NATUS MEDICAL INCORPORATED
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") should be read in conjunction with the
Consolidated Financial Statements and the accompanying footnotes. MD&A includes
the following sections:
Business
We are a leading provider of medical device solutions focused on the diagnosis
and treatment of central nervous and sensory system disorders for patients of
all ages.
Year 2019 Overview
Our consolidated revenue decreased by $35.7 million for the year ended
December 31, 2019 compared to the year ended December 31, 2018 . This decrease
was driven by the exit of GND and Neurocom businesses, the sale of our Medix
business in Argentina , the impact of product discontinuations in our Newborn
Care market, and ship holds within Newborn Care and Hearing & Balance markets.
Net loss was $15.7 million , or $0.47 per share in the year ended December 31,
2019 , compared with net loss of $22.9 million , or $0.69 per share in the prior
year. This increase in income was primarily driven by our restructuring
initiative announced in 2019. While we experienced a net loss driven by our
reorganization efforts, we generated cash flow from operations of $60.1 million .
Reorganization
On January 15, 2019 , we announced the implementation of a new organizational
structure designed to improve operational performance and make us a stronger,
more profitable company. We consolidated our three business units, Neuro,
Newborn Care and Hearing & Balance, formerly Otometrics, into "One Natus." This
initiative was designed to create a single, unified company with globally led
operational teams in Sales & Marketing, Manufacturing, R&D , Quality, and General
and Administrative functions. We expect to continue to see increased
transparency, efficiency and cross-functional collaboration across common
technologies, processes and customer channels.
Application of Critical Accounting Policies
We prepare our financial statements in accordance with accounting principles
generally accepted in the United States of America ("GAAP"). In so doing, we
must often make estimates and use assumptions that can be subjective and,
consequently, our actual results could differ from those estimates. For any
given individual estimate or assumption we make, there may also be other
estimates or assumptions that are reasonable.
We believe that the following critical accounting policies require the use of
significant estimates, assumptions, and judgments. The use of different
estimates, assumptions, and judgments could have a material effect on the
reported amounts of assets, liabilities, revenue, expenses, and related
disclosures as of the date of the financial statements and during the reporting
period.
Revenue recognition
Revenue is recognized when obligations under the terms of a contract with a
customer are satisfied; generally this occurs with the transfer of control of
devices, supplies, or services. Revenue is measured as the amount of
consideration we expect to receive in exchange for transferring goods or
providing services.
For the majority of devices and supplies, we transfer control and recognizes
revenue when products ship from the warehouse to the customer. We generally do
not provide rights of return on devices and supplies. Freight charges billed to
customers are included in revenue and freight-related expenses are charged to
cost of revenue.
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Depending on the terms of the arrangement, we may also defer the recognition of
a portion of the consideration received because we have to satisfy a future
obligation (e.g. installation). Judgment is required to determine the standalone
selling price ("SSP") for each distinct performance obligation. Our estimate of
SSP is a point estimate. The estimate is calculated annually for each
performance obligation that is not sold separately. In instances where SSP is
not directly observable, such as when we do not sell the product or service
separately, the SSP is determined using information that may include market
conditions and other observable inputs.
We sell separately-priced service contracts that extend maintenance coverages
for both medical devices and data management systems beyond the base agreements
to customers. The separately priced service contracts range from twelve (12)
months to sixty (60) months. We receive payment at the inception of the contract
and recognize revenue ratably over the service period.
For products containing embedded software, we determine the hardware and
software components function together to deliver the products' essential
functionality and are considered a combined performance obligation. Revenue
recognition policies for sales of these products are substantially the same as
for other tangible products.
Acquisition Accounting
We have made a number of acquisitions in the past and may continue to make
acquisitions in the future. We account for acquired business combinations using
the acquisition method of accounting. The assets acquired and liabilities
assumed are recorded based on their respective fair values at the date of
acquisition. Valuations are generally completed for business acquisitions using
a discounted cash flow analysis. The most significant estimates and assumptions
inherent in a discounted cash flow analysis include the amount and timing of
projected future cash flows, the discounted rate used to measure the risks
inherent in the future cash flows, the assessment of the asset's life cycle, and
the competitive and other trends impacting the asset, including consideration of
technical, legal, regulatory, economic and other factors. Each of these factors
and assumptions can significantly affect the value of the intangible asset. The
excess of the fair value of consideration transferred over the fair value of the
net assets acquired is recorded as goodwill.
Determining the useful life of an intangible asset also requires judgment, as
different types of intangibles assets will have different useful lives and
certain assets may even be considered to have indefinite useful lives. Useful
life is the period over which the intangible asset is expected to contribute
directly and indirectly to our future cash flows. We determine the useful lives
of intangible assets based on a number of factors, such as legal, regulatory, or
contractual provisions that may limit the useful life, and the effects of
obsolescence, anticipated demand, existence or absence of competition, and other
economic factors on useful life.
