Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Management’s discussion and analysis of financial condition and results of operations is intended to help the reader understand the results of operations and financial condition of ResMed Inc. and subsidiaries. It is provided as a supplement to, and should be read together with the selected financial data and consolidated financial statements and notes included elsewhere in this report.

We are a global leader in the development, manufacturing, distribution and marketing of medical devices and cloud-based software applications that diagnose, treat and manage respiratory disorders, including SDB, COPD, neuromuscular disease and other chronic diseases. SDB includes obstructive sleep apnea and other respiratory disorders that occur during sleep. Our products and solutions are designed to improve patient quality of life, reduce the impact of chronic disease and lower healthcare costs as global healthcare systems continue to drive a shift in care from hospitals to the home and lower cost settings. Our cloud-based software digital health applications, along with our devices are designed to provide connected care to improve patient outcomes and efficiencies for our customers.

Since the development of continuous positive airway pressure therapy, we have expanded our business by developing or acquiring a number of products and solutions for a broader range of respiratory disorders including technologies to be applied in medical and consumer products, ventilation devices, diagnostic products, mask systems, headgear and other accessories, dental devices, portable oxygen concentrators and cloud-based software informatics solutions to manage patient outcomes and customer and provider business processes. Our growth has been fueled by geographic expansion, our research and product development efforts, acquisitions and an increasing awareness of SDB and respiratory conditions like chronic obstructive pulmonary disease as significant health concerns.

We are committed to ongoing investment in research and development and product enhancements. During fiscal year 2019, we invested $180.7 million on research and development activities, which represents 6.9% of net revenues with a continued focus on the development and commercialization of new, innovative products and solutions that improve patient outcomes, create efficiencies for our customers and help physicians and providers better manage chronic disease and lower healthcare costs. During fiscal year 2019, we released new products including AirFit F30, a full face mask with minimal-contact cushion, and AirFit N30i and P30i, a top-of-head connected nasal and pillow mask, respectively. Due to multiple acquisitions, including of Brightree in April 2016, HEALTHCAREfirst in July 2018 and MatrixCare in November 2018, our operations now include out-of-hospital software platforms designed to support the professionals and caregivers who help people stay healthy in the home or care setting of their choice. These platforms comprise our SaaS business. These products, our cloud-based remote monitoring and therapy management system, and a robust product pipeline, should continue to provide us with a strong platform for future growth.

We have determined that we have two operating segments, which are the sleep and respiratory disorders sector of the medical device industry (“Sleep and Respiratory Care”) and the supply of business management software as a service to out-of-hospital health providers (“SaaS”).

Net revenue in fiscal year 2019 increased to $2,606.6 million, an increase of 11% compared to fiscal year 2018. Gross profit increased for the year ended June 30, 2019 to $1,536.6 million, from $1,362.2 million for the year ended June 30, 2018, an increase of $174.4 million or 13%. Our net income for the year ended June 30, 2019 was $404.6 million or $2.80 per diluted share compared to net income of $315.6 million or $2.19 per diluted share for the year ended June 30, 2018.

Total operating cash flow for fiscal year 2019 was $459.1 million and at June 30, 2019, our cash and cash equivalents totaled $147.1 million. At June 30, 2019, our total assets were $4.1 billion and our stockholders’ equity was $2.1 billion. During fiscal year 2019, we repurchased 200,000 shares at a cost of $22.8 million under our share repurchase program. We paid a quarterly dividend of $0.37 per share during fiscal 2019 with a total amount of $211.7 million paid to stockholders.

In order to provide a framework for assessing how our underlying businesses performed, excluding the effect of foreign currency fluctuations, we provide certain financial information on a “constant currency basis”, which is in addition to the actual financial information presented. In order to calculate our constant currency information, we translate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period. However, constant currency measures should not be considered in isolation or as an alternative to U.S. dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with U.S. generally accepted accounting principles.

-37-

PART II	Item 7

RESMED INC. AND SUBSIDIARIES

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

For discussion related to the results of operations and changes in financial condition for the fiscal year ended June 30, 2018 compared to fiscal year June 30, 2017, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report for the Year Ended June 30, 2018, which was filed with the United States Securities and Exchange Commission on August 17, 2018.

