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	49
Consolidated Balance Sheets as of June 30, 2019 and 2018	52
Consolidated Statements of Income for the years ended June 30, 2019, 2018 and 2017	53
Consolidated Statements of Comprehensive Income for the years ended June 30, 2019, 2018 and 2017	54
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2019, 2018 and 2017	55
Consolidated Statements of Cash Flows for the years ended June 30, 2019, 2018 and 2017	56
Notes to Consolidated Financial Statements	57
Schedule II – Valuation and Qualifying Accounts and Reserves	80

(b) Supplementary Data

Quarterly Financial Information (unaudited)—The quarterly results for the years ended June 30, 2019 and 2018 are summarized below (in thousands, except per share amounts):

2019		First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Fiscal Year
Net revenue		$	588,279		$	651,100		$	662,228		$	704,964		$	2,606,572
Gross profit			343,093			383,731			391,910			417,850			1,536,585
Net income			105,737			124,639			105,417			68,797			404,592
Basic earnings per share			0.74			0.87			0.74			0.48			2.83
Diluted earnings per share			0.73			0.86			0.73			0.48			2.80
2018		First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Fiscal Year
Net revenue		$	523,659		$	601,273		$	591,634		$	623,631		$	2,340,196
Gross profit			305,605			349,792			344,295			362,472			1,362,164
Net income			86,125			9,527			110,125			109,812			315,588
Basic earnings per share			0.61			0.07			0.77			0.77			2.21
Diluted earnings per share			0.60			0.07			0.76			0.76			2.19

Note: the amounts for each quarter are computed independently, and, due to the computation formula, the sum of the four quarters may not equal the year.

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors ResMed Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of ResMed Inc. and subsidiaries (the Company) as of June 30, 2019 and 2018, 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, 2019, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended June 30, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated August 7, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Determination and evaluation of goodwill triggering events

As discussed in Notes 1(g) and 6 to the consolidated financial statements, the carrying amount of goodwill as of June 30, 2019 was $1,856 million. The Company performs goodwill impairment testing on an annual basis and whenever events or changes in circumstances indicate that the carrying value of a reporting unit, including goodwill, might exceed the fair value of the reporting unit. In the current year, the Company only performed

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qualitative, or Step 0, assessments to determine whether there was a greater than 50 percent likelihood that the fair value of each reporting unit was less than its carrying value.

We identified the determination and evaluation of goodwill triggering events as a critical audit matter because such events indicate possible impairment of goodwill, which required the application of greater auditor judgment. Potential triggering events, such as the recent acquisitions, macroeconomic conditions, industry and market considerations, cost factors, historical and forecasted financial results, market capitalization and events specific to the entity and reporting units, required a higher degree of auditor judgment to evaluate. These possible triggering events could have a significant effect on the Company’s Step 0 assessment and the determination of whether further quantitative analysis of goodwill impairment was required.

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s goodwill impairment assessment process, including a control related to the Company’s assessment of possible goodwill triggering events. We evaluated the Company’s Step 0 assessment for its reporting units by:

Considering macroeconomic indicators such as gross domestic product and inflation by key regions around the world;

	·		Evaluating information from analyst reports in the enterprise software and sleep and respiratory care industries, which are compared to industry and market considerations used by the Company; and

	·		Analyzing cost factors, financial performance of the reporting units, the Company’s market capitalization and other entity and reporting-unit specific events.

Evaluation of acquisition-date fair value of customer relationships and developed technology intangible assets

As discussed in Note 21 to the consolidated financial statements, the Company acquired MatrixCare Inc. (MatrixCare) on November 13, 2018 for a total purchase price of $612.4 million, which is net of cash acquired and debt assumed. In connection with the transaction, the Company recorded customer relationships and developed technology intangible assets relating to both existing as well as potential new products and services to be developed in the future (collectively, the intangible assets). The acquisition-date fair value for the intangible assets was $265.0 million as of June 30, 2019.

We identified the evaluation of the acquisition-date fair value of the intangible assets acquired in the MatrixCare transaction as a critical audit matter. This critical audit matter required a high degree of subjectivity in determining the weighting of the valuation methods used to calculate the fair value of the intangible assets. Further, the discounted cash flow model included the following internally-developed assumptions for which there was limited observable market information, and the calculated fair value of such assets was sensitive to possible changes to these key assumptions:

	·		Forecasted revenue growth rates

	·		Estimated annual customer attrition rate

	·		Forecasted earnings before interest, tax, depreciation, and amortization (EBITDA) margins

	·		Weighted-average cost of capital (WACC), including the discount rate

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s acquisition-date valuation process, including controls over the development of the key assumptions. We evaluated the Company’s forecasted revenue growth rates for existing customers by comparing forecasted growth assumptions to those of MatrixCare’s peers and industry reports. We compared the Company’s (1) forecasted revenue growth rates and EBITDA margins to MatrixCare’s historical actual results to assess MatrixCare’s ability to accurately forecast and (2) forecasted annual customer attrition rate to the Company’s historical SaaS customer attrition data. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:

	·		Evaluating the valuation approach and weighting of valuation methods used by the Company to calculate the fair value of the intangible assets;

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	·		Evaluating the Company’s discount rate, by comparing it against a discount rate range that was independently developed using publicly available market data for comparable peers;

	·		Assessing the Company’s WACC calculation, by comparing it against an independently estimated WACC range based on inputs obtained through published surveys and studies; and

Evaluation of uncertain tax positions related to Australian Tax Office audits

As discussed in Notes 14 and 19 to the consolidated financial statements, the Company’s tax filings in Australia for the years 2009 through 2017 are under audit by the Australian Tax Office (ATO). The Company has been assessed $266.0 million of additional income tax, penalties, and interest for tax years 2009 through 2013 in connection with this tax audit. Certain of these amounts have been paid by the Company to the ATO. However, the Company has not recorded any expense relating to the ongoing audit, or these assessments, as the Company believes it is more likely than not (more than a 50% likelihood) that its tax positions will be upheld.

We identified the evaluation of the Company’s assertion that it is more likely than not that its tax positions currently under audit by the ATO will be upheld as a critical audit matter. This critical audit matter required challenging auditor judgment due to the nature and the subjectivity of the applicable tax rules and regulations.

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process relating to uncertain tax positions, including controls over the Australian tax calculation and assessment of uncertain tax positions. In addition, we involved tax professionals with specialized skills and knowledge of Australian tax laws, who assisted by:

	·		Reading formal notices and assessments, and other correspondence received by the Company from the ATO in connection with the audit, as well as responses and information the Company submitted to the ATO in response to its requests for information;

	·		Evaluating the Company’s analysis and conclusions regarding its assertion, which included an assessment of the Company’s analysis of Australian tax laws and regulations related to the specific audit findings, and an evaluation of the facts, assumptions, and representations made; and

	·		Reading legal opinions obtained by the Company from third parties, and inquiring of third-party legal counsel about the likelihood of the Company’s tax position being ultimately upheld.

We have served as the Company’s auditor since 1994.

San Diego, California August 7, 2019

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Consolidated Balance Sheets

June 30, 2019 and 2018

(In thousands, except share and per share data)

	June 30, 2019			June 30, 2018
Assets
Current assets:
Cash and cash equivalents	$	147,128		$	188,701
Accounts receivable, net of allowance for doubtful accounts of $25,171 and $19,258 at June 30, 2019 and June 30, 2018, respectively		528,484			483,681
Inventories (note 4)		349,641			268,701
Prepaid expenses and other current assets		120,113			124,634
Total current assets		1,145,366			1,065,717
Non-current assets:
Property, plant and equipment, net (note 5)		387,460			386,550
Goodwill (note 6)		1,856,449			1,068,944
Other intangible assets, net (note 6)		521,950			215,184
Deferred income taxes		45,478			53,818
Prepaid taxes and other non-current assets		150,979			273,710
Total non-current assets		2,962,316			1,998,206
Total assets	$	4,107,682		$	3,063,923
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	115,725		$	92,723
Accrued expenses (note 8)		266,359			185,805
Deferred revenue		88,667			60,828
Income taxes payable (note 14)		73,248			160,427
Short-term debt, net (note 10)		11,992			11,466
Total current liabilities		555,991			511,249
Non-current liabilities:
Deferred revenue		81,143			71,596
Deferred income taxes		11,380			13,084
Other long-term liabilities		2,058			924
Long-term debt, net (note 10)		1,258,861			269,988
Long-term income taxes payable (note 14)		126,056			138,102
Total non-current liabilities		1,479,498			493,694
Total liabilities		2,035,489			1,004,943
Commitments and contingencies (note 18 and 19)
Stockholders’ equity: (note 11)
Preferred stock, $0.01 par value, 2,000,000 shares authorized; none issued		-			-
Common stock, $0.004 par value, 350,000,000 shares authorized; 185,491,064 issued and 143,654,830 outstanding at June 30, 2019 and 184,315,866 issued and 142,679,632 outstanding at June 30, 2018		575			571
Additional paid-in capital		1,511,473			1,450,821
Retained earnings		2,436,410			2,432,328
Treasury stock, at cost, 41,836,234 shares at June 30, 2019 and 41,636,234 shares at June 30, 2018		(1,623,256)			(1,600,412)
Accumulated other comprehensive loss		(253,009)			(224,328)
Total stockholders’ equity		2,072,193			2,058,980
Total liabilities and stockholders’ equity	$	4,107,682		$	3,063,923

