortization (155,559) (144,402)
Other intangibles, net 107,617  99,971 
Total other intangibles, net $ 528,178  $ 552,341 
Intangible assets consist of developed/core product technology, trade names, non-compete agreements, customer relationships, and patents, which we amortize over the estimated useful life of the assets, generally between two years to fifteen years. There are no expected residual values related to these intangible assets.
During the three months ended December 31, 2023, we impaired $18.6 million of developed/core product technology intangible assets, $14.5 million of customer relationship intangible assets, and $0.1 million of other intangibles associated with restructuring activities. These non-cash charges were recorded within restructuring expenses in the condensed consolidated statements of operations. Refer to Note 11, Restructuring Expenses, for the facts and circumstances leading to the impairments. We did not record any intangible asset impairments during the three and six months ended December 31, 2022.
(4)    Goodwill
A reconciliation of changes in our goodwill by reportable segment is as follows (in thousands):
Six Months Ended December 31, 2023
Sleep and
Respiratory Care
SaaS Total
Balance at the beginning of the period $ 670,120  $ 2,100,179  $ 2,770,299 
Business acquisitions 77,712    77,712 
Foreign currency translation adjustments 4,010  9,833  13,843 
Balance at the end of the period $ 751,842  $ 2,110,012  $ 2,861,854 
(5)    Investments
We have equity investments in privately and publicly held companies that are unconsolidated entities. The following discusses our investments in marketable equity securities, non-marketable equity securities, and investments accounted for under the equity method.
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Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Our marketable equity securities are publicly traded stocks measured at fair value and classified within Level 1 in the fair value hierarchy because we use quoted prices for identical assets in active markets. Marketable equity securities are recorded in prepaid expenses and other current assets on the condensed consolidated balance sheets.
Non-marketable equity securities consist of investments in privately held companies without readily determinable fair values and are recorded in prepaid taxes and other non-current assets on the condensed consolidated balance sheets. Non-marketable equity securities are reported at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. We assess non-marketable equity securities at least quarterly for impairment and consider qualitative and quantitative factors including the investee's financial metrics, product and commercial outlook and cash usage. All gains and losses on marketable and non-marketable equity securities, realized and unrealized, are recognized in gain (loss) on equity investments as a component of other income (loss), net on the condensed consolidated statements of operations.
Equity investments whereby we have significant influence, but not control over the investee and are not the primary beneficiary of the investee’s activities, are accounted for under the equity method. Under this method, we record our share of gains or losses attributable to equity method investments as a component of other income (loss), net on the condensed consolidated statements of operations.
Equity investments by measurement category were as follows (in thousands):
Measurement category December 31,
2023
June 30,
2023
Fair value $ 7,617  $ 12,423 
Measurement alternative 74,993  68,748 
Equity method 66,088  65,366 
Total $ 148,698  $ 146,537 
The following tables show a reconciliation of the changes in our equity investments (in thousands):
  Six Months Ended December 31, 2023
  Non-marketable securities Marketable securities Equity method investments Total
Balance at the beginning of the period $ 68,748  $ 12,423  $ 65,366  $ 146,537 
Additions to investments 4,180    3,125  7,305 
Observable price adjustments on non-marketable equity securities 2,315      2,315 
Unrealized (gains) losses on marketable equity securities   (4,806)   (4,806)
Proceeds from exits of investments (250)     (250)
Loss attributable to equity method investments     (3,156) (3,156)
Foreign currency translation adjustments     753  753 
Carrying value at the end of the period $ 74,993  $ 7,617  $ 66,088  $ 148,698 
Six Months Ended December 31, 2022
Non-marketable securities Marketable securities Equity method investments Total
Balance at the beginning of the period $ 39,290  $ 9,167  $ 9,918  $ 58,375 
Additions to investments
17,132    57,233  74,365 
Observable price adjustments on non-marketable equity securities
9,275      9,275 
Unrealized losses on marketable equity securities
  (4,187)   (4,187)
Loss attributable to equity method investments     (4,853) (4,853)
Foreign currency translation adjustments
    1,801  1,801 
Carrying value at the end of the period $ 65,697  $ 4,980  $ 64,099  $ 134,776 
Net unrealized losses recognized for equity investments in non-marketable and marketable securities held as of December 31, 2023 for the three and six months ended December 31, 2023 were $1.9 million and $2.5 million. Net unrealized gains recognized for equity investments in non-marketable and marketable securities held as of December 31, 2022 for the three and six months ended December 31, 2022 were $8.4 million and $5.1 million.
