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 March 31, 2008

 

[    ]

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

For the transition period from              to             

001-15317

Commission File Number

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.)

14040 Danielson St

Poway, CA 92064-6857

United States

(Address of principal executive offices)

(858) 746 2400

(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 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 April 30, 2008, there were 77,264,515 shares of Common Stock ($0.04 par value) outstanding. This number excludes 3,492,518 shares held by the registrant as treasury shares.

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RESMED INC. AND SUBSIDIARIES

INDEX

 

Part I		Financial Information		3
Item 1		Financial Statements		3
		Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2008 and June 30, 2007		3
		Condensed Consolidated Statements of Income (Unaudited) for the Three Months Ended March 31, 2008 and 2007 and the Nine Months Ended March 31, 2008 and 2007		4
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended March 31, 2008 and 2007		5
		Notes to the Condensed Consolidated Financial Statements (Unaudited)		6
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3		Quantitative and Qualitative Disclosures About Market Risk		39
Item 4		Controls and Procedures		42
Part II		Other Information		43
Item 1		Legal Proceedings		43
Item 1A		Risk Factors		43
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 3		Defaults Upon Senior Securities		43
Item 4		Submission of Matters to a Vote of Security Holders		44
Item 5		Other Information		44
Item 6		Exhibits		44
		Signatures		45

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PART I - FINANCIAL INFORMATION		Item 1

 

RESMED INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

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

 

		March 31,     2008		June 30,     2007
ASSETS
Current assets:
Cash and cash equivalents		$307,494		$257,792
Investment securities (note 3)		-		19,950
Accounts receivable, net of allowance for doubtful accounts of $5,719 at March 31, 2008 and $4,704 at June 30, 2007		179,869		167,821
Inventories, net (note 4)		169,488		157,204
Deferred income taxes		45,956		42,109
Income taxes receivable		-		7,952
Prepaid expenses and other current assets		16,267		15,971
Total current assets		719,074		668,799
Property, plant and equipment, net (note 6)		335,129		310,580
Goodwill (note 7)		235,663		206,778
Other intangibles (note 8)		48,853		46,575
Deferred income taxes		14,781		9,206
Other assets		7,282		10,104
Investment securities (note 3)		5,000		-
Total non current assets		646,708		583,243
Total assets		$1,365,782		$1,252,042
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$35,296		$53,039
Accrued expenses		64,406		98,324
Deferred revenue		24,799		18,865
Income taxes payable		858		3,410
Deferred income taxes		511		415
Current portion of long-term debt (note 9)		16,237		28,350
Total current liabilities		142,107		202,403
Non current liabilities
Deferred income taxes		18,109		18,297
Deferred revenue		16,176		12,472
Income taxes payable		4,121		-
Long-term debt (note 9)		115,972		87,648
Total non current liabilities		154,378		118,417
Total liabilities		296,485		320,820
Commitments and contingencies (notes 12 and 13)		-		-
Stockholders’ equity
Preferred Stock, $0.01 par value, 2,000,000 shares authorized; none issued		-		-
Common stock, $0.004 par value, 200,000,000 shares authorized; issued and outstanding 77,168,123 at March 31, 2008 and 77,617,450 at June 30, 2007 (excluding 3,492,518 and 2,304,918 shares held as treasury stock, respectively)		309		311
Additional paid-in capital		457,458		421,701
Retained earnings		518,709		436,954
Treasury stock, at cost		(91,313)		(43,497)
Accumulated other comprehensive income (note 5)		184,134		115,753
Total stockholders’ equity		1,069,297		931,222
Total liabilities and stockholders’ equity		$1,365,782		$1,252,042

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

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PART I - FINANCIAL INFORMATION		Item 1

 

 

RESMED INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income (Unaudited)

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

 

		Three Months Ended March 31,						Nine Months Ended March 31,
		2008		2007				2008		2007
Net revenues		$211,827		$182,990				$600,246		$525,023
Cost of sales (A)		85,269		69,058				240,580		198,037
Voluntary product recall expenses (note 13)		-		59,700				-		59,700
Gross profit		126,558		54,232				359,666		267,286
Operating expenses:
Selling, general and administrative (A)		70,118		61,335				200,644		172,115
Research and development (A)		15,003		13,059				42,935		35,942
Donation to Foundation		2,000		-				2,000		-
Amortization of acquired intangible assets		1,987		1,730				5,725		5,114
Restructuring expenses (note 10)		62		-				2,378		-
Total operating expenses		89,170		76,124				253,682		213,171
Income/(loss) from operations		37,388		(21,892)				105,984		54,115
Other income (expense), net:
Interest income (expense), net		2,268		1,608				6,937		4,592
Other, net (note 16)		3,907		(669)				3,301		(1,176)
Total other income (expense), net		6,175		939				10,238		3,416
Income/(loss) before income taxes		43,563		(20,953)				116,222		57,531
Income taxes		(13,879)		5,588				(35,553)		(18,902)
Net income/(loss)		$29,684		($15,365)				$80,669		$38,629
Basic earnings/(loss) per share		$0.38		($0.20)				$1.04		$0.51
Diluted earnings/(loss) per share (note 2-j)		$0.38		($0.20)				$1.02		$0.49
Basic shares outstanding (000’s)		77,516		77,035				77,510		76,428
Diluted shares outstanding (000’s)		78,605		77,035				78,715		78,198
(A) Includes stock-based compensation costs as follows:
Cost of sales		$249		$299				$750		$890
Selling, general and administrative		4,802		3,936				13,164		10,593
Research and development		542		496				1,498		1,487
Total stock-based compensation costs		$5,593		$4,731				$15,412		$12,970

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

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PART I - FINANCIAL INFORMATION		Item 1

 

 

RESMED INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In US$ thousands)

 

		Nine Months Ended March 31,
		2008		2007
Cash flows from operating activities:
Net income		$80,669		$38,629
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		42,812		34,846
Stock-based compensation costs		15,412		12,970
Amortization of deferred borrowing costs		122		158
Write-down of cost-method investments		3,250		-
Provision for product warranties		1,801		1,181
Voluntary product recall expenses		-		59,700
Foreign currency options revaluation		(851)		(751)
Tax benefit from stock option exercises		(3,327)		(11,290)
Changes in operating assets and liabilities; net of effect of acquisitions:
Accounts receivable, net		(2,119)		(11,586)
Inventories, net		1,064		(33,247)
Prepaid expenses, net deferred income taxes and other current assets		(2,230)		(32,280)
Accounts payable, accrued expenses and other liabilities		(55,619)		5,670
Net cash provided by operating activities		80,984		64,000
Cash flows from investing activities:
Purchases of property, plant and equipment		(57,585)		(60,127)
Proceeds from disposals of property, plant and equipment		24,711		-
Capitalized interest		(852)		(351)
Patent registration costs		(4,358)		(2,700)
Purchases of foreign currency options		(1,064)		(1,063)
Proceeds from exercise of foreign currency options		2,049		-
Cash paid for business acquisitions, net of cash acquired of $Nil in 2008 and $Nil in 2007		(855)		(1,912)
Purchases of investment securities		(6,500)		(21,950)
Proceeds from sale or maturity of investment securities		21,450		2,000
Net cash used in investing activities		(23,004)		(86,103)
Cash flows from financing activities:
Proceeds from issuance of common stock, net		16,894		32,678
Purchases of treasury stock		(47,805)		-
Tax benefit from stock option exercises		3,327		11,290
Proceeds from borrowings, net of borrowing costs		20,000		9,589
Repayment of borrowings		(18,108)		(20,000)
Net cash (used in)/provided by financing activities		(25,692)		33,557
Effect of exchange rate changes on cash		17,414		9,108
Net increase in cash and cash equivalents		49,702		20,562
Cash and cash equivalents at beginning of period		257,792		219,544
Cash and cash equivalents at end of period		$307,494		$240,106
Supplemental disclosure of cash flow information:
Income taxes paid		$31,321		$48,914
Interest paid		$5,013		4,482
Fair value of assets acquired in acquisitions		$-		$-
Liabilities assumed		-		-
Goodwill on acquisition		856		1,588
Net acquisition costs accrued		-		324
Cash paid for acquisitions, including acquisition costs		$856		$1,912

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

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PART I - FINANCIAL INFORMATION		Item 1

 

RESMED INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

(1)	Organization and Basis of Presentation

ResMed Inc. is a Delaware corporation formed in March 1994 as a holding company for the ResMed Group. Unless otherwise stated in this Quarterly Report on Form 10-Q, the terms “we”, “us”, “our” and “the Company” refer to ResMed Inc. and its subsidiaries, on a consolidated basis. 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, France and the United States. Major distribution and sales sites are located in the United States, Germany, France, the United Kingdom, Switzerland, Australia and Sweden.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the nine months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending June 30, 2008.

The condensed consolidated financial statements for the three months ended March 31, 2008 and 2007 and the nine months ended March 31, 2008 and 2007 are unaudited and should be read in conjunction with the condensed consolidated financial statements and notes thereto included in our Form 10-K for the year ended June 30, 2007.

 

(2)	Summary of Significant Accounting Policies

 

(a)

Basis of Consolidation

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

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

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PART I - FINANCIAL INFORMATION		Item 1

 

 

RESMED INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(2)	Summary of Significant Accounting Policies, Continued

 

(b)

Revenue Recognition

Revenue on product sales is generally recorded upon shipment, at which time title transfers to the customer. Revenue on product sales that require customer acceptance is not recorded until acceptance is received. Royalty revenue from license agreements is recorded when earned. Service revenue received in advance from service contracts is initially deferred and recognized ratably over the life of the service contract. Revenue received in advance from rental unit contracts is initially deferred and recognized ratably over the life of the rental contract. Revenue from sale of marketing or distribution rights is initially deferred and recognized ratably as revenue over the life of the contract. Freight charges billed to customers are included in revenue. All freight-related expenses are charged to cost of sales.

