10-Q 1 d806516d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2014

 

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

For the transition period from              to             

Commission File Number: 001-15317

 

 

ResMed Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

(State or other jurisdiction of incorporation or organization)

98-0152841

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

9001 Spectrum Center Blvd.

San Diego, CA 92123

United States of America

(Address of principal executive offices)

(858) 836-5000

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

At October 21, 2014, there were 139,444,592 shares of Common Stock ($0.004 par value) outstanding. This number excludes 37,629,964 shares held by the registrant as treasury shares.

 

 

 


Table of Contents

RESMED INC. AND SUBSIDIARIES

INDEX

 

Part I

  Financial Information      3   

Item 1

  Financial Statements      3  
  Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2014 and June 30, 2014      3  
  Condensed Consolidated Statements of Income (Unaudited) for the Three Months Ended September 30, 2014 and 2013      4  
  Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended September 30, 2014 and 2013      5  
  Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended September 30, 2014 and 2013      6  
  Notes to the Condensed Consolidated Financial Statements (Unaudited)      7  

Item 2

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      16  

Item 3

  Quantitative and Qualitative Disclosures About Market Risk      22  

Item 4

  Controls and Procedures      24  

Part II

  Other Information      25  

Item 1

  Legal Proceedings      25  

Item 1A

  Risk Factors      25  

Item 2

  Unregistered Sales of Equity Securities and Use of Proceeds      25  

Item 3

  Defaults Upon Senior Securities      25  

Item 4

  Mine Safety Disclosures      25  

Item 5

  Other Information      25  

Item 6

  Exhibits      26  
  Signatures      27  

 

2


Table of Contents
PART I – FINANCIAL INFORMATION    Item 1

 

Item 1.    Financial Statements

RESMED INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

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

 

     September 30,
2014
    June 30,
2014
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 881,694      $ 905,730   

Accounts receivable, net of allowance for doubtful accounts of $10,848 and $10,971 at September 30, 2014 and June 30, 2014, respectively

     328,591        359,593   

Inventories (note 3)

     197,226        165,418   

Deferred income taxes

     36,270        31,908   

Income taxes receivable

     2,577        14,853   

Prepaid expenses and other current assets

     88,392        78,707   
  

 

 

   

 

 

 

Total current assets

     1,534,750        1,556,209   

Non-current assets:

    

Property, plant and equipment, net (note 4)

     419,786        434,277   

Goodwill and other intangible assets, net (note 6)

     323,746        334,510   

Deferred income taxes

     13,538        18,755   

Other assets

     17,633        17,211   
  

 

 

   

 

 

 

Total non-current assets

     774,703        804,753   
  

 

 

   

 

 

 

Total assets

   $ 2,309,453      $ 2,360,962   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable

     76,248        85,405   

Accrued expenses

     124,235        130,656   

Deferred revenue

     39,543        42,370   

Income taxes payable

     13,619        10,392   

Deferred income taxes

     651        717   

Current portion of long-term debt (note 7)

     -        18   
  

 

 

   

 

 

 

Total current liabilities

     254,296        269,558   

Non-current liabilities:

    

Deferred income taxes

     10,002        10,716   

Deferred revenue

     14,489        16,352   

Long-term debt (note 7)

     375,701        300,770   

Income taxes payable

     1,754        5,318   
  

 

 

   

 

 

 

Total non-current liabilities

     401,946        333,156   
  

 

 

   

 

 

 

Total liabilities

     656,242        602,714   
  

 

 

   

 

 

 

Commitments and contingencies (note 12)

    

Stockholders’ equity: (note 10)

    

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

     -        -   

Common stock, $0.004 par value, 350,000,000 shares authorized; 177,030,185 issued and 139,752,203 outstanding at September 30, 2014 and 176,747,039 issued and 140,304,544 outstanding at June 30, 2014

     559        561   

Additional paid-in capital

     1,136,528        1,117,644   

Retained earnings

     1,824,457        1,780,396   

Treasury stock, at cost, 37,277,982 shares at September 30, 2014, and 36,442,495 shares at June 30, 2014

     (1,334,782     (1,291,910

Accumulated other comprehensive income

     26,449        151,557   
  

 

 

   

 

 

 

Total stockholders’ equity

     1,653,211        1,758,248   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,309,453      $ 2,360,962   
  

 

 

   

 

 

 

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

 

3


Table of Contents
PART I – FINANCIAL INFORMATION    Item 1

 

RESMED INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income (Unaudited)

(In US$ thousands, except per share data)

 

     Three Months Ended
September 30,
 
     2014      2013  

Net revenue

   $ 380,399      $ 357,662  

Cost of sales

     143,086        129,680  
  

 

 

    

 

 

 

Gross profit

     237,313        227,982  
  

 

 

    

 

 

 

Operating expenses:

     

Selling, general and administrative

     110,520        101,323  

Research and development

     30,024        27,363  

Amortization of acquired intangible assets

     2,094        2,412  
  

 

 

    

 

 

 

Total operating expenses

     142,638        131,098  
  

 

 

    

 

 

 

Income from operations

     94,675        96,884  
  

 

 

    

 

 

 

Other income, net:

     

Interest income, net

     5,584        6,414  

Other, net

     1,671        (1,228
  

 

 

    

 

 

 

Total other income, net

     7,255        5,186  
  

 

 

    

 

 

 

Income before income taxes

     101,930        102,070  

Income taxes

     18,670        21,140  
  

 

 

    

 

 

 

Net income

   $ 83,260      $ 80,930  
  

 

 

    

 

 

 

Basic earnings per share

   $ 0.59      $ 0.57  

Diluted earnings per share (note 2)

   $ 0.58      $ 0.56  

Dividend declared per share

   $ 0.28      $ 0.25  

Basic shares outstanding (000’s)

     140,127        142,005  

Diluted shares outstanding (000’s)

     142,683        145,456  

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

 

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Table of Contents
PART I – FINANCIAL INFORMATION    Item 1

 

RESMED INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In US$ thousands)

 

     Three Months Ended
September 30,
 
     2014     2013  

Net income

   $ 83,260     $ 80,930  

Other comprehensive income:

    

Foreign currency translation gain (loss) adjustments

     (125,108     38,203  
  

 

 

   

 

 

 

Comprehensive income

   $ (41,848   $ 119,133  
  

 

 

   

 

 

 

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

 

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Table of Contents
PART I – FINANCIAL INFORMATION    Item 1

 

RESMED INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In US$ thousands)

 

     Three Months Ended
September 30,
 
     2014     2013  

Cash flows from operating activities:

    

Net income

   $ 83,260     $ 80,930  

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

    