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Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(6)    Product Warranties
Changes in the liability for warranty costs, which is included in accrued expenses in our condensed consolidated balance sheets, are as follows (in thousands):
Six Months Ended
December 31,
2023 2022
Balance at the beginning of the period $ 27,621  $ 25,889 
Warranty accruals for the period 10,448  5,099 
Warranty costs incurred for the period (7,745) (5,480)
Foreign currency translation adjustments 716  281 
Balance at the end of the period $ 31,040  $ 25,789 
(7)    Debt
Debt consisted of the following (in thousands):
December 31,
2023
June 30,
2023
Short-term debt $ 10,000  $ 10,000 
Deferred borrowing costs (102) (98)
Short-term debt, net $ 9,898  $ 9,902 
Long-term debt $ 1,220,000  $ 1,435,000 
Deferred borrowing costs (3,231) (3,766)
Long-term debt, net $ 1,216,769  $ 1,431,234 
Total debt $ 1,226,667  $ 1,441,136 
Credit Facility
On June 29, 2022, we entered into a second amended and restated credit agreement (the “Revolving Credit Agreement”), as borrower, with lenders MUFG Union Bank, N.A., as administrative agent, joint lead arranger, sole book runner, swing line lender and letter of credit issuer, Westpac Banking Corporation, as syndication agent and joint lead arranger, HSBC Bank USA, National Association, as syndication agent and joint lead arranger, and Wells Fargo Bank, National Association, as documentation agent. The Revolving Credit Agreement, among other things, provided a senior unsecured revolving credit facility of $1,500.0 million, with an uncommitted option to increase the revolving credit facility by an additional amount equal to the greater of $1,000.0 million or 1.0 times the EBITDA (as defined in the Revolving Credit Agreement) for the trailing twelve-month measurement period. The Revolving Credit Agreement amends and restates that certain Amended and Restated Credit Agreement, dated as of April 17, 2018, among ResMed, MUFG Union Bank, N.A., Westpac Banking Corporation and the lenders party thereto.
Additionally, on June 29, 2022, ResMed Pty Limited entered into a Second Amendment to the Syndicated Facility Agreement and First Amendment to Unconditional Guaranty Agreement (the “Term Credit Agreement”), as borrower, with lenders MUFG Union Bank, N.A., as administrative agent, joint lead arranger and joint book runner, and Westpac Banking Corporation, as syndication agent, joint lead arranger and joint book runner, which amends that certain Syndicated Facility Agreement dated as of April 17, 2018. The Term Credit Agreement, among other things, provides ResMed Pty Limited a senior unsecured term credit facility of $200.0 million.
Our obligations under the Revolving Credit Agreement are guaranteed by certain of our direct and indirect U.S. subsidiaries, and ResMed Pty 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
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(Unaudited)
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 June 29, 2027, 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 $5.0 million principal payment required on each such semi-annual amortization date. The outstanding principal amounts will bear interest at a rate equal to the Adjusted Term SOFR (as defined in the Revolving Credit Facility) 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 December 31, 2023, the interest rate that was being charged on the outstanding principal amounts was 6.3%. An applicable commitment fee of 0.075% to 0.150% (depending on the then-applicable leverage ratio) applies on the unused portion of the revolving credit facility. As of December 31, 2023, we had $955.0 million available for draw down under the revolving credit facility.
