Form: 10-K/A

Annual report pursuant to Section 13 and 15(d)

January 13, 2017

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K/A

 

 

Amendment No. 1

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2016

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

(IRS Employer Identification No.)

9001 Spectrum Center Blvd.

San Diego, CA 92123

United States of America

(Address of principal executive offices)

(858) 836-5000

(Registrant’s telephone number, including area code)

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

TITLE OF EACH CLASS

Common Stock, $0.004 Par Value

Name of each exchange upon which registered

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ☐    No  ☒

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K (§ 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  ☐

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐      Smaller reporting company  

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of registrant as of December 31, 2015 (the last business day of the registrant’s most recently completed second fiscal quarter), computed by reference to the closing sale price of such stock on the New York Stock Exchange, was $7,432,055,423. All directors, executive officers, and 10% stockholders of registrant are considered affiliates.

At July 28, 2016, registrant had 140,699,937 shares of Common Stock, $0.004 par value, issued and outstanding. This number excludes 41,086,234 shares held by the registrant as treasury shares.

Portions of the registrant’s definitive Proxy Statement to be delivered to stockholders in connection with the registrant’s 2016 Annual Meeting of Stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this report.

 

 

 


Table of Contents

Explanatory Note

ResMed Inc. (also referred to as the “Company”, “we” or “our”) is filing this Amendment No. 1 (the “Amendment No. 1”) to our Form 10-K for the fiscal year ended June 30, 2016, or the Form 10-K, originally filed with the Securities and Exchange Commission on August 5, 2016, for the purpose of correcting text within the Report of Independent Registered Public Accounting Firm. The Report of Independent Registered Public Accounting Firm, which was prepared by KPMG LLP, or KPMG, previously incorrectly described the auditing standards used in its audit of the Company’s consolidated financial statements as of June 30, 2016 and for the year then ended. KPMG has revised the text of its report to appropriately state that its audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States).

The information set forth in our financial statements and the footnotes thereto in this Amendment No. 1 has not been modified or updated in any way from the information in our financial statements and the related footnotes included in the Form 10-K. This Amendment No. 1 speaks as of the original filing date of the Form 10-K and amends and restates only the Report of Independent Registered Public Accounting Firm in Item 8 of the Form 10-K to give effect to the change discussed above. The aforementioned changes have no effect on the other parts of the Form 10-K, the financial position of ResMed Inc. (and subsidiaries) as of June 30, 2016 and 2015, or the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended June 30, 2016.

 

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PART II

 

ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item is incorporated by reference to the financial statements set forth in Item 15 of Part IV of this report, “Exhibits and Consolidated Financial Statement Schedules.”

a) Index to Consolidated Financial Statements

 

Report of Independent Registered Public Accounting Firm

     F1   

Consolidated Balance Sheets as of June 30, 2016 and 2015

     F2   

Consolidated Statements of Income for the years ended June  30, 2016, 2015 and 2014

     F3   

Consolidated Statements of Comprehensive Income for the years ended June 30, 2016, 2015 and 2014

     F4   

Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2016, 2015 and 2014

     F5   

Consolidated Statements of Cash Flows for the years ended June  30, 2016, 2015 and 2014

     F6   

Notes to Consolidated Financial Statements

     F7   

Schedule II – Valuation and Qualifying Accounts and Reserves

  

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

ResMed Inc.:

We have audited the accompanying consolidated balance sheets of ResMed Inc. (and subsidiaries) as of June 30, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended June 30, 2016. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ResMed Inc. and subsidiaries as of June 30, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in note 3 to the consolidated financial statements, the Company has adopted, on a retrospective basis, FASB Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes, and has classified all deferred tax assets, liabilities and associated allowances as non-current. The Company has also adopted FASB Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting, and has recorded all excess tax benefits and tax deficiencies as an income tax benefit or expense in the income statement effective July 1, 2015.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 30, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated August 4, 2016, expressed an unqualified opinion on the effectiveness of the internal control over financial reporting of ResMed Inc.

/s/ KPMG LLP

San Diego, California

August 4, 2016

 

- F1 -


Table of Contents

RESMED INC. AND SUBSIDIARIES

Consolidated Balance Sheets

June 30, 2016 and 2015

(In thousands, except share and per share data)

 

     June 30, 2016     June 30, 2015  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 731,434     $ 717,249  

Accounts receivable, net of allowance for doubtful accounts of $12,555 and $12,276 at June 30, 2016 and June 30, 2015, respectively

     382,086       362,568  

Inventories (note 5)

     224,456       246,859  

Prepaid expenses and other current assets

     81,743       81,168  
  

 

 

   

 

 

 

Total current assets

     1,419,719       1,407,844  
  

 

 

   

 

 

 

Non-current assets:

    

Property, plant and equipment, net (note 6)

     384,276       387,758  

Goodwill (note 7)

     1,059,245       264,261  

Other intangible assets, net (note 7)

     299,808       47,142  

Deferred income taxes (note 14)

     55,496       46,380  

Other assets

     40,391       28,389  
  

 

 

   

 

 

 

Total non-current assets

     1,839,216       773,930  
  

 

 

   

 

 

 

Total assets

   $ 3,258,935     $ 2,181,774  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 92,571     $ 81,112  

Accrued expenses (note 9)

     156,805       132,976  

Deferred revenue

     50,009       36,097  

Income taxes payable

     39,166       16,278  

Short-term debt (note 11)

     300,000       —     
  

 

 

   

 

 

 

Total current liabilities

     638,551       266,463  
  

 

 

   

 

 

 

Non-current liabilities:

    

Deferred revenue

     40,281       19,284  

Income taxes payable

     —          1,754  

Deferred income taxes (note 14)

     9,061       6,372  

Other long-term liabilities

     1,211       —     

Long-term debt (note 11)

     875,000       300,594  
  

 

 

   

 

 

 

Total non-current liabilities

     925,553       328,004  
  

 

 

   

 

 

 

Total liabilities

     1,564,104       594,467  
  

 

 

   

 

 

 

Commitments and contingencies (notes 18 and 19)

    

Stockholders’ equity: (note 12)

    

Preferred stock, $0.01 par value, 2,000,000 shares authorized; none issued

     —          —     

Common stock, $0.004 par value, 350,000,000 shares authorized; 181,747,157 issued and 140,660,923 outstanding at June 30, 2016 and 179,660,939 issued and 140,474,705 outstanding at June 30, 2015

     563       562  

Additional paid-in capital

     1,303,238       1,228,795  

Retained earnings

     2,160,299       1,976,020  

Treasury stock, at cost, 41,086,234 shares at June 30, 2016, and 39,186,234 shares at June 30, 2015

     (1,546,611     (1,444,554

Accumulated other comprehensive (loss) income

     (222,658     (173,516
  

 

 

   

 

 

 

Total stockholders’ equity

     1,694,831       1,587,307  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,258,935     $ 2,181,774  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

RESMED INC. AND SUBSIDIARIES

Consolidated Statements of Income

Years Ended June 30, 2016, 2015 and 2014

(In thousands, except per share data)

 

     June 30, 2016     June 30, 2015     June 30, 2014  

Net revenue

   $ 1,838,713     $ 1,678,912     $ 1,554,973  

Cost of sales (excluding amortization of acquired intangible assets)

     772,216       667,516       565,187  
  

 

 

   

 

 

   

 

 

 

Gross profit

     1,066,497       1,011,396       989,786  
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Selling, general and administrative

     488,057       478,627       450,414  

Research and development

     118,651       114,865       118,226  

Restructuring expenses (note 23)

     6,914       —          6,326  

Amortization of acquired intangible assets

     23,923       8,668       9,733  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     637,545       602,160       584,699  
  

 

 

   

 

 

   

 

 

 

Income from operations

     428,952       409,236       405,087  
  

 

 

   

 

 

   

 

 

 

Other income, net:

      

Interest income

     16,860       26,208       31,236  

Interest expense

     (11,206     (5,778     (6,129

Other, net (note 13)

     4,960       6,250       884  
  

 

 

   

 

 

   

 

 

 

Total other income, net

     10,614       26,680       25,991  
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     439,566       435,916       431,078  

Income taxes (note 14)

     87,157       83,030       85,805  
  

 

 

   

 

 

   

 

 

 

Net income

   $ 352,409     $ 352,886     $ 345,273  
  

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 2.51     $ 2.51     $ 2.44  

Diluted earnings per share (note 4)

   $ 2.49     $ 2.47     $ 2.39  

Dividend declared per share

   $ 1.20     $ 1.12     $ 1.00  

Basic shares outstanding (000’s)

     140,242       140,468       141,474  

Diluted shares outstanding (000’s)

     141,669       142,687       144,359  

See accompanying notes to consolidated financial statements.