Depreciation and amortization

     18,582       17,870  

Gain on divestment of business

     (709     -   

Stock-based compensation costs

     11,367       10,816  

Foreign currency revaluation

     451       (1,653

Excess tax benefit from stock-based compensation arrangements

     (2,575     (2,241

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

    

Accounts receivable, net

     20,804       40,268  

Inventories, net

     (37,897     (26,847

Prepaid expenses, net deferred income taxes and other current assets

     (15,168     (4,451

Accounts payable, accrued expenses and other liabilities

     8,421       (24,267
  

 

 

   

 

 

 

Net cash provided by operating activities

     86,536       90,425  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (20,681     (16,752

Patent registration costs

     (2,366     (1,679

Business acquisitions, net of cash acquired

     (7,318     -   

Investments in cost-method investments

     (500     (675

Proceeds from divestiture of business

     468       -   

Payments on maturity of foreign currency contracts

     (11,206     (2,486
  

 

 

   

 

 

 

Net cash used in investing activities

     (41,603     (21,592
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of common stock, net

     4,930       6,470  

Excess tax benefit from stock-based compensation arrangements

     2,575       2,241  

Purchases of treasury stock

     (46,803     (22,822

Payment of business combination contingent consideration

     (458     (442

Proceeds from borrowings, net of borrowing costs

     75,000       60,000  

Repayment of borrowings

     (10     (9

Dividend paid

     (39,199     (35,478
  

 

 

   

 

 

 

Net cash used in financing activities

     (3,965     9,960  
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (65,004     21,733  
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     (24,036     100,526  

Cash and cash equivalents at beginning of period

     905,730       876,048  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 881,694     $ 976,574  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Income taxes paid, net of refunds

   $ 14,373     $ 39,612  

Interest paid

   $ 1,233     $ 1,599  
  

 

 

   

 

 

 

Fair value of assets acquired, excluding cash

   $ 7,342     $ -   

Liabilities assumed

     (3,168     -   

Goodwill on acquisition

     6,454       -   

Deferred payments

     (2,405     -   

Fair value of contingent consideration

     (905     -   
  

 

 

   

 

 

 

Total purchase price, excluding contingent consideration

   $ 7,318     $ -   
  

 

 

   

 

 

 

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

 

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Table of Contents
PART I – FINANCIAL INFORMATION    Item 1

 

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

(1) Summary of Significant Accounting Policies

Organization and Basis of Presentation

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

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all necessary adjustments, which consisted only of normal recurring items, have been included in the accompanying financial statements to present fairly the results of the interim periods. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending June 30, 2015.

The condensed consolidated financial statements for the three months ended September 30, 2014 and 2013 are unaudited and should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the year ended June 30, 2014.

New Accounting Pronouncements

In May, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company beginning in the first quarter of fiscal year 2018. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

(2)

Earnings Per Share

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

The weighted average number of outstanding stock options and restricted stock units not included in the computation of diluted earnings per share were 154,551 and 209,856 for the three months ended September 30, 2014 and 2013, respectively, as the effect of exercising these options would have been anti-dilutive.

Basic and diluted earnings per share for the three months ended September 30, 2014 and 2013 are calculated as follows (in thousands except per share data):

 

      Three Months Ended
September 30,
 
      2014      2013  

Numerator:

         

Net Income, used in calculating diluted earnings per share

   $ 83,260      $ 80,930  

Denominator:

         

Basic weighted-average common shares outstanding

     140,127        142,005  

Effect of dilutive securities:

         

Stock options and restricted stock units

     2,556        3,451  

Diluted weighted average shares

     142,683        145,456  

Basic earnings per share

   $ 0.59      $ 0.57  

Diluted earnings per share

   $ 0.58      $ 0.56  

 

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Table of Contents
PART I – FINANCIAL INFORMATION    Item 1

 

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

(3) Inventories

Inventories were comprised of the following at September 30, 2014 and June 30, 2014 (in thousands):

 

      September 30, 2014      June 30, 2014  

Raw materials

   $ 58,024      $ 53,680  

Work in progress

     3,761        3,358  

Finished goods

     135,441        108,380  

Total inventories

   $ 197,226      $ 165,418  

 

(4) Property, Plant and Equipment

Property, plant and equipment were comprised of the following as of September 30, 2014 and June 30, 2014 (in thousands):

 

      September 30, 2014     June 30, 2014  

Machinery and equipment

   $ 196,401     $ 200,929  

Computer equipment

     135,868       133,157  

Furniture and fixtures

     41,168       42,631  

Vehicles

     3,583       4,757  

Clinical, demonstration and rental equipment

     93,503       101,453  

Leasehold improvements

     29,032       30,361  

Land

     59,494       62,468  

Buildings

     254,511       266,771  
       813,560       842,527  

Accumulated depreciation and amortization

     (393,774     (408,250

Property, plant and equipment, net

   $ 419,786     $ 434,277  

 

(5) Cost-Method Investments

The aggregate carrying amount of our cost-method investments at September 30, 2014 and June 30, 2014, was $15.4 million and $14.9 million, respectively, and is included in the non-current balance of other assets on the condensed consolidated balance sheets.

We periodically evaluate the carrying value of our cost-method investments, when events and circumstances indicate that the carrying amount of an asset may not be recovered. We estimate the fair value of our cost-method investments to assess whether impairment losses shall be recorded using Level 3 inputs. These investments include our holdings in privately held service and research companies that are not exchange traded and therefore not supported with observable market prices. However, these investments are valued by reference to their net asset values that can be market supported and unobservable inputs including future cash flows. During the three months ended September 30, 2014 and 2013, we recognized $Nil and $Nil, respectively, of impairment losses related to our cost-method investments. 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 cost-method investments during the three months ended September 30, 2014 and 2013 (in thousands):

 

      Three Months Ended September 30,  
      2014      2013  

Balance at the beginning of the period

   $ 14,850      $ 4,000  

Investments

     500        675  

Balance at the end of the period

   $ 15,350      $ 4,675  

 

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PART I – FINANCIAL INFORMATION    Item 1

 

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

(6) Goodwill and Other Intangible Assets, net

Goodwill

Changes in the carrying amount of goodwill for the three months ended September 30, 2014, and 2013 were as follows (in thousands):

 

      Three Months Ended September 30,  
      2014     2013  

Balance at the beginning of the period

   $ 289,312     $ 274,829  

Business acquisition

     6,454       -   

Foreign currency translation adjustments

     (18,502     8,616  

Balance at the end of the period

   $ 277,264     $ 283,445  

Other Intangible Assets

Other intangible assets are comprised of the following as of September 30, 2014, and June 30, 2014 (in thousands):