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Income

Years Ended June 30, 2019, 2018 and 2017

(In thousands, except per share data)

		June 30, 2019			June 30, 2018			June 30, 2017
Net revenue		$	2,606,572		$	2,340,196		$	2,066,737
Cost of sales (excluding amortization of acquired intangible assets)			1,069,987			978,032			864,992
Gross profit			1,536,585			1,362,164			1,201,745
Operating expenses:
Selling, general and administrative			645,010			600,369			553,968
Research and development			180,651			155,149			144,467
Amortization of acquired intangible assets			74,938			46,383			46,578
Restructuring expenses (note 22)			9,401			18,432			12,358
Litigation settlement expenses (note 23)			41,199			-			8,500
Acquisition related expenses (note 21)			6,123			-			10,076
Total operating expenses			957,322			820,333			775,947
Income from operations			579,263			541,831			425,798
Other income (loss), net:
Interest income			2,299			16,378			17,085
Interest expense			(36,156)			(28,355)			(28,236)
Loss attributable to equity method investments (note 7)			(15,833)			-			-
Other, net			(10,726)			(8,542)			4,096
Total other income (loss), net			(60,416)			(20,519)			(7,055)
Income before income taxes			518,847			521,312			418,743
Income taxes			114,255			205,724			76,459
Net income		$	404,592		$	315,588		$	342,284
Basic earnings per share (note 12)		$	2.83		$	2.21		$	2.42
Diluted earnings per share (note 12)		$	2.80		$	2.19		$	2.40
Dividend declared per share		$	1.48		$	1.40		$	1.32
Basic shares outstanding (000's)			143,111			142,764			141,360
Diluted shares outstanding (000's)			144,484			143,987			142,453

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Comprehensive Income

Years Ended June 30, 2019, 2018 and 2017

(In US$ thousands)

		Years Ended June 30,
		2019			2018			2017
Net income		$	404,592			315,588			342,284
Other comprehensive (loss) income:
Foreign currency translation (loss) gain adjustments			(28,681)			(35,269)			33,599
Comprehensive income		$	375,911		$	280,319		$	375,883

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Stockholders’ Equity

Years ended June 30, 2019, 2018 and 2017

(In thousands)

	Common Stock			Additional Paid-in		Treasury Stock			Retained		Accumulated Other Comprehensive
	Shares	Amount		Capital		Shares	Amount		Earnings		Income (Loss)		Total
Balance, June 30, 2016	181,747	$	563	$	1,303,238	(41,086)	$	(1,546,611)	$	2,160,299	$	(222,658)	$	1,694,831
Common stock issued on exercise of options (note 11)	740		3		22,246									22,249
Common stock issued on vesting of restricted stock units, net of shares withheld for tax (note 11)	447		2		(8,159)									(8,157)
Common stock issued on employee stock purchase plan (note 11)	327		1		15,884									15,885
Treasury stock purchases														-
Stock-based compensation costs					45,921									45,921
Other comprehensive income												33,599		33,599
Net income										342,284				342,284
Dividends declared										(186,346)				(186,346)
Balance, June 30, 2017	183,261	$	569	$	1,379,130	(41,086)	$	(1,546,611)	$	2,316,237	$	(189,059)	$	1,960,266
Common stock issued on exercise of options (note 11)	539		2		18,759									18,761
Common stock issued on vesting of restricted stock units, net of shares withheld for tax (note 11)	214		1		(15,385)									(15,384)
Common stock issued on employee stock purchase plan (note 11)	302		1		19,955									19,956
Treasury stock purchases			(2)			(550)		(53,801)						(53,803)
Stock-based compensation costs					48,362									48,362
Other comprehensive income												(35,269)		(35,269)
Net income										315,588				315,588
Dividends declared										(199,497)				(199,497)
Balance, June 30, 2018	184,316	$	571	$	1,450,821	(41,636)	$	(1,600,412)	$	2,432,328	$	(224,328)	$	2,058,980
Common stock issued on exercise of options (note 11)	252		1		12,329									12,330
Common stock issued on vesting of restricted stock units, net of shares withheld for tax (note 11)	638		3		(28,104)									(28,101)
Common stock issued on employee stock purchase plan (note 11)	285		1		24,364									24,365
Treasury stock purchases			(1)			(200)		(22,844)						(22,845)
Stock-based compensation costs					52,063									52,063
Other comprehensive income												(28,681)		(28,681)
Net income										404,592				404,592
Cumulative effect of change in accounting standards (note 3)										(188,798)				(188,798)
Dividends declared										(211,712)				(211,712)
Balance, June 30, 2019	185,491	$	575	$	1,511,473	(41,836)	$	(1,623,256)	$	2,436,410	$	(253,009)	$	2,072,193

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Cash Flows

Years ended June 30, 2019, 2018 and 2017

(In thousands)

		June 30, 2019			June 30, 2018			June 30, 2017
Cash flows from operating activities:
Net income		$	404,592		$	315,588		$	342,284
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			150,795			119,960			112,157
Stock-based compensation costs			52,073			48,412			45,925
Loss attributable to equity method investments (note 7)			15,833			-			-
Impairment of equity investments (note 7)			15,007			11,593			1,955
Gain on previously held equity interest (note 21)			(1,909)			-			-
Changes in fair value of business combination contingent consideration			(286)			411			10,076
Payment of business combination contingent consideration			-			-			(8,460)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable			(18,013)			(32,356)			(63,604)
Inventories			(84,188)			1,494			(41,599)
Prepaid expenses, net deferred income taxes and other current assets			(47,575)			(160,726)			(19,257)
Accounts payable, accrued expenses and other			(27,278)			200,650			34,576
Net cash provided by operating activities			459,051			505,026			414,053
Cash flows from investing activities:
Purchases of property, plant and equipment			(68,710)			(62,581)			(62,219)
Patent registration costs			(8,632)			(8,876)			(9,257)
Business acquisitions, net of cash acquired (note 21)			(951,383)			(902)			(7,274)
Purchases of investments (note 7)			(46,717)			(14,495)			(6,464)
Proceeds (payments) on maturity of foreign currency contracts			(264)			(14,970)			3,324
Net cash used in investing activities			(1,075,706)			(101,824)			(81,890)
Cash flows from financing activities:
Proceeds from issuance of common stock, net			36,727			38,717			38,320
Taxes paid related to net share settlement of equity awards			(28,104)			(15,385)			(8,159)
Purchases of treasury stock			(22,844)			(53,801)			-
Payments of business combination contingent consideration			(909)			(486)			(11,682)
Proceeds from borrowings, net of borrowing costs			1,519,230			350,000			450,000
Repayment of borrowings			(711,745)			(1,146,242)			(545,000)
Dividends paid			(211,712)			(199,497)			(186,346)
Net cash provided by (used in) financing activities			580,643			(1,026,694)			(262,867)
Effect of exchange rate changes on cash			(5,561)			(9,742)			21,205
Net increase (decrease) in cash and cash equivalents			(41,573)			(633,234)			90,501
Cash and cash equivalents at beginning of period			188,701			821,935			731,434
Cash and cash equivalents at end of period		$	147,128		$	188,701		$	821,935
Supplemental disclosure of cash flow information:
Income taxes paid, net of refunds		$	242,860		$	170,653		$	92,901
Interest paid		$	36,156		$	28,355		$	28,236
Fair value of assets acquired, excluding cash		$	429,522		$	290		$	10,460
Liabilities assumed			(265,217)			-			(877)
Goodwill on acquisition			794,320			247			(645)
Deferred payments			(7,242)			365			(84)
Fair value of contingent consideration			-			-			(1,580)
Cash paid for acquisitions		$	951,383		$	902		$	7,274

See accompanying notes to consolidated financial statements.

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Notes to the Condensed Consolidated Financial Statements

(1) Organization and Basis of Presentation

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

(2) Summary of Significant Accounting Policies

(a) Basis of Consolidation

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

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

(b) Revenue Recognition

We adopted Accounting Standard Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” on July 1, 2018. We account for a contract with a customer when there is a legally enforceable contract, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. We have determined that we have two operating segments, which are the sleep and respiratory disorders sector of the medical device industry (“Sleep and Respiratory Care”) and the supply of business management software as a service to out-of-hospital health providers (“SaaS”). Our Sleep and Respiratory Care revenue relates primarily to the sale of our products that are therapy-based equipment. Some contracts include additional performance obligations such as the provision of extended warranties and data for patient monitoring. Our SaaS revenue relates to the provision of software access with ongoing support and maintenance services as well as professional services such as training and consulting.