Inventory Valuation
Inventories are carried at the lower of cost or net realizable value, with cost
being determined using the first-in, first-out method. The carrying value of our
inventory is reduced for any difference between cost and estimated net
realizable value of the inventory. We determine net realizable value by
evaluating ending inventories for excess quantities, obsolescence, and other
factors that could impact our ability to consume inventory for its intended use.
Our evaluation includes an analysis of historical sales by product, projections
of future demand by product, and an analysis of obsolescence by product.
Adjustments to the value of inventory establish a new cost basis and are
considered permanent even if circumstances later suggest that increased carrying
amounts are recoverable. If demand is higher than expected, we may sell
inventory that had previously been written down.
Results of Operations
The following table sets forth for the periods indicated selected consolidated
statement of income data as a percentage of total revenue. Our historical
operating results are not necessarily indicative of the results for any future
period.
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Percent of Revenue
Years Ended December 31,
2019 2018 2017
Revenue 100.0 % 100.0 % 100.0 %
Cost of revenue 39.7 % 41.1 % 42.6 %
Intangibles amortization 1.4 % 1.7 % 1.3 %
Gross profit 58.9 % 57.3 % 56.1 %
Operating expenses:
Marketing and selling 26.1 % 25.7 % 25.2 %
Research and development 11.9 % 11.6 % 10.3 %
General and administrative 12.0 % 13.3 % 14.9 %
Intangibles amortization 3.1 % 4.3 % 3.8 %
Restructuring 9.0 % 7.0 % 0.2 %
Total operating expenses 62.1 % 61.9 % 54.4 %
Income (loss) from operations (3.2 )% (4.6 )% 1.7 %
Other expense, net (1.1 )% (1.5 )% (0.7 )%
Income (loss) before provision (benefit) for income tax (4.3 )% (6.1 )% 1.0 %
Provision (benefit) for income tax expense (1.1 )% (1.8 )% 5.1 %
Net loss (3.2 )% (4.3 )% (4.1 )%
Comparison of 2019 and 2018
Revenue
Years ended December 31,
2019 2018 Change
Neuro
Devices and Systems $ 220,306 $ 200,762 10 %
Supplies 66,059 67,025 (1 )%
Services 871 12,000 (93 )%
Total Neuro Revenue 287,236 279,787 3 %
Newborn Care
Devices and Systems 53,465 72,807 (27 )%
Supplies 38,264 40,669 (6 )%
Services 19,183 20,396 (6 )%
Total Newborn Care Revenue 110,912 133,872 (17 )%
Hearing & Balance
Devices and Systems $ 92,050 $ 110,597 (17 )%
Supplies 4,977 6,635 (25 )%
Services - - - %Total Hearing & Balance Revenue 97,027 117,232 (17 )% Total Revenue
$ 495,175 $ 530,891 (7 )% For the year endedDecember 31, 2019 , Neuro revenue increased by 3% compared to the prior year. Devices and Systems revenue increased by 10% compared to the prior year due primarily to growth in EEG sales. Supplies revenue for 2019 decreased 1%, which was driven by declines in our international markets. Services revenue from GND decreased 93% compared to the prior year due to our exit from this business inJanuary 2019 . For the year endedDecember 31, 2019 , Newborn Care revenue decreased by 17% compared to the prior year. Devices and Systems revenue decreased by 27%. The decrease is primarily due to the divestiture ofMedix , exit from our balance and mobility product line, and planned product line rationalization. Supplies revenue decreased 6% compared to the prior year related to divestiture ofMedix business and product line rationalization. Services revenue decreased by 6% compared to the prior year 32
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primarily due to a lower collection per screen and decrease in screening volume on our Peloton hearing screening service, which was exited as ofDecember 31, 2019 . For the year endedDecember 31, 2019 , Hearing & Balance revenue decreased 17% compared to the prior year. Revenue from Devices and Systems decreased 17% and revenue from Supplies decreased 25% in 2019 compared to 2018. The overall decline in Hearing & Balance was driven by the impact of product rationalization and ship holds on some products. Cost of Revenue and Gross Profit Years endedDecember 31 ,
2019 2018
Revenue $ 495,175 $ 530,891
Cost of revenue 196,551 217,952
Intangibles amortization 6,916 8,924
Gross profit 291,708 304,015
Gross profit percentage 58.9 % 57.3 %
For the year ended December 31, 2019 , our gross profit as a percentage of sales
increased by 160 basis points compared to the prior year. This increase was
primarily attributable to cost reductions in our operations overhead and our
exit from lower margin businesses as a result of our corporate reorganization
announced in January 2019 and a reduction in intangible amortization and
restructuring costs incurred in 2018 related to business line exits.