 

      September 30, 2014     June 30, 2014  

Developed/core product technology

   $ 70,677     $ 76,015  

Accumulated amortization

     (51,642     (54,073

Developed/core product technology, net

     19,035       21,942  

Trade names

     2,803       2,784  

Accumulated amortization

     (2,508     (2,697

Trade names, net

     295       87  

Non-compete agreements

     1,982       2,135  

Accumulated amortization

     (1,715     (1,768

Non compete agreements, net

     267       367  

Customer relationships

     28,368       24,593  

Accumulated amortization

     (19,834     (20,877

Customer relationships, net

     8,534       3,716  

Patents

     67,872       70,734  

Accumulated amortization

     (49,521     (51,648

Patents, net

     18,351       19,086  

Total other intangibles, net

   $ 46,482     $ 45,198  

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

 

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Table of Contents
PART I – FINANCIAL INFORMATION    Item 1

 

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

(7) Long-Term Debt

Long-term debt at September 30, 2014 and June 30, 2014 consists of the following (in thousands):

 

      September 30, 2014      June 30, 2014  

Current long-term debt

   $ -       $ 18  

Non-current long-term debt

     375,701        300,770  

Total long-term debt

   $ 375,701      $ 300,788  

Credit Facility

On October 31, 2013, we entered into a credit agreement, as borrower, with lenders, including Union Bank, N.A., as administrative agent, joint lead arranger, swing line lender and letters of credit issuer, and HSBC Bank USA, National Association, as syndication agent and joint lead arranger. Our obligations under the credit agreement are guaranteed by ResMed Corp. and ResMed Motor Technologies Inc., two of our U.S. subsidiaries.

The credit agreement provides a $700 million senior unsecured five-year revolving credit facility, with an uncommitted option to increase the credit facility by an additional $300 million. The credit facility also includes a $25 million sublimit for letters of credit. The credit facility terminates on October 31, 2018, when all unpaid principal and interest under the loans must be repaid. The outstanding principal amount due under the credit facility will bear interest at a rate equal to LIBOR plus 1.0% to 2.0% (depending on the then-applicable leverage ratio). At September 30, 2014, the interest rate that was being charged on the outstanding principal amount was 1.2%. An applicable commitment fee of 0.15% to 0.25% (depending on the then-applicable leverage ratio) applies on the unused portion of the credit facility.

When we entered into the credit agreement, we used a portion of the proceeds from the initial funding of the credit facility to repay the outstanding balance under our previous revolving credit facility with Union Bank, N.A and other lenders. On that repayment, the previous credit agreement, dated as of February 10, 2011, between us and lenders (including Union Bank, N.A., as administrative agent, swing line lender and L/C Issuer, HSBC Bank USA, National Association, as syndication agent and Union Bank, N.A., HSBC Bank USA, National Association, Commonwealth Bank of Australia and Wells Fargo Bank), was terminated and the commitments under the previous credit agreement were also terminated.

Our obligations under the current credit agreement are unsecured but are guaranteed by two of our U.S. subsidiaries. The credit agreement contains customary covenants, including certain financial covenants and an obligation that we maintain certain financial ratios, including a maximum leverage ratio of funded debt to EBITDA (as defined in the credit agreement) and an interest coverage ratio. The entire principal amount of the credit facility and any accrued but unpaid interest may be declared immediately due and payable if an event of default occurs, as defined in the credit agreement. Events of default under the credit agreement include failure to make payments when due, the occurrence of a default in the performance of any covenants in the credit agreement or related documents, or certain changes of control of ResMed Inc., ResMed Corp., ResMed Motor Technologies Inc., ResMed Limited, ResMed Holdings Ltd/LLC or ResMed EAP Holdings LLC.

At September 30, 2014, there was $375.0 million outstanding under the credit agreement.

 

(8) Product Warranties

Changes in the liability for warranty costs, which is included in accrued expenses in our condensed consolidated balance sheets, for the three months ended September 30, 2014 and 2013 are as follows (in thousands):

 

      Three Months Ended September 30,  
      2014     2013  

Balance at the beginning of the period

   $ 11,798     $ 16,011  

Warranty accruals for the period

     3,376       2,796  

Warranty costs incurred for the period

     (1,567     (2,270

Foreign currency translation adjustments

     (714     368  

Balance at the end of the period

   $ 12,893     $ 16,905  

 

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Table of Contents
PART I – FINANCIAL INFORMATION    Item 1

 

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

(9) 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 employee stock purchase plan (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. The fair value of performance restricted stock units which contain a market condition, are estimated using a Monte-Carlo simulation model. 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:

 

     Three Months Ended September 30,  
     2014     2013  

Stock options:

       

Weighted average grant date fair value

  $ -      $ -   

Weighted average risk-free interest rate

    -        -   

Expected option life in years

    -        -   

Dividend yield

    -        -   

Expected volatility

    -        -   

ESPP purchase rights:

       

Weighted average risk-free interest rate

    0.1     0.1

Expected option life in years

    6 months        6 months   

Dividend yield

    2.00     1.44

Expected volatility

    24     24

 

(10) Stockholders’ Equity

Common Stock. During the three months ended September 30, 2014 and 2013 we repurchased 0.8 million and 0.4 million shares at a cost of $42.9 million and $21.1 million, respectively. Since the inception of our share repurchase programs and through September 30, 2014, we have repurchased a total of 37.3 million shares at a cost of $1.3 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 September 30, 2014, 17.4 million additional shares can be repurchased under the approved share repurchase program.

Preferred Stock. In April 1997, the board of directors designated 2,000,000 shares of our $0.01 par value preferred stock as Series A Junior Participating Preferred Stock. No shares were issued or outstanding at September 30, 2014 and June 30, 2014.

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

The maximum number of shares of our common stock authorized for issuance under the 2009 Plan is 43.7 million shares. The number of securities remaining available for future issuance under the 2009 Plan at September 30, 2014 is 16.2 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, that 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, when up to 4.5 million shares of our common stock may be granted).

At September 30, 2014, there were $62.1 million in unrecognized compensation costs related to unvested stock-based compensation arrangements. This is expected to be recognized over a weighted average period of 2.1 years. The aggregate intrinsic value of the stock-based compensation arrangements outstanding and exercisable at September 30, 2014 was $225.0 million and $93.9 million, respectively. The aggregate intrinsic value of the options exercised during the three months ended September 30, 2014 and 2013, was $9.7 million and $11.5 million, respectively.