Disaggregation of revenue

See note 15 – Segment Information for our net revenue disaggregated by segment, product and region for the years ended June 30, 2019, 2018 and 2017.

Performance obligations and contract balances

Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied; generally, this occurs with the transfer of risk and/or control of our products are provided at a point in time. For products in our Sleep and Respiratory Care business, we transfer control and recognize a sale when products are shipped to the customer in accordance with the contractual shipping terms. For our SaaS business, revenue associated with professional services are recognized as they are provided. We defer the recognition of a portion of the consideration received when performance obligations are not yet satisfied. Consideration received from customers in advance of revenue recognition is classified as deferred revenue. Performance obligations resulting in deferred revenue in our Sleep and Respiratory Care business relate primarily to extended warranties on our devices and the provision of data for patient monitoring. Performance obligations resulting in deferred revenue in our SaaS business relate primarily to the provision of software access with maintenance and support over an agreed term and material rights associated with future discounts upon renewal of some SaaS contracts. Generally, deferred revenue will be recognized over a period of one to five years. The following table summarizes our contract balances at June 30, 2019 and June 30, 2018 (in thousands):

		2019			2018			Balance sheet caption
Contract assets
Accounts receivable, net		$	528,484		$	483,681		Accounts receivable, net
Unbilled revenue, current			9,834			13,342		Prepaid expenses and other current assets
Unbilled revenue, non-current			4,592			2,973		Prepaid taxes and other non-current assets
Contract liabilities
Deferred revenue, current			(88,667)			(60,828)		Deferred revenue (current liabilities)
Deferred revenue, non-current			(81,143)			(71,596)		Deferred revenue (non-current liabilities)

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Notes to the Condensed Consolidated Financial Statements

Transaction price determination

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. In our Sleep and Respiratory Care segment, the amount of consideration received and revenue recognized varies with changes in marketing incentives (e.g., rebates, discounts, free goods) and returns offered to customers and their customers. When we give customers the right to return eligible products and receive credit, returns are estimated based on an analysis of historical experience. However, returns of products, excluding warranty-related returns, are infrequent and insignificant. We adjust the estimate of revenue at the earlier of when the most likely amount of consideration can be estimated, the amount expected to be received changes, or when the consideration becomes fixed.

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

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

Accounting and practical expedient elections

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

(c) Cash and Cash Equivalents

Cash equivalents include certificates of deposit and other highly liquid investments and we state them at 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.

(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.

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

We amortize all of our other intangible assets on a straight-line basis over their estimated useful lives, which range from two to fifteen years. We evaluate the recoverability of intangible assets at least annually and take into account events or circumstances that warrant revised estimates of useful lives or that 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 2019 and is performed at our reporting unit level, which is one level below our operating segments. Our goodwill impairment review involves the following steps:

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

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

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

During the annual review, we completed a Step 0 or Qualitative assessment and determined it was more likely than not that the fair value of our reporting units exceeded their carrying amounts, including goodwill and, therefore, goodwill was not impaired.

(h) Foreign Currency

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

(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.

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(k) Foreign Exchange Risk Management

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

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

We have determined our hedge program to be a non-effective hedge as defined. We record the foreign currency derivatives portfolio at fair value and include it in other assets and accrued expenses in our consolidated balance sheets. We do not offset the fair value amounts recognized for foreign 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) Provision for Warranty

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

(n) Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, which results in bad debt expense. We determine the adequacy of this allowance by periodically evaluating individual customer receivables, considering a customer’s financial condition, credit history 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.

(o) Impairment of Long-Lived Assets

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

We did not recognize impairment charges in relation to long-lived assets during the fiscal years ended June 30, 2019, 2018 and 2017.

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(p) Contingencies

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

(3) New Accounting Pronouncements

(a) Recently issued accounting standards not yet adopted

ASU No. 2016-02, “Leases”

In February 2016, the FASB issued Accounting Standard Update ASU No. 2016-02, “Leases” (Topic 842). Under the new guidance, lessees are required to recognize a right-of-use asset and a lease liability on the balance sheet for all leases, other than those that meet the definition of a short-term lease. This update will establish a lease asset and lease liability by lessees for those leases classified as operating under current GAAP. Leases will be classified as either operating or finance under the new guidance. Operating leases will result in straight-line expense in the income statement, similar to current operating leases, and finance leases will result in more expense being recognized in the earlier years of the lease term, similar to current capital leases. For lessors, the update will more closely align lease accounting to comparable guidance in the new revenue standards described.

The new standard is effective for us beginning in the first quarter of the fiscal year ending June 30, 2020 and early application is permitted. ASU 2016-02 will be adopted on a modified retrospective transition basis for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We will make an accounting policy election to not recognize on our consolidated balance sheet right-of-use assets and lease liabilities arising from short-term leases.

In preparation for the adoption of this guidance, we have designed and operated internal controls over its implementation as well as established a system solution for lease administration as well as the preparation and disclosure of financial information surrounding our leasing arrangements. We have substantially completed the work related to our implementation project except for finalization of discount rates as of the adoption date, evaluation as to whether we are ‘reasonably certain’ to extend certain leases, and evaluation of several contracts to determine whether they contain an embedded lease.

We estimate that the adoption of the guidance will result in the recognition of additional right-of-use assets and lease liabilities for operating leases of approximately $60.0 million to $70.0 million as of July 1, 2019, excluding the impact of our evaluation of lease terms and several contracts that may contain an embedded lease. As we are yet to finalize our work in relation to discount rates, we have used a preliminary rate of 3.5% when calculating this range. We do not believe the guidance will have a material impact on our consolidated statements of income.

(b) Recently adopted accounting pronouncements

ASU No. 2014-09, “Revenue from Contracts with Customers”

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Since its initial release, the FASB has issued several amendments to the standard, which include clarification of accounting guidance related to identification of performance obligations, intellectual property licenses, and principal vs. agent considerations. ASU 2014-09 and all subsequent amendments (collectively, the “new revenue recognition standards”) replaced most existing revenue recognition guidance in U.S. GAAP during the current quarter when it became effective. The guidance also requires improved disclosures on the nature, amount, timing, and uncertainty of revenue that is recognized.

Effective July 1, 2018, we adopted the new revenue recognition standards and applied its provisions to all contracts using the modified retrospective method. Application of the new provisions did not have a material impact on our financial statements and no cumulative-effect adjustment was calculated or recognized. The comparative information has not been restated; however, if it were there would be no change in the accounting treatment. Refer to the “Revenue Recognition” section above for further details about our revenue recognition following adoption of the new revenue recognition standards.

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

ASU No. 2016-01, "Financial Instruments - Overall"

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall" (Topic 825-10). The amendments address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments, and require equity investments, other than equity-method investments, to be measured at fair value with changes in fair value recognized through net income. The amendments also simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment for impairment quarterly at each reporting period. We adopted ASU 2016-01 during the quarter ended September 30, 2018 and elected to apply the practical expedient for measuring equity investments that do not have readily determinable fair market. Based on our elections, our strategic equity investments that do not have readily determinable fair values are measured at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identifiable or similar investments of the same issuer. The measurement alternative was applied prospectively and the adoption of ASU 2016-01 did not result in an adjustment to retained earnings.