Fiscal Year Ended June 30, 2019 Compared to Fiscal Year Ended June 30, 2018

Net Revenues. Net revenue for the year ended June 30, 2019 increased to $2,606.6 million from $2,340.2 million for the year ended June 30, 2018, an increase of $266.4 million or 11% (a 13% increase on a constant currency basis). The following table summarizes our net revenue disaggregated by segment, product and region for the year ended June 30, 2019 compared to the year ended June 30, 2018 (in millions):

		Year Ended June 30,
		2019			2018			% Change			Constant Currency*
U.S., Canada and Latin America
Devices		$	743.1		$	689.6		8	%
Masks and other			677.4			600.5		13
Total Sleep and Respiratory Care		$	1,420.5		$	1,290.1		10
Software as a Service			275.8			157.0		76
Total		$	1,696.3		$	1,447.1		17
Combined Europe, Asia and other markets
Devices		$	618.5		$	614.0		1	%		5	%
Masks and other			291.8			279.1		5			9
Total Sleep and Respiratory Care		$	910.3		$	893.1		2			6
Global revenue
Devices		$	1,361.6		$	1,303.6		4	%		6	%
Masks and other			969.2			879.6		10			12
Total Sleep and Respiratory Care		$	2,330.8		$	2,183.2		7			9
Software as a Service			275.8			157.0		76			76
Total		$	2,606.6		$	2,340.2		11			13

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

Sleep and Respiratory Care

Net revenue from our Sleep and Respiratory Care business for the year ended June 30, 2019 increased to $2,330.8 million from $2,183.2 million for the year ended June 30, 2018, an increase of $147.6 million or 7%. Movements in international currencies against the U.S. dollar negatively impacted net revenues by approximately $40.9 million for the year ended June 30, 2019. Excluding the impact of currency movements, total net revenue from our Sleep and Respiratory Care business for the year ended June 30, 2019 increased 9% compared to the year ended June 30, 2018. The increase in net revenue was attributable to an increase in unit sales of our devices, masks and other, partially offset by a decline in average selling prices.

Net revenue from our Sleep and Respiratory Care business in the United States, Canada and Latin America for the year ended June 30, 2019 increased to $1,420.5 million from $1,290.1 million for the year ended June 30, 2017, an increase of $130.4 million or 10%. The increase is primarily due to an increase in unit sales of our devices, masks and other, partially offset by a decline in average selling prices.

Net revenue from our Sleep and Respiratory Care business in markets in combined Europe, Asia and other markets increased for the year ended June 30, 2019 to $910.3 million from $893.1 million for the year ended June 30, 2018, an increase of $17.2 million or 2% (an increase of 6% on a constant currency basis). The constant currency increase in sales in combined Europe, Asia and other markets predominantly reflects an increase in unit sales of our masks and other and devices, partially offset by a decline in average selling prices.

Net revenue from devices for the year ended June 30, 2019 increased to $1,361.6 million from $1,303.6 million for the year ended June 30, 2018, an increase of $58.0 million or 4%, including an increase of 8% in the United States, Canada and Latin America and an increase of 1% in combined Europe, Asia and other markets (a 5% increase on a constant currency basis). Excluding the impact of foreign currency movements, device sales for the year ended June 30, 2019 increased by 6%,

-38-

PART II	Item 7

RESMED INC. AND SUBSIDIARIES

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

Net revenue from masks and other for the year ended June 30, 2019 increased to $969.2 million from $879.6 million for the year ended June 30, 2018, an increase of 10%, including an increase of 13% in the United States, Canada and Latin America and an increase of 5% in combined Europe, Asia and other markets (a 9% increase on a constant currency basis). Excluding the impact of foreign currency movements, masks and other sales increased by 12%, compared to the year ended June 30, 2018.