 

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Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

The following table summarizes option activity during the three months ended September 30, 2014:

 

              Weighted Average
Exercise Price
     Weighted Average Remaining
Contractual Term in Years
 

Outstanding at beginning of period

     4,687,220         $ 24.45          2.6     

Granted

     -            -          

Exercised

     (297,969)           18.56         

Forfeited

     (13,823)           34.00             

Outstanding at end of period

     4,375,428         $ 24.82          2.4     

Exercise price range of granted options

     -                

Options exercisable at end of period

     3,399,349         $ 21.66             

The following table summarizes the activity of restricted stock units during the three months ended September 30, 2014:

 

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

Outstanding at beginning of period

     2,448,331         $ 38.58          1.3     

Granted

     1,500           47.08         

Vested

     (33,149)           30.95         

Forfeited

     (24,189)           36.86             

Outstanding at end of period

     2,392,493         $ 38.70          1.1     

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 September 30, 2014, the number of shares remaining available for future issuance under the ESPP is 1.8 million shares.

 

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Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

(11) Fair Value Measurements

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

The hierarchies of inputs are as follows:

 

   Level 1:   

Input prices quoted in an active market for identical financial assets or liabilities;

   Level 2:   

Inputs other than prices quoted in Level 1, such as prices quoted for similar financial assets and liabilities in active markets, prices for identical assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data; and

   Level 3:   

Input prices quoted that are significant to the fair value of the financial assets or liabilities which are not observable nor supported by an active market.

The following table summarizes our financial assets and liabilities, as at September 30, 2014 and June 30, 2014, using the valuation input hierarchy (in thousands):

 

          Level 1          Level 2     Level 3     Total  

Balances at September 30, 2014

             

Foreign currency hedging instruments, net

   $ -       $ (2,048   $ -      $ (2,048

Business acquisition contingent consideration

   $ -       $ -      $ (875   $ (875

Balances at June 30, 2014

                                 

Foreign currency hedging instruments, net

   $ -       $ (2,270   $ -      $ (2,270

Business acquisition contingent consideration

   $ -       $ -      $ (480   $ (480

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

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

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

The following is a reconciliation of changes in the fair value of contingent consideration for the three months ended September 30, 2014 (in thousands):

 

      Three Months Ended September 30, 2014  

Balance at the beginning of the period

   $ (480

Acquisition date fair value of contingent consideration

     (905

Changes in fair value included in operating income

     132  

Payments

     458  

Foreign currency translation adjustments

     (80

Balance at the end of the period

   $ (875

We did not have any significant non-financial assets or liabilities measured at fair value on September 30, 2014 or June 30, 2014.

 

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Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

(12) Legal Actions and Contingencies

Litigation

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

Contingent Obligations Under Recourse Provisions

We use independent leasing companies to provide financing to certain customers for the purchase of our products. In some cases, we are contingently liable in the event of a customer default, to the leasing companies, within certain limits, for unpaid installment receivables transferred to the leasing companies. The gross amount of receivables sold with recourse during the three months ended September 30, 2014 and 2013, amounted to $2.0 million and $0.8 million, respectively. The maximum potential amount of contingent liability under these arrangements at September 30, 2014 and June 30, 2014 were $5.2 million, and $4.9 million, respectively. The recourse liability recognized by us at September 30, 2014 and June 30, 2014, in relation to these arrangements was $0.5 million and $0.5 million, respectively.

 

(13) 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 condensed consolidated statements of income. We do not enter into financial instruments for trading or speculative purposes.

We held foreign currency instruments with notional amounts totaling $405.8 million and $473.7 million at September 30, 2014 and June 30, 2014, respectively, to hedge foreign currency fluctuations. These contracts mature at various dates prior to September 30, 2017.

The following table summarizes the amount and location of our derivative financial instruments as of September 30, 2014 and June 30, 2014 (in thousands):

 

      September 30, 2014     June 30, 2014     Balance Sheet Caption

Foreign currency hedging instruments

   $ 557     $ 456     Other assets - current

Foreign currency hedging instruments

     518       489     Other assets - non  current

Foreign currency hedging instruments

     (3,123     (3,215   Accrued expenses
     $ (2,048   $ (2,270    

The following table summarizes the amount and location of gains (losses) associated with our derivative financial instruments for the three months ended September 30, 2014 and September 30, 2013, respectively (in thousands):

 

      Gain /(Loss) Recognized     Income Statement Caption
      Three Months Ended September 30,       
      2014     2013       

Foreign currency hedging instruments

   $ (11,054   $ (3,156   Other, net

Other foreign-currency-denominated transactions

     12,148       1,741     Other, net
     $ 1,094     $ (1,415    

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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Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

(14)

Business Combinations

During the three months ended September 30, 2014 we acquired two, Australian-based distributors of equipment and services for the treatment of sleep-disordered breathing and respiratory disorders. 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 are not considered a material business combination and accordingly pro forma information is not provided. The acquisitions were funded through cash on-hand and we have not incurred any material acquisition related costs.

We have completed the preliminary purchase price allocation for the above acquisitions during the quarter. The cost of the acquisitions has been allocated to the assets acquired and liabilities assumed based on estimates of their fair values at the date of acquisition. As part of the preliminary purchase price allocation, we recognized an intangible asset relating to customer relationships of $6.0 million, with an estimated useful life of 5 years, and goodwill of $6.5 million. The goodwill recognized as part of these acquisitions, which is not deductible for tax purposes, mainly represents the synergies that are unique to our combined businesses and the potential for new products and services to be developed in the future.

 

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

Special Note Regarding Forward-Looking Statements

This report contains certain forward-looking statements and information that are based on the beliefs of our management as well as estimates and assumptions made by, and information currently available to, our management. All statements other than statements regarding historical facts are forward-looking statements. The words “believe,” “expect,” “anticipate,” “will continue,” “will,” “estimate,” “plan,” “future” and other similar expressions, and negative statements of such expressions, generally identify forward-looking statements, including, in particular, statements regarding the development and approval of new products and product applications, market expansion, pending litigation and the development of new markets for our products, such as cardiovascular and stroke markets. These forward-looking statements are made in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements reflect the views of our management at the time the statements are made and are subject to a number of risks, uncertainties, estimates and assumptions, including, without limitation, and in addition to those identified in the text surrounding such statements, those identified in our annual report on Form 10-K for the fiscal year ended June 30, 2014 and elsewhere in this report.