We do not recognize revenues to the extent that we offer a right of return or other recourse with respect to the sale of our products, other than returns for product defects or other warranty claims, nor do we recognize revenues if we offer variable sale prices for subsequent events or activities. However, as part of our sales process, we may provide upfront discounts for large orders, one-time special pricing to support new product introductions, sales rebates for centralized purchasing entities or price-breaks for regular order volumes. The costs of all such programs are recorded as an adjustment to revenue. Our products are predominantly therapy-based equipment and require no installation. As such, we have no significant installation obligations.

 

(c)

Cash and Cash Equivalents

Cash equivalents include certificates of deposit, commercial paper and other highly liquid investments and are stated at cost, which approximates market. Investments with original maturities of 90 days or less are considered to be cash equivalents for purposes of the condensed consolidated statements of cash flows.

 

(d)

Inventories

Inventories are stated at the lower of cost, determined principally by the first-in, first-out method, or net realizable value. We review and provide for any product obsolescence in our manufacturing and distribution operations with assessments of individual products and components (based on estimated future usage and sales) being performed throughout the year.

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PART I - FINANCIAL INFORMATION		Item 1

 

 

RESMED INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(2)	Summary of Significant Accounting Policies, Continued

 

(e)

Property, Plant and Equipment

Property, plant and equipment, including rental equipment are recorded at cost. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, generally two to ten years except for buildings, which are depreciated over an estimated useful life of 40 years. Straight-line and accelerated methods of depreciation are used for tax purposes. Maintenance and repairs are charged to expense as incurred.

We capitalize interest in connection with the construction of facilities. Actual construction costs incurred relating to facilities under active development qualify for interest capitalization. Interest capitalization ceases when the construction of a facility is complete and available for use. During the three months and nine months ended March 31, 2008, we capitalized $0.3 million and $0.9 million, respectively, of interest relating to such construction costs. During the three months and nine months ended March 31, 2007, we capitalized interest of $nil and $0.4 million, respectively.

 

(f)

Intangible Assets

The registration costs for new patents are capitalized and amortized over the estimated useful life of the patent, generally five years. In the event of a patent being superseded, the unamortized costs are written off immediately.

Other intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from seven to nine years. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. No impairment of intangible assets has been identified during any of the periods presented.

 

(g)

Goodwill

We conducted our annual review for goodwill impairment during the final quarter of fiscal 2007. In conducting our review of goodwill impairment, we identified reporting units, being components of our operating segment, as each of the entities acquired and giving rise to the goodwill. The fair value for each reporting unit was determined based on discounted cash flows and involved a two-step process as follows:

 

Step 1 -

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

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PART I - FINANCIAL INFORMATION		Item 1

 

 

RESMED INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(2)	Summary of Significant Accounting Policies, Continued

 

(g)

Goodwill (continued)

 

Step 2 -

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

The results of the review indicated that no impaired goodwill existed at June 30, 2007.

 

(h)

Foreign Currency

The consolidated financial statements of our non-U.S. subsidiaries, whose functional currencies are other than U.S. dollars, are translated into U.S. dollars for financial reporting purposes. Assets and liabilities of non-U.S. subsidiaries whose functional currencies are other than U.S. dollars are translated at period-end exchange rates, and revenue and expense transactions are translated at average exchange rates for the period. Cumulative translation adjustments are recognized as part of comprehensive income, as described in Note 5, and are included in accumulated other comprehensive income in the condensed consolidated balance sheet until such time as the subsidiary is sold or substantially or completely liquidated. Gains and losses on transactions denominated in other than the functional currency of the entity are reflected in operations.

 

(i)

Research and Development

All research and development costs are expensed in the period incurred.

 

(j)

Earnings Per Share

We calculate earnings per share in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS 128”), as amended by SFAS No. 123(R), “Share Based Payments” (“SFAS 123(R)”), SFAS 128 requires the presentation of “basic” earnings per share and “diluted” 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.

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PART I - FINANCIAL INFORMATION		Item 1

 

 

RESMED INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(2)	Summary of Significant Accounting Policies, Continued

 

(j)

Earnings Per Share (continued)

The weighted average shares used to calculate basic earnings per share were 77,516,000 and 77,035,000 for the three months ended March 31, 2008 and 2007, respectively, and were 77,510,000 and 76,428,000 for the nine months ended March 31, 2008 and 2007, respectively. The difference between basic earnings per share and diluted earnings per share is attributable to the impact of outstanding stock options during the periods presented. Stock options had the effect of increasing the number of shares used in the calculation (by application of the treasury stock method) by 1,089,000 and Nil for the three months ended March 31, 2008 and 2007, respectively, and 1,205,000 and 1,770,000 for the nine months ended March 31, 2008 and 2007, respectively.

Stock options of 6,080,000 and 8,575,000 for the three months ended March 31, 2008 and 2007, respectively, and stock options of 4,601,000 and 2,920,000 for the nine months ended March 31, 2008 and 2007, respectively, were not included in the computation of diluted earnings per share as the effect of exercising these options would have been anti-dilutive.

Basic and diluted earnings per share for the three months and nine months ended March 31, 2008 and 2007 are calculated as follows (in thousands except per share data):

 

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PART I - FINANCIAL INFORMATION		Item 1

 

 

RESMED INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(2)	Summary of Significant Accounting Policies, Continued

 

(k)

Financial Instruments

The carrying value of financial instruments, such as cash and cash equivalents, investment securities, accounts receivable and accounts payable, approximate their fair value because of their short-term nature. Foreign currency option contracts 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 defined as the amount at which the instrument could be exchanged in a current transaction between willing parties.

 

(l)

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 our Australian manufacturing activities. We enter into foreign currency option contracts to hedge anticipated sales and manufacturing costs, principally denominated in Australian dollars and Euros. The terms of such foreign currency option contracts generally do not exceed three years.

Our foreign currency derivatives portfolio represents a cash flow hedge program against the net cash flow of our international manufacturing operations. We have determined our hedge program to be a non-effective hedge as defined under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”. 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 in our condensed consolidated statements of income.

We are exposed to credit-related losses in the event of non performance by counter parties to financial instruments. The credit exposure of foreign exchange options at March 31, 2008 and June 30, 2007 was $4.7 million and $3.8 million, respectively, which represents the positive fair value of options held by us and are included in other assets on the condensed consolidated balance sheets.

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PART I - FINANCIAL INFORMATION		Item 1

 

 

RESMED INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(2)	Summary of Significant Accounting Policies, Continued

 

(l)

Foreign Exchange Risk Management (continued)

We held foreign currency option contracts with notional amounts totaling $191.4 million and $139.3 million at March 31, 2008 and June 30, 2007, respectively, to hedge foreign currency items. These contracts mature at various dates prior to December 2009.

 

(m)

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. Deferred tax assets and liabilities are measured using enacted tax rates expected 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.

 

(n)

Investment Securities

Management determines the appropriate classification of our investments in debt and equity securities at the time of purchase and re-evaluates such determination at each balance sheet date. Debt securities for which we do not have the intent or ability to hold to maturity are classified as available-for-sale. Securities available-for-sale are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income.

The investments in debt securities are classified on the accompanying condensed consolidated balance sheet as investment securities. These investments are diversified among high-credit quality securities in accordance with our investment policy.

 

(o)

Warranty

Estimated future warranty costs related to certain products are charged to operations in the period in which the related revenue is recognized. The liability for warranty costs is included in accrued expenses in our condensed consolidated balance sheets.

Changes in the liability for product warranty for the nine months ended March 31, 2008 are as follows (in thousands):

 

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PART I - FINANCIAL INFORMATION		Item 1

 

 

RESMED INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(2)	Summary of Significant Accounting Policies, Continued

 

(p)

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 recoverable. 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 such assets are considered to be impaired, the impairment to be recognized is measured by the amount which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.

 

(q)

Cost-Method Investments

The aggregate carrying amount of our cost-method investments at March 31, 2008 and June 30, 2007, was $1.4 million and $4.6 million, respectively. We review the carrying value of these investments at each balance sheet date and at March 31, 2008 we recognized $3.2 million of impairment losses related to our cost-method investments based on the determination that the impairment was other-than temporary. Of the amount written down, $2.8 million was in relation to an investment in a publicly traded company. The duration of the impairment in this company had exceeded 24 months and during its most recent published results the company recognized a significant impairment write-down in its goodwill. The remaining $0.4 million of the recognized impairment was in respect to an investment in a private company which ceased operations during the quarter ended March 31, 2008. The expense associated with these impairments has been included in the other income (expense) line within the consolidated statements of income. We have determined, subsequent to the impairment charge, that the fair value of our remaining investments exceed their carrying values.

 

(r)

Stock-Based Employee Compensation

We have granted stock options to personnel, including officers and directors, under our 2006 Incentive Award Plan, as amended (the “2006 Plan”). These options have expiration dates of seven years from the date of grant and vest over four years. We granted these options with the exercise price equal to the market value as determined at the date of grant. We have also offered to our personnel, including officers and directors, the right to purchase shares of our common stock at a discount under our employee stock purchase plan (“ESPP”).