Operating Costs
Years ended December 31,
2019 2018
Marketing and selling $ 129,109 $ 136,680
Percentage of revenue 26.1 % 25.7 %
Research and development $ 58,733 $ 61,482
Percentage of revenue 11.9 % 11.6 %
General and administrative $ 59,649 $ 70,599
Percentage of revenue 12.0 % 13.3 %
Intangibles amortization $ 15,144 $ 22,585
Percentage of revenue 3.1 % 4.3 %
Restructuring $ 44,739 $ 37,231
Percentage of revenue 9.0 % 7.0 %
Marketing and Selling
Marketing and selling expenses as a percentage of revenue remained relatively
flat in the year ended December 31, 2019 as compared to the prior year. The
decrease in expense is mainly attributable to the benefits of our corporate
reorganization initiated in January 2019 .
Research and Development
Research and development expenses decreased during the year ended December 31,
2019 compared to the prior year. The decrease relates to lower compensation
related expenses due to our corporate reorganization initiatives.
General and Administrative
General and administrative expenses decreased during the year ended December 31,
2019 compared to the prior year. This decrease was due to a reduction in
employee expenses, consulting fees and travel expenses due to our corporate
reorganization and exit from non-core businesses.
Intangibles Amortization
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Intangibles amortization decreased in the year endedDecember 31, 2019 compared to the prior year. The decrease is related to our restructuring initiatives, which included an impairment charge of$5.6 million in 2018 related to the end of life of our Bio-Logic core technology that did not recur in 2019. Restructuring Restructuring costs increased during the year endedDecember 31, 2019 compared to the prior year. This increase was driven by the restructuring initiatives announced inJanuary 2019 . We recorded an impairment related to the sale ofMedix , which included the recognition of deferred foreign currency related adjustments in accumulated other comprehensive income, of$24.8 million , net of tax, and an adjustment of$4.6 million for assets with a book value in excess of their fair market value. The increase was also driven by restructuring expenses incurred related to exiting the GND business and our restructuring initiatives. Other Income (Expense), net Other income (expense), net consists of interest income, interest expense, net currency exchange gains and losses, and other miscellaneous income and expense. We reported other expense, net of$5.6 million in the year endedDecember 31, 2019 , compared to$7.7 million in the prior year. We reported$0.8 million of foreign currency exchange losses in the year endedDecember 31, 2019 versus$0.8 million of foreign currency losses in the prior year. Interest expense was$4.9 million in the year endedDecember 31, 2019 compared to$6.8 million in the prior year. The reduction in interest expense was driven by accelerated payments on our outstanding debt. Interest income was$0.3 million in both the year endedDecember 31, 2019 and the prior year. Provision for Income Tax The effective tax rate ("ETR") for the year endedDecember 31, 2019 was 26.3% as compared to 28.9% for the prior year. Significant items that impact the effective tax rate are the change in geographic mix of income, adjustments and reversals of uncertain tax positions andSAB 118 adjustments arising from the 2017 Tax Act that were recorded in 2018. Comparison of 2018 and 2017 Revenue Years ended December 31, 2018 2017 Change Neuro Devices and Systems$ 200,762 $ 171,315 17 % Supplies 67,025 59,955 12 % Services 12,000 11,886 1 % Total Neuro Revenue 279,787 243,156 15 % Newborn Care Devices and Systems 72,807 89,027 (18 )% Supplies 40,669 43,928 (7 )% Services 20,396 22,325 (9 )% Total Newborn Care Revenue 133,872 155,280 (14 )% Hearing & Balance Devices and Systems 110,597 75,466 47 % Supplies 6,635 27,068 (75 )% Services - - - %
Total Hearing & Balance Revenue 117,232 102,534 14 % Total Revenue
$ 530,891 $ 500,970 6 % For the year endedDecember 31, 2018 , Neuro revenue increased by 15% compared to the prior year. Devices and Systems revenue increased by 17% compared to the prior year due primarily to the addition of acquired Neurosurgery products and growth in EEG sales. Supplies revenue for 2018 increased 12%, which was also driven by the addition of our Neurosurgery business and organic growth in our Neurodiagnostic supply business. Services revenue from GND increased 1% compared to the prior year. For the year endedDecember 31, 2018 , Newborn Care revenue decreased by 14% compared to the prior year. Devices and Systems revenue decreased by 18%. The decrease is primarily due to the recognition of$10.0 million of revenue in the first half of 2017 from our contract with the government ofVenezuela , which did not reoccur in 2018. We also experienced a one- 34
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time shipment of neoBLUE blanket backlog in the first quarter of 2017 and a one-time shipment of hearing devices and supplies toChina ,Japan , andAustralia in the second quarter of 2017. Supplies revenue decreased 7% compared to the prior year related to revenue contract with the government ofVenezuela , which did not reoccur in 2018, as well as product line rationalization. Services revenue decreased by 9% compared to the prior year primarily due to a lower collection per screen on our Peloton hearing screening service. For the year endedDecember 31, 2018 , Hearing & Balance revenue increased 14% compared to the prior year. Revenue from Devices and Systems increased 47% and revenue from Supplies decreased 75% in 2018 compared to 2017. The overall growth in Hearing & Balances was driven by increased market share primarily inEurope andChina . In addition to increased market share, Hearing & Balance also benefited from favorable exchanges rates and the launch of our new Otoscan product in 2018. Cost of Revenue and Gross Profit Years endedDecember 31 ,
2018 2017
Revenue $ 530,891 $ 500,970
Cost of revenue 217,952 213,376
Intangibles amortization 8,924 6,380
Gross profit 304,015 281,214
Gross profit percentage 57.3 % 56.1 %
For the year ended December 31, 2018 , our gross profit as a percentage of sales
increased by 1.2% compared to the prior year. This increase was primarily
attributable to the improvement in Newborn Care gross profit, which was lower in
the prior year due to sales to the government of Venezuela which carry a lower
gross margin. We also experienced an increase on gross profit on our
Neurosurgery products where we experienced higher sales in the U.S. which carry
higher margins.