In addition, important factors to consider in evaluating such forward-looking statements include changes or developments in healthcare reform, social, economic, market, legal or regulatory circumstances, changes in our business or growth strategy or an inability to execute our strategy due to changes in our industry or the economy generally, the emergence of new or growing competitors, the actions or omissions of third parties, including suppliers, customers, competitors and governmental authorities and various other factors. If any one or more of these risks or uncertainties materialize, or underlying estimates or assumptions prove incorrect, actual results may vary significantly from those expressed in our forward-looking statements, and there can be no assurance that the forward-looking statements contained in this report will in fact occur.

Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described in our annual report on Form 10-K, in addition to the other cautionary statements and risks described elsewhere in this report and in our other filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on us, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our common stock will likely decline and you may lose all or part of your investment.

 

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

 

Overview

The following is an overview of our results of operations for the three months ended September 30, 2014. Management’s discussion and analysis of financial condition and results of operations is intended to help the reader understand the results of operations and financial condition of ResMed Inc. Management’s discussion and analysis is provided as a supplement to, and should be read in conjunction with, the selected financial data and condensed consolidated financial statements and notes, included in this report.

We are a leading developer, manufacturer and distributor of medical equipment for treating, diagnosing, and managing sleep-disordered breathing (“SDB”) and other respiratory disorders. During the three months ended September 30, 2014, we continued our efforts to build awareness of the consequences of untreated SDB, and to grow our business in this market. In our efforts, we have attempted to raise awareness through market and clinical initiatives highlighting the relationship between SDB/obstructive sleep apnea and co-morbidities, such as cardiac disease, diabetes, hypertension and obesity, as well as the dangers of sleep apnea in regard to occupational health and safety, especially in the transport industry.

We are committed to ongoing investment in research and development and product enhancements. During the three months ended September 30, 2014, we invested $30.0 million on research and development activities. Since the development of continuous positive airway pressure (“CPAP”) therapy, we have developed a number of innovative products for SDB and other respiratory disorders including airflow generators, diagnostic products, mask systems, headgear and other accessories. Our new product release schedule remains active across both our mask and flow generator categories. We are taking steps to increase awareness of the health dangers of SDB by sponsoring educational programs targeted at the primary care physician community. We believe these efforts should further increase awareness of both doctors and patients about the relationship between SDB, obstructive sleep apnea and co-morbidities such as cardiac disease, diabetes, hypertension and obesity. We also believe these efforts should help inform the community of the dangers of sleep apnea in occupational health and safety, especially in the transport industry.

During the quarter, we launched innovative products for our sleep-disordered breathing and respiratory care markets. We have also recently launched two initiatives as part of our efforts to increase community awareness: an education and product-focused campaign called ‘Better Sleep for Women’; and the recent launch of a new product ‘S+ by ResMed’, the first non-contact sleep wellness tracking device for individuals.

During the three months ended September 30, 2014, our net revenue increased by 6% when compared to the three months ended September 30, 2013. Gross margin was 62.4% for the three months ended September 30, 2014 compared to 63.7% for the three months ended September 30, 2013. Diluted earnings per share for the three months ended September 30, 2014 increased to $0.58 per share, up from $0.56 per share in the three months ended September 30, 2013.

At September 30, 2014, our cash and cash equivalents totaled $881.7 million, our total assets were $2.3 billion and our stockholders’ equity was $1.7 billion.

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

 

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Net Revenue

Net revenue increased for the three months ended September 30, 2014 to $380.4 million compared to $357.7 million for the three months ended September 30, 2013, an increase of $22.7 million or 6% (also a 6% increase on a constant currency basis). The increase in net revenue is primarily attributable to an increase in unit sales of our flow generators, masks and accessories, partially offset by a decline in average selling prices. Movements in international currencies against the U.S. dollar favorably impacted revenues by approximately $0.4 million for the three months ended September 30, 2014.

Net revenue in North and Latin America for the three months ended September 30, 2014 was $207.2 million, compared to $201.5 million for the three months ended September 30, 2013, an increase of $5.7 million, or 3%. The increase net revenue is primarily attributable to an increase in unit sales of our flow generators, masks and accessories, offset by a decline in average selling prices. Net revenue in markets outside North and Latin America, for the three months ended September 30, 2014, increased to $173.2 million compared to $156.2 million for the three months ended September 30, 2013, an increase of 11% (also an 11% increase in constant currency terms).

Net revenue from the sales of flow generators, including humidifiers, for the three months ended September 30, 2014 totaled $214.3 million, an increase of 12% compared to the three months ended September 30, 2013 of $191.8 million, including an increase of 8% in North and Latin America and an increase of 15% elsewhere. Net revenue from the sales of masks and other accessories for the three months ended September 30, 2014 totaled $166.1 million, compared to the three months ended September 30, 2013 of $165.9 million, reflecting a decrease of 1% in North and Latin America and an increase of 2% elsewhere.

The following table summarizes the percentage movements in our net revenue for the three months ended September 30, 2014 compared to the three months ended September 30, 2013:

 

      North and
Latin America
    International     Total     International
(Constant
Currency) *
    Total
(Constant
Currency)*

Flow generators

     8     15     12     15   12%

Masks and other accessories

     -1     2     0     2   0%

Total

     3     11     6     11   6%

 

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

Gross Profit

Gross profit increased for the three months ended September 30, 2014 to $237.3 million from $228.0 million for the three months ended September 30, 2013, an increase of $9.3 million or 4%. Gross profit as a percentage of net revenue for the three months ended September 30, 2014 decreased to 62.4% from 63.7% for the three months ended September 30, 2013.

The decline in gross margins was primarily due to declines in our average selling prices, and unfavorable product mix as sales of our lower margin products represented a higher proportion of our sales, partially offset by manufacturing and supply chain improvements.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased for the three months ended September 30, 2014 to $110.5 million from $101.3 million for the three months ended September 30, 2013, an increase of $9.2 million or 9% (also a 9% increase in constant currency terms). Selling, general and administrative expenses, as a percentage of net revenue, were 29.1% for the three months ended September 30, 2014, compared to 28.3% for the three months ended September 30, 2013.

The increase in selling, general and administrative expenses was primarily due to additional personnel to support our commercial activities, higher marketing expenditure associated with our recent product releases and an increase in our variable employee compensation costs.

 

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Research and Development Expenses

Research and development expenses increased for the three months ended September 30, 2014 to $30.0 million from $27.4 million for the three months ended September 30, 2013, an increase of $2.7 million, or 10% (a 9% increase in constant currency terms). Research and development expenses, as a percentage of net revenue, were 7.9% for the three months ended September 30, 2014, compared to 7.7% for the three months ended September 30, 2013.

The increase in research and development expenses was primarily due to an increase in expenses associated with healthcare informatics product development activities and clinical trials in the area of heart failure.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets for the three months ended September 30, 2014 totaled $2.1 million, compared to $2.4 million for the three months ended September 30, 2013.