 

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Table of Contents

RESMED INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

Years Ended June 30, 2016, 2015 and 2014

(In US$ thousands)

 

     Years Ended June 30,  
     2016     2015     2014  

Net income

   $ 352,409     $ 352,886     $ 345,273  

Other comprehensive (loss) income:

      

Foreign currency translation (loss) gain adjustments

     (49,142     (325,073     59,469  
  

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 303,267     $ 27,813     $ 404,742  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

- F4 -


Table of Contents

RESMED INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

Years ended June 30, 2016, 2015 and 2014

(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, 2013

    174,039      $  568      $  1,025,064        (32,026   $ (1,083,845   $  1,576,641      $ 92,088      $  1,610,516   

Common stock issued on exercise of options (note 12)

    1,681        7        31,157                31,164   

Common stock issued on vesting of restricted stock units, net of shares withheld for tax (note 12)

    713        3        (11,302             (11,299

Common stock issued on employee stock purchase plan (note 12)

    314        1        13,052                13,053   

Treasury stock purchases

      (18       (4,416     (208,065         (208,083

Tax benefit from exercise of options

        16,211                16,211   

Stock-based compensation costs

        43,462                43,462   

Other comprehensive income

                59,469        59,469   

Net income

              345,273          345,273   

Dividends declared

              (141,518       (141,518
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

    176,747      $ 561      $ 1,117,644        (36,442   $ (1,291,910   $ 1,780,396      $ 151,557      $ 1,758,248   

Common stock issued on exercise of options (note 12)

    1,954        8        36,565                36,573   

Common stock issued on vesting of restricted stock units, net of shares withheld for tax (note 12)

    651        3        (11,406             (11,403

Common stock issued on employee stock purchase plan (note 12)

    309        1        13,412                13,413   

Treasury stock purchases

      (11       (2,744     (152,644         (152,655

Tax benefit from exercise of options

        24,868                24,868   

Stock-based compensation costs

        47,712                47,712   

Other comprehensive income

                (325,073     (325,073

Net income

              352,886          352,886   

Dividends declared

              (157,262       (157,262
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

    179,661      $ 562      $ 1,228,795        (39,186   $ (1,444,554   $ 1,976,020      $ (173,516   $ 1,587,307   

Common stock issued on exercise of options (note 12)

    1,176        5        26,247                26,252   

Common stock issued on vesting of restricted stock units, net of shares withheld for tax (note 12)

    619        3        (12,388             (12,385

Common stock issued on employee stock purchase plan (note 12)

    291        1        14,081                14,082   

Treasury stock purchases

      (8       (1,900     (102,057         (102,065

Tax benefit from exercise of options

                  —     

Stock-based compensation costs

        46,503                46,503   

Other comprehensive income

                (49,142     (49,142

Net income

              352,409          352,409   

Dividends declared

              (168,130       (168,130
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2016

    181,747      $ 564      $ 1,303,238        (41,086   $ (1,546,611   $ 2,160,299      $ (222,658   $ 1,694,831   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

RESMED INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended June 30, 2016, 2015 and 2014

(In thousands)

 

     June 30, 2016     June 30, 2015     June 30, 2014  

Cash flows from operating activities:

      

Net income

   $ 352,409     $ 352,886     $ 345,273  

Adjustment to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     86,849       73,056       73,454  

Stock-based compensation costs

     46,408       47,855       43,457  

Impairment of long lived assets

     2,815       —          —     

Impairment of cost-method investments

     750       —          —     

Changes in fair value of business combination contingent consideration

     (2,986     (132     (6,283

Gain on disposal of business

     —          (709     —     

Excess tax benefit from stock-based compensation arrangements

     —          (24,959     (16,335

Changes in operating assets and liabilities, net of effect of acquisitions:

      

Accounts receivable, net

     (27,307     (28,259     (35,108

Inventories, net

     30,492       (99,524     (15,851

Prepaid expenses, net deferred income taxes and other current assets

     12,121       (22,849     5,814  

Accounts payable, accrued expenses and other liabilities

     46,382       85,815       (3,153
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     547,933       383,180       391,268  
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Purchases of property, plant and equipment

     (58,534     (62,502     (72,722

Patent registration costs

     (9,295     (9,442     (8,434

Business acquisitions, net of cash acquired

     (1,041,864     (29,407     (3,852

Investments in cost-method investments

     (8,965     (10,750     (10,850

Proceeds from disposal of cost-method investments

     468       937       —     

Purchases of foreign currency contracts

     —          (700     (1,477

(Payment)/proceeds on maturity of foreign currency contracts

     (7,564     (31,207     2,348  
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (1,125,754     (143,071     (94,987
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Proceeds from issuance of common stock, net

     27,694       38,806       33,354  

Excess tax benefit from stock-based compensation arrangements

     —          24,959       16,335  

Purchases of treasury stock

     (102,058     (160,300     (202,169

Payment of business combination contingent consideration

     (1,228     (458     (1,117

Proceeds from borrowings, net of borrowing costs

     1,140,000       180,000       557,834  

Repayment of borrowings

     (283,694     (181,536     (560,035

Dividends paid

     (168,130     (157,262     (141,518
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     612,584       (255,791     (297,316
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (20,578     (172,799     30,717  
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     14,185       (188,481     29,682  

Cash and cash equivalents at beginning of period

     717,249       905,730       876,048  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 731,434     $ 717,249     $ 905,730  
  

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

      

Income taxes paid, net of refunds

   $ 68,966     $ 48,533     $ 90,183  

Interest paid

   $ 11,206     $ 5,778     $ 6,129  
  

 

 

   

 

 

   

 

 

 

Fair value of assets acquired, excluding cash

   $ 338,353     $ 20,408     $ 2,257  

Liabilities assumed

     (79,808     (8,528     (829

Goodwill on acquisition

     796,306       20,947       3,227  

Deferred payments

     120       (1,703     (803

Fair value of contingent consideration

     (13,107     (1,717     —     
  

 

 

   

 

 

   

 

 

 

Cash paid for acquisition

   $ 1,041,864     $ 29,407     $ 3,852  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

- F6 -


Table of Contents

RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(1) Organization and Basis of Presentation

ResMed Inc. (referred to herein as “we”, “us”, “our” or the “Company”) is a Delaware corporation formed in March 1994 as a holding company for the ResMed Group. Through our subsidiaries, we design, manufacture and market equipment for the diagnosis and treatment of sleep-disordered breathing and other respiratory disorders, including obstructive sleep apnea. Our manufacturing operations are located in Australia, Singapore, Malaysia, France and the United States. Major distribution and sales sites are located in the United States, Germany, France, the United Kingdom, Switzerland, Australia, Japan, Norway and Sweden.

 

(2) Summary of Significant Accounting Policies

 

  (a) Basis of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management estimates and assumptions that affect amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from management’s estimates.

 

  (b) Revenue Recognition

We generally record revenue on product sales at the time of shipment, which is when title transfers to the customer. We do not record revenue on product sales which require customer acceptance until we receive acceptance. We initially defer service revenue received in advance from service contracts and recognize that deferred revenue ratably over the life of the service contract. We initially defer revenue we receive in advance from rental unit contracts and recognize that deferred revenue ratably over the life of the rental contract. Otherwise, we recognize revenue from rental unit contracts ratably over the life of the rental contract. We include in revenue freight charges we bill to customers. We charge all freight-related expenses to cost of sales. Taxes assessed by government authorities that are imposed on and concurrent with revenue-producing transactions, such as sales and value added taxes, are excluded from revenue.

We do not recognize revenues to the extent that we offer a right of return or other recourse with respect to the sale of our products, other than returns for product defects or other warranty claims, nor do we recognize revenues if we offer variable sale prices for subsequent events or activities. However, as part of our sales processes we may provide upfront discounts for large orders, one-time special pricing to support new product introductions, sales rebates for centralized purchasing entities or price-breaks for regular order volumes. We record the costs of all such programs as an adjustment to revenue. Our products are predominantly therapy-based equipment and require no installation. Therefore, we have no installation obligations. For multiple-element arrangements, we allocate arrangement consideration to the deliverables by use of the relative selling price method. The selling price used for each deliverable is based on vendor–specific objective evidence.

We also generate revenue from time-based licensing of our software and associated services. In most instances, revenue is generated under sales agreements with multiple elements comprising subscription fees and professional services, which typically have contract terms of one to three years. We evaluate each element in these multiple-element arrangements to determine whether they represent a separate unit of accounting and recognize each element as the services are performed.

 

  (c) Cash and Cash Equivalents

Cash equivalents include certificates of deposit and other highly liquid investments and we state them at cost, which approximates market. We consider investments with original maturities of 90 days or less to be cash equivalents for purposes of the consolidated statements of cash flows.

Our cash and cash equivalents balance at June 30, 2016, include $291.7 million in cash which is subject to notice periods of up to 90 days. These cash balances earn interest rates above normal term deposit rates otherwise available and are held at highly rated financial institutions.

 

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RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

  (d) Inventories

We state inventories at the lower of cost (determined principally by the first-in, first-out method) or net realizable value. We include material, labor and manufacturing overhead costs in finished goods and work-in-process inventories. We review and provide for any product obsolescence in our manufacturing and distribution operations by assessing throughout the year individual products and components (based on estimated future usage and sales).

 

  (e) Property, Plant and Equipment

We record property, plant and equipment, including rental and demonstration equipment at cost. We compute depreciation expense using the straight-line method over the estimated useful lives of the assets. Useful lives are generally two to ten years except for buildings which are depreciated over an estimated useful life of 40 years and leasehold improvements, which we amortize over the lease term. We charge maintenance and repairs to expense as we incur them.

 

  (f) Intangible Assets

We capitalize the registration costs for new patents and amortize the costs over the estimated useful life of the patent, which is generally five years. If a patent is superseded or a product is retired, any unamortized costs are written off immediately.

We amortize all of our other intangible assets on a straight-line basis over their estimated useful lives, which range from two to fifteen years. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. We have not identified any impairment of intangible assets during any of the periods presented.

 

  (g) Goodwill

We conducted our annual review for goodwill impairment during the final quarter of fiscal 2016 using a quantitative assessment. In conducting our review of goodwill impairment, we identified eleven reporting units, being components of our operating segment. The fair value for each reporting unit was determined based on estimated discounted cash flows. Our goodwill impairment review involved a two-step process as follows:

Step 1- Compare the fair value for each reporting unit to its carrying value, including goodwill. For each reporting unit where the carrying value, including goodwill, exceeds the reporting unit’s fair value, move on to step 2. If a reporting unit’s fair value exceeds the carrying value, no further work is performed and no impairment charge is necessary.

Step 2- Allocate the fair value of the reporting unit to its identifiable tangible and non-goodwill intangible assets and liabilities. This will derive an implied fair value for the goodwill. Then, compare the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of its goodwill, an impairment loss must be recognized for the excess.

The results of Step 1 of our annual review indicated that no impaired goodwill exists as the fair value for each reporting unit exceeded its carrying value.