Operating Costs
Years ended December 31,
2018 2017
Marketing and selling $ 136,680 $ 126,166
Percentage of revenue 25.7 % 25.2 %
Research and development $ 61,482 $ 51,822
Percentage of revenue 11.6 % 10.3 %
General and administrative $ 70,599 $ 74,424
Percentage of revenue 13.3 % 14.9 %
Intangibles Amortization $ 22,585 $ 19,171
Percentage of revenue 4.3 % 3.8 %
Restructuring $ 37,231 $ 914
Percentage of revenue 7.0 % 0.2 %
Marketing and Selling
Marketing and selling expenses as a percentage of revenue remained relatively
flat in the year ended December 31, 2018 as compared to the prior year. The
increase in expense is for incremental costs of payroll, commissions, and travel
associated with higher revenue.
Research and Development
Research and development expenses increased during the year ended December 31,
2018 compared to the prior year. The increase relates to increased spend on new
product development, including Otoscan and RetCam products, and the addition of
Neurosurgery products. These increases were partially offset by a reduction in
spend related to remediation activities within our Newborn Care business.
General and Administrative
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General and administrative expenses decreased during the year endedDecember 31, 2018 compared to the prior year. This decrease was due to a reduction in bad debt expense related to our GND and Peloton businesses. Intangibles Amortization Intangibles amortization increased in the year endedDecember 31, 2018 compared to the prior year. The increase is related to the impairment charge incurred in 2018 in relation to an end of life decision on our Bio-logic core technology of$5.6 million . This impairment charge was partially offset by purchase accounting adjustments in 2017 related to our Integra and RetCam acquisitions which did not recur in 2018. Restructuring Restructuring costs increased during the year endedDecember 31, 2018 compared to the prior year. This increase included costs associated with our executive management transition, which were approximately$10.0 million and were primarily comprised of accelerated vesting of stock compensation and severance expense. In 2018 we experienced impairment charges associated with exiting two of our non-core businesses, GND and Neurocom, which were categorized as restructuring expenses. We recorded a$14.8 million goodwill impairment charge related to GND. Impairment charges were also recorded for intangible and fixed assets related to GND and Neurocom, which totaled$2.8 million . Restructuring expenses were also incurred in 2018 in relation to the announcement of our new organizational structure, "One Natus." Other Income (Expense), net Other income (expense), net consists of interest income, interest expense, net currency exchange gains and losses, and other miscellaneous income and expense. We reported other expense, net of$7.7 million in the year endedDecember 31, 2018 , compared to$3.6 million in the prior year. We reported$0.8 million of foreign currency exchange losses in the year endedDecember 31, 2018 versus$1.0 million of foreign currency gains in the prior year. This increase was driven primarily by the changing value of foreign currencies in which we transact. Interest expense was$6.8 million in the year endedDecember 31, 2018 compared to$5.1 million in the prior year related to interest expense payments on our outstanding debt while interest income of$0.3 million in the year endedDecember 31, 2018 was$0.1 million less than the amount reported for the prior year. Provision for Income Tax The effective tax rate for the year endedDecember 31, 2018 was 28.9% as compared to 494.0% for the prior year. The significantly lower effective rate in the year endedDecember 31, 2018 compared with the prior year is primarily due to the impacts of the 2017 Tax Act, including the repatriation tax on accumulated foreign earnings and re-measurement of net deferred tax assets recorded in the prior year, a reduction in withholding taxes from distribution of income, and reduction in theU.S. Federal corporate rate from 35% to 21%. Liquidity and Capital Resources Liquidity is our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments. In addition, liquidity includes the ability to obtain appropriate financing and to raise capital. Therefore, liquidity cannot be considered separately from capital resources that consist of our current funds and the potential to increase those funds in the future. We plan to use these resources in meeting our commitments and in achieving our business objectives. We believe that our current cash and cash equivalents and any cash generated from operations will be sufficient to meet our ongoing operating requirements for the foreseeable future. As ofDecember 31, 2019 , we had cash and cash equivalents outside theU.S. in certain of our foreign operations of$51.0 million . We intend to permanently reinvest this cash held by our foreign subsidiaries except for Excel-Tech andNatus Ireland subsidiaries, which we intend to repatriate. If, however, a portion of these permanently reinvested funds were needed and distributed to our operations inthe United States , we may be subject to additionalU.S. income taxes and foreign withholding taxes depending on facts and circumstances at the time of distribution. The amount