ResMed Inc. (RMD) FY2025 Earnings Quality Report

Grade: D — Significant concerns

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Fiscal year ended June 30, 2025) + Yahoo Finance

Auditor: KPMG LLP — Unqualified opinion (1 critical audit matter: Evaluation of goodwill triggering events)

One-line verdict: ResMed earns a D grade because two fails hit simultaneously — receivables outpaced revenue for two consecutive years (A2) and goodwill plus intangibles equal 59% of equity (D1) above the 50% threshold. Neither fail involves a critical-code check, but the combination triggers the D rule. Underneath these flags, the business is performing well: revenue grew 10% to $5.15B, gross margin expanded 270bp to 59.4%, operating cash flow jumped 25% to $1.75B, and the balance sheet has actually improved — cash grew from $238M to $1.21B while long-term debt fell from $697M to $658M. The M-Score of -2.61 is clean. This is a story of a healthy business whose accounting flags are mechanical rather than substantive.

The CPAP Leader

ResMed describes itself in the MD&A as "a global leader in the development, manufacturing, distribution and marketing of medical devices and cloud-based software applications that diagnose, treat and manage respiratory disorders, including sleep disordered breathing, or SDB, chronic obstructive pulmonary disease, neuromuscular disease and other chronic diseases."

The company operates in two segments: Sleep and Breathing Health (formerly Sleep and Respiratory Care) and Residential Care Software (formerly Software as a Service). In FY2025 ResMed renamed both segments in alignment with its "2030 strategy."

Revenue breakdown from the MD&A:

The Residential Care Software segment — which includes MEDIFOX DAN (acquired 2022) and MatrixCare — grew 10% and is increasingly important to the ResMed margin story. Per the MD&A: "The increase was driven by continued growth in the Home Medical Equipment, or HME, and MEDIFOX DAN verticals within our Residential Care Software business."

Gross margin expansion from 56.7% to 59.4% is the strongest story in the 10-K. From the MD&A: "The increase in gross margin was due primarily to procurement, manufacturing and logistics efficiencies, $14.3 million of combined expenses associated with the field safety notifications for masks with magnets and Astral devices recognized during the year ended June 30, 2024, as well as a reduction in the amortization of acquired intangibles during the year ended June 30, 2025."

Cash Flow: A Transformation

Operating cash flow grew from $351M in FY2022 to $1.75B in FY2025 — a 5x increase in three years. The FY2022/FY2023 depression was driven by heavy working capital investment during the Philips CPAP recall period (ResMed built inventory aggressively to capture displaced demand). Once that working capital cycle normalized, operating cash flow converged toward its natural level above net income.

Free cash flow of $1.65B in FY2025 comfortably funds the $311M annual dividend ($0.53 per share quarterly) plus share buybacks. CapEx has been declining ($156M → $101M) as the inventory build-out is complete.

The Balance Sheet: Delevered

The cash explosion from $238M to $1.21B is the most striking balance sheet change. ResMed generated $1.75B of operating cash flow, spent $101M on CapEx and $311M on dividends, and retained the rest. Long-term debt fell from $697M to $658M, and total debt fell from $874M to $852M. This is a company that has completed its major debt-funded acquisition cycle (MEDIFOX DAN, Snap Analytics, VirtuOx) and is now in pure cash-generation mode.

Cash of $1.21B comfortably exceeds total debt of $852M (C4 pass). Goodwill of $3.05B plus intangibles of $465M equals $3.51B — this is the denominator of the D1 fail.

The 18-Point Screening

Revenue Quality

A2 (fail): Accounts receivable grew 12.2% in FY2025 ($837M → $939M) against revenue growth of 9.8%. In FY2024 the same pattern occurred (AR growth exceeded revenue growth). The 2-consecutive-year rule fires.

Unlike most A2 fails, this one is not corroborated by other revenue-quality concerns. DSO moved only +1 day (A1 pass with room to spare), CFFO grew 25% vs. revenue at 10% (A3 pass), and the Beneish M-Score is a clean -2.61. The pattern is simply that receivables have been growing slightly faster than revenue across the post-Philips-recall period. Home Medical Equipment (HME) customers — who distribute ResMed devices to end patients — have been consolidating, which the 10-K discusses in Item 1A: "Many HME providers, durable medical equipment (DME) suppliers, and residential health providers are consolidating, which may result in greater concentration of purchasing power." Larger, consolidated DME customers typically negotiate longer payment terms.

Expense Quality

B1: Inventory grew 12.8% vs. COGS of 3.0%. This is a notable spread but the absolute level remains healthy and the business continues to sell through. Per the MD&A, continued strong demand for masks and devices supports the working capital build. Inventory growth is backward-facing (the Philips recall era still reverberating) more than forward-facing.

B4: Gross margin expansion of 270bp is the strongest signal in the whole filing. Procurement efficiency and the absence of the prior-year $14.3M field safety notification charges are the stated drivers.

Cash Flow Quality

All four cash flow checks pass — this is strong corroboration that the A2 AR fail is not a cash-quality signal.

Balance Sheet

D1 (fail): Goodwill + intangibles = 59% of equity. The threshold is 50%. The bulk of this is from the MEDIFOX DAN acquisition (2022, ~$1B), plus earlier deals. Goodwill stood at $3.05B at June 30, 2025, up from $2.84B a year earlier — the increase reflects smaller bolt-ons and foreign currency translation.

KPMG identified exactly this area as the critical audit matter. From the audit report: "the Company's goodwill balance was $3,047 million as of June 30, 2025. The Company performs goodwill impairment testing on an annual basis and whenever events or changes in circumstances indicate that the carrying value of a reporting unit, including goodwill, might exceed the fair value of the reporting unit."