Software as a Service

Net revenue from our SaaS business for the year ended June 30, 2019 was $275.8 million, compared to $157.0 million for the year ended June 30, 2018, an increase of $118.8 million or 76%. The increase was predominantly due to our acquisitions of MatrixCare and HEALTHCAREfirst, which were acquired on November 13, 2018 and July 6, 2018, respectively, and MatrixCare contributed $79.2 million in net revenue for the year ended June 30, 2019.

Gross Profit. Gross profit increased for the year ended June 30, 2019 to $1,536.6 million from $1,362.2 million for the year ended June 30, 2018, an increase of $174.4 million or 13%. Gross profit as a percentage of net revenue was 59.0% for the year ended June 30, 2019, compared with the 58.2% for the year ended June 30, 2018. The increase in gross margin was due primarily to manufacturing and procurement efficiencies, favorable impact from our MatrixCare acquisition, and favorable product mix, partially offset by declines in average selling prices.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased for the year ended June 30, 2019 to $645.0 million from $600.4 million for the year ended June 30, 2018, an increase of $44.6 million or 7%. The selling, general and administrative expenses, as reported in U.S. dollars, were favorably impacted by the movement of international currencies against the U.S. dollar, which decreased our expenses by approximately $20.3 million. Excluding the impact of foreign currency movements, selling, general and administrative expenses for the year ended June 30, 2019 increased by 11% compared to the year ended June 30, 2018. As a percentage of net revenue, selling, general and administrative expenses for the year ended June 30, 2019 improved to 24.7% compared to 25.7% for the year ended June 30, 2018.

The constant currency increase in selling, general and administrative expenses was primarily due to additional expenses associated with the consolidation of recent acquisitions. Excluding the incremental selling, general and administrative expenses attributed to our recent acquisitions, selling, general and administrative expenses for the year ended June 30, 2019 increased by 4% in constant currency terms.

Research and Development Expenses. Research and development expenses increased for the year ended June 30, 2019 to $180.7 million from $155.1 million for the year ended June 30, 2018, an increase of $25.5 million or 16%. The research and development expenses were favorably impacted by the movement of international currencies against the U.S. dollar, which decreased our expenses by approximately $6.1 million, as reported in U.S. dollars. Excluding the impact of foreign currency movements, research and development expenses for the year ended June 30, 2019 increased by 20% compared to the year ended June 30, 2018. As a percentage of net revenue, research and development expenses were 6.9% for the year ended June 30, 2019 compared to 6.6% for the year ended June 30, 2018.

The constant currency increase in research and development expenses was primarily due to additional expenses associated with the consolidation of recent acquisitions. Excluding the incremental research and development expenses attributed to our recent acquisitions, research and development expenses for the year ended June 30, 2019 increased by 4% in constant currency terms.

Amortization of Acquired Intangible Assets. Amortization of acquired intangible assets for the year ended June 30, 2019 totaled $74.9 million compared to $46.4 million for the year ended June 30, 2018. The increase in amortization expense was attributable to our recent acquisitions.

Restructuring expenses. During the year ended June 30, 2019, we incurred restructuring expenses of $9.4 million associated with the reorganization, rationalization and relocation of some of our research and development and SaaS operations including the closure of our German research and development site. We recorded the full amount of $9.4 million during the year ended June 30, 2019, within our operating expenses, which was separately disclosed as restructuring expenses and had $5.4 million remaining in our accruals at year end. The restructuring expenses consisted primarily of severance payments to employees and contract exit costs associated with several impacted sites.

-39-

PART II	Item 7

RESMED INC. AND SUBSIDIARIES

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

During the year ended June 30, 2018, we incurred restructuring expenses of $18.4 million associated with a global strategic workforce planning review, which resulted in a reduction in headcount across most of our functions and locations and closure of our Paris site. We recorded the full amount of $18.4 million during the year ended June 30, 2018, within our operating expenses, which was separately disclosed as restructuring expenses and had $1.5 million remaining in our employee related costs accrual at year end. The restructuring expenses consisted primarily of severance payments to employees and the remaining expense relating to legal and consulting services associated with the completion of the employee severances and contract exit costs associated with the Paris site.