of taxes due would depend on the amount and manner of repatriation, as well as the location from where the funds were repatriated. OnSeptember 23, 2016 , we entered into a Credit Agreement withJP Morgan Chase Bank ("JP Morgan"),Citibank, NA ("Citibank") andWells Fargo Bank, National Association ("Wells Fargo"). The Credit Agreement provides for an aggregate$150.0 million of secured revolving credit facility (the "Credit Facility"). OnSeptember 15, 2017 , we exercised our right to increase the amount available under the facility by$75.0 million , bringing the aggregate revolving credit facility to$225.0 million . The Credit Agreement contains covenants, including covenants relating to maintenance of books and records, financial reporting and notification, compliance with laws, maintenance of properties and insurance, and limitations on guaranties, 36
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investments, issuance of debt, lease obligations and capital expenditures. The Credit Agreement provides for events of default, including failure to pay any principal or interest when due, failure to perform or observe covenants, bankruptcy or insolvency events and the occurrence of a material adverse effect. We have no other significant credit facilities. As ofDecember 31, 2019 we had$55.0 million outstanding under the Credit Facility. December 31, 2019 December 31, 2018 December 31, 2017 Cash, cash equivalents, and investments $ 63,297 $ 56,373 $ 88,950 Debt 54,665 104,474 154,283 Working capital 126,928 152,329 213,491 Year Ended December 31, 2019 December 31, 2018 December 31, 2017 Net cash provided by operating activities $ 60,060 $ 33,020 $ 19,726 Net cash used in investing activities (5,339 ) (8,389 ) (160,935 ) Net cash provided by (used in) financing activities (48,532 ) (49,512 ) 5,826 Comparison of 2019, 2018, and 2017 During 2019 cash generated from operating activities of$60.1 million was the result of$15.7 million of net loss, non-cash adjustments to net loss of$63.2 million , and net cash outflows of$12.5 million from changes in operating assets and liabilities. The non-cash adjustments were$30.7 million of depreciation and amortization expense,$24.6 million of impairment for the sale ofMedix ,$8.4 million from share-based compensation,$2.9 million of warranty reserves, and$1.6 million of accounts receivable reserves, offset by deferred taxes of$5.4 million . Cash used in investing activities during the period was$5.3 million and consisted of cash used to acquire other property and equipment. Cash used in financing activities during the year endedDecember 31, 2019 was$48.5 million and consisted of repayments of$50.0 million of our outstanding debt under the Credit Facility,$1.7 million for taxes paid related to net share settlement of equity awards,$0.5 million of principal payments of financing lease liability, offset by proceeds from stock option exercises and Employee Stock Purchase Program ("ESPP") purchases of$3.6 million . During 2018 cash generated from operating activities of$33.0 million was the result of$22.9 million of net loss, non-cash adjustments to net loss of$70.1 million , and net cash outflows of$14.1 million from changes in operating assets and liabilities. The non-cash adjustments were$33.9 million of depreciation and amortization expense,$17.1 million from share-based compensation, a$14.8 million goodwill impairment charge related to GND,$8.2 million from intangible impairments,$6.9 million of accounts receivable reserves, and$2.2 million of warranty reserves, offset by deferred taxes of$13.7 million . Cash used in investing activities during the period was$8.4 million and consisted primarily of cash used to acquire other property and equipment of$7.9 million . Cash used in financing activities during the year endedDecember 31, 2018 was$49.5 million and consisted of repayments of$50.0 million of our outstanding debt under the Credit Facility,$5.6 million for repurchases of common stock under our share repurchase program,$5.2 million for taxes paid related to net share settlement of equity awards, offset by proceeds from stock option exercises and Employee Stock Purchase Program purchases of$11.5 million . During 2017 cash generated from operating activities of$19.7 million was the result of$20.3 million of net loss, non-cash adjustments to net loss of$60.6 million , and net cash outflows of$20.6 million from changes in operating assets and liabilities. The non-cash adjustments were$30.1 million of depreciation and amortization expense,$10.0 million of accounts receivable reserves,$9.4 million from share-based compensation,$5.4 million of warranty reserves,$4.0 of deferred taxes and$1.7 million from intangible impairments. The change in operating assets and liabilities was driven primarily by an increase in accounts receivable and lower collections during the year compared to the prior year, and a decrease in deferred revenue related to the Venezuelan contract, partially offset by an increase in accrued liabilities for the transition tax under the Act for the deemed repatriation of foreign earnings and decreases in inventories and other assets. Cash used in investing activities during the period was$161.1 million and consisted primarily of the acquisition of Otometrics for$143.6 million , net of cash, and the Integra asset acquisition for$46.4 million , offset by sales of short-term investments of$34.0 million . Cash used to acquire other property and equipment was$4.1 million . Cash provided by financing activities during the year endedDecember 31, 2017 was$5.8 million and consisted of proceeds from borrowings under the Credit Facility of$60.0 million along with proceeds from stock option exercises and Employee Stock Purchase Program purchases of$3.5 million , offset by$45.0 million repayment of debt under the Credit Facility,$7.0 million for taxes paid related to net share settlement of equity awards,$3.0 million for contingent acquisition consideration,$2.3 million for repurchases of common stock under our share repurchase program, and$0.3 million of deferred debt issuance costs. Future Liquidity 37