We are required to disclose the fair value of financial instruments for which it is practicable to estimate the value, even though these instruments are not recognized at fair value in the consolidated balance sheets. As the Revolving Credit and Term Credit Agreements’ interest rate is calculated as Adjusted Term SOFR plus the spreads described above, its carrying amount is equivalent to its fair value as at December 31, 2023 and June 30, 2023, which was $730.0 million and $945.0 million, respectively.
Senior Notes
On July 10, 2019, we entered into a Note Purchase Agreement with the purchasers to that agreement, in connection with the issuance and sale of $250.0 million principal amount of our 3.24% senior notes due July 10, 2026, and $250.0 million principal amount of our 3.45% senior notes due July 10, 2029 (collectively referred to as the “Senior Notes”). Our obligations under the Note Purchase Agreement and the Senior Notes are unconditionally and irrevocably guaranteed by certain of our direct and indirect U.S. subsidiaries. The net proceeds from this transaction were used to pay down borrowings on our Revolving Credit Agreement.
Under the terms of the Note Purchase Agreement, we agreed to customary covenants including with respect to our corporate existence, transactions with affiliates, and mergers and other extraordinary transactions. We also agreed that, subject to limited exceptions, we will maintain a ratio of consolidated funded debt to consolidated EBITDA (as defined in the Note Purchase Agreement) of no more than 3.50 to 1.00 as of the last day of any fiscal quarter, and will not at any time permit the amount of all priority secured and unsecured debt of us and our subsidiaries to exceed 10% of our consolidated tangible assets, determined as of the end of our most recently ended fiscal quarter. This ratio is calculated at the end of each reporting period for which the Note Purchase Agreement requires us to deliver financial statements, using the results of the 12 consecutive month period ending with such reporting period.
We are required to disclose the fair value of financial instruments for which it is practicable to estimate the value, even though these instruments are not recognized at fair value in the consolidated balance sheets. As of December 31, 2023 and June 30, 2023, the Senior Notes had a carrying amount of $500.0 million, excluding deferred borrowing costs, and an estimated fair value of $466.8 million and $462.2 million, respectively. Quoted market prices in active markets for similar liabilities based inputs (Level 2) were used to estimate fair value.
At December 31, 2023, we were in compliance with our debt covenants and there was $1,230.0 million outstanding under the Revolving Credit Agreement, Term Credit Agreement and Senior Notes.
(8)    Earnings Per Share
Basic earnings per share is computed 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 663,485 and 293,796 for the three months ended December 31, 2023 and 2022,
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(Unaudited)
respectively, and 643,466 and 270,100 for the six months ended December 31, 2023 and 2022, respectively, as the effect would have been anti-dilutive.
Basic and diluted earnings per share are calculated as follows (in thousands except per share data):
Three Months Ended
December 31,
Six Months Ended
December 31,
2023 2022 2023 2022
Numerator:
Net income $ 208,800  $ 224,914  $ 428,222  $ 435,392 
Denominator:
Basic weighted-average common shares outstanding 147,132  146,704  147,104  146,568 
Effect of dilutive securities:
Stock options and restricted stock units 413  701  468  799 
Diluted weighted average shares 147,545  147,405  147,572  147,367 
Basic earnings per share $ 1.42  $ 1.53  $ 2.91  $ 2.97 
Diluted earnings per share $ 1.42  $ 1.53  $ 2.90  $ 2.95 
(9)    Legal Actions, Contingencies and Commitments
Litigation
In the normal course of business, we are subject to routine litigation incidental to our business. While the results of this litigation cannot be predicted with certainty, we believe that their final outcome will not, individually or in aggregate, have a material adverse effect on our consolidated financial statements taken as a whole.