Litigation Settlement Expenses. During the year ended June 30, 2019 we recognized litigation settlement expenses of $41.2 million on account of a tentative agreement with the Office of Inspector General to resolve an ongoing investigation by the government into certain of our product offerings. The tentative agreement includes payment by us of $39.5 million, and we expect to also incur additional fees and administrative costs that typically accompany such a resolution. However, we have not yet completed negotiations, and there can be no assurance as to whether or when the parties will finalize any such negotiated resolution or what the final terms of such a resolution will be.

Total Other Income (Loss), Net. Total other income (loss), net for the year ended June 30, 2019 was a loss of $60.4 million, compared with a loss of $20.5 million for the year ended June 30, 2018. The change was due primarily to an increase in interest expense to $36.2 million and a decrease in interest income to $2.3 million for the year ended June 30, 2019 compared to interest expense of $28.4 million and interest income of $16.4 million for the year ended June 30, 2018.

We also recorded losses attributable to equity method investments and impairments of equity investments for the year ended June 30, 2019 of $15.8 million and $15.0 million respectively, compared to $0.0 million and $11.6 million for the year ended June 30, 2018. The losses attributable to equity method investments relate to our joint venture with Verily whereby we recognize our share of the joint venture’s losses.

Income Taxes. Our effective income tax rate decreased to 22.0% for the year ended June 30, 2019 from 39.5% for the year ended June 30, 2018.

On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act directing taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. Effective December 31, 2018, the accounting relating to the impact of the U.S. Tax Act was no longer considered provisional. However, further adjustments could be required as a result of future legislation, amended tax returns, or tax examinations of the years impacted by the calculation. We recorded additional tax expense associated with changes in the U.S. Tax Act of $6.7 million and $138.0 million during the years ended June 30, 2019 and June 30, 2018, respectively.

Our effective income tax rate was affected by the geographic mix of our earnings. Our Singapore operations operate under certain tax holidays and tax incentive programs that will expire in whole or in part at various dates through June 30, 2030. As a result of the U.S. Tax Act, we treated all non-U.S. historical earnings as taxable during the year ended June 30, 2018. Therefore, future repatriation of cash held by our non-U.S. subsidiaries will generally not be subject to U.S. federal tax, if repatriated.

Finally, in connection with the audit by the ATO for the tax years 2009 to 2013, we received Notices of Amended Assessments in March 2018. Based on these assessments, the ATO asserted that we owe $151.7 million in additional income tax and $38.4 million in accrued interest, of which $75.9 million was paid in April 2018 under a payment arrangement with the ATO. At September 30, 2018, we have recorded a receivable in prepaid taxes and other non-current assets for the amount paid as we ultimately expect this will be refunded by the ATO. In June 2018, we received a notice from the ATO claiming penalties of 50% of the additional income tax that was assessed or $75.9 million. We do not agree with the ATO’s assessments and continue to believe we are more likely than not to be successful in defending our position. The ATO is currently auditing tax years 2014 to 2017, and we have also been notified by the ATO that they intend to audit tax year 2018.

Net Income and Earnings per Share. As a result of the factors above, our net income for the year ended June 30, 2019 was $404.6 million compared to net income of $315.6 million for the year ended June 30, 2018. Our earnings per diluted share for the year ended June 30, 2019 was $2.80 compared to $2.19 for the year ended June 30, 2018, an increase of 28%.

-40-

PART II	Item 7

RESMED INC. AND SUBSIDIARIES

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

Liquidity and Capital Resources

As of June 30, 2019 and June 30, 2018, we had cash and cash equivalents of $147.1 million and $188.7 million, respectively. Working capital was $589.4 million and $554.5 million, at June 30, 2019 and June 30, 2018, respectively. As of June 30, 2019 we had $1.3 billion of borrowings under our credit facility agreement as compared to $0.3 billion at June 30, 2018.

As of June 30, 2019 and June 30, 2018, our cash and cash equivalent balances held within the United States amounted to $33.6 million and $36.9 million, respectively. Our remaining cash and cash equivalent balances at June 30, 2019 and June 30, 2018, of $113.5 million and $151.8 million, respectively, were held by our non-U.S. subsidiaries. Our cash and cash equivalent balances are held at highly rated financial institutions.