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Our future liquidity and capital requirements will depend on numerous factors, including the: • Amount and timing of revenue;
• Extent to which our existing and new products gain market acceptance;
• Extent to which we make acquisitions;
• Cost and timing of product development efforts and the success of these
development efforts;
• Cost and timing of marketing and selling activities; and
• Availability of borrowings under line of credit arrangements and the
availability of other means of financing.
Contractual Obligations
In the normal course of business, we enter into obligations and commitments that
require future contractual payments. The commitments result primarily from
purchase orders placed with contract vendors that manufacture some of the
components used in our medical devices and related disposable supply products,
purchase orders placed for employee benefits and outside services, as well as
commitments for leased office space, leased equipment, and bank debt. The
following table summarizes our contractual obligations and commercial
commitments as of December 31, 2019 (in thousands):
Payments Due by Period
Less than More than
Total 1 Year 1-3 Years 4-5 Years 5 Years
Unconditional purchase
obligations $ 44,955 $ 44,955 $ - $ - $ -
Bank debt 55,000 - 55,000 - -
Interest payments 2,390 1,907 483 - -
Repatriation tax 9,113 797 1,751 3,830 2,735 Total$ 111,458 $ 47,659 $ 57,234 $ 3,830 $ 2,735 Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding. Included in the purchase obligations category above are obligations related to purchase orders for inventory purchases under our standard terms and conditions and under negotiated agreements with vendors. We expect to receive consideration (products or services) for these purchase obligations. The purchase obligation amounts do not represent all anticipated purchases in the future, but represent only those items for which we are contractually obligated. The table above does not include obligations under employment agreements for services rendered in the ordinary course of business. We have a Credit Agreement withJP Morgan Chase Bank , Citibank, and Wells Fargo which matures in 2021. We have recorded this obligation in the payments due in one to three years category in the table above based on the maturity date of the Agreement. As ofDecember 31, 2019 we have classified$35.0 million out of the$55.0 million outstanding as short-term on our balance sheet due to our intent to repay this portion over the next twelve months. We are not able to reasonably estimate the timing of any potential payments for uncertain tax positions under Accounting Standards Codification ("ASC") 740, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement 109. As a result, the preceding table excludes any potential future payments related to our ASC 740 liability for uncertain tax positions. See Note 17 of our Consolidated Financial Statements for further discussion on income taxes. Quantitative and Qualitative Disclosures about Market Risk We are exposed to various market risks, including changes in foreign currency exchange rates and interest rates that could adversely affect our results of operations and financial condition. We are exposed to interest rate risk on our LIBOR-indexed floating-rate debt. We have entered into an interest rate swap agreement to effectively covert a portion of our floating-rate debt to a fixed-rate. The principal objective of the swap contract is to reduce the variability of future earnings and cash flows associated with our floating-rate debt. We do not hold or issue derivative instruments for trading or other speculative purposes. Foreign Exchange Rate Risk We develop products in theU.S ,Canada , andEurope , and sell those products into more than 100 countries throughout the world. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Most of our sales inEurope andAsia are denominated in theU.S. Dollar and Euro, with a portion of our sales denominated in the Canadian dollar and British pound. As our sales in currencies other than theU.S. dollar increase, our exposure to foreign currency fluctuations may increase. 38