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PART I - FINANCIAL INFORMATION		Item 1

 

 

RESMED INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(2)	Summary of Significant Accounting Policies, Continued

 

(r)

Stock-Based Employee Compensation, Continued

As of July 1, 2005, we adopted SFAS 123(R) using the modified prospective method, which requires measurement of compensation expense of all stock-based awards at fair value on the date of grant and recognition of compensation expense over the service period for awards expected to vest. Under this method, the provisions of SFAS 123(R) apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption, determined under the original provisions of SFAS No. 123 shall be recognized in net income in the periods after adoption. The fair value of stock options is determined using the Black-Scholes valuation model. Such value is recognized as expense over the service period, using the graded-attribution method for stock-based awards granted prior to July 1, 2005 and the straight-line method for stock-based awards granted after July 1, 2005.

The fair value of stock options granted under our stock option plans and purchase rights granted under our ESPP is estimated on the date of the grant using the Black-Scholes option-pricing model, assuming no dividends and the following assumptions:

 

Expected volatilities are based on a combination of historical volatilities of our stock and implied volatilities from traded options of our stock. The expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(3)	Investment Securities

The estimated fair value of investment securities as of March 31, 2008 and June 30, 2007 are $5.0 million and $20.0 million, respectively. These investments are diversified among high credit quality investment grade securities in accordance with our investment policy. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

At March 31, 2008, our investment securities were held in Aaa rated auction securities with various maturities between July 2039 and November 2047. These investments had regular roll-over or auction dates at which time the interest rates were re-set or the investments were redeemed for cash. During the three months ended March 31, 2008, we experienced failed auctions with respect to these investments. We continue to earn interest on these investments in accordance with the contract until the next auction occurs. In the event we need to access funds invested in these auction rate securities, we may not be able to liquidate these securities at the fair value recorded on March 31, 2008 until a future auction of these securities is successful or a buyer is found outside of the auction process. Based on our ability to access our cash and cash equivalents, expected operating cash flows, and other sources of cash, we do not anticipate the current lack of liquidity on these investments will affect our ability to operate the business in the ordinary course. We believe the current lack of liquidity of these investments is temporary and therefore have not recorded any impairment. However, due to the current market liquidity conditions and given our intention to hold these investments until there is an overall improvement in global credit markets we have reclassified these securities from current to non-current assets.

 

(4)	Inventories

Inventories were comprised of the following at March 31, 2008 and June 30, 2007 (in thousands):

 

 

(5)	Comprehensive Income

The components of comprehensive income, net of tax, were as follows (in thousands):

 

We do not provide for U.S. income taxes on foreign currency translation adjustments since we do not provide for such taxes on undistributed earnings of foreign subsidiaries.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(6)	Property, Plant and Equipment

Property, plant and equipment is comprised of the following as of March 31, 2008 and June 30, 2007 (in thousands):

 

		March 31, 2008		June 30, 2007
Machinery and equipment		$76,039		$66,093
Computer equipment		85,014		73,114
Furniture and fixtures		33,419		27,865
Vehicles		3,498		2,985
Clinical, demonstration and rental equipment		62,228		52,128
Leasehold improvements		22,314		17,635
Land		61,669		61,503
Buildings		160,730		152,691
Construction in Progress		24,808		11,125
		529,719		465,139
Accumulated depreciation and amortization		(194,590)		(154,559)
		$335,129		$310,580

On March 24, 2008, we completed the sale and leaseback of our real property in Poway, California, where our principal executive offices and one of our U.S. distribution facilities are located. The net consideration for the sale of this property was $24.7 million in cash and on completion of the sale and leaseback we recognized a gain on sale of $5.9 million. As we have relinquished the right to substantially all of the remaining use of the property we recognized the entire gain on sale of the property during the three months ended March 31, 2008. The gain associated with this sale has been included in other income (expense) within the consolidated statements of income. We will lease back the property for a period ending June 30, 2009, and will retain an option to extend the lease term for an additional three months.

 

(7)

Goodwill

Changes in the carrying amount of goodwill for the nine months ended March 31, 2008 were as follows (in thousands):

 

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(8)	Other Intangible Assets

Other intangible assets are comprised of the following as of March 31, 2008 and June 30, 2007 (in thousands):

 

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

 

(9)	Long-Term Debt

Long-term debt at March 31, 2008 and June 30, 2007 consists of the following (in thousands):

 

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(Unaudited)

 

(9)	Long-Term Debt

Revolving Facility

On March 13, 2006, our wholly owned subsidiaries ResMed Corp., ResMed Motor Technologies Inc. (formerly known as Servo Magnetics Inc.) and ResMed EAP Holdings Inc. entered into a Second Amended and Restated Revolving Loan Agreement with Union Bank of California, N.A. as administrative agent for the Lenders (the “Loan Agreement”), that provides for a revolving loan of up to $65 million. Payment of principal must be made to reduce the total outstanding principal to $55 million on March 1, 2009 and the entire outstanding principal amount must be repaid in full before March 1, 2011. The outstanding principal amount due under the loan will bear interest at a rate equal to LIBOR plus 0.75% to 1.00% (depending on the applicable leverage ratio). At March 31, 2008 there was $20 million outstanding under this loan.

The obligations of ResMed Corp., ResMed Motor Technologies Inc. and ResMed EAP Holdings Inc. under the Loan Agreement are secured by substantially all of the personal property of each of ResMed Corp., ResMed Motor Technologies Inc. and ResMed EAP Holdings Inc., and are guaranteed by ResMed Inc. under an Amended and Restated Continuing Guaranty and Pledge Agreement, which guaranty is secured by a pledge of the equity interests in ResMed Corp., ResMed Motor Technologies Inc. and ResMed EAP Holdings Inc. held by ResMed Inc. The Loan Agreement also contains customary covenants, including certain financial covenants and an obligation that ResMed Inc. maintain certain financial ratios, including a maximum ratio of total debt to EBITDA (as defined in the Loan Agreement), a fixed charge coverage ratio, a minimum tangible net worth, and a minimum ResMed Corp., ResMed Motor Technologies Inc. and ResMed EAP Holdings Inc. EBITDA and liquidity.

The entire principal amount of the revolving loan and any accrued but unpaid interest may be declared immediately due and payable in the event of the occurrence of an event of default as defined in the Loan Agreement. Events of default include, among other items, failure to make payments when due, the occurrence of a material default in the performance of any covenants in the Loan Agreement or related document or a 35% or more change in control of ResMed Inc., ResMed Corp., ResMed Motor Technologies Inc. or ResMed EAP Holdings Inc. At March 31, 2008, we were in compliance with our debt covenants.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(9)	Long-Term Debt, Continued

Syndicated Facility

On June 8, 2006, our wholly owned Australian subsidiary, ResMed Limited, entered into a Syndicated Facility Agreement with HSBC Bank Australia Limited as original financier, facility agent and security trustee, that provides for a loan in three tranches (the “Syndicated Facility Agreement”).

Tranche A is a Euro (“EUR”) 50 million five-year term loan facility that refinanced all amounts outstanding under a syndicated facility agreement dated May 16, 2005, between ResMed Limited and HSBC Bank Australia Limited, to fund the obligations of our wholly owned French subsidiary ResMed SAS under its agreement to acquire Saime SAS. Tranche A bears interest at a rate equal to LIBOR for deposits denominated in EUR plus a margin of 0.80% or 0.90%, depending on the ratio of the total debt to EBITDA of ResMed Inc. and its subsidiaries (the “ResMed Group”) for the most recently completed fiscal year for the applicable interest period. Payments of principal must be made to reduce the total outstanding principal amount of Tranche A to EUR 37.75 million on June 30, 2008, EUR 27.5 million on June 30, 2009, EUR 15 million on December 31, 2009, and the entire outstanding principal amount must be repaid in full on June 8, 2011. At March 31, 2008, the Tranche A facility loan had an amount outstanding of EUR 44.5 million, equivalent to approximately U.S. dollars (“USD”) 70.2 million.

Tranche B is a USD 15 million term loan facility that may only be used for the purpose of financing capital expenditures and other asset acquisitions by the ResMed Group. Tranche B bears interest at a rate equal to LIBOR for deposits denominated in EUR, Australian dollars, USD or British Pounds Sterling plus a margin of 0.80% or 0.90%, depending on the ratio of the total debt to EBITDA of the ResMed Group for the most recently completed fiscal year for the applicable interest period. The entire principal amount must be repaid in full on June 8, 2011. At March 31, 2008, the Tranche B facility loan had an amount outstanding of GBP 3.0 million, equivalent to approximately USD 5.9 million.

Tranche C is a USD 60 million term loan facility that may only be used for the purpose of the payment by ResMed Limited of a dividend to ResMed Holdings Limited, which will ultimately be paid to ResMed Inc. Tranche C bears interest at a rate equal to LIBOR for deposits denominated in EUR, Australian dollars or USD plus a margin of 0.70% or 0.80%, depending on the ratio of the total debt to EBITDA of the ResMed Group for the most recently completed fiscal year for the applicable interest period. The entire outstanding principal amount must be repaid in full by June 8, 2009. At March 31, 2008, the Tranche C facility loan had an amount outstanding of EUR 20.0 million, equivalent to approximately USD 31.5 million.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(9)	Long-Term Debt, Continued

The loan is secured by a pledge of one hundred percent of the shares of ResMed Inc.’s subsidiary, Saime SAS, pursuant to a pledge agreement. The Syndicated Facility Agreement also contains customary covenants, including certain financial covenants and an obligation that ResMed Limited maintains certain financial ratios, including a minimum debt service cover ratio, a maximum ratio of total debt to EBITDA and a minimum tangible net worth. The entire principal amount of the loan and any accrued, but unpaid, interest may be declared immediately due and payable in the event of the occurrence of an event of default as defined in the Syndicated Facility Agreement. Events of default include, among other items, failure to make payments when due, breaches of representations, warranties or covenants, the occurrence of certain insolvency events, the occurrence of an event or change which could have a material adverse effect on ResMed Limited and its subsidiaries, and if ResMed Inc. ceases to control ResMed Limited, ResMed Corp., ResMed SAS, ResMed GmbH & Co. KG, ResMed (UK) Limited, Take Air Medical Handels-GmbH or Saime SAS.