 

  (h) Foreign Currency

The consolidated financial statements of our non-U.S. subsidiaries, whose functional currencies are other than the U.S. dollar, are translated into U.S. dollars for financial reporting purposes. We translate assets and liabilities of non-U.S. subsidiaries whose functional currencies are other than the U.S. dollar at period end exchange rates, but translate revenue and expense transactions at average exchange rates for the period. We recognize cumulative translation adjustments as part of comprehensive income, as detailed in the consolidated statements of comprehensive income, and include those adjustments in accumulated other comprehensive income in the consolidated balance sheets until such time the relevant subsidiary is sold or substantially or completely liquidated. We reflect gains and losses on transactions denominated in other than the functional currency of an entity in our results of operations.

 

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RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

  (i) Research and Development

We record all research and development expenses in the period we incur them.

 

  (j) Financial Instruments

The carrying value of financial instruments, such as cash equivalents, accounts receivable and accounts payable, approximate their fair value because of their short-term nature. The carrying value of long-term debt approximates its fair value as the principal amounts outstanding are subject to variable interest rates that are based on market rates which are regularly reset. Foreign currency hedging instruments are marked to market and therefore reflect their fair value. We do not hold or issue financial instruments for trading purposes.

The fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

  (k) Foreign Exchange Risk Management

We enter into various types of foreign exchange contracts in managing our foreign exchange risk, including derivative financial instruments encompassing forward exchange contracts and foreign currency options.

The purpose of our foreign currency hedging activities is to protect us from adverse exchange rate fluctuations with respect to net cash movements resulting from the sales of products to foreign customers and Australian and Singapore manufacturing activities. We enter into foreign exchange contracts to hedge anticipated sales and manufacturing costs, principally denominated in Australian and Singapore dollars, and Euros. The terms of such foreign exchange contracts generally do not exceed three years.

We have determined our hedge program to be a non-effective hedge as defined. We record the foreign currency derivatives portfolio at fair value and include it in other assets and accrued expenses in our consolidated balance sheets. We do not offset the fair value amounts recognized for foreign currency derivatives. We classify purchases of foreign currency derivatives and proceeds received from the exercise of foreign currency derivatives as an investing activity within our consolidated statements of cash flows.

We record all movements in the fair value of the foreign currency derivatives within other income, net in our consolidated statements of income.

 

  (l) Income Taxes

We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using the enacted tax rates we expect to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

  (m) Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, which results in bad debt expense. We determine the adequacy of this allowance by periodically evaluating individual customer receivables, considering a customer’s financial condition, credit history and current economic conditions. We are also contingently liable, within certain limits, in the event of a customer default, to independent leasing companies in connection with customer leasing programs. We monitor the collection status of these installment receivables and provide for estimated losses separately under accrued expenses within our consolidated balance sheets based upon our historical collection experience with such receivables and a current assessment of our credit exposure.

 

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RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

  (n) Impairment of Long-Lived Assets

We periodically evaluate the carrying value of long-lived assets to be held and used, including certain identifiable intangible assets, when events and circumstances indicate that the carrying amount of an asset may not be recovered. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If assets are considered to be impaired, we recognize as the impairment the amount by which the carrying amount of the assets exceeds the fair value of the assets. We report assets to be disposed of at the lower of the carrying amount or fair value less costs to sell.

We recognized impairment charges of $2.8 million, $ Nil and $ Nil in relation to long-lived assets during fiscal years ended June 30, 2016, 2015 and 2014, respectively.

 

  (o) Contingencies

We record a liability in the consolidated financial statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded.

 

(3) New Accounting Pronouncements

In May, 2014, the FASB issued Accounting Standards Update (ASU), ASU No. 2014-09, “Revenue from Contracts with Customers”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company beginning in the first quarter of fiscal year 2019. Early application is not permitted. We are currently assessing the impact on our financial condition, results of operations and cash flows as a result of the adoption of ASU 2014-09, however, we do not expect this updated standard to have a material impact on our consolidated financial statements and related disclosures.

In April, 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. ASU 2015-03 will more closely align the presentation of debt issuance costs under U.S. GAAP with the presentation under comparable IFRS standards by requiring that debt issuance costs be presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability. This accounting guidance is effective for us beginning in the first quarter of fiscal 2017. We do not expect this updated standard to have a material impact on our consolidated financial statements and related disclosures.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory” which requires an entity to measure inventory within the scope of this ASU at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this guidance more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). This accounting guidance is effective for us beginning in the first quarter of fiscal 2018. We do not expect this updated standard to have a material impact on our consolidated financial statements and related disclosures.

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes”, which requires entities to classify all deferred tax assets and liabilities as non-current on the balance sheet. The standard may be adopted on either a prospective or retrospective basis. The standard is effective for fiscal years beginning after December 15, 2016, and early adoption is permitted. Effective March 31, 2016, we adopted ASU 2015-17 and applied the new standard retrospectively. As a result of applying ASU 2015-17 to the previously reported Consolidated Balance Sheet as of June 30, 2015, deferred income taxes within the total current assets decreased by approximately $36.3 million and the deferred income taxes within the total non-current assets increased by approximately $33.9 million, respectively; deferred income taxes within the total current liabilities decreased by approximately $0.8 million and the deferred income taxes within total non-current liabilities decreased by approximately $1.7 million, respectively. There was no effect on our stockholders’ equity or to the consolidated statements of income as a result of this adoption.

 

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RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

On March 30, 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”, which requires companies to recognize additional tax benefits or expenses related to the vesting or settlement of employee share-based awards (the difference between the actual benefit for tax purposes and the tax benefit initially recognized for financial reporting purposes) as income tax benefit or expense in earnings, rather than in additional paid-in capital, in the reporting period in which they occur. This ASU also requires companies to classify cash flows resulting from employee share-based payments, including the additional tax benefits or expenses related to the vesting or settlement of share-based awards, as cash flows from operating activities rather than financing activities. Although this change will reduce some of the administrative complexities of tracking share-based awards, it will increase the volatility of our income tax expense and cash flows from operations. The new standard is effective for annual reporting periods beginning after December 15, 2016, with early adoption permitted. We elected to early adopt this ASU during the fourth quarter of fiscal year 2016 and are therefore required to report the impacts as though the ASU had been adopted on July 1, 2015 , the beginning of our fiscal year, and to reflect the tax benefit as a discrete item within each of the respective interim reporting periods. Accordingly, we recognized additional income tax benefits as an increase to earnings of $11.2 million during the year ended June 30, 2016 and we also recognized additional income tax benefits as an increase to operating cash flows of $14.5 million for the year ended June 30, 2016. The new accounting standard did not impact any periods prior to July 1, 2015, as we applied the changes on a prospective basis.

 

(4) Earnings Per Share

We compute basic earnings per share by dividing the net income available to common stockholders by the weighted average number of shares of common stock outstanding. For purposes of calculating diluted earnings per share, the denominator includes both the weighted average number of shares of common stock outstanding and the number of dilutive common stock equivalents such as stock options and restricted stock units.

The weighted average number of outstanding stock options and restricted stock units not included in the computation of diluted earnings per share were 297,000, 62,000 and 273,000 for the years ended June 30, 2016, 2015 and 2014, respectively, as the effect would have been anti-dilutive.

Basic and diluted earnings per share for the years ended June 30, 2016, 2015 and 2014 are calculated as follows (in thousands except per share data):

 

     2016      2015      2014  

Numerator:

        

Net Income, used in calculating diluted earnings per share

   $ 352,409      $ 352,886      $ 345,273  
  

 

 

    

 

 

    

 

 

 

Denominator:

        

Basic weighted-average common shares outstanding

     140,242        140,468        141,474  

Effect of dilutive securities:

        

Stock options and restricted stock units

     1,427        2,219        2,885  
  

 

 

    

 

 

    

 

 

 

Diluted weighted average shares

     141,669        142,687        144,359  
  

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 2.51      $ 2.51      $ 2.44  

Diluted earnings per share

   $ 2.49      $ 2.47      $ 2.39  

 

(5) Inventories

Inventories were comprised of the following as of June 30, 2016 and June 30, 2015 (in thousands):

 

     2016      2015  

Raw materials

   $ 67,121      $ 74,416  

Work in progress

     3,939        2,550  

Finished goods

     153,396        169,893  
  

 

 

    

 

 

 

Total inventories

   $ 224,456      $ 246,859  
  

 

 

    

 

 

 

 

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RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(6) Property, Plant and Equipment, net

Property, plant and equipment, net is comprised of the following as of June 30, 2016 and June 30, 2015 (in thousands):

 

     2016      2015  

Machinery and equipment

   $ 197,485      $ 198,047  

Computer equipment

     154,105        125,423  

Furniture and fixtures

     40,776        38,511  

Vehicles

     9,060        5,371  

Clinical, demonstration and rental equipment

     79,641        80,911  

Leasehold improvements

     33,795        31,553  

Land

     54,338        54,915  

Buildings

     229,502        235,515  
  

 

 

    

 

 

 
     798,702        770,246  

Accumulated depreciation and amortization

     (414,426      (382,488
  

 

 

    

 

 

 

Property, plant and equipment, net

   $ 384,276      $ 387,758  

 

(7) Goodwill and Other Intangible Assets, net

Goodwill

Changes in the carrying amount of goodwill for the years ended June 30, 2016 and June 30, 2015 (in thousands):

 

     2016      2015  

Balance at the beginning of the period

   $ 264,261      $ 289,312  

Business acquisitions (note 22)

     796,306        20,947  

Foreign currency translation adjustments

     (1,322      (45,998
  

 

 

    

 

 

 

Balance at the end of the period

   $ 1,059,245      $ 264,261  

As at June 30, 2016 we have not recorded any goodwill impairments.