Total Other Income, Net

Total other income, net for the three months ended September 30, 2014 was $7.3 million, an increase of $2.1 million compared with $5.2 million for the three months ended September 30, 2013. The increase in total other income, net, was due primarily to gains on foreign currency transactions and the gain on sale of a distribution business, partially offset by lower interest income resulting from lower interest rates on cash balances held.

Income Taxes

Our effective income tax rate of approximately 18.3% for the three months ended September 30, 2014 was lower than our effective income tax rate of approximately 20.7% for the three months ended September 30, 2013. During the three months ended September 30, 2014, there was a final resolution of a German tax audit relating to the 1997 and 1998 fiscal years. As a result, we recorded a net tax benefit of $3.2 million. Excluding the impact of this one-time tax benefit, our effective tax rate for the three months ended September 30, 2014 would have been 21.5%. Our effective income tax rate is affected by the geographic mix of our taxable income, including the lower taxes associated with our Singapore and Malaysia manufacturing operations. Our Singapore and Malaysia operations operate under certain tax holidays and tax incentive programs that will expire in whole or in part at various dates through June 30, 2020. As of September 30, 2014, we have not provided for U.S. income taxes for the undistributed earnings of our foreign subsidiaries. We intend these earnings to be permanently reinvested outside the United States.

Net Income and Earnings per Share

As a result of the factors above, our net income for the three months ended September 30, 2014 was $83.3 million compared to net income of $80.9 million for the three months ended September 30, 2013, an increase of 3% over the three months ended September 30, 2013.

As a result of the increase in our net income and lower share count due to our stock repurchases, our diluted earnings per share for the three months ended September 30, 2014 were $0.58 compared to $0.56 for the three months ended September 30, 2013, an increase of 4%.

Liquidity and Capital Resources

As of September 30, 2014 and June 30, 2014, we had cash and cash equivalents of $881.7 million and $905.7 million, respectively. Working capital was $1.3 billion and $1.3 billion at September 30, 2014 and June 30, 2014, respectively.

As of September 30, 2014 and June 30, 2014, our cash and cash equivalent balances held within the United States amounted to $37.8 million and $29.0 million, respectively. Our remaining cash and cash equivalent balances at September 30, 2014 and June 30, 2014, of $843.9 million and $876.7 million, respectively, were held by our non-U.S. subsidiaries and would be subject to tax if repatriated. If these funds were needed for our operations in the United States, we would be required to accrue and pay United States taxes to repatriate these funds. However, we intend to permanently reinvest these funds outside of the United States and our current plans do not demonstrate a need to repatriate them to fund our United States operations. Our cash and cash equivalent balances are held at highly rated financial institutions.

Inventories at September 30, 2014 were $197.2 million, an increase of $21.9 million or 12% from the September 30, 2013 balance of $175.4 million. The increase in inventories was mainly associated with our new product introductions.

 

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Accounts receivable at September 30, 2014 were $328.6 million, an increase of $46.2 million or 16% over the September 30, 2013 accounts receivable balance of $282.4 million. Accounts receivable days outstanding of 78 days at September 30, 2014 was 9 days higher than the 69 days at September 30, 2013. The increase in our accounts receivable balance and days sales is reflecting the impact of longer payment terms given to our customers in our domestic market. Our allowance for doubtful accounts as a percentage of total accounts receivable at September 30, 2014 was 3.2%, compared to 3.0% at June 30, 2014.

During the three months ended September 30, 2014, we generated cash of $86.5 million from operations compared to 90.4 million for the three months ended September 30, 2013. Movements in foreign currency exchange rates during the three months ended September 30, 2014 had the effect of decreasing our cash and cash equivalents by $65.0 million, as reported in U.S. dollars. During the three months ended September 30, 2014 and 2013, we repurchased 0.8 million and 0.4 million shares at a cost of $42.9 million and $21.1 million, respectively. During the three months ended September 30, 2014 and 2013, we also paid dividends totaling $39.2 million and $35.5 million, respectively.

Capital expenditures for the three months ended September 30, 2014 and 2013 amounted to $20.7 million and $16.8 million, respectively. The capital expenditures for the three months ended September 30, 2014 primarily reflected investment in production tooling, equipment and machinery, computer hardware and software, and rental and loan equipment. At September 30, 2014, our balance sheet reflects net property, plant and equipment of $419.8 million compared to $434.3 million at June 30, 2014. At September 30, 2014, no capital lease obligations exist. Details of contractual obligations at September 30, 2014 are as follows:

 

              Payments Due by September  
In $000’s    Total      2015      2016      2017      2018      2019      Thereafter  

Long Term Debt

   $ 375,701      $ -       $ -       $ -       $ -       $ 375,000      $ 701  

Interest on Long Term Debt

     19,820        4,834        4,834        4,834        4,834        434        50  

Operating Leases

     60,695        17,173        12,452        8,525        5,447        3,305        13,793  

Purchase Obligations

     148,960        148,848        112        -         -         -         -   

Total

   $ 605,176      $ 170,855      $ 17,398      $ 13,359      $ 10,281      $ 378,739      $ 14,544  

Details of other commercial commitments as at September 30, 2014 are as follows:

 

  

           
              Amount of Commitment Expiration Per Period  
In $000’s    Total      2015      2016      2017      2018      2019      Thereafter  

Guarantees*

   $ 13,530      $ 1,970      $ 4      $ 1,680      $ 1      $ 1      $ 9,874  

Total

   $ 13,530      $ 1,970      $ 4      $ 1,680      $ 1      $ 1      $ 9,874  

 

*

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

Credit Facility

On October 31, 2013, we entered into a credit agreement, as borrower, with lenders, including Union Bank, N.A., as administrative agent, joint lead arranger, swing line lender and letters of credit issuer, and HSBC Bank USA, National Association, as syndication agent and joint lead arranger. Our obligations under the credit agreement are guaranteed by ResMed Corp. and ResMed Motor Technologies Inc., two of our U.S. subsidiaries.

The credit agreement provides a $700 million senior unsecured five-year revolving credit facility, with an uncommitted option to increase the credit facility by an additional $300 million. The credit facility also includes a $25 million sublimit for letters of credit. The credit facility terminates on October 31, 2018, when all unpaid principal and interest under the loans must be repaid. The outstanding principal amount due under the credit facility will bear interest at a rate equal to LIBOR plus 1.0% to 2.0% (depending on the then-applicable leverage ratio). At September 30, 2014, the interest rate that was being charged on the outstanding principal amount was 1.2%. An applicable commitment fee of 0.15% to 0.25% (depending on the then-applicable leverage ratio) applies on the unused portion of the credit facility.