The obligations of ResMed Limited under the loan are subject to two guarantee and indemnity agreements, one on behalf of ResMed Inc. and its U.S. subsidiary, ResMed Corp., and another on behalf of ResMed’s international subsidiaries, ResMed SAS (other than Tranche C), ResMed GmbH & Co. KG, ResMed (UK) Limited and Take Air Medical Handels-GmbH. At March 31, 2008, we were in compliance with our debt covenants.

Simultaneous with the Syndicated Facility Agreement, ResMed Limited entered into a working capital agreement with HSBC Bank Australia Limited for revolving, letter of credit and overdraft facilities up to a total commitment of 6.5 million Australian dollars, and ResMed (UK) Limited entered into a working capital agreement with HSBC Bank plc for a revolving cash advance facility for a total commitment of up to 3 million Sterling. At March 31, 2008, the working capital agreement had an amount outstanding of GBP 2.0 million, equivalent to approximately USD 4.0 million.

Capital Lease

As part of the acquisition of Saime SAS, we assumed a capital lease over land and buildings. This lease contains an option to purchase the property, for nominal consideration, at the end of the lease term in September 2014.

Details of contractual debt maturities at March 31, 2008 are as follows (in thousands):

 

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(10)	Restructuring Expenses

Restructuring expenses incurred during the three and nine months ended March 31, 2008 were $62,000 ($49,000 net of tax) and $2.4 million ($1.9 million net of tax). Restructuring expenses consisted predominantly of expenses associated with the Company’s decision to streamline European management including the closure of part of the European headquarters in Basel, Switzerland and two regional offices in the Netherlands. This mainly comprises employee termination costs, leasehold improvement write-downs and property lease exit costs. We will continue to monitor the progress of this restructure and adjust our business strategies and personnel accordingly to achieve maximum efficiencies and cost savings.

Following is a summary of the restructuring liabilities related to the restructure of our European operations during the nine months ended March 31, 2008 (in thousands):

 

 

(11)	Stockholders’ Equity

Stock Options. We have granted stock options to personnel, including officers and directors, in accordance with the 2006 Plan. These options have expiration dates of seven years from the date of grant and vest over four years. We have granted these 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 2006 Plan is 7,800,000 shares. The number of securities remaining available for future issuance under the 2006 Plan at March 31, 2008 is 3,218,000. The number of shares of our common stock available for issuance under the 2006 Plan will be reduced by (i) two and one tenth (2.1) 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 2006 Plan to any individual during any calendar year, may not exceed 1,000,000 shares of our common stock.

At March 31, 2008, there was $55.5 million in unrecognized compensation costs related to unvested stock-based compensation arrangements. This is expected to be recognized over a weighted average period of 2.9 years. The aggregate intrinsic value of the options outstanding and the options exercisable at March 31, 2008 was $187.5 million and $103.9 million, respectively. The aggregate intrinsic value of the options exercised during the three months and nine months ended March 31, 2008, was $2.5 million and $9.5 million, respectively. The total fair value of options that vested during the three and nine months ended March 31, 2008, was $11.1 million and $21.2 million, respectively.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(11)	Stockholders’ Equity, Continued

Stock Options (continued). The following table summarizes option activity during the nine months ended March 31, 2008:

 

Employee Stock Purchase Plan (the “ESPP”). The ESPP was approved by our stockholders at the Annual General Meeting in November 2003. Under the ESPP, participants are offered 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. On August 21, 2006, the Board of Directors approved a reduction in the number of shares available for grant under the ESPP to 500,000 shares, effective as of November 9, 2006, the date of the shareholder approval of the 2006 Plan. The number of securities remaining available for future issuance under the ESPP at March 31, 2008 is 343,550.

During the nine months ended March 31, 2008, we recognized $1.1 million of stock-based compensation expense associated with the ESPP and issued 77,074 shares at a share price of $35.22.

Common Stock. On June 6, 2002, the Board of Directors authorized us to repurchase up to 8.0 million shares of outstanding common stock. During the three and nine months ended March 31, 2008, we repurchased 0.6 million and 1.2 million shares at a cost of $23.2 million and $47.8 million, respectively. At March 31, 2008, we have repurchased a total of 3.5 million shares at a cost of $91.3 million. 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.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(12)	Legal Actions and Contingencies

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 have a material adverse effect on our consolidated financial statements taken as a whole.

On December 23, 2002, three former contractors of our subsidiary MAP Medizin-Technologie GmbH initiated proceedings in Munich 1 Regional Court (Proceedings No. 7 O 23286/02), petitioning the Court for a declaration of inventorship with respect to MAP German Patent Applications identified as No. 100 31 079 and 101 92 802.5 and European Patent Application No. EP 01 967 819.7. On March 10, 2005, the Court entered judgment in favor of the plaintiffs, finding that they should be identified as co-inventors in place of certain individual defendants. In April 2005, MAP filed an appeal of that decision. On February 28, 2008, the Court of Appeal granted the appeal, setting aside the Regional Court’s decision, and ruling that plaintiffs should not be identified as co-inventors. Plaintiffs have asked the Federal Supreme Court to review the Court of Appeal’s decision. The Federal Supreme Court has not yet acted on that request. We do not expect the outcome of this litigation to have an adverse material effect on our consolidated financial statements.

During September and October 2004, we began receiving tax assessment notices for the audit of one of our German subsidiaries by the German tax authorities for the years 1996 through 1998. Certain aspects of these assessment notices are being contested and appealed to the German tax authority office. As the outcome of the appeal cannot be predicted with certainty, any tax issues resolved in a manner not consistent with our expectations may require us to adjust our provision for income tax in the period of resolution.

In February 2007, an Australian university commenced legal action in the Federal Court of Australia against us, claiming breach of a license agreement and infringement of certain intellectual property. The university is seeking various types of relief, including an injunction against manufacturing, supplying, offering for sale, selling or exporting certain mask devices, payment of license fees, damages or an account of profits, interest, costs and assignment of certain intellectual property. In October 2007, we filed a defense denying the university’s claim, as well as a cross-claim against the university seeking an order for rectification of the contract and alleging the university violated the Australian Trade Practices Act. We do not expect the outcome of this matter to have a material adverse effect on our condensed consolidated financial statements.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(13)	Voluntary Product Recall Expenses

On April 23, 2007, we initiated a worldwide voluntary recall of approximately 300,000 units of our early production S8 flow generators used for the treatment of obstructive sleep apnea. In S8 devices manufactured between July 2004 and May 15, 2006, there is a remote potential for a short circuit in the power supply connector. We are working with our distribution partners globally to provide a replacement device to patients who have an affected S8 flow generator. The estimated cost of this action is $59.7 million which was recognized as a charge to cost of sales in the consolidated statement of income during the three months ended March 31, 2007. At March 31, 2008 we have a remaining liability of $2.2 million which is accrued in the consolidated balance sheet. These costs represent our best estimate of probable costs based on current available data and take into account factors such as expected return rates for the affected units, unit replacement costs, legal, consulting, logistical and temporary contractor expenses directly associated with the recall.

Should actual product recall costs differ from our estimated costs, material revisions to our estimated product recall accrual may be required. Following is a summary of the liabilities related to the voluntary product recall that were recorded during the nine months ended March 31, 2008 (in thousands):

 

 

(14)	Income Taxes

In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” and subsequently in May 2007 issued FSP FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken in a tax return. FIN 48 requires recognition of tax benefits that satisfy a greater than 50% probability threshold and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

We adopted the provisions of FIN 48 on July 1, 2007. As a result of the implementation of FIN 48, we recognized an increase of $1.1 million to the July 1, 2007 retained earnings balance. At the adoption date, our gross unrecognized tax benefits totaled $3.5 million of which $0.5 million, if recognized, would affect our effective tax rate. We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of the adoption date, we recognized a total liability of $0.6 million for accrued interest and penalties.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(14)	Income Taxes, Continued

We file numerous consolidated and separate income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. We are no longer subject to U.S. federal income tax examination for tax years prior to fiscal year 2005, and no longer subject to state income tax examinations for the tax years prior to fiscal year 2003. With few exceptions, including the German tax assessment discussed in Note 12, we are no longer subject to foreign income tax examinations for fiscal years before 2001.

Within the next 12 months, we anticipate a potential decrease of up to $1.0 million in the unrecognized tax benefit relating to the timing of certain amortization deductions due to a statute of limitation expiration. This will not have an impact on the effective tax rate other than the potential reduction in accrued interest as any change will be offset by a similar adjustment to our deferred tax balances. We do not anticipate any other significant changes within the next 12 months.