ASU No. 2016-16, “Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory”

In October 2016, the FASB issued Accounting Standard Update ASU No. 2016-16, “Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory” (Topic 740). Under the new guidance, an entity is required to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. ASU 2016-16 became effective during the first quarter of the year ended June 30, 2019 and was required to be adopted on a modified retrospective basis, with a cumulative-effect adjustment recorded directly to retained earnings for intra-entity transfers that occur before the adoption date. Accordingly, we recognized the following reclassifications upon adoption (in thousands):

Balance Sheet Caption		As reported balance June 30, 2018			Adoption of ASU 2016-16 Increase/(Decrease)			Revised balance July 1, 2018
Assets
Prepaid expenses and other current assets		$	124,634		$	(28,947)		$	95,687
Prepaid taxes and other non-current assets			273,710			(156,406)			117,304
Deferred income taxes			53,818			(3,445)			50,373
Equity
Retained Earnings			2,432,328			(188,798)			2,243,530

(4) Inventories

Inventories were comprised of the following as of June 30, 2019 and June 30, 2018 (in thousands):

		2019			2018
Raw materials		$	80,861		$	75,415
Work in progress			2,256			2,453
Finished goods			266,524			190,833
Total inventories		$	349,641		$	268,701

(5) Property, Plant and Equipment, net

Property, plant and equipment, net is comprised of the following as of June 30, 2019 and June 30, 2018 (in thousands):

		2019			2018
Machinery and equipment		$	262,010		$	239,671
Computer equipment			173,895			155,069
Furniture and fixtures			51,942			51,045
Vehicles			7,477			7,399
Clinical, demonstration and rental equipment			94,007			92,229
Leasehold improvements			34,210			32,169
Land			52,406			54,089
Buildings			223,028			229,193
			898,975			860,864
Accumulated depreciation and amortization			(511,515)			(474,314)
Property, plant and equipment, net		$	387,460		$	386,550

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(6) Goodwill and Other Intangible Assets, net

Goodwill

For each of the years ended June 30, 2019 and June 30, 2018, we have not recorded any goodwill impairments. Changes in the carrying amount of goodwill is comprised of the following for the year ended June 30, 2019 (in thousands):

		2019
		Sleep and Respiratory Care			SaaS			Total
Balance at the beginning of the period		$	464,157		$	604,787		$	1,068,944
Business acquisition			159,623			634,697			794,320
Foreign currency translation adjustments			(6,815)			-			(6,815)
Balance at the end of the period		$	616,965		$	1,239,484		$	1,856,449

Other Intangible Assets

Other intangibles, net are comprised of the following as of June 30, 2019 and June 30, 2018 (in thousands):

		2019			2018
Developed/core product technology		$	401,842		$	205,149
Accumulated amortization			(157,651)			(115,237)
Developed/core product technology, net			244,191			89,912
Trade names			76,392			48,832
Accumulated amortization			(25,592)			(16,868)
Trade names, net			50,800			31,964
Non-compete agreements			4,218			3,288
Accumulated amortization			(2,783)			(2,283)
Non-compete agreements, net			1,435			1,005
Customer relationships			273,114			118,084
Accumulated amortization			(68,630)			(48,157)
Customer relationships, net			204,484			69,927
Patents			95,741			91,708
Accumulated amortization			(74,701)			(69,332)
Patents, net			21,040			22,376
Total other intangibles, net		$	521,950		$	215,184

Intangible assets consist of developed/core product technology, trade names, non-compete agreements, customer relationships, and patents, and we amortize them over the estimated useful life of the assets, generally between two and fifteen years. There are no expected residual values related to these intangible assets.

Refer to note 21 of the consolidated financial statements for details of acquisitions.

Amortization expense related to identified intangible assets for the years ended June 30, 2019 and June 30, 2018 was $74.9 million and $46.4 million, respectively. Amortization expense related to patents for the years ended June 30, 2019 and June 30, 2018 was $8.1 million and $8.0 million, respectively. Total estimated annual amortization expense for the years ending June 30, 2020 through June 30, 2024, is shown below (in thousands):

Fiscal Year		Amortization expense
2020		$	90,347
2021			84,424
2022			73,169
2023			53,893
2024			48,509

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(7) Investments

The aggregate carrying amount of our investments at June 30, 2019 and June 30, 2018, which are included within our other non-current assets on our consolidated balance sheets, was $52.1 million and $41.2 million, respectively.

Investments whereby we do not have significant influence or control over the investee are accounted for initially at cost. These investments are not exchange traded and therefore not supported with observable market prices. We have determined that these investments do not have readily determinable fair values and are therefore revalued only when there are observable price changes in orderly transactions for identifiable or similar investments of the same issuer. We also estimate the fair value of our equity investments to assess whether impairment losses shall be recorded using Level 3 inputs. However, these investments are valued by reference to their net asset values that can be market supported and unobservable inputs including future cash flows. During the years ended June 30, 2019 and June 30, 2018, we recognized $15.0 million and $11.6 million, respectively, of impairment losses related to our equity investments, which was recorded in other, net. The carrying value of these investments was $30.4 million and $41.2 million, at June 30, 2019 and June 30, 2018, respectively.

Equity investments whereby we have significant influence but not control over the investee, and are not the primary beneficiary of the investee’s activities, are accounted for under the equity method. Under this method, we record our share of gains or losses attributable to equity method investments, which were $15.8 million during the year ended June 30, 2019 and were recorded in loss attributable to equity method investments. The carrying value of these investments was $21.7 million and $0.0 million at June 30, 2019 and June 30, 2018, respectively.

We have determined that the fair value of our investments exceed their carrying values. The following table shows a reconciliation of the changes in our investments during the years ended June 30, 2019 and June 30, 2018 (in thousands):

		2019			2018
Balance at the beginning of the period		$	41,226		$	38,324
Investments			46,717			14,495
Impairment of investments			(15,007)			(11,593)
Loss attributable to equity method investments			(15,833)			-
Acquisition of controlling interest in previously held investment (note 21)			(5,000)			-
Balance at the end of the period		$	52,103		$	41,226

(8) Accrued Expenses

Accrued expenses at June 30, 2019 and June 30, 2018 consist of the following (in thousands):

		2019			2018
Product warranties (note 9)		$	19,625		$	19,227
Consulting and professional fees			12,726			10,341
Value added taxes and other taxes due			25,555			20,130
Employee related costs			123,446			107,819
Hedging instruments (note 20)			244			2,373
Liability on receivables sold with recourse (note 19)			1,752			2,277
Accrued interest			1,683			120
Logistics and occupancy costs			8,137			5,987
Inventory in transit			15,175			5,081
Litigation settlement expenses (note 23)			41,199			-
Restructuring expenses (note 22)			5,432			1,461
Other			11,385			10,989
		$	266,359		$	185,805

(9) Product Warranties

We include the liability for warranty costs in accrued expenses in our consolidated balance sheets. Changes in the liability for product warranty for the years ended June 30, 2019 and June 30, 2018 are as follows (in thousands):

		2019			2018
Balance at the beginning of the period		$	19,227		$	19,558
Warranty accruals for the period			15,416			17,339
Warranty costs incurred for the period			(14,634)			(17,406)
Foreign currency translation adjustments			(384)			(264)
Balance at the end of the period		$	19,625		$	19,227

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(10) Debt

Debt at June 30, 2019 and June 30, 2018 consists of the following (in thousands):

		2019			2018
Short-term debt		$	12,012		$	12,000
Deferred borrowing costs			(20)			(534)
Short-term debt, net			11,992			11,466
			-
Long-term debt		$	1,262,000		$	272,000
Deferred borrowing costs			(3,139)			(2,012)
Long-term debt, net		$	1,258,861		$	269,988
Total debt		$	1,270,853		$	281,454

Credit Facility

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

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

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

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

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

On July 10, 2019, we entered into a Note Purchase Agreement for senior notes amounting to $500.0 million. See note 24 – Subsequent Event in this report for further details.

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(11) Stockholders’ Equity

Common Stock. On February 21, 2014, our board of directors approved a new share repurchase program, authorizing us to acquire up to an aggregate of 20.0 million shares of our common stock. The program allows us to repurchase shares of our common stock from time to time for cash in the open market, or in negotiated or block transactions, as market and business conditions warrant and subject to applicable legal requirements. The 20.0 million shares the new program authorizes us to purchase are in addition to the shares we repurchased on or before February 21, 2014 under our previous programs. There is no expiration date for this program, and the program may be accelerated, suspended, delayed or discontinued at any time at the discretion of our board of directors. All share repurchases since February 21, 2014 have been executed in accordance with this program.

During fiscal year 2019, we repurchased 200,000 shares at a cost of $22.8 million and during fiscal year 2018, we repurchased 550,000 shares at a cost of $53.8 million shares under our share repurchase program. As of June 30, 2019, we have repurchased a total of 41.8 million shares at a cost of $1.6 billion. Shares that are repurchased are classified as “treasury stock pending future use” and reduce the number of shares outstanding used in calculating earnings per share. At June 30, 2019, 12.9 million additional shares can be repurchased under the approved share repurchase program.

Preferred Stock. In April 1997, our board of directors authorized 2,000,000 shares of $0.01 par value preferred stock. No such shares were issued or outstanding at June 30, 2019.

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

At the annual meeting of our stockholders in November 2017, our stockholders approved an amendment and restatement to the 2009 Plan to increase the number of shares of common stock that may be issued or transferred pursuant to awards under the 2009 Plan by 7.4 million. The amendment and restatement imposes a maximum award amount which may be granted under the 2009 Plan to non-employee director in a calendar year, which when taken together with any other cash fees earned for services as a non-employee director during the calendar year, has a total value of $0.7 million, or $1.2 million in the case of a non-employee director who is also serving as chairman of our board of directors. The amendment and restatement also increased the maximum amount payable pursuant to cash-denominated performance awards granted in any calendar year from $3.0 million to $5.0 million. In addition, the amendment and restatement extended the existing prohibition on the payment of dividends or dividend equivalents on unvested awards to apply to all awards, including time-based restricted stock, deferred stock and stock payment. The term of the 2009 Plan was extended by four years so that the plan expires on September 11, 2027.