When we entered into the credit agreement, we used a portion of the proceeds from the initial funding of the credit facility to repay the outstanding balance under our previous revolving credit facility with Union Bank, N.A and other lenders. On that repayment, the previous credit agreement, dated as of February 10, 2011, between us and lenders (including Union Bank, N.A., as administrative agent, swing line lender and L/C Issuer, HSBC Bank USA, National Association, as syndication agent and Union Bank, N.A., HSBC Bank USA, National Association, Commonwealth Bank of Australia and Wells Fargo Bank), was terminated and the commitments under that previous credit agreement were also terminated.

 

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PART I – FINANCIAL INFORMATION    Item 2

 

RESMED INC. AND SUBSIDIARIES

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

 

Our obligations under the current credit agreement are unsecured but are guaranteed by two of our U.S. subsidiaries. The credit agreement contains customary covenants, including certain financial covenants and an obligation that we maintain certain financial ratios, including a maximum leverage ratio of funded debt to EBITDA (as defined in the credit agreement) and an interest coverage ratio. The entire principal amount of the credit facility and any accrued but unpaid interest may be declared immediately due and payable if an event of default occurs, as defined in the credit agreement. Events of default under the credit agreement include failure to make payments when due, the occurrence of a default in the performance of any covenants in the credit agreement or related documents, or certain changes of control of ResMed Inc., ResMed Corp., ResMed Motor Technologies Inc., ResMed Limited, ResMed Holdings Ltd/LLC or ResMed EAP Holdings LLC.

At September 30, 2014, we were in compliance with our debt covenants and there was $375.0 million outstanding under the credit agreement.

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

Common Stock

During the three months ended September 30, 2014, we repurchased 0.8 million shares at a cost of $42.9 million. At September 30, 2014, we have repurchased a total of 37.3 million shares at a cost of $1.3 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 September 30, 2014, 17.4 million additional shares can be repurchased under the current share repurchase program.

Critical Accounting Principles and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis we evaluate our estimates, including those related to allowance for doubtful accounts, inventory reserves, warranty obligations, goodwill, potentially impaired assets, intangible assets, income taxes and contingencies.

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

For a full discussion of our critical accounting policies, see our Annual Report on Form 10-K for the year ended June 30, 2014.

Recently Issued Accounting Pronouncements

See note 1 to the condensed consolidated financial statements for a description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations, financial positions and cash flows.

Off-Balance Sheet Arrangements

As of September 30, 2014, we are not involved in any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC.

 

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PART I – FINANCIAL INFORMATION    Item 3

 

RESMED INC. AND SUBSIDIARIES

Quantitative and Qualitative Disclosures About Market Risk

 

Foreign Currency Market Risk

Our reporting currency is the U.S. dollar, although the financial statements of our non-U.S. subsidiaries are maintained in their respective local currencies. We transact business in various foreign currencies, including a number of major European currencies as well as the Australian and Singapore dollar. We have significant foreign currency exposure through our Australian and Singapore manufacturing activities and our 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 goal of this hedging program is to economically manage the financial impact of foreign currency exposures predominantly denominated in euros, Australian dollars 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 enter into financial instruments for trading or speculative purposes. The foreign currency derivatives portfolio is recorded in the condensed consolidated balance sheets at fair value and included in other assets or other liabilities. All movements in the fair value of the foreign currency derivatives are recorded within other income, net, on our condensed consolidated statements of income.

The table below provides information (in U.S. dollars) on our foreign-currency-denominated balances by legal entity functional currency as of September 30, 2014 (in thousands):

 

      Australian
Dollar
(AUD)
    U.S.
Dollar
(USD)
    Euro
(EUR)
    Singapore
Dollar
(SGD)
    Canadian
Dollar
(CAD)
    British
Pound
(GBP)
    Malaysian
Ringgit
(MYR)
 

AUD Functional:

                

Assets

     -        207,994       143,935       -        -        -        3,067  

Liabilities

     -        (61,675     (42,873     (1,148     (9,264     (5,026     -   

Forward Contracts

     -        (155,000     (75,782     -        -        6,484       -   

Net Total

     -        (8,681     25,280       (1,148     (9,264     1,458       3,067  

USD Functional:

                

Assets

     -        -        -        -        13,096       -        -   

Liability

     -        -        (157     -        (735     -        -   

Forward Contracts

     -        -        -        -        -        -        -   

Net Total

     -        -        (157     -        12,361       -        -   

EURO Functional:

                

Assets

     94       477       -        -        -        3,523       -   

Liability

     -        (1,383     -        -        (6     (117     -   

Forward Contracts

     -        -        -        -        -        (3,242     -   

Net Total

     94       (906     -        -        (6     164       -   

GBP Functional:

                

Assets

     -        367       43,396       -        -        -        -   

Liability

     -        (5     (39,104     -        -        -        -   

Forward Contracts

     -        -        -        -        -        -        -   

Net Total

     -        362       4,292       -        -        -        -   

SGD Functional :

                

Assets

     806       122,014       58,835       -        -        -        -   

Liability

     (1,842     (78,629     (38,077     -        -        (7     -   

Forward Contracts

     -        (15,000     (18,945     -        -        -        -   

Net Total

     (1,036     28,385       1,813       -        -        (7     -   

SEK Functional :

                

Assets

     -        -        3,301       -        -        -        -   

Liability

     -        -        (272     -        -        -        -   

Forward Contracts

     -        -        -        -        -        -        -   

Net Total

     -        -        3,029       -        -        -        -   

MYR Functional:

                

Assets

     -        1,991       60       -        -        -        -   

Liability

     (56     (1,099     (169     (3     -        -        -   

Forward Contracts

     -        -        -        -        -        -        -   

Net Total

     (56     892       (109     (3     -        -        -   

 

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PART I – FINANCIAL INFORMATION    Item 3

 

RESMED INC. AND SUBSIDIARIES

Quantitative and Qualitative Disclosures About Market Risk

 

The table below provides information about our foreign currency derivative financial instruments and presents the information in U.S. dollar equivalents. The table summarizes information on instruments and transactions that are sensitive to foreign currency exchange rates, including foreign currency call options, collars and forward contracts held at September 30, 2014. The table presents the notional amounts and weighted average exchange rates by contractual maturity dates for our foreign currency derivative financial instruments, including the forward contracts used to hedge our foreign currency denominated assets and liabilities. These notional amounts generally are used to calculate payments to be exchanged under the contracts (in thousands, except exchange rates).