D2 (pass with room): Debt/EBITDA of just 0.4x is one of the lowest leverage readings in our med-device coverage. With $1.2B cash and $852M debt, net debt is actually negative ~$357M. The D1 intangibles metric is driven by the numerator being large, not by solvency risk.

M&A Risk

Beneish M-Score

Critical Audit Matter: Goodwill Triggering Events

KPMG identified the "Evaluation of goodwill triggering events" as the sole critical audit matter. From the audit report:

"As discussed in Notes 2(i) and 5 to the consolidated financial statements, the Company's goodwill balance was $3,047 million as of June 30, 2025. The Company performs goodwill impairment testing on an annual basis and whenever events or changes in circumstances indicate that the carrying value of a reporting unit, including goodwill, might exceed the fair value of the reporting unit. In the current year, the Company performed qualitative, or Step 0, assessments to determine whether there was a greater than 50 percent likelihood that the fair value of each reporting unit was less than its carrying value. After completing Step 0, the Company determined that goodwill was not more likely than not impaired and, therefore, no Step 1, or quantitative assessment, was necessary."

KPMG's reasoning: "We identified the evaluation of goodwill triggering events as a critical audit matter. The evaluation of potential triggering events, including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, market capitalization and events specific to the entity and reporting units, required a higher degree of auditor judgment."

The procedures KPMG performed included "considering macroeconomic conditions including gross domestic product, labor market, and inflation by key regions around the world for negative indicators; evaluating information from analyst reports in the enterprise software and sleep and breathing health industries, which were compared to industry and market considerations used by the Company; analyzing information including changes in the costs of raw materials and labor, the financial performance of the reporting units, the Company's market capitalization, and other entity and reporting-unit specific events."

KPMG has served as ResMed's auditor since 1994. The critical audit matter is exactly the area the D1 check also flags — it confirms the issue is real enough to warrant auditor focus, while also confirming that management and auditor have concluded no impairment is more-likely-than-not.

Key Risks from Item 1A

1. GLP-1 disruption. From Item 1A: "certain pharmaceutical treatments, such as GLP-1s currently approved to treat diabetes and for weight loss, may enhance patient health, lower the occurrence of obesity, or potentially reduce the severity or existence of OSA." This is the single biggest long-term risk to ResMed's core CPAP franchise — if weight loss via GLP-1s reduces obstructive sleep apnea population prevalence, the ResMed addressable market shrinks.

2. Philips CPAP return. From Item 1A: "one of our competitors, Philips, continues to operate in the U.S. under a consent decree resulting from its product recall. We cannot predict the timing or nature of their substantial return or the impact to our business, financial condition, and results of operations. The temporary ban against sales of Philips flow generators has provided an opportunity for smaller companies to compete for customers." ResMed captured significant share during the Philips recall; a return could reverse some of that.

3. DME consolidation and pricing pressure. From Item 1A: "Many HME providers, durable medical equipment (DME) suppliers, and residential health providers are consolidating, which may result in greater concentration of purchasing power... If we are forced to reduce our prices because of consolidation in the healthcare industry, our revenues may decrease."

4. Tariffs and supply chain. From Item 1A: "Global economic conditions, geopolitical instability, the impact of tariffs and trade wars on our suppliers, and other macroeconomic factors, including inflation, supply chain disruptions, such as recent shipping disruptions in the Red Sea, interest rate and foreign currency rate fluctuations, and volatility in the capital markets could negatively impact our business."

5. Software business competition. From Item 1A on the Residential Care Software segment: "the demand for business management software is highly competitive, rapidly evolving, subject to changing technology, with low barriers to entry, shifting customer needs, increased use of AI and frequent introductions of new products and services."

6. VirtuOx oversight risk. Item 1A specifically flags: "We are subject to new areas of direct healthcare oversight by federal government agencies due to our acquisition of VirtuOx." VirtuOx is a remote diagnostic testing provider.

Altman Z-Score and F-Score

Z-Score of 8.65 is very strong — driven by the gross margin expansion, low leverage, and positive net cash position. The F-Score of 1.34 is slightly elevated (consistent with the AR/revenue pattern from A2) but not at a level that flags manipulation.

Summary

Grade: D. Two fails outside the critical-code set drive the grade.

ResMed's D grade should be read carefully. Neither fail is in the critical-codes set (C1, C4, D2, F1) — it's not a manipulation signal, not a distress signal, not a revenue-cutoff signal. The business fundamentals are strong: 10% revenue growth, 270bp gross margin expansion, 25% CFFO growth, 1.25 CFFO/NI ratio, net cash balance sheet, M-Score -2.61.

A2 fail: AR has grown slightly faster than revenue for two consecutive years. DSO moved only +1 day. This looks like an effect of HME customer consolidation and longer payment terms rather than a revenue cutoff or channel stuffing issue.

D1 fail: Goodwill + intangibles of $3.5B = 59% of equity. This is the residue of the MEDIFOX DAN and earlier software acquisitions. KPMG specifically focused its critical audit matter on goodwill triggering events and concluded management's Step 0 assessment was appropriate; no impairment was more-likely-than-not.

The real risks are business risks, not accounting risks: GLP-1 disruption of the OSA population, Philips' potential return to the CPAP market, DME customer consolidation, and the ongoing integration of the Residential Care Software acquisitions. ResMed has one of the strongest balance sheets in medical devices after the FY2025 cash build — the D grade is a rules-based outcome, not a recommendation to avoid the company.

**Disclaimer**: This report is based on ResMed's FY2025 10-K (SEC EDGAR) and public financial data. This is NOT investment advice.

Data: SEC EDGAR 10-K (Fiscal year ended June 30, 2025) + Yahoo Finance

Auditor: KPMG LLP (Unqualified opinion, 1 critical audit matter: Evaluation of goodwill triggering events)