The maximum number of shares of our common stock authorized for issuance under the 2009 Plan is 51.1 million. The number of securities remaining available for future issuance under the 2009 Plan at June 30, 2019 is 16.3 million. The number of shares of our common stock available for issuance under the 2009 Plan will be reduced by (i) 2.8 shares for each one share of common stock delivered in settlement of any “full-value award,” which is any award other than a stock option, stock appreciation right or other award for which the holder pays the intrinsic value and (ii) one share for each share of common stock delivered in settlement of all other awards. The maximum number of shares, which may be subject to awards granted under the 2009 Plan to any individual during any calendar year, may not exceed 3 million shares of our common stock (except in a participant’s initial year of hiring up to 4.5 million shares of our common stock may be granted).

At June 30, 2019, there was $75.9 million in unrecognized compensation costs related to unvested stock-based compensation arrangements. This is expected to be recognized over a weighted average period of 2.3 years. The aggregate intrinsic value of the stock-based compensation arrangements outstanding and exercisable at June 30, 2019 and June 30, 2018 was $238.4 million and $222.3 million, respectively. The aggregate intrinsic value of the options exercised during the fiscal years 2019, 2018 and 2017, was $15.1 million, $27.5 million and $28.1 million, respectively.

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

The following table summarizes option activity during the year ended June 30, 2019:

		Options			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term in Years
Outstanding at beginning of period			1,205,826		$	60.48		4.4
Granted			306,842			102.12
Exercised			(252,371)			49.04
Forfeited			(183)			52.02
Outstanding at end of period			1,260,114		$	72.91		4.4
Exercise price of granted options		$	102.12
Options exercisable at end of period			704,466		$	59.31

• Includes NIL shares netted for tax.

The following table summarizes the activity of restricted stock units, including performance restricted stock units, during year ended June 30, 2019:

		Restricted Stock Units			Weighted Average Grant-Date Fair Value			Weighted Average Remaining Contractual Term in Years
Outstanding at beginning of period			1,644,754		$	62.90		1.6
Granted			512,822			99.19
Vested			(909,065)			57.50
Performance factor adjustment			251,642			-
Expired / cancelled			(53,160)			69.55
Forfeited			(823)			69.55
Outstanding at end of period			1,446,170		$	77.21		1.6

• Includes 267,779 shares netted for tax.

Employee Stock Purchase Plan (the “ESPP”). Under the ESPP, we offer participants the right to purchase shares of our common stock at a discount during successive offering periods. Each offering period under the ESPP will be for a period of time determined by the board of directors’ compensation committee of no less than 3 months and no more than 27 months. The purchase price for our common stock under the ESPP will be the lower of 85% of the fair market value of our common stock on the date of grant or 85% of the fair market value of our common stock on the date of purchase. An individual participant cannot subscribe for more than $25,000 in common stock during any calendar year. At June 30, 2019, the number of shares remaining available for future issuance under the ESPP is 2.4 million shares.

During years ended June 30, 2019 and June 30, 2018, we issued 285,000 and 302,000 shares to our employees in two offerings and we recognized $6.4 million and $5.2 million, respectively, of stock compensation expense associated with the ESPP.

(12) Earnings Per Share

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

The weighted average number of outstanding stock options and restricted stock units not included in the computation of diluted earnings per share were 200,000, 153,000 and 173,000 for the years ended June 30, 2019, 2018 and 2017, respectively, as the effect would have been anti-dilutive.

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

Basic and diluted earnings per share for the years ended June 30, 2019, 2018 and 2017 are calculated as follows (in thousands except per share data):

		2019			2018			2017
Numerator:
Net income		$	404,592		$	315,588		$	342,284
Denominator:
Basic weighted-average common shares outstanding			143,111			142,764			141,360
Effect of dilutive securities:
Stock options and restricted stock units			1,373			1,223			1,093
Diluted weighted average shares			144,484			143,987			142,453
Basic earnings per share		$	2.83		$	2.21		$	2.42
Diluted earnings per share		$	2.80		$	2.19		$	2.40

(13) Other, net

Other, net, in the consolidated statements of income is comprised of the following for the years ended June 30, 2019, 2018 and 2017 (in thousands):

		2019			2018			2017
Gain (loss) on foreign currency transactions and hedging, net (note 20)		$	1,712		$	(1,546)		$	5,434
Impairment of equity investments (note 7)			(15,007)			(11,593)			(1,955)
Other			2,569			4,597			617
		$	(10,726)		$	(8,542)		$	4,096

(14) Income Taxes

Income before income taxes for the years ended June 30, 2019, 2018 and 2017, was taxed under the following jurisdictions (in thousands):

		2019			2018			2017
U.S.		$	(34,468)		$	42,627		$	(4,985)
Non-U.S.			553,315			478,685			423,728
		$	518,847		$	521,312		$	418,743

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

			2019			2018			2017
Current:	Federal		$	28,658		$	128,971		$	16,468
	State			7,595			948			(1,159)
	Non-U.S.			127,540			68,858			65,612
				163,793			198,777			80,921
Deferred:	Federal			(30,456)			9,488			11,385
	State			(5,408)			(350)			2,706
	Non-U.S.			(13,674)			(2,191)			(18,553)
				(49,538)			6,947			(4,462)
Provision for income taxes			$	114,255		$	205,724		$	76,459

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. federal income tax rate of 21% for the year ended June 30, 2019, 28% for the year ended June 30, 2018 and 35% for the year ended June 30, 2017, to pretax income as a result of the following (in thousands):

		2019			2018			2017
Taxes computed at statutory U.S. rate		$	108,958		$	146,280		$	146,560
Increase (decrease) in income taxes resulting from:
Transition tax			6,038			126,753			-
State income taxes, net of U.S. tax benefit			2,186			2,427			(1,294)
Research and development credit			(12,953)			(4,089)			(2,804)
Change in statutory tax rates			-			16,685			-
Tax effect of dividends			-			-			97,662
Change in valuation allowance			(1,118)			(2,962)			4,021
Effect of non-U.S. tax rates			25,045			(70,250)			(97,141)
Foreign tax credits (1)			(7,806)			(6,473)			(67,689)
Stock-based compensation expense			(11,534)			(7,045)			(3,107)
Other			5,439			4,398			251
		$	114,255		$	205,724		$	76,459

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(1) In fiscal year 2018, $75.5 million of the foreign tax credit is included as a reduction in the transition tax.

The components of our deferred tax assets and liabilities at June 30, 2019 and June 30, 2018, are as follows (in thousands):

					2019			2018
Deferred tax assets:
Employee liabilities					$	18,104		$	16,184
Tax credit carry overs						15,666			9,031
Inventories						4,905			5,840
Provision for warranties						3,551			3,904
Provision for doubtful debts						5,532			3,817
Net operating loss carryforwards						53,315			26,355
Capital loss carryover						6,640			3,932
Property, plant and equipment						3,002			6,121
Stock-based compensation expense						10,769			9,322
Deferred revenue						9,619			1,148
Research and development capitalization						17,910			-
Other						(332)			3,367
						148,681			89,021
Less valuation allowance						(11,644)			(12,297)
Deferred tax assets						137,037			76,724
Deferred tax liabilities:
Goodwill and other intangibles						(102,939)			(35,990)
Deferred tax liabilities						(102,939)			(35,990)
Net deferred tax asset					$	34,098		$	40,734

We reported the net deferred tax assets and liabilities in our consolidated balance sheets at June 30, 2019 and June 30, 2018, as follows (in thousands):

					2019			2018
Non-current deferred tax asset					$	45,478		$	53,818
Non-current deferred tax liability						(11,380)			(13,084)
Net deferred tax asset					$	34,098		$	40,734

As of June 30, 2019, we had $192.2 million of U.S. federal and state net operating loss carryforwards and $86.7 million of non-U.S. net operating loss carryforwards, which expire in various years beginning in 2019 or carry forward indefinitely.

The valuation allowance at June 30, 2019 relates to a provision for uncertainty of the utilization of net operating loss carryforwards of $5.0 million and capital loss and other items of $6.6 million. We believe that it is more likely than not that the benefits of deferred tax assets, net of any valuation allowance, will be realized.

A substantial portion of our manufacturing operations and administrative functions in Singapore operate under various tax holidays and tax incentive programs that will expire in whole or in part at various dates through June 30, 2030. The end of certain tax holidays may be extended if specific conditions are met. The net impact of these tax holidays and tax incentive programs increased our net earnings by $20.3 million ($0.14 per diluted share) for the year ended June 30, 2019 and $33.5 million ($0.23 per diluted share) for the year ended June 30, 2018.