 

(15)	Business Acquisitions

As disclosed in our consolidated financial statements and Form 10-K for the year ended June 30, 2006, we acquired 100% of the outstanding stock of PolarMed, the holding company for PolarMed AS and its affiliates, on December 1, 2005, for net cash consideration of $6.5 million. Under the purchase agreement, we may also be required to make additional future payments of up to $3.0 million based on the achievement of certain performance milestones following the acquisition through December 31, 2008. Of the potential additional future payments included within the purchase agreement, $1.0 million was paid during the quarter ended March 31, 2007 and an additional $0.9 million was paid during the quarter ended March 31, 2008, as a result of the successful achievement of a performance milestone. This increased the total acquisition consideration to $8.7 million and increased the amount recorded as goodwill to $6.3 million.

 

(16)	Other, net

The components of other, net, were as follows (in thousands):

 

		Three months ended March 31,				Nine months ended March 31,
		2008		2007		2008		2007
Gain/(loss) on foreign currency transactions and hedging		$935		$(558)		$(72)		$(1,301)
Impairment of cost-method investments (note 2-q)		(3,250)		-		(3,250)		-
Gain on sale of real property (note 6)		5,917		-		5,917		-
Other		305		(111)		706		125
		$3,907		$(669)		$3,301		$(1,176)

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Item 2.

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

Special Note Regarding Forward-Looking Statements

This report contains or may contain 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 pursuant to 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. Such forward-looking statements reflect the views of our management at the time such 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, 2007 and elsewhere in this report.

In addition, important factors to consider in evaluating such forward-looking statements include changes or developments in 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. Should 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 such 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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RESMED INC. AND SUBSIDIARIES

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 and nine months ended March 31, 2008. It should be read together with the detail provided in the individual sections below.

We are a leading developer, manufacturer and distributor of medical equipment for treating, diagnosing, and managing sleep-disordered breathing and other respiratory disorders. Sleep-disordered breathing, or SDB, includes obstructive sleep apnea, or OSA, and other respiratory disorders that occur during sleep. When we were formed in 1989, our primary purpose was to commercialize a treatment for OSA. This treatment, nasal Continuous Positive Airway Pressure, or CPAP, was the first successful noninvasive treatment for OSA. CPAP systems deliver pressurized air, typically through a nasal mask, to prevent collapse of the upper airway during sleep.

Since the development of CPAP, 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 growth has been fuelled by geographic expansion, increased awareness of respiratory conditions as a significant health concern among physicians and patients, and our research and product development efforts. Our net revenues are generated from the sale and rental of our various flow generator devices, nasal mask systems, accessories and other products.

We currently employ approximately 2,700 people and market our products in over 68 countries using a network of distributors and our direct sales force. We market our products primarily to home health care dealers and sleep clinics. We attempt to tailor our marketing approach to each national market, based on regional awareness of SDB as a health problem, physician referral patterns, consumer preferences and local reimbursement policies.

Our principal manufacturing facility is located in Sydney, Australia, and we have additional manufacturing facilities in Paris, France and Chatsworth, California. Our manufacturing operations consist primarily of assembly and testing of our flow generators, masks and accessories. Of the numerous raw materials, parts and components purchased for assembly of our therapeutic and diagnostic sleep disorder products, most are off-the-shelf items available from multiple vendors. We generally manufacture to our internal sales forecasts and fill orders as received.

During the quarter ended March 31, 2008, our net revenue increased by 16% when compared to the quarter ended March 31, 2007. These results were primarily driven by increasing unit sales of our flow generators, masks and accessories including a strong contribution from our new full-face masks. Gross margin was 59.7% for the quarter ended March 31, 2008 compared to 29.6% for the same period in fiscal 2007. Excluding the voluntary product recall expenses incurred during the prior year quarter of $59.7 million, gross margins for the quarter ended March 31, 2007 were 62.3%. Diluted earnings per share for the quarter ended March 31, 2008 increased to $0.38 per share, up from a loss of ($0.20) per share in the quarter ended March 31, 2007. Excluding the net after tax impact of $41.8 million relating to the voluntary product recall expenses, diluted earnings per share for the quarter ended March 31, 2007 would have been $0.34.

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RESMED INC. AND SUBSIDIARIES

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

Net Revenue

Net revenue increased for the three months ended March 31, 2008 to $211.8 million as compared to $183.0 million for the three months ended March 31, 2007, an increase of $28.8 million or 16%. The increase in net revenue is primarily attributable to an increase in unit sales of our flow generators, masks and accessories. Movements in international currencies against the U.S. dollar positively impacted revenues by approximately $12.3 million during the three months ended March 31, 2008.

Net revenue in North and South America increased for the quarter ended March 31, 2008 to $99.6 million from $94.6 million for the three months ended March 31, 2007, an increase of $5.0 million or 5%. The revenue growth has been generated by increased public and physician awareness of sleep-disordered breathing together with increasing unit sales of our masks and accessories including a strong contribution from our new full-face masks.

Net revenue in international markets for the quarter ended March 31, 2008 increased to $112.2 million from $88.4 million compared to the quarter ended March 31, 2007, an increase of $23.9 million or 27%. International sales growth in the quarter ended March 31, 2008 predominantly reflects organic growth in the overall sleep-disordered breathing market and the positive impact from movements in international currencies against the U.S. dollar. Recent product releases such as the S8II flow generator and the new full-face masks have also contributed strongly to our sales growth. Excluding the impact of movements in international currencies, international sales grew by 13%.

Revenue from sales of flow generators for the quarter ended March 31, 2008 totaled $105.1 million, an increase of 11% compared to the quarter ended March 31, 2007, with a decrease of 5% in North and South America offset by increases of 23% elsewhere. Revenue from sales of mask systems, motors and other accessories totaled $106.7 million, an increase of 21%, including increases of 13% in North and South America and 33% elsewhere, for the quarter ended March 31, 2008, compared to the quarter ended March 31, 2007. We believe these increases primarily reflect growth in the overall sleep-disordered breathing market and contributions from new products.

Revenue from sales of flow generators for the nine months ended March 31, 2008 increased by 11% compared to the nine months ended March 31, 2007; 1% in North and South America and 19% internationally. Revenue from sales of mask systems, motors and other accessories increased by 18%; 11% in North and South America and 30% internationally, for the nine months ended March 31, 2008 compared to the nine months ended March 31, 2007. We believe these increases primarily reflect growth in the overall sleep-disordered breathing market, and strong sales from our new products.

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RESMED INC. AND SUBSIDIARIES

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

Gross Profit

Gross profit increased for the quarter ended March 31, 2008 to $126.6 million from $54.2 million for the quarter ended March 31, 2007, an increase of $72.4 million or 133%. This is primarily due to voluntary product recall expenses incurred in the prior year quarter of $59.7 million. Gross profit as a percentage of net revenue for the quarter ended March 31, 2008 was 59.7%. Excluding the voluntary product recall expenses, gross profit as a percentage of net revenue was 62.3% for the quarter ended March 31, 2007.

Gross profit increased for the nine months ended March 31, 2008 to $359.7 million from $267.3 million for the nine months ended March 31, 2007, an increase of $92.4 million or 35%. Gross profit as a percentage of net revenue for the nine months ended March 31, 2008 was 59.9% compared to 50.9% for the nine months ended March 31, 2007, which included the product recall of $59.7 million. Excluding the voluntary product recall expenses, gross profit as a percentage of net revenue was 62.3% for the nine months ended March 31, 2007.

The lower gross margin for the three and nine months ended March 31, 2008, excluding the voluntary product recall expense, is primarily due to a general reduction in average selling prices which were partly offset by a favorable change in product and geographic mix of sales as our higher margin product sales have increased in our international markets.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased for the three months ended March 31, 2008 to $70.1 million from $61.3 million for the three months ended March 31, 2007, an increase of $8.8 million or 14%. Stock-based compensation expenses of $4.8 million and $3.9 million have been included within the selling, general and administrative expenses for the three months ended March 31, 2008 and 2007, respectively. Selling, general and administrative expenses, as a percentage of net revenue, were 33% for the three months ended March 31, 2008 compared to 34% for the three months ended March 31, 2007.

Selling, general and administrative expenses increased for the nine months ended March 31, 2008 to $200.6 million from $172.1 million for the nine months ended March 31, 2007, an increase of $28.5 million or 17%. Stock-based compensation expenses of $13.2 million and $10.6 million have been included within the selling, general and administrative expenses for the nine months ended March 31, 2008 and 2007, respectively. Selling, general and administrative expenses, as a percentage of net revenue, were 33% for the nine months ended March 31, 2008 and are consistent with the nine months ended March 31, 2007.

The increase in selling, general and administrative expenses was primarily due to an increase in the number of sales and administrative personnel to support our growth. The increase in selling, general and administrative expenses was also attributable to the net appreciation of international currencies against the U.S. dollar, which added approximately $5.3 million and $13.0 million, to our expenses for the three months and nine months ended March 31, 2008, respectively, as reported in U.S. dollars. As a percentage of net revenue, we expect our future selling, general and administrative expenses to continue in the range of 32% to 34%, including stock-based compensation expense.

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RESMED INC. AND SUBSIDIARIES

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

Donations to Foundation

During the three and nine months ended March 31, 2008, we donated $2.0 million to the ResMed Sleep Disordered Breathing Foundation. The Foundation’s overall mission includes the education of both the public and physicians about the inherent dangers of untreated SDB/OSA, particularly as it relates to cerebrovascular and cardiovascular disease. No donations were made during the three and nine months ended March 31, 2007.