Other Intangible Assets

Other intangibles, net are comprised of the following as of June 30, 2016 and June 30, 2015:

 

     2016      2015  

Developed/core product technology

   $ 202,050      $ 67,548  

Accumulated amortization

     (63,825      (50,373
  

 

 

    

 

 

 

Developed/core product technology, net

     138,225        17,175  
  

 

 

    

 

 

 

Trade names

     47,897        2,500  

Accumulated amortization

     (3,832      (2,206
  

 

 

    

 

 

 

Trade names, net

     44,065        294  
  

 

 

    

 

 

 

Non-compete agreements

     3,089        1,747  

Accumulated amortization

     (1,899      (1,704
  

 

 

    

 

 

 

Non-compete agreements, net

     1,190        43  
  

 

 

    

 

 

 

Customer relationships

     118,528        30,538  

Accumulated amortization

     (26,783      (19,308
  

 

 

    

 

 

 

Customer relationships, net

     91,745        11,230  
  

 

 

    

 

 

 

In-process research and development

     4,100        —     

Accumulated amortization

     —           —     
  

 

 

    

 

 

 

In-process research and development, net

     4,100        —     
  

 

 

    

 

 

 

Patents

     74,034        66,585  

Accumulated amortization

     (53,551      (48,185
  

 

 

    

 

 

 

Patents, net

     20,483        18,400  
  

 

 

    

 

 

 

Total other intangibles, net

   $ 299,808      $ 47,142  

 

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RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Intangible assets consist of developed/core product technology, trade names, non-compete agreements, customer relationships, and patents, and we amortize them over the estimated useful life of the assets, generally between two and fifteen years. There are no expected residual values related to these intangible assets. In-process research and development is amortized over the estimated the useful life of the assets, once the research and development efforts are completed. At least on an annual basis, we evaluate the in-process research and development balances for impairment.

Refer to note 22 of the consolidated financial statements for details of acquisitions made during the year.

Amortization expense related to identifiable intangible assets, including patents, for the year ended June 30, 2016 was $30.2 million. Estimated annual amortization expense for the years ending June 30, 2017 through June 30, 2021, is shown below (in thousands):

 

Fiscal Year

   Amortization expense  

2017

   $ 53,121  

2018

     50,121  

2019

     48,396  

2020

     41,800  

2021

     35,164  

 

(8) Cost-Method Investments

The aggregate carrying amount of our cost-method investments at June 30, 2016 and June 30, 2015, included within our other long-term assets on our consolidated balance sheets, was $33.8 million and $25.6 million, respectively.

We periodically evaluate the carrying value of our cost-method investments, when events and circumstances indicate that the carrying amount of an asset may not be recovered. We determine the fair value of our cost-method investments to evaluate whether impairment losses shall be recorded using Level 3 inputs. These investments include our holdings in privately held service and research companies that are not exchange traded and therefore not supported with observable market prices. However, these investments are valued by reference to their net asset values which can be market supported and unobservable inputs including future cash flows. We have determined, that the fair value of our cost-method investments exceed their carrying values.

The following table shows a reconciliation of the changes in our cost-method investments during the years ended June 30, 2016 and June 30, 2015 (in thousands):

 

     2016      2015  

Balance at the beginning of the period

   $ 25,600      $ 14,850  

Investments

     8,965        10,750  

Impairment of cost-method investments

     (750      —     
  

 

 

    

 

 

 

Balance at the end of the period

   $ 33,815      $ 25,600  
  

 

 

    

 

 

 

 

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RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(9) Accrued Expenses

Accrued expenses at June 30, 2016 and June 30, 2015 consist of the following (in thousands):

 

     2016      2015  

Product warranties

   $ 15,043      $ 9,823  

Consulting and professional fees

     11,948        4,412  

Value added taxes and other taxes due

     14,769        13,863  

Employee related costs

     83,407        80,086  

Marketing and promotional programs

     2,401        1,581  

Business acquisition contingent consideration

     10,450        1,584  

Hedging instruments

     243        1,954  

SERVE-HF field safety notification expenses

     —           4,320  

Liability on receivables sold with recourse

     4,615        4,155  

Accrued interest

     1,271        141  

Other

     12,658        11,057  
  

 

 

    

 

 

 
   $ 156,805      $ 132,976  
  

 

 

    

 

 

 

 

(10) Product Warranties

We include the liability for warranty costs in accrued expenses in our consolidated balance sheets. Changes in the liability for product warranty for the years ended June 30, 2016 and 2015 are as follows (in thousands):

 

     2016      2015  

Balance at the beginning of the period

   $ 9,823      $ 11,798  

Fair value of warranty obligations acquired on business combination

     971        —     

Warranty accruals for the period

     15,014        7,818  

Warranty costs incurred for the period

     (10,667      (7,649

Foreign currency translation adjustments

     (98      (2,144
  

 

 

    

 

 

 

Balance at the end of the period

   $ 15,043      $ 9,823  
  

 

 

    

 

 

 

 

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RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(11) Debt

Long-term debt at June 30, 2016 and June 30, 2015 consists of the following (in thousands):

 

     June 30, 2016      June 30, 2015  

Short-term debt

   $ 300,000      $ —     

Long-term debt

     875,000        300,594  
  

 

 

    

 

 

 

Total debt

   $ 1,175,000      $ 300,594  
  

 

 

    

 

 

 

Credit Facility

On October 31, 2013, we entered into a revolving credit agreement, as borrower, with lenders, including Union Bank, N.A., as administrative agent, joint lead arranger, swing line lender and letters of credit issuer, and HSBC Bank USA, National Association, as syndication agent and joint lead arranger. The credit facility terminates on October 31, 2018, when all unpaid principal and interest under the loans must be repaid. The outstanding principal amount due under the credit facility will bear interest at a rate equal to LIBOR plus 1.0% to 2.0% (depending on the then-applicable leverage ratio). At June 30, 2016, the interest rate that was being charged on the outstanding principal amount was 2.0%. A commitment fee of 0.15% to 0.25% (depending on the then-applicable leverage ratio) applies on the unused portion of the credit facility. The credit facility also includes a $25 million sublimit for letters of credit.

In connection with the acquisition of Brightree LLC, we entered into a first amendment to our existing revolving credit agreement, on April 4, 2016, to increase the size of the revolving credit facility from $700 million to $1 billion, with an uncommitted option to increase the revolving credit facility by an additional $300 million and make other modifications to provide for the acquisition of Brightree.

Our obligations under the revolving credit agreement (as amended) are unsecured but are guaranteed by certain of our direct and indirect U. S. subsidiaries, including ResMed Corp., ResMed Motor Technologies Inc., Birdie Inc., Inova Labs, Inc., Brightree, Brightree Services LLC, Brightree Home Health & Hospice LLC and Strategic AR LLC, under an unconditional guaranty. The credit agreement contains customary covenants, including certain financial covenants and an obligation that we maintain certain financial ratios, including a maximum leverage ratio of funded debt to EBITDA (as defined in the credit agreement) and an interest coverage ratio.

Part of the proceeds from the funding of the revolving credit facility were used to pay a portion of the acquisition consideration for the Brightree acquisition, as well as to pay fees and expenses in connection with the acquisition, the amendment to the revolving credit agreement and the term loan credit agreement (as described below).

At June 30, 2016, there was $875.0 million outstanding under the revolving credit facility.

Term Loan

On April 4, 2016, in connection with the Brightree acquisition, we also entered into a credit agreement (the “term loan credit agreement”) providing a $300 million senior unsecured one-year term loan credit facility.

Our obligations under the term loan credit agreement are unsecured but are guaranteed by certain of our direct and indirect U.S. subsidiaries, including ResMed Corp., ResMed Motor Technologies Inc., Birdie Inc., Inova Labs, Inc., Brightree, Brightree Services LLC, Brightree Home Health & Hospice LLC and Strategic AR LLC, under an unconditional guaranty. The term loan credit facility terminates on April 3, 2017, when all unpaid principal and interest under the loans must be repaid. The outstanding principal amount due under the term loan credit facility will bear interest at a rate equal to LIBOR plus 1.0% to 2.0% (depending on the then-applicable leverage ratio). At June 30, 2016, the interest rate that was being charged on the outstanding principal amount was 2.0%. The term loan credit agreement contains customary covenants, including certain financial covenants and an obligation that we maintain certain financial ratios, including a maximum ratio of funded debt to EBITDA (as defined in the term loan credit agreement) and an interest coverage ratio.

The proceeds from the funding of the term loan credit facility were used to pay a portion of the acquisition consideration for the Brightree acquisition, as well as to pay fees and expenses in connection with the acquisition, the amendment to the revolving credit agreement and the term loan credit agreement.

At June 30, 2016, there was $300.0 million outstanding under the term loan credit agreement.

 

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RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(12) Stockholders’ Equity

Common Stock. On February 21, 2014, our board of directors approved a new share repurchase program, authorizing us to acquire up to an aggregate of 20.0 million shares of our common stock. The program allows us to repurchase shares of our common stock from time to time for cash in the open market, or in negotiated or block transactions, as market and business conditions warrant and subject to applicable legal requirements. The 20.0 million shares the new program authorizes us to purchase are in addition to the shares we repurchased on or before February 21, 2014 under our previous programs. There is no expiration date for this program, and the program may be accelerated, suspended, delayed or discontinued at any time at the discretion of our board of directors. All share repurchases since February 21, 2014 have been executed in accordance with this program. We have temporarily suspended our share repurchase program due to recent acquisitions. Accordingly, we did not repurchase any shares during the six months ended June 30, 2016. However, we may, at any time, elect to resume the share repurchase program as the circumstances allow.

During the fiscal years 2016 and 2015, we repurchased 1.9 million and 2.7 million shares, respectively, at a cost of $102.1 million and $152.6 million, respectively. As of June 30, 2016, we have repurchased a total of 41.1 million shares at a cost of $1.5 billion. Shares that are repurchased are classified as “treasury stock pending future use” and reduce the number of shares outstanding used in calculating earnings per share. At June 30, 2016, 13.6 million additional shares can be repurchased under the approved share repurchase program.