We repatriated $0.4 billion and $1.4 billion to the United States during the years ended June 30, 2019 and 2018, respectively, from earnings generated in each of those years. The amount of the current year foreign earnings that we have repatriated to the United States in the past has been determined, and the amount that we expect to repatriate during fiscal year 2020 will be determined, based on a variety of factors, including current year earnings of our foreign subsidiaries, foreign investment needs and the cash flow needs we have in the United States, such as for the repayment of debt, dividend distributions, and other domestic obligations.

During the year ended June 30, 2018, as a result of the U.S. Tax Act, we treated all non-U.S. historical earnings as taxable, which resulted in additional tax expense of $126.9 million which was payable over the proceeding eight years. Therefore, future repatriation of cash held by our non-U.S. subsidiaries will generally not be subject to U.S. federal tax if repatriated. On June 14, 2019, the U.S. Treasury Department issued final and temporary regulations relating to the repatriation of non-U.S. earnings. As a result, in the event our non-U.S. earnings had not been permanently reinvested, deferred taxes of approximately $201.6 million in U.S. federal deferred tax and $5.2 million in U.S. state deferred taxes would have been recognized in the consolidated financial statements.

Inventories at June 30, 2019 were $349.6 million, an increase of $80.9 or 30% over the balance at June 30, 2018 of $268.7 million. The increase in inventories was required primarily to support our revenue growth and new product introductions.

Accounts receivable, net of allowance for doubtful accounts, at June 30, 2019 were $528.5 million, an increase of $44.8 million or 9% over the June 30, 2018 accounts receivable balance of $483.7 million. Accounts receivable days’ sales outstanding of 67 days at June 30, 2019 decreased by 2 days compared to 69 days at June 30, 2018. Our allowance for doubtful accounts as a percentage of total accounts receivable at June 30, 2019 and 2018 was 4.5% and 3.8%, respectively.

During the year ended June 30, 2019, we generated cash of $459.1 million from operations. This was lower than the cash generated from operations for the year ended June 30, 2018 of $505.0 million, which was primarily due to the increase in inventories and the increase in tax payments, which increased to $242.9 million during the year ended June 30, 2019 from $170.7 million during the year ended June 30, 2018. Movements in foreign currency exchange rates during the year ended June 30, 2019 had the effect of decreasing our cash and cash equivalents by $5.6 million, as reported in U.S. dollars.

During the year ended June 30, 2019, we paid $951.4 million associated with business acquisitions, net of cash acquired, compared to $0.9 million during the year ended June 30, 2018. These acquisitions were primarily funded by using our credit facility.

During the year ended June 30, 2019, we repurchased 200,000 shares at a cost of $22.8 million and during the year ended June 30, 2018, we repurchased 550,000 shares at a cost of $53.8 million under our share repurchase program. During fiscal years 2019 and 2018, we also paid dividends totaling $211.7 million and $199.5 million, respectively.

Details of contractual obligations at June 30, 2019 are as follows (in thousands):

					Payments Due by June 30,
In $000’s		Total			2020			2021			2022			2023			2024			Thereafter
Debt			1,274,012			12,000			12,012			12,000			1,238,000			-			-
Interest on debt			165,008			43,620			43,182			42,792			35,414			-			-
Operating leases			98,013			23,500			17,161			12,403			9,478			7,916			27,555
Purchase obligations			292,076			291,022			1,054			-			-			-			-
Total		$	1,829,109		$	370,142		$	73,409		$	67,195		$	1,282,892		$	7,916		$	27,555

-41-

PART II	Item 7

RESMED INC. AND SUBSIDIARIES

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

Details of other commercial commitments at June 30, 2019 are as follows (in thousands):

					Amount of Commitment Expiration Per Period
In $000’s		Total			2020			2021			2022			2023			2024			Thereafter
Standby letter of credit		$	10,581		$	3,816		$	-		$	11		$	47		$	-		$	6,707
Guarantees*			6,830			168			41			17			25			2			6,577
Total		$	17,411		$	3,984		$	41		$	28		$	72		$	2		$	13,284

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

Refer to Note 19 - Legal Actions and Contingencies of the Notes to the Consolidated Financial Statements (Part II, Item 8) for details of our contingent obligations under recourse provisions.