Research and Development Expenses

Research and development expenses increased for the three months ended March 31, 2008 to $15.0 million from $13.1 million for the three months ended March 31, 2007, an increase of $1.9 million or 15%. Stock-based compensation expenses of $0.5 million have been included within research and development expenses for both the three months ended March 31, 2008 and 2007. Research and development expenses, as a percentage of net revenue, were 7%, for the three months ended March 31, 2008, which is consistent with the 7% for the three months ended March 31, 2007.

Research and development expenses increased for the nine months ended March 31, 2008 to $42.9 million from $35.9 million for the nine months ended March 31, 2007, an increase of $7.0 million or 19%. Stock-based compensation expenses of $1.5 million have been included within research and development expenses for both the nine months ended March 31, 2008 and 2007. Research and development expenses, as a percentage of net revenue, were 7%, for the nine months ended March 31, 2008, which is consistent with the nine months ended March 31, 2007.

The increase in research and development expenses was primarily due to the net appreciation of international currencies against the U.S. dollar, which added approximately $1.9 million and $5.0 million, to our expenses for both the three months and nine months ended March 31, 2008, respectively, as reported in U.S. dollars. The increase in research and development expenses was also attributable to an increase in the number of research and development personnel, increased charges for consulting fees and an increase in materials and tooling incurred to facilitate development of new products. As a percentage of net revenue, we expect our future research and development expense to continue in the range of 7% to 8%, including stock-based compensation expense.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets for the three and nine months ended March 31, 2008 totaled $2.0 million and $5.7 million, respectively, as compared to $1.7 million and $5.1 million for the three and nine months ended March 31, 2007, respectively. The increase in amortization expense is mainly attributable to the appreciation of the Euro against the U.S. dollar as the majority of the acquired intangible assets are denominated in Euros.

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RESMED INC. AND SUBSIDIARIES

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

Restructuring Expenses

Restructuring expenses incurred during the three and nine months ended March 31, 2008 were $62,000 and $2.4 million, respectively. Restructuring expenses consisted of expenses associated with our decision to streamline European management, including the closure of part of the European headquarters in Basel, Switzerland and two regional offices in the Netherlands. We will continue to monitor the progress of this restructure and adjust our business strategies and personnel accordingly to achieve maximum efficiencies and cost savings.

Income Taxes

Our effective income tax rate of approximately 32% for the three months ended March 31, 2008 was higher than our effective income tax rate (benefit) of approximately (27%) for the three months ended March 31, 2007, primarily due to the voluntary product recall expenses recognized during the three months ended March 31, 2007. Excluding the impact of the product recall expenses, the income tax rate is consistent with the three months ended March 31, 2007 of 32%.

Our effective income tax rate of approximately 31% for the nine months ended March 31, 2008 was lower than our effective tax rate of 33% for the nine months ended March 31, 2007. This is again primarily due to the impact of voluntary product recall expense recognized during the nine months ended March 31, 2007. Excluding the impact of voluntary product recall expense the effective income tax rate was consistent with the nine months ended March 31, 2008 of 31%. We also continue to benefit from the relatively low Australian corporate tax rate of 30% and certain Australian research and development tax benefits because we generate a majority of our taxable income in Australia.

Other Income (Expense), Net

Other income (expense), net for the three and nine months ended March 31, 2008 was income of $6.2 million and $10.3 million, compared to $0.9 million and $3.4 million, respectively, for the three and nine months ended March 31, 2007. The increase in other income, net for the three and nine months ended March 31, 2008 was predominantly due to higher interest income on additional cash balances, gains on foreign currency transactions and hedging and the $5.9 million gain on the sale of our Poway property. These impacts were partly offset by the $3.2 million impairment write-down of our at cost-method investments.

Net Income

As a result of the factors above, our net income for the three months ended March 31, 2008 was $29.7 million or $0.38 per diluted share compared to net loss of ($15.4) million or ($0.20) per diluted share for the three months ended March 31, 2007.

As a result of the factors above, our net income for the nine months ended March 31, 2008 was $80.7 million or $1.02 per diluted share compared to net income of $38.6 million or $0.49 per diluted share for the nine months ended March 31, 2007.

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RESMED INC. AND SUBSIDIARIES

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

Liquidity and Capital Resources

As of March 31, 2008 and June 30, 2007, we had cash and cash equivalents of $307.5 million and $257.8 million, respectively. Working capital was $577.0 million and $466.4 million at March 31, 2008 and June 30, 2007, respectively.

Inventories at March 31, 2008 increased by $12.6 million or 8% to $169.5 million compared to March 31, 2007 inventories of $156.9 million. The percentage increase in inventories was lower than the 14% increase in revenues in the nine-month period ended March 31, 2008 compared to the nine month period ended March 31, 2007. The lower inventory growth reflects improved working capital management.

Accounts receivable at March 31, 2008 were $179.9 million, an increase of $26.8 million or 18% over the March 31, 2007 accounts receivable balance of $153.1 million. This increase was higher than the 14% incremental increase in revenues for the nine months ended March 31, 2008 compared to the nine months ended March 31, 2007. Accounts receivable days outstanding were 73 days for the quarter ended March 31, 2008, which was consistent with the 73 days for the quarter ended March 31, 2007. Our allowance for doubtful accounts as a percentage of total accounts receivable at March 31, 2008 and June 30, 2007 was 3.1% and 2.7%, respectively. The credit quality of our customers remains consistent with our past experience.

During the nine months ended March 31, 2008, we generated cash of $81.5 million from operations. Capital expenditures for the nine months ended March 31, 2008, and 2007 aggregated $57.6 million and $60.1 million, respectively. The capital expenditures for the nine months ended March 31, 2008 primarily reflected the construction costs related to the extension of our manufacturing facility in Sydney, Australia, construction of our new corporate headquarters in Kearny Mesa, San Diego, computer hardware and software, rental and loan equipment and the purchase of production tooling equipment and machinery. As a result of these capital expenditures, our balance sheet reflects net property, plant and equipment of approximately $335.1 million at March 31, 2008 compared to $310.6 million at June 30, 2007.

On July 7, 2005, we purchased a 9.78-acre parcel of land in San Diego for $21.0 million. The new location at Kearny Mesa, San Diego will allow us to develop a new corporate headquarters. We commenced construction of our new corporate headquarters during fiscal 2007 and to date have incurred expenditures of $24.8 million. We estimate additional construction costs of approximately $76.7 million to complete the project. We drew down an additional $5 million during the quarter and to date we have drawn down $20 million from our revolving loan facility to fund the construction. We expect to complete the project in March 2009 and to fund the remaining project costs through a combination of cash on hand and our undrawn revolving loan facility of $45 million.

On March 24, 2008, we completed the sale and leaseback of real property in Poway, California, where our principal executive offices and one of our US distribution facilities are located. The net consideration for the sale of this property was $24.7 million in cash and on completion of the sale and leaseback we recognized a gain on sale of $5.9 million. We will lease back the property for a period ending June 30, 2009, and will retain an option to extend the lease term for an additional three months.

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RESMED INC. AND SUBSIDIARIES

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

Liquidity and Capital Resources, Continued

Details of contractual obligations at March 31, 2008 are as follows:

 

In $000’s		Payments Due by Period
		Total		Mar 31, 2009		Mar 31, 2010		Mar 31, 2011		Mar 31, 2012		Mar 31, 2013		Thereafter
Long-Term Debt		$131,620		$16,146		$46,162		$19,710		$43,652		$5,950		$-
Operating Leases		48,042		13,193		10,309		7,232		4,999		2,594		9,715
Capital Leases		589		91		91		91		91		91		134
Unconditional Purchase Obligations		28,270		26,251		1,149		841		25		4		-
Total Contractual Obligations (A)		$208,521		$55,681		$57,711		$27,874		$48,767		$8,639		$9,849

(A)	The liabilities related to unrecognized tax benefits as disclosed within Note 14 of the financial statements, are not included in the above contractual obligations because the timing cannot be reliably estimated.

Details of other commercial commitments as at March 31, 2008 are as follows:

 

In $000’s		Amount of Commitment Expiration Per Period
		Total		Mar 31, 2009		Mar 31, 2010		Mar 31, 2011		Mar 31, 2012		Mar 31, 2013		Thereafter
Standby Letters of Credit		$42		$42		$-		$-		$-		$-		$-
Guarantees*		88,999		1,760		1,119		83,966		87		-		2,067
Total Commercial Commitments		$89,041		$1,802		$1,119		$83,966		$87		$-		$2,067

*	The above guarantees relate mainly to guarantees required as part of our debt facilities and requirements under contractual obligations with insurance companies transacting with our German subsidiaries.

On March 13, 2006, our wholly-owned subsidiaries ResMed Corp., ResMed Motor Technologies Inc. and ResMed EAP Holdings Inc. entered into a Second Amended and Restated Revolving Loan Agreement with Union Bank of California, N.A. as administrative agent for the Lenders (the “Loan Agreement”), that provides for a revolving loan of up to $65 million. Payment of principal must be made to reduce the total outstanding principal to $55 million on March 1, 2009; and the entire outstanding principal amount must be repaid in full before March 1, 2011. The outstanding principal amount due under the loan will bear interest at a rate equal to LIBOR plus 0.75% to 1.00% (depending on the applicable leverage ratio). The Loan Agreement contains customary covenants, including certain financial covenants and an obligation that we maintain certain financial ratios, including a maximum ratio of total debt to EBITDA (as defined in the Loan Agreement), a fixed charge coverage ratio, a minimum tangible net worth, and that certain of our subsidiaries maintain a minimum EBITDA and liquidity. We are currently in compliance with all of these covenants. At March 31, 2008 there was $20 million outstanding under this loan.