On June 2, 2021, New York University ("NYU") filed a complaint for patent infringement in the United States District Court, District of Delaware against ResMed Inc., case no. 1:21-cv-00813 (JPM). The complaint alleges that the AutoSet or AutoRamp features of ResMed’s AirSense 10 AutoSet flow generators infringe one or more claims of various NYU patents, including U.S. Patent Nos. 6,988,994; 9,108,009; 9,168,344; 9,427,539; 9,533,115; 9,867,955; and 10,384,024. According to the complaint, the NYU patents are directed to systems and methods for diagnosis and treating sleeping disorders during different sleep states. The complaint seeks monetary damages and attorneys’ fees. We answered the complaint on September 30, 2021 and filed a motion to dismiss the complaint on the basis that the patents are invalid because the subject matter of the patents is not patentable under the Supreme Court and Federal Circuit precedent. The motion to dismiss was granted in part and denied in part. In December 2022, the Patent Trial and Appeal Board (“PTAB”) of the Patent and Trademark Office granted our request to review the validity of the claims in the patents asserted by NYU against us, determining that there is a reasonable likelihood that we will prevail. In December 2023, the PTAB issued written decisions invalidating each of the challenged claims in each of the NYU patents asserted against us. On December 28, 2023, the District Court entered an order continuing its stay of all proceedings against us pending any appeal by NYU of the invalidation of its patents by the PTAB. The deadlines for NYU to appeal the PTAB’s rulings are the week of February 5, 2024. Any appeals are not expected to resolve before March 2025.
On January 27, 2021, the International Trade Commission ("ITC") instituted In Re Certain UMTS and LTE Cellular Communications Modules and Products Containing the Same, Investigation No. 337-TA-1240, by complainants Philips RS North America, LLC and Koninklijke Philips N.V. (collectively “Philips”) against Quectel Wireless Solutions Co., Ltd; Thales DIS AIS USA, LLC, Thales DIS AIS Deutschland GmbH; Telit Wireless Solutions, Inc., Telit Communications PLC, CalAmp. Corp., Xirgo Technologies, LLC, and Laird Connectivity, Inc. (collectively “respondents”). In the ITC investigation, Philips seeks an order excluding communications modules, and products that contain them, from importation into the United States based on alleged infringement of 3G and 4G standard essential patents held by Philips. On October 6-14, 2021, the administrative law judge held a hearing on the merits. The administrative law judge issued an initial determination on April 1, 2022, finding no violation of any of the Philips' patents asserted in the ITC. Philips sought review by the full ITC. On July 6, 2022, the Commission affirmed the administrative law judge’s determination that there was no violation of asserted Philips' patents. The Commission terminated the ITC proceedings. Philips did not appeal the ITC’s decision. On December 17, 2020, Philips filed companion cases for patent infringement against the same defendants in the United States District Court for the District of Delaware, case nos. 1:20-cv-01707, 01708, 01709, 01710, 01711, and 01713 (CFC) seeking damages, an injunction, and a declaration from the court on the amount of a fair reasonable and non-
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Notes to the Condensed Consolidated Financial Statements
(Unaudited)
discriminatory license rate for the standard essential patents it is asserting against the communications module defendants. The district court cases were stayed pending the resolution of the ITC proceedings. The parties have returned to the district court for further proceedings. We were not a party to the ITC investigation, and we are not a party to the district court cases, but we sell products that incorporate communications modules at issue in the district court case. The first trial in the cases by Philips against the communications module defendants is set for April 1, 2024.
On June 16, 2022, Cleveland Medical Devices Inc. ("Cleveland Medical") filed suit for patent infringement against ResMed Inc. in the United States District Court for the District of Delaware, case no. 1:22-cv-00794. Cleveland Medical asserts that numerous ResMed connected devices, when combined with certain ResMed data platforms and/or software, including AirView and ResScan, infringe one or more of eight Cleveland Medical patents, including U.S. Patent Nos. 10,076,269; 10,426,399; 10,925,535; 11,064,937; 10,028,698; 10,478,118; 11,202,603; and 11,234,637. We moved to dismiss the action because Cleveland Medical sued the wrong ResMed entity, and to dismiss the indirect and willful infringement allegations by Cleveland Medical. On October 2, 2023, the court granted a portion of the motion, dismissing all Cleveland Medical claims for indirect and willful infringement, and denied the rest of the motion. On March 22, 2023, we filed a petition with the PTAB of the Patent and Trademark Office seeking review of the validity of U.S. Patent No. 10,076,269. On September 25, 2023, the PTAB exercised its discretion to deny our petition challenging the validity of the U.S. Patent No. 10,076,269 in light of the August 2024 trial date in the Delaware District Court case. That discretionary denial was overturned by the Director of the Patent and Trademark Office, and the panel was ordered to reconsider the discretionary denial. That decision is pending.