 

                              Fair Value Assets /
(Liabilities)
Foreign Exchange Contracts    Year 1    Year 2            Year 3            Total    September 30, 2014   June 30, 2014

Receive AUD/Pay USD

                        

Contract amount

   160,000    -    -    160,000    (766)   328

Ave. contractual exchange rate

   AUD 1 = USD 0.8817              AUD 1 = USD 0.8817         

Receive AUD/Pay Euro

                        

Contract amount

   152,000    50,000         202,000    (1,275)   (2,574)

Ave. contractual exchange rate

   AUD 1 = Euro 0.7397    AUD 1 = Euro 0.7295    -    AUD 1 = Euro 0. 7371         

Receive SGD/Pay Euro

                        

Contract amount

   19,000    -    -    19,000    52   (90)

Ave. contractual exchange rate

   SGD 1 = Euro 0.6190              SGD 1 = Euro 0.6190         

Receive SGD/Pay USD

                        

Contract amount

   15,000    -    -    15,000    (12)   59

Ave. contractual exchange rate

   SGD 1 = USD 0.7846              SGD 1 = USD 0.7846         

Receive GBP/Pay AUD

                        

Contract amount

   6,000    -    -    6,000    (37)   18

Ave. contractual exchange rate

   AUD 1 = GBP 0.5338              AUD 1 = GBP 0.5338         

Receive EUR/Pay GBP

                        

Contract amount

   3,000    -    -    3,000    (10)   (11)

Ave. contractual exchange rate

   EUR 1 = GBP 0.7815              EUR 1 = GBP 0.7815         

Interest Rate Risk

We are exposed to risk associated with changes in interest rates affecting the return on our cash and cash equivalents and debt. At September 30, 2014, we held cash and cash equivalents of $881.7 million, principally comprised of bank term deposits and at-call accounts, and they are invested at short-term fixed and variable interest rates. At September 30, 2014, we had total long-term debt, including the current portion of those obligations of $375.7 million, of which $375.0 million is subject to variable interest rates. A hypothetical 10% change in interest rates during the three months ended September 30, 2014, would not have had a material impact on pretax income. We have no interest rate hedging agreements.

 

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PART I – FINANCIAL INFORMATION    Item 4

 

RESMED INC. AND SUBSIDIARIES

 

Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2014.

There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II – OTHER INFORMATION    Item 1-6

 

RESMED INC. AND SUBSIDIARIES

 

Item 1 Legal Proceedings

We have initiated several legal proceedings to enforce our intellectual property rights. Litigation is inherently uncertain. Accordingly, we cannot predict the outcome of these matters. But we do not expect the outcome of these matters to have a material adverse effect on our consolidated financial statements when taken as a whole.

In 2013, we initiated actions in the U.S. and Germany against Taiwanese manufacturer APEX to stop the infringement of several ResMed patents. In September 2014, we entered into a settlement, resolving all our outstanding patent disputes with APEX, on confidential terms. After the settlement, at the request of the parties, the patent litigation we initiated was dismissed, and the US Patent & Trademark Office dismissed APEX’s validity challenges to ResMed’s patents. Patent validity challenges that were pending against ResMed in Germany, Japan and China were also dismissed, leaving only a proceeding in the European patent office still pending.

In 2013, we filed actions in the U.S. and Germany against Chinese manufacturer BMC Medical Co., Ltd to stop the infringement of several ResMed patents. The U.S. International Trade Commission initiated an investigation, and in August 2014, made an initial determination and recommendation that certain of BMC’s humidifiers and masks infringed ResMed’s patents and should be excluded from importation or sale in the US. The International Trade Commission has not made a final determination in this matter. In 2013, we obtained a preliminary injunction prohibiting BMC from marketing and selling certain products accused of patent infringement in Germany. It remains in effect until November 2014. Proceedings in Germany continue regarding other ResMed patents.

 

Item 1A Risk Factors

The discussion of our business and operations should be read together with the risk factors contained in our annual report on Form 10-K for the fiscal year ended June 30, 2014, which was filed with the SEC and describes the various risks and uncertainties to which we are or may become subject. At September 30, 2014, there have been no material changes to the risk factors set forth in our annual report on Form 10-K for the year ended June 30, 2014.

 

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of equity securities. The following table summarizes purchases by us of our common stock during the nine months ended September 30, 2014:

 

Period    Total Number
of Shares
Purchased
     Average Price
Paid per Share
     Total Number of Shares
Purchased as Part  of
Publicly Announced
Programs (1)
     Maximum Number of Shares
that May Yet Be Purchased
Under the Program(1)
 

July 1 - 31, 2014

     182,579       $ 49.50         36,625,074         18,090,939   

August 1 - 31, 2014

     257,986         51.65         36,883,060         17,832,953   

September 1 - 30, 2014

     394,922         51.93         37,277,982         17,438,031   

Total

     835,487         51.31         37,277,982         17,438,031   

 

(1)

On February 21, 2014, our board of directors approved a new share repurchase program, authorizing us to acquire up to an aggregate of 20 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. This program canceled and replaced our previous share repurchase program authorized on August 24, 2011, under which we had repurchased 18.1 million shares. The 20 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 after February 21, 2014 have been executed under this program. Since the inception of the share buyback programs, we have repurchased 37.3 million shares at a total cost of $1.3 billion.

 

Item 3 Defaults Upon Senior Securities

None

 

Item 4 Mine Safety Disclosures

None

 

Item 5 Other Information

None

 

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PART II – OTHER INFORMATION    Item 1-6

 

RESMED INC. AND SUBSIDIARIES

 

Item 6 Exhibits

Exhibits (numbered in accordance with Item 601 of Regulation S-K)

 

3.1

  

First Restated Certificate of Incorporation of ResMed Inc., as amended. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Report on Form 10-Q for the quarter ended September 30,2013)

3.2

  

Fifth Amended and Restated Bylaws of ResMed Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K/A filed on September 17, 2012)

31.1

  

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

  

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32

  

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

  

The following financial statements from ResMed Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed on October 30, 2014, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Cash Flows, (v) the Notes to the Condensed Consolidated Financial Statements.

 

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PART II – OTHER INFORMATION    Signatures

 

RESMED INC. AND SUBSIDIARIES

 

Signatures

We have authorized the persons whose signatures appear below to sign this report on our behalf, in accordance with the Securities Exchange Act of 1934.

October 30, 2014

ResMed Inc.

 

/s/ MICHAEL J. FARRELL

Michael J. Farrell
Chief executive officer
(Principal Executive Officer)

 

/s/ BRETT A. SANDERCOCK

Brett A. Sandercock
Chief financial officer
(Principal Financial Officer)

 

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