Segment Information

We have determined that we have two operating segments, which are the Sleep and Respiratory Care segment and the SaaS segment. However, prior to the three months ended December 31, 2018, we had previously determined the SaaS segment was not material to our global operations in terms of revenue and profit, and therefore this had not been separately reported as a segment. Following our recent acquisitions, we have quantitatively and qualitatively reassessed our segment reporting and determined the SaaS segment is material to the group. See Note 15 – Segment Information of the Notes to the Consolidated Financial Statements (Part II, Item 8) for financial information regarding segment reporting. Financial information about our revenues from and assets located in foreign countries is also included in the notes to the consolidated financial statements included in this report.

Credit Facility

On April 17, 2018, we entered into an amended and restated credit agreement, or the Revolving Credit Agreement, as borrower, with lenders MUFG Union Bank, N.A., as administrative agent, joint lead arranger, joint book runner, swing line lender and letter of credit issuer, and Westpac Banking Corporation, as syndication agent, joint lead arranger and joint book runner. The Revolving Credit Agreement, among other things, provided a senior unsecured revolving credit facility of $800.0 million, with an uncommitted option to increase the revolving credit facility by an additional $300.0 million.

Additionally, on April 17, 2018, ResMed Limited entered into a syndicated facility agreement, or the Term Credit Agreement, as borrower, with lenders MUFG Union Bank, N.A., as administrative agent, joint lead arranger and joint book runner, and Westpac Banking Corporation, as syndication agent, joint lead arranger and joint book runner. The Term Credit Agreement, among other things, provides ResMed Limited a senior unsecured term credit facility of $200.0 million.

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

Our obligations under the Revolving Credit Agreement are guaranteed by certain of our direct and indirect U.S. subsidiaries, and ResMed Limited’s obligations under the Term Credit Agreement are guaranteed by us and certain of our direct and indirect U.S. subsidiaries. The Revolving Credit Agreement and Term Credit Agreement contain customary covenants, including, in each case, a financial covenant that requires that we maintain a maximum leverage ratio of funded debt to EBITDA (as defined in the Revolving Credit Agreement and Term Credit Agreement, as applicable). The entire principal amounts of the revolving credit facility and term credit facility, and, in each case, any accrued but unpaid interest may be declared immediately due and payable if an event of default occurs, as defined in the Revolving Credit Agreement and the Term Credit Agreement, as applicable. Events of default under the Revolving Credit Agreement and the Term Credit Agreement include, in each case, failure to make payments when due, the occurrence of a default in the performance of any covenants in the respective agreements or related documents, or certain changes of control of us, or the respective guarantors of the obligations borrowed under the Revolving Credit Agreement and Term Credit Agreement.

-42-

PART II	Item 7

RESMED INC. AND SUBSIDIARIES

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

The Revolving Credit Agreement and Term Credit Agreement each terminate on April 17, 2023, when all unpaid principal and interest under the loans must be repaid. Amounts borrowed under the Term Credit Agreement will also amortize on a semi-annual basis, with a $6.0 million principal payment required on each such semi-annual amortization date. The outstanding principal amounts will bear interest at a rate equal to LIBOR plus 0.75% to 1.50% (depending on the then-applicable leverage ratio) or the Base Rate (as defined in the Revolving Credit Agreement and the Term Credit Agreement, as applicable) plus 0.0% to 0.50% (depending on the then-applicable leverage ratio). At June 30, 2019, the interest rate that was being charged on the outstanding principal amounts was 3.4%. An applicable commitment fee of 0.100% to 0.175% (depending on the then-applicable leverage ratio) applies on the unused portion of the revolving credit facility. At June 30, 2019, we were in compliance with our debt covenants and there was $1,274.0 million outstanding under the Revolving Credit Agreement and Term Credit Agreement. We expect to satisfy all of our liquidity and long-term debt requirements through a combination of cash on hand, cash generated from operations and debt facilities.