Preferred Stock. In April 1997, our board of directors authorized 2,000,000 shares of $0.01 par value preferred stock. No such shares were issued or outstanding at June 30, 2016.

Stock Options and Restricted Stock Units. We have granted stock options and restricted stock units to personnel, including officers and directors, in accordance with the ResMed Inc. 2009 Incentive Award Plan (the “2009 Plan”). These options and restricted stock units vest over one to four years and the options have expiration dates of seven years from the date of grant. We have granted the options with an exercise price equal to the market value as determined at the date of grant.

The maximum number of shares of our common stock authorized for issuance under the 2009 Plan is 43.7 million. The number of securities remaining available for future issuance under the 2009 Plan at June 30, 2016 is 12.1 million. The number of shares of our common stock available for issuance under the 2009 Plan will be reduced by (i) 2.8 shares for each one share of common stock delivered in settlement of any “full-value award,” which is any award other than a stock option, stock appreciation right or other award for which the holder pays the intrinsic value and (ii) one share for each share of common stock delivered in settlement of all other awards. The maximum number of shares, which may be subject to awards granted under the 2009 Plan to any individual during any calendar year, may not exceed 3 million shares of our common stock (except in a participant’s initial year of hiring up to 4.5 million shares of our common stock may be granted).

At June 30, 2016, there was $67.1 million in unrecognized compensation costs related to unvested stock-based compensation arrangements. This is expected to be recognized over a weighted average period of 2.2 years. The aggregate intrinsic value of the stock-based compensation arrangements outstanding and exercisable at June 30, 2016 was $164.9 million and $42.3 million, respectively. The aggregate intrinsic value of the options exercised during the fiscal years 2016, 2015, and 2014 was $40.4 million, $80.2 million and $50.2 million, respectively.

 

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RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The following table summarizes option activity during the year ended June 30, 2016:

 

            Weighted Average Exercise
Price
     Weighted Average
Remaining Contractual Term
in Years
 

Outstanding at beginning of period

     2,809,238      $ 29.63        2.5   

Granted

     336,176        58.22     

Exercised*

     (1,189,787      22.68     

Forfeited

     (31,398      41.52     
  

 

 

    

 

 

    

 

 

 

Outstanding at end of period

     1,924,229      $ 38.70        3.2   
  

 

 

    

 

 

    

 

 

 

Exercise price of granted options

   $ 58.22        

Options exercisable at end of period

     1,367,907      $ 32.31     

 

* Includes 13,747 shares netted for tax.

The following table summarizes the activity of restricted stock units, including performance restricted stock units, during year ended June 30, 2016:

 

            Weighted Average Grant-Date
Fair Value
     Weighted Average
Remaining Contractual Term
in Years
 

Outstanding at beginning of period

     2,312,529      $ 43.65        1.2   

Granted

     725,145        54.83     

Vested*

     (835,255      39.45     

Expired

     (251,945      38.22     

Forfeited

     (88,964      45.79     
  

 

 

    

 

 

    

 

 

 

Outstanding at end of period

     1,861,510      $ 50.52        1.4   
  

 

 

    

 

 

    

 

 

 

 

* Includes 216,408 shares netted for tax.

Employee Stock Purchase Plan (the “ESPP”). Under the ESPP, we offer participants the right to purchase shares of our common stock at a discount during successive offering periods. Each offering period under the ESPP will be for a period of time determined by the board of directors’ compensation committee of no less than 3 months and no more than 27 months. The purchase price for our common stock under the ESPP will be the lower of 85% of the fair market value of our common stock on the date of grant or 85% of the fair market value of our common stock on the date of purchase. An individual participant cannot subscribe for more than $25,000 in common stock during any calendar year. At June 30, 2016, the number of shares remaining available for future issuance under the ESPP is 1.2 million shares.

During fiscal years 2016 and 2015, we issued 291,000 and 309,000 shares to our employees in two offerings and we recognized $4.3 million and $3.3 million, respectively, of stock compensation expense associated with the ESPP.

The following table summarizes the total stock-based compensation costs incurred and the associated tax benefit recognized during the years ended June 30, 2016, 2015 and 2014 (in thousands):

 

     2016      2015      2014  

Cost of sales - capitalized as part of inventory

   $ 2,731       $ 2,605       $ 2,621   

Selling, general and administrative expenses

     36,994         38,755         34,667   

Research and development expenses

     6,683         6,495         6,169   
  

 

 

    

 

 

    

 

 

 

Stock-based compensation costs

     46,408         47,855         43,457   

Tax benefit*

     (25,020      (14,100      (11,744
  

 

 

    

 

 

    

 

 

 

Stock-based compensation costs, net of tax benefit

   $ 21,388       $ 33,755       $ 31,713   
  

 

 

    

 

 

    

 

 

 

 

* Includes an additional tax benefit of $11.2 million for the year ended June 30, 2016, associated with the early adoption of ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”, discussed in Note 3 - New Accounting Pronouncements.

 

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RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(13) Other, net

Other, net, in the consolidated statements of income is comprised of the following for the years ended June 30, 2016, 2015 and 2014 (in thousands):

 

     2016      2015      2014  

Gain (loss) on foreign currency transactions and hedging, net

   $ 4,169      $ 5,068      $ 590  

Impairment of cost method investments

     (750      —           —     

Other

     1,541        1,182        294  
  

 

 

    

 

 

    

 

 

 
   $ 4,960      $ 6,250      $ 884  

 

(14) Income Taxes

Income before income taxes for the years ended June 30, 2016, 2015 and 2014, was taxed under the following jurisdictions (in thousands):

 

     2016      2015      2014  

U.S.

   $ 1,785      $ 11,431      $ 2,556  

Non-U.S.

     437,781        424,485        428,522  
  

 

 

    

 

 

    

 

 

 
   $ 439,566      $ 435,916      $ 431,078  

The provision for income taxes is presented below (in thousands):

 

            2016      2015      2014  

Current:

     Federal       $ 24,325      $ 28,429      $ 18,931  
     State         5,805        695        1,334  
     Non-U.S.         58,023        50,892        55,675  
     

 

 

    

 

 

    

 

 

 
        88,153        80,016        75,940  
     

 

 

    

 

 

    

 

 

 

Deferred:

     Federal         5,640        (4,269      (420
     State         (1,644      (180      (81
     Non-U.S.         (4,992      7,463        10,366  
     

 

 

    

 

 

    

 

 

 
        (996      3,014        9,865  
     

 

 

    

 

 

    

 

 

 

Provision for income taxes

      $ 87,157      $ 83,030      $ 85,805  

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. federal income tax rate of 35% to pretax income as a result of the following (in thousands):

 

     2016      2015      2014  

Taxes computed at statutory U.S. rate

   $ 153,848      $ 152,570      $ 150,877  

Increase (decrease) in income taxes resulting from:

        

State income taxes, net of U.S. tax benefit

     2,573        348        794  

Research and development credit

     (5,138      (4,821      (5,395

Tax effect of dividends

     80,754        56,219        87,764  

Change in valuation allowance

     (5,882      (614      5,894  

Effect of non-U.S. tax rates

     (91,124      (87,721      (83,135

Foreign tax credits

     (44,835      (36,725      (73,975

Stock-based compensation expense

     (8,170      3,158        3,431  

Other

     5,131        616        (450
  

 

 

    

 

 

    

 

 

 
   $ 87,157      $ 83,030      $ 85,805  

 

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RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The components of our deferred tax assets and liabilities at June 30, 2016 and 2015 are as follows (in thousands):

 

     2016      2015  

Deferred tax assets:

     

Employee liabilities

   $ 15,514      $ 11,663  

Inventories

     9,714        8,822  

Provision for warranties

     4,081        2,722  

Provision for doubtful debts

     3,708        3,779  

Net operating loss carryforwards

     33,881        13,262  

Capital loss carryover

     2,109        1,805  

Stock-based compensation expense

     15,460        18,173  

Other

     4,655        5,446  
  

 

 

    

 

 

 
     89,122        65,672  

Less valuation allowance

     (10,807      (14,647
  

 

 

    

 

 

 

Deferred tax assets

     78,315        51,025  
  

 

 

    

 

 

 

Deferred tax liabilities:

     

Unrealized foreign exchange gains

     (1,016      (512

Property, plant and equipment

     (4,383      (2,291

Goodwill and other intangibles

     (26,481      (8,214
  

 

 

    

 

 

 

Deferred tax liabilities

     (31,880      (11,017
  

 

 

    

 

 

 

Net deferred tax asset

   $ 46,435      $ 40,008  

We reported the net deferred tax assets and liabilities in our consolidated balance sheets at June 30, 2016 and 2015 as follows (in thousands):

 

     2016      2015  

Non-current deferred tax asset

     55,496        46,380  

Non-current deferred tax liability

     (9,061      (6,372
  

 

 

    

 

 

 

Net deferred tax asset

   $ 46,435      $ 40,008  

As of June 30, 2016, we had $112.8 million of U.S. federal and state net operating loss carryforwards and $80.1 million of non-U.S. net operating loss carryforwards, which expire in various years through 2021 or carry forward indefinitely.

The valuation allowance at June 30, 2016 relates to a provision for uncertainty of the utilization of net operating loss carryforwards of $8.5 million and capital loss and other items of $2.3 million. We believe that it is more likely than not that the benefits of deferred tax assets, net of any valuation allowance, will be realized.

A substantial portion of our manufacturing operations and administrative functions in Malaysia and Singapore operate under various tax holidays and tax incentive programs that will expire in whole or in part at various dates through June 30, 2020. The end of certain tax holidays may be extended if specific conditions are met. The net impact of these tax holidays and tax incentive programs increased our net earnings by $19.2 million ($0.14 per diluted share) for the year ended June 30, 2016 and $18.9 million ($0.13 per diluted share) for the year ended June 30, 2015.