As a result of the U.S. Tax Act, we have treated all non-U.S. historical earnings as taxable, which resulted in additional tax expense of $126.9 million during the year ended June 30, 2018 and $6.0 million during the year ended June 30, 2019, which was payable over eight years. Therefore, future repatriation of cash held by our non-U.S. subsidiaries will generally not be subject to U.S. federal tax if repatriated. The total amount of these undistributed earnings at June 30, 2019 amounted to approximately $2.0 billion. On June 14, 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.

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

In accounting for uncertainty in income taxes, we recognize a tax benefit in the financial statements for an uncertain tax position only if management’s assessment is that the position is “more likely than not” (that is, a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term “tax position” refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for annual periods. The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statements of income. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets. Based on all known facts and circumstances and current tax law, we believe the total amount of unrecognized tax benefits on June 30, 2019, is not material to our results of operations, financial condition or cash flows, and if recognized, would not have a material impact on our effective tax rate.

Our income tax returns are based on calculations and assumptions subject to audit by various tax authorities. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws. We regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes. Any final assessment resulting from tax audits may result in material changes to our past or future taxable income, tax payable or deferred tax assets, and may require us to pay penalties and interest that could materially adversely affect our financial results.

In connection with the audit by the Australian Taxation Office (“ATO”) for the tax years 2009 to 2013, we received Notices of Amended Assessments in March 2018. Based on these assessments, the ATO asserted that we owe $151.7 million in additional income tax and $38.4 million in accrued interest, of which $75.9 million was paid in April 2018 under a payment arrangement with the ATO. In June 2018, we received a notice from the ATO claiming penalties of 50% of the additional income tax that was assessed or $75.9 million. At September 30, 2018, we recorded a receivable in prepaid taxes and other non-current assets for the amount paid as we ultimately expect this will be refunded by the ATO. The ATO is currently auditing tax years 2014 to 2017, and we have also been notified by the 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.

Our income tax expense, short-term income taxes payable and long-term income taxes payable were impacted by charges associated with the U.S. Tax Act enacted on December 22, 2017, which resulted in additional income tax expense of $138.0 million during the year ended June 30, 2018. Specifically, the income tax expense includes the transition tax imposed on our accumulated foreign earnings, which resulted in additional income tax expense of $126.9 million for the year ended June 30, 2018. Additionally, it resulted in the write down in the carrying value of our net deferred tax assets due to the lower corporate tax rate and the reduction in the future value of deferred tax assets, which resulted in additional income tax expense of $11.1 million recorded in the year ended June 30, 2018. During the year ended June 30, 2019, we recorded additional tax expense of $6.0 million in transition tax imposed on our accumulated foreign earnings, which related to final treasury regulations issued and temporary guidance published during the year.

On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the U.S. Tax Act as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. Effective December 31, 2018, the accounting relating to the impact of U.S. legislation was no longer considered provisional. During the year ended June 30, 2018, we recorded additional tax expense of $138.0 million relating to changes in U.S. tax legislation. During the year ended June 30, 2019, we recorded additional tax expense of $6.0 million in additional transition tax, which related to final treasury regulations issued and temporary guidance published during the year. However, further adjustments could be required as a result of future legislation, amended tax returns, or tax examinations of the years impacted by the calculation.

(15) Segment Information

Prior to the three months ended December 31, 2018, we had previously determined the software-as-a-service, or SaaS, line of business was not material to our global operations in terms of revenue and profit, and therefore had not been separately reported as a segment. However, following recent acquisitions, we have quantitatively and qualitatively reassessed our segment reporting and determined the SaaS segment is material to the group, and now have two operating segments, which are the Sleep and Respiratory Care segment and the SaaS segment.

We evaluate the performance of our segments based on net sales and income from operations. The accounting policies of the segments are the same as those described in note 2 – significant accounting policies. Segment net sales and segment income from operations do not include inter-segment profits and revenue is allocated to a geographic area based on where the products are shipped to or where the services are performed.

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

Certain items are maintained at the corporate level and are not allocated to the segments. The non-allocated items include corporate headquarters costs, stock-based compensation, amortization expense from acquired intangibles, acquisition related expenses, interest income, interest expense and other, net. We neither discretely allocate assets to our operating segments, nor does our Chief Operating Decision Maker evaluate the operating segments using discrete asset information.

Effective July 1, 2018, we refined our operating model to integrate our regional sales structures into our global business segments, which resulted in a reorganization of our internal business reporting. As part of this reorganization, we redesigned our systems and processes in relation to the business segment reporting, including management reporting responsibilities and cost allocations. These changes were made prospectively for the year ended June 30, 2018. As such, we do not have comparable net operating profit by reportable segment for the year ended June 30, 2017, and recreating this reporting is not considered practicable given the redesign of our systems and processes. The net revenues by reportable segment is available for the year ended June 30, 2017, and has been presented in the table summarizing our net revenue disaggregated by segment, product and region below.

The table below presents a reconciliation of net revenues and net operating profit by reportable segments for year ended June 30, 2019 compared to June 30, 2018 (in millions):

		2019			2018
Revenue by segment
Total Sleep and Respiratory Care		$	2,330.8		$	2,183.2
Software as a Service			281.1			157.0
Deferred revenue fair value adjustment*			(5.3)			-
Total Software as a Service			275.8			157.0
Total		$	2,606.6		$	2,340.2
Net operating profit by segment
Sleep and Respiratory Care		$	766.1		$	656.3
Software as a Service			74.9			55.2
Total		$	841.0		$	711.5
Reconciling items
Corporate costs		$	124.9		$	104.9
Amortization of acquired intangible assets			74.9			46.4
Restructuring expenses			9.4			18.4
Acquisition related expenses			6.1			-
Litigation settlement expenses			41.2			-
Deferred revenue fair value adjustment*			5.3			-
Interest income			(2.3)			(16.4)
Interest expense			36.2			28.4
Loss attributable to equity method investments			15.8			-
Other, net			10.7			8.5
Income before income taxes		$	518.8		$	521.3

• The deferred revenue fair value adjustment is a purchase price accounting adjustment related to MatrixCare which was acquired on November 13, 2018.

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

The following table summarizes our net revenue disaggregated by segment, product and region for the years ended June 30, 2019, 2018 and 2017 (in millions):

		2019			2018			2017
U.S., Canada and Latin America
Devices		$	743.1		$	689.6		$	632.7
Masks and other			677.4			600.5			539.3
Total Sleep and Respiratory Care		$	1,420.5		$	1,290.1		$	1,172.0
Software as a Service			275.8			157.0			138.1
Total		$	1,696.3		$	1,447.1		$	1,310.1
Combined Europe, Asia and other markets
Devices		$	618.5		$	614.0		$	528.3
Masks and other			291.8			279.1			228.3
Total Sleep and Respiratory Care		$	910.3		$	893.1		$	756.6
Global revenue
Devices		$	1,361.6		$	1,303.6		$	1,161.0
Masks and other			969.2			879.6			767.6
Total Sleep and Respiratory Care		$	2,330.8		$	2,183.2		$	1,928.6
Software as a Service			275.8			157.0			138.1
Total		$	2,606.6		$	2,340.2		$	2,066.7

Revenue information by geographic area for the years ended June 30, 2019, 2018 and 2017 is summarized below (in millions):

		2019			2018			2017
United States		$	1,588.7		$	1,345.2		$	1,229.2
Rest of the World			1,017.9			995.0			837.5
Total		$	2,606.6		$	2,340.2		$	2,066.7

Long-lived assets of geographic areas are those assets used in our operations in each geographical area, and excludes goodwill, other intangible assets, and deferred tax assets. Long-lived assets by geographic area as of June 30, 2019, 2018 and 2017, is summarized below (in millions):

		2019			2018			2017
United States		$	149.7		$	142.3		$	150.7
Australia			165.5			173.4			183.1
Rest of the World			72.3			70.8			60.4
Total		$	387.5		$	386.5		$	394.2

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(16) Stock-based Employee Compensation

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

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

		Fiscal Year Ended June 30,
		2019			2018			2017
Stock options:
Weighted average grant date fair value		$	21.92		$	16.68		$	10.89
Weighted average risk-free interest rate			2.96%			2.08%			1.61%
Expected life in years			4.9			4.9			4.9
Dividend yield			1.34% - 1.46%			1.46% - 1.65%			2.02% - 2.29%
Expected volatility			23%			23%			25%
ESPP purchase rights:
Weighted average grant date fair value		$	22.12		$	17.44		$	12.50
Weighted average risk-free interest rate			2.4%			0.8%			0.5%
Expected life in years			6 months			6 months			6 months
Dividend yield			1.40% - 1.47%			1.47% - 1.92%			1.92% - 2.27%
Expected volatility			23%			23%			23%

During the fiscal years ended June 30, 2019 and June 30, 2018, we granted 139,000 and 167,000, performance restricted stock units (“PRSUs”), which contain a market condition, with the ultimate realizable number of PRSUs dependent on relative total stockholder return over a three-year period, up to a maximum amount to be issued under the award of 225% of the original grant. The weighted average grant date fair value of PRSUs granted during the fiscal years 2019 and 2018 was estimated at $98.23 and $76.20 per PRSU, respectively, using a Monte-Carlo simulation valuation model.