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In addition, changes in exchange rates also may affect the end-user prices of our products compared to those of our foreign competitors, who may be selling their products based on local currency pricing. These factors may make our products less competitive in some countries. If theU.S. Dollar uniformly increased or decreased in strength by 10% relative to the currencies in which our sales were denominated, our net income would have correspondingly increased or decreased by an immaterial amount for the year endedDecember 31, 2019 . All of the potential changes noted above are based on sensitivity analyses performed on our financial position as ofDecember 31, 2019 . Actual results may differ as our analysis of the effects of changes in interest rates does not account for, among other things, sales of securities prior to maturity and repurchase of replacement securities, the change in mix or quality of the investments in the portfolio, and changes in the relationship between short-term and long-term interest rates. Interest Rate Risk In 2018, we entered into an interest rate swap agreement with a notional amount of$40.0 million , designated as a cash flow hedge, to hedge the variability of cash flows in interest payments associated with our floating-rate debt. This interest rate swap agreement matures inSeptember 2021 and converts a portion of our LIBOR floating-Rate debt to fixed-rate debt. The fair value of the interest rate swap agreement is based upon inputs corroborated by observable market data. Changes in the fair value of the interest rate swap agreement are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity and are amortized to interest expense over the term of the related debt. As ofDecember 31, 2019 , accumulated other comprehensive income (loss) related to the interest rate swap agreement included a net unrealized loss of approximately$143 thousand , net of tax, which will be recognized in interest expense after the following 12 months, at the then current values on a pre-tax basis. See Note 12 to these Condensed Consolidated Financial Statements for additional discussion on our financial instruments and derivatives. Interest Rate Risk Sensitivity Analysis Our remaining indebtedness is at variable rates of interest. Accordingly, changes in interest rates would impact our results of operations in future periods. Based on a sensitivity analysis on actual rates experienced during 2019, a hypothetical increase in interest rates of 50 basis points would have resulted in increased interest expense of$0.4 million during the year endedDecember 31, 2019 . Recently Issued Accounting Pronouncements InJune 2016 , the FASB issued ASU 2016-13, Credit Losses (Topic 326). This update requires financial assets measured at amortized cost, such as trade receivables and contract assets, to be presented net of expected credit losses, which may be estimated based on relevant information such as historical experience, current conditions, and future expectation for each pool of similar financial assets. The new guidance requires enhanced disclosures related to trade receivables and associated credit losses. InMay 2019 , the FASB issued ASU 2019-05 which provides targeted transition relief guidance intended to increase comparability of financial statement information. The guidance for both updates is effective beginningJanuary 1, 2020 . We do not believe adoption will have a material impact to our consolidated financial statements. InAugust 2018 , the FASB issued ASU 2018-13 Fair Value Measurement (Topic 813), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. This update amends Topic 820 to add, remove, and clarify disclosure requirements related to fair value measurement disclosure. For calendar year-end entities, the update will be effective for annual periods beginningJanuary 1, 2020 , and interim periods within those fiscal years. Early adoption of the amendments is permitted, including adoption in any interim period. As the standard relates only to disclosures, we do not expect the adoption to have a material impact on our consolidated financial statements. InDecember 2019 , the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Tax. This update includes removal of certain exceptions to the general principles of ASC 740, Income taxes, and simplification in several other areas such as accounting for franchise tax (or similar tax) that is partially based on income. The ASU is effective for us onJanuary 1, 2021 . We are in the process of evaluating the impact of this standard on our consolidated financial statements. Cautionary Information Regarding Forward Looking Statements This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 aboutNatus Medical Incorporated . Forward-looking statements can be identified by the words "expects", "anticipates", "believes", "intends", "estimates", "plans", "will", "outlook" and similar expressions. Forward-looking statements are based on management's current plans, estimates, assumptions and projections, and speak only as of the date they are made. These forward-looking statements within Item 7 include, without limitation, statements regarding our ability to capitalize on improving market conditions, the sufficiency of our current cash, cash equivalents and short- 39