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RESMED INC. AND SUBSIDIARIES

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

Liquidity and Capital Resources, Continued

Syndicated Facility

On June 8, 2006, our wholly-owned Australian subsidiary, ResMed Limited, entered into a Syndicated Facility Agreement with HSBC Bank Australia Limited as original financier, facility agent and security trustee, that provides for a loan in three tranches.

Tranche A is a EUR 50 million term loan facility that refinanced all amounts outstanding under a previous syndicated facility agreement dated May 16, 2005 between ResMed Limited and HSBC Bank Australia Limited, to fund the obligations of our wholly owned French subsidiary ResMed SAS under its agreement to acquire Saime SAS). Tranche A bears interest at a rate equal to LIBOR for deposits denominated in EUR plus a margin of 0.80% or 0.90%, depending on the ratio of the total debt to EBITDA of the ResMed Group for the most recently completed fiscal year for the applicable interest period. Payments of principal must be made to reduce the total outstanding principal amount of Tranche A to EUR 37.75 million on June 30, 2008, EUR 27.5 million on June 30, 2009, EUR 15 million on December 31, 2009, and the entire outstanding principal amount must be repaid in full on June 8, 2011. At March 31, 2008, the Tranche A facility loan had an amount outstanding of EUR 44.5 million, equivalent to approximately USD 70.2 million.

Tranche B is a USD 15 million term loan facility that may only be used for the purpose of financing capital expenditures and other asset acquisitions by the ResMed Group. Tranche B bears interest at a rate equal to LIBOR for deposits denominated in EUR, Australian dollars, USD or British Pounds plus a margin of 0.80% or 0.90%, depending on the ratio of the total debt to EBITDA of the ResMed Group for the most recently completed fiscal year for the applicable interest period. The entire principal amount must be repaid in full on June 8, 2011. At March 31, 2008, the Tranche B facility loan agreement had an amount outstanding of GBP 3.0 million, equivalent to approximately USD 5.9 million.

Tranche C is a USD 60 million term loan facility that may only be used for the purpose of the payment by ResMed Limited of a dividend to ResMed Holdings Limited, which will ultimately be paid to ResMed Inc. Tranche C bears interest at a rate equal to LIBOR for deposits denominated in EUR, Australian dollars or USD plus a margin of 0.70% or 0.80%, depending on the ratio of the total debt to EBITDA of the ResMed Group for the most recently completed fiscal year for the applicable interest period. The entire outstanding principal amount must be repaid in full by June 8, 2009. At March 31, 2008, the Tranche C facility loan had an amount outstanding of EUR 20.0 million, equivalent to approximately USD 31.5 million.

Simultaneous with the Syndicated Facility Agreement, ResMed Limited entered into a working capital agreement with HSBC Bank Australia Limited for revolving, letter of credit and overdraft facilities up to a total commitment of 6.5 million Australian dollars, and ResMed (UK) Limited entered into a working capital agreement with HSBC Bank plc for a revolving cash advance facility up to a total commitment of 3 million Sterling. At March 31, 2008, the working capital agreement had an amount outstanding of GBP 2.0 million, USD 4.0 million.

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RESMED INC. AND SUBSIDIARIES

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

Liquidity and Capital Resources, Continued

We expect to satisfy all of our short-term liquidity requirements through a combination of cash on hand, cash generated from operations, our $45 million undrawn revolving line of credit with Union Bank of California and our $17.0 million undrawn facilities with HSBC.

The results of our international operations are affected by changes in exchange rates between currencies. Changes in exchange rates may negatively affect our consolidated net revenue and gross profit margins from international operations. We are exposed to the risk that the dollar value equivalent of anticipated cash flows would be adversely affected by changes in foreign currency exchange rates. We manage this risk through foreign currency option contracts.

Common stock

On June 6, 2002, the Board of Directors authorized us to repurchase up to 8.0 million shares of outstanding common stock. During the three and nine months ended March 31, 2008, we repurchased 0.6 million and 1.2 million shares at a cost of $23.2 million and $47.8 million, respectively. At March 31, 2008, we have repurchased a total of 3.5 million shares at a cost of $91.3 million. 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.

Critical Accounting Principles and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis we evaluate our estimates, including those related to allowance for doubtful accounts, inventory reserves, warranty obligations, goodwill, 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.

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

(1) 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 continually evaluating individual customer receivables, considering a customer’s financial condition, credit history and current economic conditions. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

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RESMED INC. AND SUBSIDIARIES

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

Critical Accounting Principles and Estimates, continued

(2) Inventory Adjustments. Inventories are stated at lower of cost or market and are determined by the first-in, first-out method. We review the components of inventory on a regular basis for excess, obsolete and impaired inventory based on estimated future usage and sales. The likelihood of any material inventory write-downs is dependent on changes in competitive conditions, new product introductions by us or our competitors, or rapid changes in customer demand.

(3) Valuation of Goodwill, Intangible and Other Long-Lived Assets. We use assumptions in establishing the carrying value, fair value and estimated lives of our long-lived assets and goodwill. The criteria used for these evaluations include management’s estimate of an asset’s continuing ability to generate positive income from operations and positive cash flow in future periods compared to the carrying value of the asset, as well as the strategic significance of any identifiable intangible asset in our business objectives. If assets are considered to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Useful lives and related amortization or depreciation expense are based on our estimate of the period that the assets will generate revenues or otherwise be used by us.

Factors that would influence the likelihood of a material change in our reported results include significant changes in the asset’s ability to generate positive cash flow, loss of legal ownership or title to the asset, a significant decline in the economic and competitive environment on which the asset depends, significant changes in our strategic business objectives, utilization of the asset, and a significant change in the economic and/or political conditions in certain countries.

(4) Valuation of Deferred Income Taxes. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The likelihood of a material change in our expected realization of these assets is dependent on future taxable income, the intrinsic value of stock options, our ability to deduct tax loss carry forwards against future taxable income, the effectiveness of our tax planning strategies among the various tax jurisdictions that we operate in, and any significant changes in the tax treatment received on our business combinations.

(5) Provision for Warranty. We provide for the estimated cost of product warranties at the time the related revenue is recognized. The amount of this provision is determined by using a financial model, which takes into consideration actual, historical expenses and potential risks associated with our different products. This financial model is then used 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, revisions to our estimated warranty provision would be required.

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RESMED INC. AND SUBSIDIARIES

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

Critical Accounting Principles and Estimates, continued

(6) Revenue Recognition. Revenue on product sales is recorded at the time of shipment, at which time title transfers to the customer. Revenue on product sales, which require customer acceptance, is not recorded until acceptance is received. Royalty revenue from license agreements is recorded when earned. Service revenue received in advance from service contracts is initially deferred and recognized ratably over the life of the service contract. Revenue received in advance from rental unit contracts is initially deferred and recognized ratably over the life of the rental contract. Revenue from sale of marketing and distribution rights is initially deferred and recognized ratably as revenue over the life of the contract. Freight charges billed to customers are included in revenue. All freight-related expenses are charged to cost of sales.

We do not recognize revenues to the extent that we offer a right of return or other recourse with respect to the sale of our products, other than returns for product defects or other warranty claims, nor do we recognize revenues if we offer variable sale prices for subsequent events or activities. As part of our sales processes we may provide upfront discounts for large orders, one time special pricing to support new product introductions, sales rebates for centralized purchasing entities or price-breaks for regular order volumes. The costs of all such programs are recorded as an adjustment to revenue. Our products are predominantly therapy-based equipment and require no installation. As such, we have no significant installation obligations.

(7) Stock-Based Compensation. In accordance with the modified prospective method of SFAS No. 123 (R), we measure the compensation of all stock-based awards at fair value on the date of grant. Such value is recognized as compensation expense over the service period, net of estimated forfeitures. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period the estimates are revised. We consider many factors when estimating expected forfeitures, including the type of awards, employee class, and historical experience. Actual results may differ substantially from these estimates.

(8) Voluntary Product Recall Expenses. We recognized an accrual for the estimated cost of the voluntary product recall at the time the liability was probable and the related expenses could be reasonably estimated. The amount of this accrual was determined taking into consideration the future probable expenses directly related to the product recall including expected return rates for the affected units, unit replacement costs, legal, consulting, logistical and administrative expenses. Should actual product recall costs differ from our estimated costs, revisions to our estimated product recall accrual may be required.

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RESMED INC. AND SUBSIDIARIES

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

Critical Accounting Principles and Estimates, Continued

(9) Income Tax. We have adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48 “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109” (“FIN 48”) on July 1, 2007. In accordance with FIN 48 we assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.

Recently Issued Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised), “Business Combinations” (“SFAS No. 141(R)”). Under the requirements of SFAS No. 141(R), the acquiring entity will be required to recognise all assets and liabilities acquired in a transaction at their acquisition date fair value. SFAS No. 141(R) will also change the accounting treatment for specific transactions such as the recognition of contingent liabilities, the recognition of capitalized in-process research and development, restructuring costs, the treatment of acquisition related transaction costs and changes in the income tax valuation allowances. SFAS No. 141(R) is effective for business combinations for which the acquisition date is on or after July 1, 2009, with early adoption prohibited. The adoption of this standard will not impact our current financial statements but we are assessing the potential impact that the adoption of this standard will have on our future financial statements.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – An amendment of ARB No.51” (“SFAS No. 160”). SFAS No. 160 outlines the accounting and reporting requirements for non-controlling interests in consolidated financial statements such as recognizing non-controlling interests as a component of consolidated stockholder’s equity separate from the parent equity and net income attributable to non-controlling interests be identified and shown separately on the face of the consolidated income statement. SFAS No. 160 also revises the accounting for increases and decreases in a parent’s controlling interest. SFAS No. 160 is effective for fiscal years and interim periods within those years, beginning after December 15, 2008, with early adoption prohibited. We do not believe the adoption of this standard will have a material impact on our financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement 133” (“SFAS No. 161”). SFAS No. 161 requires disclosure of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cashflows. SFAS No. 161 is effective for fiscal years and interim periods within those years, beginning after November 15, 2008. We are assessing the potential impact that the adoption of this standard will have on our financial statements.