At June 30, 2016, applicable U.S. federal income taxes and foreign withholding taxes have not been provided on the accumulated earnings of foreign subsidiaries that are expected to be permanently reinvested. The total amount of these undistributed earnings at June 30, 2016 amounted to approximately $1.2 billion. If these earnings had not been permanently reinvested, deferred taxes of approximately $286 million would have been recognized in the consolidated financial statements.

In accounting for uncertainty in income taxes, we recognize a tax benefit in the financial statements for an uncertain tax position only if management’s assessment is that the position is “more likely than not” (that is, a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term “tax position” refers to a position in

 

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RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for annual periods.

The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statements of income. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets.

Based on all known facts and circumstances and current tax law, we believe the total amount of unrecognized tax benefits on June 30, 2016, is not material to our results of operations, financial condition or cash flows, and if recognized, would not have a material impact on our effective tax rate.

 

(15) Segment Information

We predominantly operate in a single operating segment, which is the sleep and respiratory disorders sector of the medical device industry. Due to the acquisition of Brightree LLC in April 2016, our operations now include the supply of business management software and services to medical equipment and home health providers. However, these operations, both in terms of revenue and profit, are not material to our global operations and therefore have not been separately reported.

Sales of devices for each of the years ended June 30, 2016, 2015 and 2014 were $1,064.2 million, $975.9 million and $846.7 million, respectively. Sales of masks and other accessories for each of the years ended June 30, 2016, 2015 and 2014 were $745.6 million, $703.0 million and $708.3 million, respectively. Revenue information by geographic area for the years ended June 30, 2016, 2015 and 2014, is summarized below (in thousands):

 

     Revenue from external sources for the years ended June 30,  
     2016      2015      2014  

North and Latin America

   $ 1,130,431      $ 962,696      $ 839,126  

Germany

     163,257        184,245        214,598  

France

     136,847        145,504        152,271  

Rest of the World

     408,178        386,467        348,978  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,838,713      $ 1,678,912      $ 1,554,973  

Long-lived assets of geographic areas are those assets used in our operations in each geographical area, and excludes goodwill, other intangible assets, and deferred tax assets. Long-lived assets by geographic area as of June 30, 2016, 2015 and 2014, is summarized below (in thousands):

 

     Long lived assets at June 30,  
     2016      2015      2014  

North and Latin America

   $ 148,789      $ 140,344      $ 133,986  

Australia

     185,978        197,609        245,718  

Rest of the World

     49,509        49,805        54,573  
  

 

 

    

 

 

    

 

 

 

Total

   $ 384,276      $ 387,758      $ 434,277  

 

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RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(16) Stock-based Employee Compensation

We measure the compensation expense of all stock-based awards at fair value on the grant date. We estimate the fair value of stock options and purchase rights granted under the ESPP using the Black-Scholes valuation model. The fair value of restricted stock units is equal to the market value of the underlying shares as determined at the grant date less the fair value of dividends that holders are not entitled to, during the vesting period. We recognize the fair value as compensation expense using the straight-line method over the service period for awards expected to vest.

We estimate the fair value of stock options granted under our stock option plans and purchase rights granted under the ESPP using the following assumptions:

 

     Fiscal Year Ended June 30,  
     2016     2015  

Stock options:

    

Weighted average grant date fair value

   $ 12.18      $ 10.58   

Weighted average risk-free interest rate

     1.66     1.60

Expected option life in years

     4.9        4.9   

Dividend yield

     2.06% - 2.09     2.15% - 2.15

Expected volatility

     27     27

ESPP purchase rights:

    

Weighted average grant date fair value

   $ 13.61      $ 10.72   

Weighted average risk-free interest rate

     0.2     0.1

Expected option life in years

     6 months        6 months   

Dividend yield

     1.96% - 2.14     1.73% - 2.17

Expected volatility

     23% - 32     22% - 26

During the fiscal years ended June 30, 2016 and 2015, we granted 208,000 and 216,000, performance restricted stock units (“PRSUs”), which contain a market condition, with the ultimate realizable number of PRSUs dependent on relative total stockholder return over a three-year period, up to a maximum amount to be issued under the award of 200% of the original grant. The weighted average grant date fair value of PRSUs granted during the fiscal years 2016 and 2015 was estimated at $53.11 and $51.12 per PRSU, respectively, using a Monte-Carlo simulation valuation model.

 

(17) Employee Retirement Plans

We contribute to a number of employee retirement plans for the benefit of our employees. Details of the main plans are as follows:

(1) Australia - We contribute to defined contribution plans for each employee resident in Australia. All Australian employees, after serving a qualifying period, are entitled to benefits on retirement, disability or death. Employees may contribute additional funds to the plans. We contribute to the plans at the rate of approximately 9.5% of the salaries of all Australian employees. Our total contributions to the plans for the years ended June 30, 2016, 2015 and 2014, were $9.1 million, $9.9 million and $9.9 million, respectively.

(2) United Kingdom - We contribute to a defined contribution plan for each permanent United Kingdom employee. All employees, after serving a three-month qualifying period, are entitled to benefit on retirement, disability or death. Employees may contribute additional funds to the plan. We contribute to the plan at the rate of 5% of the salaries of all United Kingdom employees. Our total contributions to the plan were $0.5 million, $0.5 million and $0.5 million in fiscal 2016, 2015, and 2014, respectively.

(3) United States - We sponsor a defined contribution plan available to substantially all domestic employees. Company contributions to this plan are based on a percentage of employee contributions to a maximum of 4% of the employee’s salary. Our total contributions to the plan were $3.3 million, $3.2 million and $2.9 million in fiscal 2016, 2015, and 2014, respectively.

(4) Switzerland - We sponsor a fixed return defined contribution fund for each permanent Swiss employee. As part of our contribution to the fund, we guarantee a fixed 2% net return on accumulated contributions per annum. We contribute to the plan at variable rates that have averaged 8% of salaries over the last three years. Our total contributions to the plan were $0.4 million, $0.4 million and $0.4 million in fiscal 2016, 2015, and 2014, respectively.

 

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RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(18) Commitments

We lease buildings, motor vehicles and office equipment under operating leases. We expense rental charges for operating leases on a straight-line basis over the lease term taking into account rent concessions or holidays. Rent expenses under operating leases for the years ended June 30, 2016, 2015 and 2014 were approximately $17.4 million, $17.0 million and $16.5 million, respectively. At June 30, 2016 we had the following future minimum lease payments under non-cancelable operating leases (in thousands):

 

Fiscal Years

   Operating Leases  

2017

   $ 19,856  

2018

     15,280  

2019

     10,142  

2020

     5,738  

2021

     3,902  

Thereafter

     10,955  
  

 

 

 

Total minimum lease payments

   $ 65,873  
  

 

 

 

 

(19) Legal Actions and Contingencies

Litigation

In the normal course of business, we are subject to routine litigation incidental to our business. While the results of this litigation cannot be predicted with certainty, we believe that their final outcome will not, individually or in aggregate, have a material adverse effect on our consolidated financial statements taken as a whole.

Contingent Obligations Under Recourse Provisions

We use independent leasing companies to provide financing to certain customers for the purchase of our products. In some cases, we are contingently liable in the event of a customer default, to the leasing companies, within certain limits, for unpaid installment receivables transferred to the leasing companies. The gross amount of receivables sold, with recourse, during the fiscal years 2016 and 2015, amounted to $67.1 million and $31.5 million, respectively. The maximum potential amount of contingent liability under these arrangements at June 30, 2016 and June 30, 2015 were $12.9 million, and $7.2 million, respectively. The recourse liability recognized by us at June 30, 2016 and June 30, 2015, in relation to these arrangements was $0.7 million and $0.5 million, respectively.

SERVE-HF Field Safety Notification

On May 13, 2015 we announced the preliminary analysis of the data on SERVE-HF clinical trial designed to assess whether the treatment of moderate to severe predominant central sleep apnea with Adaptive Servo-Ventilation (ASV) therapy could reduce mortality and morbidity in patients with symptomatic chronic heart failure. The preliminary headline results showed no significant difference with respect to all-cause mortality and hospitalization. However, the analysis of the data identified a statistically significant, 2.5 percent absolute, increased risk of cardiovascular mortality for those patients in the trial who received ASV therapy with moderate to severe predominant central sleep apnea and symptomatic chronic heart failure with reduced ejection fraction. During the year ended June 30, 2015 we recognized $5.0 million in expenses associated with SERVE-HF field safety notification activities within cost of sales. During the year ended June 30, 2016, we released the remaining balance of $2.8 million to cost of sales, as we have concluded the field safety notification activities.

 

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RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(20) Fair Value Measurements

In determining the fair value measurements of our financial assets and liabilities, we consider the principal and most advantageous market in which we transact and consider assumptions that market participants would use when pricing the financial asset or liability. We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The hierarchies of inputs are as follows:

 

•    Level 1:    Input prices quoted in an active market for identical financial assets or liabilities;
•    Level 2:    Inputs other than prices quoted in Level 1, such as prices quoted for similar financial assets and liabilities in active markets, prices for identical assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data; and
•    Level 3:    Input prices quoted that are significant to the fair value of the financial assets or liabilities which are not observable nor supported by an active market.

The following table summarizes our financial assets and liabilities, as at June 30, 2016 and June 30, 2015, using the valuation input hierarchy (in thousands):

 

     Level 1      Level 2      Level 3      Total  

Balances at June 30, 2016

           

Foreign currency hedging instruments, net

   $ —         $ 4,185      $ —         $ 4,185  

Business acquisition contingent consideration

   $ —         $ —         $ (10,450    $ (10,450
  

 

 

    

 

 

    

 

 

    

 

 

 

Balances at June 30, 2015

           

Foreign currency hedging instruments, net

   $ —         $ 1,038      $ —         $ 1,038  

Business acquisition contingent consideration

   $ —         $ —         $ (1,584    $ (1,584
  

 

 

    

 

 

    

 

 

    

 

 

 

We determine the fair value of our financial assets and liabilities as follows:

Foreign currency options – These financial instruments are valued using third-party valuation models based on market observable inputs, including interest rate curves, on-market spot currency prices, volatilities and credit risk.