Senior Notes

On July 10, 2019, we entered into a Note Purchase Agreement with the purchasers to that agreement, in connection with the issuance and sale of $250.0 million principal amount of our 3.24% senior notes due July 10, 2026, and $250.0 million principal amount of our 3.45% senior notes due July 10, 2029. Our obligations under the Note Purchase Agreement and the Notes are unconditionally and irrevocably guaranteed by certain of our direct and indirect U.S. subsidiaries, including ResMed Corp., ResMed Motor Technologies Inc., Birdie Inc., Inova Labs, Inc., Brightree LLC, Brightree Home Health & Hospice LLC, Brightree Patient Collections LLC, ResMed Operations Inc., HEALTHCAREfirst Holding Company, HCF Holdco Company, HEALTHCAREfirst, Inc., CareFacts Information Systems, LLC and Lewis Computer Services, LLC, MatrixCare Holdings Inc., MatrixCare, Inc., Reciprocal Labs Corporation and ResMed SaaS Inc., under a Subsidiary Guaranty Agreement dated as of July 10, 2019. The net proceeds from this transaction were used to pay down borrowings on our Revolving Credit Agreement.

Under the terms of the Note Purchase Agreement, we agreed to customary covenants including with respect to our corporate existence, transactions with affiliates, and mergers and other extraordinary transactions. We also agreed that, subject to limited exceptions, we will maintain a ratio of consolidated funded debt to consolidated EBITDA of no more than 3.50 to 1.00 as of the last day of any fiscal quarter, and will not at any time permit the amount of all secured and unsecured debt of us and our subsidiaries to exceed 10% of our consolidated tangible assets, determined as of the end of our most recently ended fiscal quarter.

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

Critical Accounting Principles and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those estimates related to allowance for doubtful accounts, inventory adjustments, warranty obligations, goodwill, impaired assets, intangible assets, income taxes, deferred tax valuation allowances and stock-based compensation costs.

We state these accounting policies in the notes to the consolidated financial statements and at relevant sections in this discussion and analysis. The estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions.

-43-

PART II	Item 7

RESMED INC. AND SUBSIDIARIES

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

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

(1) Valuation of Goodwill, Intangible and Other Long-Lived Assets. We make assumptions in establishing the carrying value, fair value and estimated lives of our goodwill, intangibles and other long-lived assets. Our goodwill impairment tests are performed at our reporting unit level, which is one level below our operating segments. The criteria used for these evaluations include management’s estimate of the asset’s continuing ability to generate positive income from operations and positive cash flow in future periods compared to the carrying value of the asset, as well as the strategic significance of any identifiable intangible asset in our business objectives. If assets are considered to be impaired, we recognize as impairment the amount by which the carrying value of the assets exceeds their fair value. We base useful lives and related amortization or depreciation expense on our estimate of the period that the assets will generate revenues or otherwise be used by us. Factors that would influence the likelihood of a material change in our reported results include significant changes in the asset’s ability to generate positive cash flow, loss of legal ownership or title to the asset, a significant decline in the economic and competitive environment on which the asset depends, significant changes in our strategic business objectives, utilization of the asset, and a significant change in the economic and/or political conditions in certain countries.

We conduct an annual review for goodwill impairment at our reporting unit level, which is one level below our operating segments. Our goodwill impairment review involves the following steps:

Step 0 or Qualitative assessment – Evaluate qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. The factors we consider include, but are not limited to, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance or events-specific to that reporting unit. If or when we determine it is more likely than not that the fair value of a reporting unit is less than the carrying amount, including goodwill, we would move to Step 1 of the quantitative method.

Step 1 – Compare the fair value for each reporting unit to its carrying value, including goodwill. Fair value is determined based on estimated discounted cash flows. If the carrying value of the reporting unit, including goodwill, exceeds the reporting unit’s fair value, we would proceed to Step 2. If a reporting unit’s fair value exceeds the carrying value, no further work is performed and no impairment charge is necessary.