The following table summarizes the total stock-based compensation costs incurred and the associated tax benefit recognized during the years ended June 30, 2019, 2018 and 2017 (in thousands):

		2019			2018			2017
Cost of sales - capitalized as part of inventory		$	3,043		$	2,990		$	2,877
Selling, general and administrative expenses			42,700			39,754			37,096
Research and development expenses			6,330			5,668			5,952
Stock-based compensation costs			52,073			48,412			45,925
Tax benefit			(26,658)			(17,078)			(20,100)
Stock-based compensation costs, net of tax benefit		$	25,415		$	31,334		$	25,825

(17) Employee Retirement Plans

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

(1) Australia - We contribute to defined contribution plans for each employee resident in Australia. All Australian employees, after serving a qualifying period, are entitled to benefits on retirement, disability or death. Employees may contribute additional funds to the plans. We contribute to the plans at the rate of approximately 9.5% of the salaries of all Australian employees. Our total contributions to the plans for the years ended June 30, 2019, 2018 and 2017, were $10.0 million, $10.5 million and $9.9 million, respectively.

(2) United States - We sponsor a defined contribution plan available to substantially all domestic employees. Company contributions to this plan are based on a percentage of employee contributions to a maximum of 4.0% of the employee’s salary. Our total contributions to the plan were $6.7 million, $5.0 million and $4.3 million in fiscal 2019, 2018 and 2017, respectively.

(3) Singapore - We sponsor a defined contribution plan available to substantially all domestic employees. Company contributions to this plan are based on a percentage of employee contributions to a maximum of 17.0% of the employee’s salary. Our total contributions to the plan were $2.6 million, $2.2 million and $1.7 million in fiscal 2019, 2018 and 2017, respectively.

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(18) Commitments

We lease buildings, motor vehicles and office equipment under operating leases. We expense rental charges for operating leases on a straight-line basis over the lease term taking into account rent concessions or holidays. Rent expenses under operating leases for the years ended June 30, 2019, 2018 and 2017, were approximately $23.4 million, $21.1 million and $20.1 million, respectively. At June 30, 2019 we had the following future minimum lease payments under non-cancelable operating leases (in thousands):

Fiscal Years		Operating Leases
2020		$	23,500
2021			17,161
2022			12,403
2023			9,478
2024			7,916
Thereafter			27,555
Total minimum lease payments		$	98,013

As outlined in note 3 – new accounting pronouncements, and in relation to ASU No. 2016-02, “Leases”, we expect to recognize additional right-of-use assets and lease liabilities for operating leases of approximately $60.0 million to $70.0 million as of July 1, 2019, excluding the impact of our evaluation of lease terms and several contracts that may contain an embedded lease. The table above includes operating leases that have been executed and are non-cancelable but will not commence in accordance with the provisions of the new leases guidance until after the adoption date and, therefore, will not be included in the right-of-use assets and lease liabilities for operating leases at the date of adoption.

(19) Legal Actions and Contingencies

Litigation

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

Taxation Matters

As described in note 14 – Income Taxes, we received Notices of Amended Assessments from the ATO for the tax years 2009 to 2013. Based on these assessments, the ATO asserted that we owe $151.7 million in additional income tax and $38.4 million in accrued interest, of which $75.9 million was paid in April 2018 under a payment arrangement with the ATO. In June 2018, we received a notice from the ATO claiming penalties of 50% of the additional income tax that was assessed, or $75.9 million. At September 30, 2018, we recorded a receivable in prepaid taxes and other non-current assets for the amount paid as we ultimately expect this will be refunded by the ATO. We do not agree with the ATO’s assessments and we continue to believe we are more likely than not to be successful in defending our position. However, if we are not successful, we will not receive a refund of the amount paid in April 2018 and we would be required to pay the remaining additional income tax, accrued interest and penalties, which would be recorded as income tax expense. The ATO is currently auditing tax years 2014 to 2017, and we have also been notified by the ATO that they intend to audit tax year 2018.

In connection with the recent U.S. Tax Act and the analysis of historical tax filings, we identified an administrative oversight in our prior year tax filing relating to a gain on an internal legal entity reorganization. We have applied for relief from the U.S. Internal Revenue Service (“IRS”) and have amended the related tax returns required to correct the administrative oversight, which would indefinitely defer the recognition of this gain. We believe it is more likely than not that we will be granted this relief and therefore, have not recorded a reserve in relation to this matter during the year ended June 30, 2019.

Contingent Obligations Under Recourse Provisions

We use independent financing institutions to offer some of our customers financing for the purchase of some of our products. Under these arrangements, if the customer qualifies under the financing institutions’ credit criteria and finances the transaction, the customers repay the financing institution on a fixed payment plan. For some of these arrangements, the customer’s receivable balance is with recourse, either limited or full, whereby we are responsible for repaying the financing company should the customer default. We record a contingent provision, which is estimated based on historical default rates. This is applied to receivables sold with recourse and is recorded in accrued expenses.

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

The following table summarizes the amount of receivables sold with recourse during the years ended June 30, 2019 and June 30, 2018 (in thousands):

		2019			2018
Total receivables sold:
Full recourse		$	33,954		$	25,829
Limited recourse			98,123			79,397
Total		$	132,077		$	105,226

The following table summarizes the maximum exposure on outstanding receivables sold with recourse and provision for doubtful accounts at June 30, 2019 and June 30, 2018 (in thousands):

		2019			2018
Maximum exposure on outstanding receivables:
Full recourse		$	19,209		$	20,139
Limited recourse			10,241			9,239
Total		$	29,450		$	29,378
Contingent provision for receivables with recourse		$	(1,752)		$	(2,277)

(20) Derivative Instruments and Hedging Activities

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

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

We held foreign currency instruments with notional amounts totaling $496.9 million and $462.1 million at June 30, 2019 and June 30, 2018, respectively, to hedge foreign currency fluctuations. These contracts mature at various dates prior to June, 2021.

The following table summarizes the amount and location of our derivative financial instruments as of June 30, 2019 and June 30, 2018 (in thousands):

		2019			2018			Balance Sheet Caption
Foreign currency hedging instruments		$	371		$	281		Other assets - current
Foreign currency hedging instruments			(244)			(2,373)		Accrued expenses
Foreign currency hedging instruments			(19)			(607)		Other long-term liabilities
		$	108		$	(2,699)

The following table summarizes the amount and location of gains (losses) associated with our derivative financial instruments and other foreign-currency-denominated transactions for the years ended June 30, 2019 and June 30, 2018, respectively (in thousands):

		Gain /(Loss) Recognized						Income Statement Caption
		2019			2018
Foreign currency hedging instruments		$	1,893		$	(21,294)		Other, net
Other foreign-currency-denominated transactions			(181)			19,748		Other, net
		$	1,712		$	(1,546)

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

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(21) Business Combinations

Fiscal year ended June 30, 2019

MatrixCare

On November 13, 2018, we completed the acquisition of 100% of the shares in MatrixCare Inc. and its subsidiaries (“MatrixCare”), a provider of software solutions for skilled nursing, life plan communities, senior living and private duty, for base purchase consideration paid of $750.0 million. This acquisition has been accounted for as a business combination using purchase accounting and included in our consolidated financial statements from November 13, 2018. The acquisition was paid for using borrowings under our revolving credit facility.

We have not finalized the purchase price allocation in relation to this acquisition as certain appraisals associated with the valuation of intangible assets and income tax positions are not yet complete. We do not believe that the completion of this work will materially modify the preliminary purchase price allocation. We expect to complete our purchase price allocation during the quarter ending December 31, 2019. The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on estimates of their fair values at the date of acquisition. The goodwill recognized as part of the acquisition is reflected in the Software as a Service segment and is not deductible for tax purposes. It mainly represents the synergies that are unique to our combined businesses and the potential for new products and services to be developed in the future.