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term investment balances, any cash generated from operations to meet our ongoing operating and capital requirements for the foreseeable future, outcomes of new product development, improved operations performance and profitability as the result of restructuring activities, and our intent to acquire additional technologies, products or businesses. Forward-looking statements are not guarantees of future performance and are subject to substantial risks and uncertainties that could cause the actual results predicted in the forward-looking statements as well as our future financial condition and results of operations to differ materially from our historical results or currently anticipated results. Investors should carefully review the information contained under the caption "Risk Factors" contained in Item 1A of this report for a description of risks and uncertainties. All forward-looking statements are based on information available to us on the date hereof, and we assume no obligation to update forward-looking statements. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk The information required by this Item is set forth in the section entitled Management's Discussion and Analysis of Financial Condition and Results of Operations-Quantitative and Qualitative Disclosures About Market Risk, and is incorporated by reference in this section. ITEM 8. Financial Statements and Supplementary Data The Consolidated Financial Statements and Supplementary Data required by this Item are set forth where indicated in Item 15 of this report. Selected Quarterly Financial Data (Unaudited) The following table presents our operating results for each of the eight quarters in the period endingDecember 31, 2019 . The information for each of these quarters is unaudited and has been prepared on the same basis as our audited financial statements appearing elsewhere in this report. In the opinion of our management all necessary adjustments, including normal recurring adjustments, have been included to present fairly the unaudited quarterly results when read in conjunction with our audited Consolidated Financial Statements and the related notes appearing elsewhere in this report. These operating results are not necessarily indicative of the results of any future period. 40
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Quarters Ended
December 31, September 30, June 30, March 31, December 31, September 30,
2019 2019 (1) 2019 (1) 2019 (1) 2018 2018 June 30, 2018 March 31, 2018
(in thousands, except per amounts)
Revenue $ 131,416 $ 123,463 $ 125,539 $ 114,757 $ 140,991 $ 130,638 $ 130,653 $ 128,609
Cost of revenue (a) 49,259 48,389 52,393 46,510 58,103 51,583 52,897 55,369
Intangibles
amortization 1,679 1,736 1,746 1,756 2,689 1,930 2,717 1,587
Gross profit 80,478 73,338 71,400 66,491 80,199 77,125 75,039 71,653
Operating expenses:
Marketing and
selling (b) 32,268 30,787 32,324 33,729 34,206 33,200 33,401 35,872Research and development (c) 17,567 14,447 13,324 13,394 15,296 15,127
15,616 15,443
General and administrative (d) 15,261 15,394 12,690 16,306 13,632 15,799
23,721 17,448
Intangibles
amortization 3,844 3,751 3,763 3,786 9,151 4,477 4,151 4,806 Restructuring 3,592 1,106 2,668 37,372 23,049 11,432 1,938
812
Total operating expenses 72,532 65,485 64,769 104,587 95,334 80,035 78,827
74,381
Income (loss) from operations 7,946 7,853 6,631 (38,096 ) (15,135 ) (2,910 ) (3,788 ) (2,728 ) Other income (expense), net (670 ) (1,609 ) (1,200 ) (2,112 ) (2,754 ) (726 ) (2,398 ) (1,821 ) Income (loss) before provision for (benefit from) income tax 7,276 6,244 5,431 (40,208 ) (17,889 ) (3,636 ) (6,186 ) (4,549 ) Provision for (benefit from) income tax (e) 4,266 (1,987 ) 1,944 (9,809 ) (6,256 ) 1,940 (3,609 ) (1,401 ) Net income (loss)$ 3,010 $ 8,231 $ 3,487 $ (30,399 ) $ (11,633 ) $ (5,576 ) $ (2,577 ) $ (3,148 ) Earnings (loss) per share: Basic$ 0.09 $ 0.24 $ 0.10 $ (0.91 ) $ (0.35 ) $ (0.17 ) $ (0.08 ) $ (0.10 ) Diluted$ 0.09 $ 0.24 $ 0.10 $ (0.91 ) $ (0.35 ) $ (0.17 ) $ (0.08 ) $ (0.10 ) Weighted average shares used in the calculation of net earnings (loss) per share: Basic 33,691 33,655 33,639 33,590 33,495 33,321 32,859 32,760 Diluted 33,829 33,738 33,690 33,590 33,495 33,321 32,859 32,760 (1) During the fourth quarter of 2019, we corrected certain previously reported financial information for the quarters endedMarch 31, 2019 ,June 30, 2019 , andSeptember 30, 2019 related to the accounting for certain research and development activities in an arrangement with a third party, certain invoice accruals, adjustments resulting from physical inventory observations, and the income tax impacts of these immaterial adjustments. The correction of the immaterial errors resulted in the following: (a) Cost of revenue increased$0.1 million and$0.2 million for the quarters endedMarch 31, 2019 andJune 30, 2019 , respectively. Cost of revenue decreased$0.3 million for the quarter endedSeptember 30, 2019 . (b) Marketing and selling expense increased$0.1 million for the quarter endedJune 30, 2019 and decreased$0.1 million for the quarter endedSeptember 30, 2019 . (c) Research and development expense increased$0.3 million ,$0.6 million , and$0.3 million for the quarters endedMarch 31, 2019 ,June 30, 2019 , andSeptember 30, 2019 respectively. 41
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(d) General and administrative expense increased$0.3 million for the quarter endedSeptember 30, 2019 . (e) Provision for income tax decreased by$0.1 million ,$0.2 million , and$6 thousand for the quarters endedMarch 31, 2019 ,June 30, 2019 , andSeptember 30, 2019 , respectively.
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