On March 20, 2023, ResMed Corp. filed suit in the United States District Court for the Southern District of California, case no. 23-cv-00500-TWR-JLB, seeking a declaration that it does not infringe U.S. Patent No. 11,602,284 issued to Cleveland Medical. In November 2023, the case was transferred to the Northern District of Ohio for the convenience of the parties. Cleveland Medical answered the complaint and filed a counterclaim asserting that ResMed Corp. infringes three additional Cleveland Medical patents, including U.S. Patent Nos. 11,375,921; 11,690,512; and 11,786,680. ResMed Corp. has challenged the validity of U.S. Patent No. 11,602,284 in the PTAB. It is expected that the PTAB will determine whether to examine the validity of U.S. Patent No. 11,602,284 patent by June 2024.
Based on currently available information, we are unable to make a reasonable estimate of loss or range of losses, if any, arising from matters that remain open.
Contingent Obligations Under Recourse Provisions
We use independent financing institutions to offer some of our customers financing for the purchase of some of our products. Under these arrangements, if the customer qualifies under the financing institutions’ credit criteria and finances the transaction, the customers repay the financing institution on a fixed payment plan. For some of these arrangements, the customer’s receivable balance is with limited recourse whereby we are responsible for repaying the financing company should the customer default. We record a contingent provision, which is estimated based on historical default rates. This is applied to receivables sold with recourse and is recorded in accrued expenses.
During the six months ended December 31, 2023 and December 31, 2022, receivables sold with limited recourse were $97.5 million and $84.3 million, respectively. As of December 31, 2023, the maximum exposure on outstanding receivables sold with recourse and the associated contingent provision were $29.2 million and $0.8 million, respectively. As of June 30, 2023, the maximum exposure on outstanding receivables sold with recourse and contingent provision were $32.6 million and $0.6 million, respectively.
(10)    Derivative Instruments and Hedging Activities
We may use derivative financial instruments, specifically foreign cross-currency swaps, purchased foreign currency call options, collars and forward contracts to mitigate exposure from certain foreign currency risk. No derivatives are used for trading or speculative purposes. We do not require or are not required to pledge collateral for the derivative instruments.
Fair Value and Net Investment Hedging
On November 17, 2022, we executed foreign cross-currency swaps as net investment hedges and fair value hedges in designated hedging relationships with either the foreign denominated net asset balances or the foreign denominated intercompany loan as the hedged items. All derivatives are recorded at fair value as either an asset or liability. Cash flows
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(Unaudited)
associated with derivative instruments are presented in the same category on the consolidated statements of cash flows as the hedged item.
The purpose of the cross-currency swaps for the fair value hedge is to mitigate foreign currency risk associated with changes in spot rates on foreign denominated intercompany debt between USD and EUR. For these hedges, we excluded certain components from the assessment of hedge effectiveness that are not related to spot rates. For fair value hedges that qualify and are designated for hedge accounting, the change in fair value of the derivative is recorded in the same line item as the hedged item, other, net, in the condensed consolidated statement of operations. The initial fair value of hedge components excluded from the assessment of effectiveness is recognized in the statement of operations under a systematic and rational method over the life of the hedging instrument and is presented in interest (expense) income, net. Any difference between the change in the fair value of the hedge components excluded from the assessment of effectiveness and the amounts recognized in earnings is recorded as a component of other comprehensive income.
The purpose of the cross-currency swaps for the net investment hedge is to mitigate foreign currency risk associated with changes in spot rates on the net asset balances of our foreign functional subsidiaries. For net investment hedges that qualify and are designated for hedge accounting, the change in fair value of the derivative is recorded in cumulative translation adjustment within other comprehensive loss and reclassified into earnings when the hedged net investment is either sold or substantially liquidated. The initial fair value of components excluded from the assessment of hedge effectiveness will be recognized in interest (expense) income, net.