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

		Preliminary			Intangible assets - useful life
Current assets		$	50,325
Property, plant and equipment			4,401
Trade names			18,000			7 years
Developed technology			133,000			7 years
Customer relationships			114,000			15 years
Goodwill			517,995
Assets acquired		$	837,721
Current liabilities			(13,751)
Deferred revenue			(18,339)
Deferred tax liabilities			(41,570)
Debt assumed			(151,665)
Total liabilities assumed		$	(225,325)
Net assets acquired		$	612,396

A reconciliation of the base consideration to the net consideration is as follows (in thousands):

Base consideration			750,000
Cash acquired			15,873
Debt assumed			(151,665)
Net working capital and other adjustments			(1,812)
Net consideration		$	612,396

During the year ended June 30, 2019, revenues of $79.2 million and losses from operations of $9.1 million related to MatrixCare were included in the consolidated statement of comprehensive income. The losses from operations for the year ended June 30, 2019 was negatively impacted by $19.0 million of amortization of acquired intangible assets and fair value purchase price adjustments relating to deferred revenue of $5.3 million. Excluding the impact of these items, revenue for the year ended June 30, 2019 was $84.6 million and income from operations was $15.3 million.

The acquisition is considered a material business combination and accordingly unaudited pro forma information presented below for the year ended June 30, 2019, includes the effects of pro forma adjustments as if the acquisition of MatrixCare occurred on July 1, 2017. The pro forma results were prepared using the acquisition method of accounting and combine our historical results and MatrixCare’s for the years ended June 30, 2019 and June 30, 2018, including the effects of the business combination, primarily amortization expense related to the fair value of identifiable intangible assets acquired, interest expense associated with the financing obtained by us in connection with the acquisition, and the elimination of incurred acquisition-related costs.

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

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

Unaudited Pro Forma Consolidated Results
(In thousands, except per share information)
	2019			2018
Revenue	$	2,652,059		$	2,457,242
Net income	$	446,721		$	295,628
Basic earnings per share	$	3.12		$	2.07
Diluted earnings per share	$	3.09		$	2.05

The unaudited pro forma consolidated results for the years ended June 30, 2019 and June 30, 2018 reflect primarily the following pro forma pre-tax adjustments:

	·		Net amortization expense related to the fair value of identifiable intangible assets acquired of $0.6 million and $8.3 million for the years ended June 30, 2019 and June 30, 2018, respectively.

	·		Net interest expense associated with debt that was issued to finance the acquisition of $2.6 million and $12.7 million for the years ended June 30, 2019 and June 30, 2018, respectively.

	·		Elimination of pre-tax acquisition-related costs incurred by ResMed and MatrixCare of $3.7 million and $16.7 million, respectively, for the year ended June 30, 2019.

	·		Net income tax expense of $1.8 million and $3.2 million for the years ended June 30, 2019 and June 30, 2018, respectively.

Other acquisitions

During the year ended June 30, 2019 we have completed the following acquisitions:

	·		On July 6, 2018, we completed the acquisition of 100% of the shares in HEALTHCAREfirst Holding Company (“HEALTHCAREfirst”), a provider of software solutions and services for home health and hospice agencies, for a total purchase consideration of $126.3 million.

	·		On October 15, 2018, we completed the acquisition of 100% of the shares in HB Healthcare, a homecare provider in South Korea.

	·		On December 11, 2018, we completed the acquisition of assets in Interactive Health Network, a provider of integrated clinical and financial management software solution for long-term care companies.

	·		On December 13, 2018, we completed the acquisition of assets in Apacheta, a provider of cloud-based SaaS software that manages the medical equipment delivery process for home medical equipment dealers.

	·		On January 6, 2019, we completed the acquisition of Propeller Health, a digital therapeutics company providing connected health solutions for people living with chronic obstructive pulmonary disease and asthma, for a total purchase consideration of $242.9 million, which adjusts for cash acquired and debt assumed at the time of acquisition. We previously held a non-controlling interest in Propeller Health’s outstanding shares. As a result of the acquisition, we recognized a fair value gain of $1.9 million in other income during the year ended June 30, 2019 associated with the previous equity investment.

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

We have not completed the purchase price allocation in relation to these acquisitions and we expect to complete this during the six months ending December 31, 2019. We do not believe that the completion of this work will materially modify the preliminary purchase price allocation for these acquisitions. The cost of the share acquisitions was allocated to the assets acquired and liabilities assumed based on estimates of their fair values at the date of acquisition. The goodwill recognized as part of these acquisitions, which is predominantly not deductible for tax purposes, mainly represents the synergies that are unique to our combined businesses and the potential for new products and services to be developed in the future. Goodwill from these acquisitions has been reflected in the Software as a Service segment except for the goodwill resulting from the HB Healthcare and Propeller Health acquisitions, which have been recorded in the Sleep and Respiratory Care segment.

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

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

		Preliminary			Intangible assets - useful life
Current assets		$	31,648
Property, plant and equipment			2,290
Deferred tax assets			5,211
Trade names			9,638			10 years
Non-compete			1,000			3 years
Developed technology			65,600			5 to 6 years
Customer relationships			42,352			5 to 15 years
Goodwill			276,325
Assets acquired		$	434,064
Current liabilities			(6,641)
Deferred revenue			(3,619)
Debt assumed			(35,104)
Total liabilities assumed		$	(45,364)
Net assets acquired		$	388,700

During the year ended June 30, 2019, we recorded $6.1 million in acquisition related expenses.

Fiscal year ended June 30, 2018

During the year ended June 30, 2018, we did not complete any material acquisitions or record any acquisition related expense.

Fiscal year ended June 30, 2017

On May 31, 2017, we completed the acquisition of assets in Conduit Technology, LLC (“Conduit”), a provider of documentation and workflow solutions. On June 30, 2017, we completed the acquisition of assets in AllCall Connect, LLC (“AllCall”), a provider of a live-calling solution for CPAP patient resupply. These acquisitions have been accounted for as business combinations using purchase accounting and are included in our consolidated financial statements from their respective acquisition dates. The acquisitions, individually and collectively, are not considered a material business combination and accordingly pro forma information is not provided. The acquisitions were funded through cash on-hand.

During the year ended June 30, 2017, we recognized a charge of $10.1 million in acquisition related expenses representing additional contingent consideration associated with the previous acquisition of Curative Medical Technology Inc., following the achievement of performance milestones.

(22) Restructuring Expenses

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

During the year ended June 30, 2018, we incurred restructuring expenses of $9.4 million associated with a global strategic workforce planning review, which resulted in a reduction in headcount across most of our functions and locations and closure of our Paris site. We recorded the full amount of $18.4 million during the year ended June 30, 2018, within our operating expenses which was separately disclosed as restructuring expenses. We had $1.5 million remaining in our employee related costs accrual at June 30, 2018, which was paid during the year ended June 30, 2019. The restructuring expenses consisted primarily of severance payments to employees and the remaining expense relating to legal and consulting services associated with the completion of the employee severances and contract exit costs associated with the Paris site.

During the year ended June 30, 2017, we incurred restructuring expenses of $12.4 million associated with the reorganization of our Paris manufacturing activities and German research and development activities. The restructuring expenses consisted primarily of severance payments to employees, site closure costs and associated project cancellation costs.

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PART II	Item 8

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(23) Litigation Settlement Expenses

During the year ended June 30, 2019 we recognized litigation settlement expenses of $41.2 million associated with a tentative agreement with Office of Inspector General of the U.S. Department of Health and Human Services to civilly resolve these matters. The amount consists of the estimated payment in relation to these matters as well as additional fees and administrative costs that typically accompany such a resolution. A resolution may also include ongoing obligations, such as any imposed under a corporate integrity agreement. However, we have not yet completed negotiations, and there can be no assurance as to whether or when the parties will finalize any such negotiated resolution or what the final terms of such a resolution will be.

During the fiscal year ended June 30, 2017 we recognized litigation settlement expenses of $8.5 million associated with an agreement with Chinese manufacturer, BMC Medical, and its U.S. distributor, 3B, to settle all outstanding disputes.

(24) Subsequent Events

On July 10, 2019, we entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with the purchasers to that agreement, in connection with the issuance and sale of $250.0 million principal amount of our 3.24% senior notes due July 10, 2026, and $250.0 million principal amount of our 3.45% senior notes due July 10, 2029. The net proceeds from this transaction were used to pay down borrowings on our senior unsecured revolving credit facility.

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

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PART II	Item 8

SCHEDULE II

RESMED INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

June 30, 2019, 2018 and 2017

(in thousands)

		Balance at Beginning of Period			Charged to costs and expenses			Other (deductions)			Balance at End of Period
Year ended June 30, 2019
Applied against asset account
Allowance for doubtful accounts		$	19,258		$	12,379		$	(6,466)		$	25,171
Year ended June 30, 2018
Applied against asset account
Allowance for doubtful accounts		$	11,150		$	15,189		$	(7,081)		$	19,258
Year ended June 30, 2017
Applied against asset account
Allowance for doubtful accounts		$	12,555		$	4,269		$	(5,674)		$	11,150

See accompanying report of independent registered public accounting firm.

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PART II	Items 9 – 9B

RESMED INC. AND SUBSIDIARIES