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

(2) Income Tax. We assess our income tax positions and record tax benefits for all years subject to audit based upon management’s evaluation of the facts, circumstances and information available at the reporting date. If we determine that it is not more likely than not that we would be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income tax expense in the period such determination is made. Alternatively, if we determine that it is more likely than not that the net deferred tax assets would be realized, any previously provided valuation allowance is reversed. These changes to the valuation allowance and resulting increases or decreases in income tax expense may have a material effect on our operating results.

Our income tax returns are based on calculations and assumptions subject to audit by various tax authorities. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws. Although currently immaterial, we recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While we believe we have appropriate support for the positions taken on our tax returns, we regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes. Based on our regular assessment, we may adjust the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known.

In connection with the audit by the ATO for the tax years 2009 to 2013, we received Notices of Amended Assessments in March 2018. Based on these assessments, the ATO asserted that we owe $151.7 million in additional income tax and $38.4 million in accrued interest, of which $75.9 million was paid in April 2018 under a payment arrangement with the ATO. In June 2018, we received a notice from the ATO claiming penalties of 50% of the additional income tax that was assessed or $75.9 million. The ATO is currently auditing tax years 2014 to 2017, and we have also been notified by the ATO that they intend to audit tax year 2018. We do not agree with the ATO’s assessments and continue to believe we are more likely than not to be successful in defending our position.

-44-

PART II	Item 7

RESMED INC. AND SUBSIDIARIES

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

(3) Revenue Recognition. We have determined that we have two operating segments, which are the sleep and respiratory disorders sector of the medical device industry (“Sleep and Respiratory Care”) and the supply of business management software as a service to out-of-hospital health providers (“SaaS”). For products in our Sleep and Respiratory Care business, we transfer control and recognize a sale when products are shipped to the customer in accordance with the contractual shipping terms. For our SaaS business, revenue associated with professional services are recognized as they are provided. We defer the recognition of a portion of the consideration received when performance obligations are not yet satisfied. Consideration received from customers in advance of revenue recognition is classified as deferred revenue. Performance obligations resulting in deferred revenue in our Sleep and Respiratory Care business relate primarily to extended warranties on our devices and the provision of data for patient monitoring. Performance obligations resulting in deferred revenue in our SaaS business relate primarily to the provision of software access with maintenance and support over an agreed term and material rights associated with future discounts upon renewal of some SaaS contracts. Generally, deferred revenue will be recognized over a period of one to five years.

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. In our Sleep and Respiratory Care business, the amount of consideration received and revenue recognized varies with changes in marketing incentives (e.g., rebates, discounts, free goods) and returns offered to customers and their customers. In accounting for these rebate programs, we reduce revenue ratably as sales occur over the rebate period by the expected value of the rebates to be returned to the customer. We also recognize discount on products as a reduction to revenue when control is transferred. We adjust the estimate of revenue for the impact of returned items at the earlier of when the most likely amount of consideration can be estimated, the amount expected to be received changes, or when the consideration becomes fixed. However, returns of products, excluding warranty-related returns, are infrequent and insignificant.

Many of our Sleep and Respiratory Care contracts have a single performance obligation which is the shipment of our therapy-based equipment. However, when the Sleep and Respiratory Care or SaaS contract has multiple performance obligations, we generally use an observable price to determine the stand-alone selling price by reference to pricing and discounting practices for the specific product or service when sold separately to similar customers. Revenue is then allocated proportionately, based on the determined stand-alone selling price, to the performance obligation.

We include shipping and handling associated with our Sleep and Respiratory Care business within cost of sales, and record shipping and handling costs collected from customers in net revenue. 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.

Recently Issued Accounting Pronouncements

See Note 3 – New Accounting Pronouncements of the Notes to Consolidated Financial Statements (Part II, Item 8) for a description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations, financial positions and cash flows.

Off-Balance Sheet Arrangements

As of June 30, 2019, we are not involved in any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC.

-45-

PART II	Item 7A

RESMED INC. AND SUBSIDIARIES

Quantitative and Qualitative Disclosures About Market and Business Risks