The notional value of outstanding foreign cross-currency swaps was $1,059.3 million and $1,046.6 million at December 31, 2023 and June 30, 2023, respectively. These contracts mature at various dates prior to December 31, 2029.
Non-Designated Hedges
We transact business in various foreign currencies, including a number of major European currencies as well as the Australian and Singapore dollars. We have foreign currency exposure through both our Australian and Singapore manufacturing activities, and international sales operations. We have established a foreign currency hedging program using purchased foreign currency call options, collars 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 purpose of this hedging program is to economically manage the financial impact of foreign currency exposures denominated mainly in Euros, and 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. All movements in the fair value of the foreign currency instruments are recorded within other, net in our condensed consolidated statements of income.
The notional value of the outstanding non-designated hedges was $1,158.5 million and $954.7 million at December 31, 2023 and June 30, 2023, respectively. These contracts mature at various dates prior to March 15, 2025.
Fair Values of Derivative Instruments
The following table presents our assets and liabilities related to derivative instruments on a gross basis within the condensed consolidated balance sheets (in thousands):
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(Unaudited)
December 31,
2023
June 30,
2023
Balance Sheet Caption
Derivative Assets
Not Designated as Hedging Instruments
Foreign currency hedging instruments $ 21,039  $ 2,126  Prepaid expenses and other current assets
Foreign currency hedging instruments 335  279  Prepaid taxes and other non-current assets
Total derivative assets $ 21,374  $ 2,405 
Derivative Liabilities
Designated as Hedging Instruments
Foreign cross-currency swaps – Fair Value Hedge $ 20,884  $ 19,743  Other long-term liabilities
Foreign cross-currency swaps – Net Investment Hedge 45,195  $ 40,803  Other long-term liabilities
Not Designated as Hedging Instruments
Foreign currency hedging instruments 6,401  9,558  Accrued expenses
Foreign currency hedging instruments 133  595  Other long-term liabilities
Total derivative liabilities $ 72,613  $ 70,699 
Fair Value Hedge Gains (Losses)
We recognized the following gains (losses) on the foreign cross currency swaps designated as fair value hedges (in thousands):
Three Months Ended
December 31,
Six Months Ended
December 31,
2023 2022 2023 2022
Gain (loss) recognized in other comprehensive income (loss) $ 2,002  $ (4,610) $ 2,590  $ (4,610)
Gain (loss) recognized on cross-currency swap in interest (expense) income, net (amount excluded from effectiveness testing) 881  847  2,061  847 
Gain (loss) recognized on cross-currency swap in other, net (13,003) (9,137) (3,732) (9,137)
Gain (loss) recognized on intercompany debt in other, net 13,003  9,137  3,732  9,137 
Net Investment Hedge Gains (Losses)
We recognized the following gains (losses) on the foreign cross currency swaps designated as net investment hedges (in thousands):
Three Months Ended
December 31,
Six Months Ended
December 31,
2023 2022 2023 2022
Gain (loss) recognized in cumulative translation adjustment within other comprehensive income (loss) $ (27,828) $ (22,831) $ (4,393) $ (22,831)
Gain (loss) recognized from the excluded components in interest (expense) income, net 2,293  2,126  5,306  2,126 
Non-designated Derivative Gains (Losses)
We recognized the following gains (losses) in the condensed consolidated statement of operations on derivatives not designated as hedging instruments (in thousands):
Three Months Ended
December 31,
Six Months Ended
December 31,
2023 2022 2023 2022
Gain (loss) recognized on foreign currency hedging instruments in other, net $ 30,654  $ 40,090  $ 15,581  $ 19,568 
Gain (loss) recognized on other foreign-currency-denominated transactions in other, net (31,435) (41,795) (13,789) (22,705)
Total $ (781) $ (1,705) $ 1,792  $ (3,137)
We classified the fair values of all hedging instruments as Level 2 measurements within the fair value hierarchy.
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