Contingent consideration – These liabilities include the fair value estimates of additional future payments that may be required for some of our previous business acquisitions based on the achievement of certain performance milestones. Each potential future payment is valued using the estimated probability of achieving each milestone, which is then discounted to present value.

The following is a reconciliation of changes in the fair value of contingent consideration during fiscal years ended June 30, 2016 and June 30, 2015 (in thousands):

 

     2016      2015  

Balance at the beginning of the period

   $ (1,584    $ (480

Acquisition date fair value of contingent consideration

     (13,107      (1,717

Changes in fair value included in operating income

     2,986        132  

Payments

     1,228        458  

Foreign currency translation adjustments

     27        23  
  

 

 

    

 

 

 

Balance at the end of the period

   $ (10,450    $ (1,584
  

 

 

    

 

 

 

We did not have any significant non-financial assets or liabilities measured at fair value on June 30, 2016 or June 30, 2015.

 

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Table of Contents

RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(21) Derivative Instruments and Hedging Activities

We transact business in various foreign currencies, including a number of major European currencies as well as the Australian and Singapore dollars. We have significant foreign currency exposure through both our Australian and Singaporean manufacturing activities, and international sales operations. We have established a foreign currency hedging program using purchased currency options and forward contracts to hedge foreign-currency-denominated financial assets, liabilities and manufacturing cash flows. The terms of such foreign currency hedging contracts generally do not exceed three years. The goal of this hedging program is to economically manage the financial impact of foreign currency exposures denominated mainly in Euros, Australian and Singapore dollars. Under this program, increases or decreases in our foreign currency denominated financial assets, liabilities, and firm commitments are partially offset by gains and losses on the hedging instruments.

We do not designate these foreign currency contracts as hedges. We have determined our hedge program to be a non-effective hedge as defined under the FASB issued authoritative guidance. All movements in the fair value of the foreign currency instruments are recorded within other income, net in our consolidated statements of income. We do not enter into financial instruments for trading or speculative purposes.

We held foreign currency instruments with notional amounts totaling $612.2 million and $576.5 million at June 30, 2016 and June 30, 2015, respectively, to hedge foreign currency fluctuations. These contracts mature at various dates prior to June 30, 2019.

The following table summarizes the amount and location of our derivative financial instruments as of June 30, 2016 and June 30, 2015 (in thousands):

 

     June 30, 2016      June 30, 2015      Balance Sheet Caption  

Foreign currency hedging instruments

   $ 2,346      $ 1,644        Other assets - current   

Foreign currency hedging instruments

     2,082        1,348        Other assets - non current   

Foreign currency hedging instruments

     (243      (1,954      Accrued expenses   
  

 

 

    

 

 

    
   $ 4,185      $ 1,038     
  

 

 

    

 

 

    

The following table summarizes the amount and location of gains (losses) associated with our derivative financial instruments and other foreign-currency-denominated transactions for the fiscal year ended June 30, 2016 and June 30, 2015, respectively (in thousands):

 

     Gain /(Loss) Recognized      Income Statement Caption
     Year Ended June 30,       
     2016      2015       

Foreign currency hedging instruments

   $ (5,192    $ (29,419    Other, net

Other foreign-currency-denominated transactions

     9,361        34,487      Other, net
   $ 4,169      $ 5,068      Other, net

We are exposed to credit-related losses in the event of non-performance by counter parties to financial instruments. We minimize counterparty credit risk by entering into derivative transactions with major financial institutions and we do not expect material losses as a result of default by our counterparties.

 

- F24 -


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RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(22) Business Combinations

Brightree

On April 4, 2016 we completed the acquisition of Brightree LLC (“Brightree”), a provider of cloud-based clinical and business management software for the post-acute care industry, for a total purchase consideration paid of $802 million. This acquisition has been accounted for as a business combination using purchase accounting and included in our consolidated financial statements from April 4, 2016. The acquisition was funded through cash on-hand, funds available from the existing revolving credit facility, an increase in the size of our revolving credit facility from $700 million to $1 billion and we also entered into a $300 million senior unsecured one-year term loan credit facility.

We have not completed the purchase price allocation in relation to this acquisition as certain appraisals associated with the valuation of intangible assets are not yet complete. We do not believe that the completion of this work will materially modify the preliminary purchase price allocation. We expect to complete our purchase price allocation during the quarter ending December 31, 2016. The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on estimates of their fair values at the date of acquisition. The goodwill recognized as part of these acquisitions, which is deductible for tax purposes, mainly represents the synergies that are unique to our combined businesses and the potential for new products and services to be developed in the future. The preliminary fair values of assets acquired and liabilities assumed, and the estimated useful lives of intangible assets acquired are as follows (in thousands):

 

     Brightree      Intangible assets - useful life  

Current assets

   $ 13,868     

Property, plant and equipment

     1,045     

Tradenames

     28,700        10 years   

In-process research and development

     4,100        n/a   

Developed technology

     114,700        5 to 6 years   

Customer relationships

     51,000        10 to 15 years   

Goodwill

     602,090     
  

 

 

    

Assets acquired

   $ 815,503     
  

 

 

    

Current liabilities

     (9,399   

Deferred revenue

     (4,571   

Deferred tax liabilities

     —        
  

 

 

    

Total liabilities assumed

   $ (13,970   
  

 

 

    

Net assets acquired

   $ 801,533     
  

 

 

    

The acquisition is considered a material business combination and accordingly unaudited pro forma information presented below for the fiscal years ended June 30, 2016 and 2015, include the effects of pro forma adjustments as if the acquisition of Brightree occurred on July 1, 2014. The pro forma results were prepared using the acquisition method of accounting and combine our historical results and Brightree’s for the fiscal years ended June 30, 2016 and 2015, including the effects of the business combination, primarily amortization expense related to the fair value of identifiable intangible assets acquired, interest expense associated with the financing obtained by us in connection with the acquisition, and the elimination of incurred acquisition-related costs.

 

- F25 -


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RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The pro forma financial information presented below is not necessarily indicative of the results of operations that would have been achieved if the acquisition occurred at the beginning of the earliest period presented, nor is it intended to be a projection of future results.

 

Unaudited Proforma Consolidated Results    Years Ended June 30,  

(In thousands, except per share information)

   2016      2015  

Revenue

   $ 1,931,257      $ 1,780,727  

Net income attributable to stockholders

   $ 354,565      $ 347,563  

Basic earnings per share

   $ 2.53      $ 2.47  

Diluted earnings per share

   $ 2.54      $ 2.44  

The unaudited pro forma consolidated results for the years ended June 30, 2016, and 2015 reflect primarily the following pro forma pre-tax adjustments:

 

  •   Addition of net amortization expense related to the fair value of identifiable intangible assets acquired of $19.9 million and $26.2 million for the years ended June 30, 2016 and June 30, 2015, respectively.

 

  •   Addition of net interest expense associated with debt that was issued to finance the acquisition of $16.1 million and $16.5 million for the years ended June 30, 2016 and June 30, 2015, respectively.

 

  •   Elimination of pre-tax acquisition-related costs totaling $4.1 million from the results for the year ended June 30, 2016.

 

  •   Addition of net income tax expense of $1.3 million for the year ended June 30, 2016 and elimination of net income tax expense of $3.1 million for the year ended June 30, 2015, respectively.

Although Brightree and its U.S. subsidiaries had historically elected to be treated as a partnership for U.S. Federal and state income tax purposes, and therefore, no income tax expense or benefit was previously recognized by Brightree in the U.S., the pro forma financial information assumes that Brightree’s historical income tax expense is based on a U.S. statutory rate of 37%. Brightree’s historical income tax expense was a benefit of $1.2 million and $0.4 million for the twelve months ended June 30, 2016 and 2015, respectively. The effective tax rate of the combined company could be significantly different depending on post-acquisition activities, such as the tax treatment applicable to each entity and the geographical mix of taxable income affecting state and foreign taxes, among other factors.

Other Acquisitions

On October 2, 2015 we completed the acquisition of 100% of the shares in Curative Medical Technology Inc., a leading provider of non-invasive ventilation and sleep-disordered breathing medical devices and accessories in China. Curative Medical has its manufacturing base in Suzhou, China, offices in Beijing, Germany and the United States, and a distributor network throughout China and in other select markets.

On November 6, 2015 we completed the acquisition of 100% of the shares in Maribo Medico A/S, a distributor of medical equipment for treating, diagnosing, and managing sleep-disordered breathing and other respiratory disorders in Denmark and the Nordics.

On November 30, 2015 we completed the acquisition of 100% of the shares in Bennett Precision Tooling Pty Ltd, an Australian based company that designs and manufactures tools specializing in applications for Liquid Silicon Rubber.

On January 29, 2016 we completed the acquisition of 100% of the shares in Inova Labs Inc. (“Inova Labs”), a medical device company specializing in the development and commercialization of innovative oxygen therapy products.

These acquisitions have been accounted for as business combinations using purchase accounting and are included in our consolidated financial statements from their respective acquisition dates. The acquisitions, individually and collectively, are not considered a material business combination and accordingly pro forma information is not provided. The acquisitions were funded through cash on-hand and by drawing on our existing credit facility.

Except for the purchase price allocation associated with the Inova Labs acquisition, we have completed the purchase price allocation in relation to all these acquisitions. We expect to complete our purchase price allocation for Inova Labs during the quarter ending December 31, 2016. We do not believe that the completion of this work will materially modify the preliminary

 

- F26 -


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RESMED INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

purchase price allocation for Inova Labs. The cost of the acquisitions was allocated to the assets acquired and liabilities assumed based on estimates of their fair values at the date of acquisition. The goodwill recognized as part of these acquisitions, which is not deductible for tax purposes, mainly represents the synergies that are unique to our combined businesses and the potential for new products and services to be developed in the future.