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RESMED INC. AND SUBSIDIARIES

Recently Issued Accounting Pronouncements, continued

In June 2007, the FASB ratified EITF No. 07-3, “Accounting for Nonrefundable Advanced Payments for Goods or Services received for Use in Future Research and Development Activities” (“EITF No. 07-3”). EITF No. 07-3 requires that non-refundable advance payments for goods and services that will be used or rendered for future research and development activities should be deferred and capitalized. These amounts should be expensed as the related goods are delivered or the related services are performed. EITF No. 07-3 is effective for fiscal years beginning after December 15, 2007. We do not believe the adoption of this standard will have a material impact on our financial statements.

In September 2006, the FASB issued FASB No. 157, “Fair Value Measurements” (“FASB 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. FASB 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are assessing the potential impact that the adoption of this standard will have on our financial statements.

Off-Balance Sheet Arrangements

As of March 31, 2008, we are not involved in any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC.

 

Item 3.

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 dollar. We have significant foreign currency exposure through both our Australian manufacturing activities and international sales operations.

We have established a foreign currency hedging program using purchased currency options to hedge foreign-currency-denominated financial assets, liabilities and manufacturing expenditures. The goal of this hedging program is to economically guarantee or lock in the exchange rates on our foreign currency exposures denominated in Euros and Australian 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.

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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, Continued

The table below provides information in U.S. dollar equivalents on our foreign-currency-denominated financial assets at March 31, 2008 (in thousands):

 

		Foreign Currency Financial Assets
		Australian Dollar (AUD)		US Dollar (USD)		Euro (EUR)		Great Britain Pound (GBP)		Canadian Dollar (CAD)		Singapore Dollar (SGD)		New Zealand Dollar (NZD)		Swedish Krona (SEK)		Swiss Franc (CHF)		Sth African Rand (ZAR)		Norwegian Kroner (NOK)
AUD Functional
Currency Entities:
Assets		$-		$78,751		$98,951		$21,971		-		$772		$1,120		$1,273		$4,646		-		$1,917
Liability		-		(24,131)		(109,067)		(6,137)		-		(34)		(279)		(32)		(140)		-		(138)
Net Total		-		54,620		(10,116)		15,834		-		738		841		1,241		4,506		-		1,779
USD Functional
Currency Entities:
Assets		66,317		-		-		-		2,756		-		-		-		-		-		-
Liability		-		-		-		-		-		-		-		-		-		-		-
Net Total		66,317		-		-		-		2,756		-		-		-		-		-		-
EURO Functional
Currency Entities:
Assets		-		1		-		-		-		-		-		-		-		-		-
Liability		-		(58)		-		(950)		-		-		-		-		(10)		-		-
Net Total		-		(57)		-		(950)		-		-		-		-		(10)		-		-
GBP Functional
Currency Entities:
Assets		-		2,235		14,580		-		-		-		-		-		-		1,346		-
Liability		-		-		(2,401)		-		-		-		-		-		(497)		(8)		(52)
Net Total		-		2,235		12,179		-		-		-		-		-		(497)		1,338		(52)
CHF Functional
Currency Entities:
Assets		-		273		7		11		-		-		-		-		-		-		-
Liability		-		-		(462)		(1)		-		-		-		-		-		-		-
Net Total		-		273		(455)		10		-		-		-		-		-		-		-
NOK Functional
Currency Entities:
Assets		-		-		-		-		-		-		-		-		-		-		-
Liability		-		(70)		(54)		(59)		-		-		-		(110)		-		-		-
Net Total		-		(70)		(54)		(59)		-		-		-		(110)		-		-		-
SEK Functional
Currency Entities:
Assets		-		-		-		-		-		-		-		-		-		-		-
Liability		-		(1,389)		(90)		(103)		-		-		-		-		-		-		(127)
Net Total		-		(1,389)		(90)		(103)		-		-		-		-		-		-		(127)

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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, Continued

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 held at March 31, 2008. The table presents the notional amounts and weighted average exchange rates by contractual maturity dates for our foreign currency derivative financial instruments. These notional amounts generally are used to calculate payments to be exchanged under our option contracts.

 

(In thousands except exchange rates)

Fair Value Assets/(Liabilities)

Foreign Exchange Call Options

FY 2008

FY 2009

FY 2010

Total

Mar 31, 2008

June 30, 2007

Receive AUD/Pay USD

Option amount

$40,500

$106,000

$9,000

$155,500

$4,260

$3,558

Ave. contractual exchange rate

AUD 1 = USD 0.8585

AUD 1 = USD 0.8926

AUD 1 = USD 0.9427

AUD 1 = USD 0.8861

Receive AUD/Pay Euro

Option amount

$2,365

$9,461

$4,730

$16,556

$44

$209

Ave. contractual exchange rate

AUD 1 = Euro 0.6629

AUD 1 = Euro 0.6657

AUD 1 = Euro 0.6685

AUD 1 = Euro 0.6661

Receive AUD/Pay GBP

Option Amount

$1,487

$14,875

$2,975

$19,337

$370

$82

Ave. contractual exchange rate

AUD 1 = GBP 0.4270

AUD 1 = GBP 0.4872

AUD 1 = GBP 0.5120

AUD 1 = GBP 0.4856

Interest Rate Risk

We are exposed to risk associated with changes in interest rates affecting the return on our cash and cash equivalents, investment securities and debt.

At March 31, 2008, we maintain cash and cash equivalents containing financial instruments that have original maturities of less than twelve months. These financial instruments principally comprised of bank term deposits and at call accounts that are invested at both variable interest rates and short term fixed interest rates.

At March 31, 2008, we had total long-term debt, including the current portion of those obligations, of $132.2 million. Of this debt, $131.6 million is at variable interest rates and $0.6 million is subject to fixed interest rates.

A hypothetical 10% change in interest rates during the three months ended March 31, 2008, 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

 

Item 4.

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 such 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.

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		Items 1-6

 

 

RESMED INC. AND SUBSIDIARIES

PART II—OTHER INFORMATION

 

Item 1

Legal Proceedings

Refer to Note 12 to the Condensed Consolidated Financial Statements.

 

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, 2007, which was filed with the SEC and describes the various risks and uncertainties to which we are or may become subject. At March 31, 2008, 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, 2007.

 

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 March 31, 2008:

 

Period		Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1)
Opening balance at July 1, 2007		2,304,918		$18.87		2,304,918		5,695,082
July 2007		Nil		-		-		-
August 2007		Nil		-		-		-
September 2007		412,600		$40.01		412,600		(412,600)
October 2007		121,200		$40.50		121,200		(121,200)
November 2007		78,800		$40.03		78,800		(78,800)
December 2007		Nil		-		-		-
January 2008		Nil		-		-		-
February 2008		202,100		40.91		202,100		(202,100)
March 2008		372,900		40.16		372,900		(372,900)
Closing balance at March 31, 2008		3,492,518		$26.15		3,492,518		4,507,482

 

(1)

On June 6, 2002, the Board of Directors authorized us to repurchase up to 8.0 million shares of our outstanding common stock. For the nine months ended March 31, 2008 and 2007, we repurchased 1,187,600 and Nil shares at a cost of $23.2 million and $Nil, respectively. Since the inception of the share buyback program, we have repurchased 3,492,518 shares at a cost of $91.3 million.

 

Item 3

Defaults Upon Senior Securities

None

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PART II - OTHER INFORMATION		Items 1-6

 

 

RESMED INC. AND SUBSIDIARIES

 

Item 4

Submission of Matters to a Vote of Security Holders

None

 

Item 5

Other Information

None

 

Item 6

Exhibits

 

3.1

First Restated Certificate of Incorporation of ResMed Inc. (1)

3.2

Fourth Amended and Restated Bylaws of ResMed Inc. (2)

10.1

Second Amendment to Second Amended and Restated Revolving Loan Agreement dated January 28, 2008 (3)

10.2

Lease Agreement between ResMed Corp. and Poway Danielson, LP (4)

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

32.1

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

 

(1)	Incorporated by reference to Exhibit 3.1 to the Registrants’ Annual Report on Form 10-K for the Fiscal Year ended June 30, 2007.

(2)	Incorporated by reference to Exhibit 3.1 to the Registrants’ Current Report on Form 8-K filed on December 14, 2007.

(3)	Incorporated by reference to Exhibit 10.1 to the Registrants’ Current Report on Form 8-K filed on February 6, 2008.

(4)	Incorporated by reference to Exhibit 10.1 to the Registrants’ Current Report on Form 8-K filed on March 27, 2008.

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PART II - OTHER INFORMATION		SIGNATURES

 

 

RESMED INC. AND SUBSIDIARIES

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

May 7, 2008

ResMed Inc.

 

 

 

/s/ KIERAN T. GALLAHUE

Kieran T. Gallahue

Chief Executive Officer

 

 

 

 

/s/ BRETT A. SANDERCOCK

Brett A. Sandercock

Chief Financial Officer