The fair values of assets acquired and liabilities assumed, and the estimated useful lives of intangible assets acquired are as follows (in thousands):

 

     All Other      Intangible assets - useful life  

Current assets

   $ 49,370     

Property, plant and equipment

     5,294     

Tradenames

     17,400         7 years   

Non-compete

     1,400         5 years   

Developed technology

     20,515         5 years   

Customer relationships

     37,303         5 to 8 years   

Goodwill

     194,216     
  

 

 

    

Assets acquired

   $ 325,498     
  

 

 

    

Current liabilities

     (21,147   

Debt assumed

     (21,201   

Deferred revenue

     (4,283   

Deferred tax liabilities

     (19,207   
  

 

 

    

Total liabilities assumed

   $ (65,838   
  

 

 

    

Net assets acquired

   $ 259,660     
  

 

 

    

During the year ended June 30, 2016, we recorded $5.3 million in acquisition-related expenses.

 

(23) Restructuring Expenses

During the year ended June 30, 2016 we incurred restructuring expenses of $6.9 million ($5.2 million, net of tax) associated with rationalizing our European research & development operations and manufacturing facilities. The restructure cost consisted primarily of severance payments and an asset write-down of a legacy manufacturing facility. We recorded and paid the full amount of $6.9 million in the year ended June 30, 2016, within our operating expenses and separately disclosed the amount as restructuring expenses.

During the year ended June 30, 2014 we completed a reorganization of our commercial and research and development teams. As a result of this reorganization we incurred restructuring expenses of $6.3 million ($4.2 million, net of tax). We recorded and paid the full amount of $6.3 million in the year ended June 30, 2014, within our operating expenses and separately disclosed the amount as restructuring expenses.

 

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Schedule II

RESMED INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

YEARS ENDED JUNE 30, 2016, 2015 AND 2014

(in thousands)

 

     Balance
at
Beginning
of Period
     Charged
to costs
and
expenses
     Other
(deductions)
    Balance
at end
of
period
 

Year ended June 30, 2016

          

Applied against asset account

          

Allowance for doubtful accounts

   $ 12,276         3,383         (3,104   $ 12,555   
  

 

 

    

 

 

    

 

 

   

 

 

 

Year ended June 30, 2015

          

Applied against asset account

          

Allowance for doubtful accounts

   $ 10,971         3,559         (2,254   $ 12,276   
  

 

 

    

 

 

    

 

 

   

 

 

 

Year ended June 30, 2014

          

Applied against asset account

          

Allowance for doubtful accounts

   $ 9,912         5,306         (4,247   $ 10,971   
  

 

 

    

 

 

    

 

 

   

 

 

 

See accompanying report of independent registered public accounting firm.


Table of Contents

RESMED INC. AND SUBSIDIARIES

SIGNATURES

Under the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the authorized persons below.

DATED January 12, 2017

ResMed Inc.

 

/s/ BRETT A. SANDERCOCK

Brett A. Sandercock
Chief financial officer

(Principal Financial Officer and

Principal Accounting Officer)


Table of Contents

RESMED INC. AND SUBSIDIARIES

EXHIBIT INDEX

The following documents are filed as part of this report:

 

(a)    Consolidated Financial Statements and Schedules – The index to our consolidated financial statements and schedules are set forth in the “Index to Consolidated Financial Statements” under Item 8 of this report.
(b)    Exhibit Lists
    2.1    Agreement and Plan of Merger, dated February 19, 2016, by and among ResMed Corp., Eagle Acquisition Sub LLC, Brightree LLC, Shareholder Representative Services LLC and ResMed Inc. (18)**
    3.1    First Restated Certificate of Incorporation of ResMed Inc., as amended. (16)
    3.2    Fifth Amended and Restated Bylaws of ResMed Inc. (13)
    4.1    Form of certificate evidencing shares of Common Stock. (1)
  10.1    Licensing Agreement between the University of Sydney and ResMed Ltd dated May 17, 1991, as amended. (1)
  10.2*    ResMed Inc. 2006 Incentive Award Plan. (6)
  10.3*    Amendment No. 1 to the ResMed Inc. 2006 Incentive Award Plan. (3)
  10.4*    2006 Grant agreement for Board of Directors. (3)
  10.5*    2006 Grant agreement for Executive Officers. (5)
  10.6*    2006 Grant agreement for Australian Executive Officers. (5)
  10.7*    Form of Executive Agreement. (4)
  10.8*    Amended and Restated 2006 Incentive Award Plan dated November 20, 2008. (7)
  10.9    Form of Indemnification Agreements for our directors and officers. (8)
  10.10    Form of Access Agreement for directors. (8)
  10.11*    Updated Form of Executive Agreement. (2) (12)
  10.12    ResMed Inc. 2009 Incentive Award Plan. (9)
  10.13    ResMed Inc. 2009 Employee Stock Purchase Plan. (9)
  10.14    Amendment No. 1 to the ResMed Inc. 2009 Employee Stock Purchase Plan. (14)
  10.15    Form of Restricted Stock Award Agreement. (9)
  10.16    ResMed Inc. Deferred Compensation Plan. (10)
  10.17    Credit Agreement, dated as of October 31, 2013, among ResMed Inc., the lenders Union Bank, N.A., as administrative agent, joint lead arranger, swing line lender and letters of credit issuer and HSBC Bank USA, National Association, as syndication agent and joint lead arranger. (17)
  10.18    First Amendment to Credit Agreement dated as of April 4, 2016, by and among ResMed, as borrower, the lenders party thereto, Union Bank, N.A., as administrative agent, joint lead arranger, swing line lender and letter of credit issuer and HSBC Bank USA, National Association, as syndication agent and joint lead arranger. (19)
  10.19    Term Loan Credit Agreement dated April 4, 2016, among ResMed Inc, as borrower, the lenders, Union Bank, N.A., as administrative agent, joint lead arranger and joint book runner, HSBC Bank USA, National Association, as joint lead arranger and joint book runner and HSBC Bank Australia Limited, as joint lead arranger and joint book runner. (20)
  10.20    Unconditional Guaranty entered into as of April 4, 2016, by each of ResMed Corp., ResMed Motor Technologies Inc., Birdie Inc., Inova Labs, Inc., Brightree LLC, Brightree Services LLC, Brightree Home Health & Hospice LLC and Strategic AR LLC., in favor of Union Bank, N.A., as administrative agent. (21)
  10.21    Form of Restricted Stock Unit Award Agreement for Executive Officers. (11)
  10.22    Form of Restricted Stock Unit Award Agreement for Directors. (11)
  10.23    Form of Stock Option Grant for Executive Officers. (11)
  10.24    Form of Stock Option Grant for Directors. (11)
  10.25    Form of Performance-Based Restricted Stock Unit Award Agreement for Executive Officers. (15)
  21.1    Subsidiaries of the Registrant. (22)
  23.1    Consent of Independent Registered Public Accounting Firm. (22)
  31.1    Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. (23)
  31.2    Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. (23)
  32.1    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (23)
101    The following materials from ResMed Inc.’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Stockholders’ Equity and Comprehensive Income, (iv) the Consolidated Statements of Cash Flows and (v) related notes.

 

* Management contract or compensatory plan or arrangement
** Exhibits and schedules have been omitted as authorized by Item 601(b)(2) of Regulation S-K. The Registrant will supplementally furnish copies of any of the omitted exhibits and schedules if the SEC requests; provided, however, that the Registrant may request confidential treatment for any exhibits or schedules it furnishes, under Rule 24b-2 of the Exchange Act.


Table of Contents
(1)  Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (No. 33-91094) declared effective on June 1, 1995.
(2)  Incorporated by reference to the Registrant’s Report on Form 10-K for the year ended June 30, 2009.
(3)  Incorporated by reference to the Registrant’s Report on Form 10-Q for the quarter ended December 31, 2006.
(4)  Incorporated by reference to the Registrant’s Report on Form 8-K filed on July 13, 2007.
(5)  Incorporated by reference to the Registrant’s Report on Form 10-K for the year ended June 30, 2007.
(6)  Incorporated by reference to the Registrant’s Report on Form 8-K filed on November 15, 2006.
(7)  Incorporated by reference to Appendix A of the Registrant’s Definitive Proxy Statement filed on October 15, 2008.
(8)  Incorporated by reference to the Registrant’s Report on Form 8-K filed on June 24, 2009.
(9)  Incorporated by reference to the Registrant’s Report on Form 8-K filed on November 23, 2009.
(10)  Incorporated by reference to the Registrant’s Report on Form 8-K filed on May 25, 2010.
(11)  Incorporated by reference to the Registrant’s Report on Form 10-Q for the quarter ended September 30, 2011.
(12)  Incorporated by reference to the Registrant’s Report on Form 8-K filed on July 2, 2012.
(13)  Incorporated by reference to the Registrant’s Report on Form 8-K/A filed on September 17, 2012.
(14)  Incorporated by reference to Appendix A of the Registrant’s Definitive Proxy Statement filed on October 4, 2012.
(15)  Incorporated by reference to the Registrant’s Report on Form 8-K filed on November 21, 2012.
(16)  Incorporated by reference to Exhibit 3.1 to the Registrant’s Report on Form 10-Q for the quarter ended September 30, 2013.
(17)  Incorporated by reference to Exhibits 10.1 and 10.2 to the Registrant’s Report on Form 8-K filed on November 5, 2013.
(18)  Incorporated by reference to Exhibit 2.1 to the Registrant’s Report on Form 8-K filed on February 22, 2016.
(19)  Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 8-K filed on April 4, 2016.
(20)  Incorporated by reference to Exhibit 10.2 to the Registrant’s Report on Form 8-K filed on April 4, 2016.
(21)  Incorporated by reference to Exhibit 10.3 to the Registrant’s Report on Form 8-K filed on April 4, 2016.
(22)  Incorporated by reference to Exhibit 21.1 to the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2016.
(23)  Filed with this report.