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 2020 Overview
Our consolidated revenue decreased by $79.5 million for the year ended
December 31, 2020 compared to the year ended December 31, 2019 . This decrease
was driven by a decline in demand for our Neuro and Hearing and Balance products
as a result of the COVID-19 global pandemic.
Net loss was $16.6 million , or $0.49 per share in the year ended December 31,
2020 , compared with net loss of $15.7 million , or $0.47 per share in the prior
year. This decrease in income was primarily driven by lower revenue resulting
from the COVID-19 pandemic on global demand for our products and impairment of
intangibles related to end of sale products partly offset by a reduction in
operating expenses. While we experienced a net loss, we generated cash flow from
operations of $34.4 million .
Reorganization
On January 15, 2019 , Natus announced the implementation of a new organizational
structure designed to improve operational performance, increase our focus on
innovation and increase profitability. 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.
COVID-19 Update
Healthcare providers and patients continue to depend on our products and
services every day. Our team members and partners are continuing to maintain our
supply chain, manufacturing and delivery of our products and services. The
health and welfare of our employees, our customers and our partners remain our
top priority as we continue our business operations.
We have implemented safeguards in our facilities to protect team members,
including social distancing practices, work from home and other measures
consistent with specific regulatory requirements and guidance from health
authorities. As an essential supplier of healthcare products and services, all
of our manufacturing, engineering, sales and customer support functions remain
fully operational and will continue to support customers with vital supplies,
service and equipment. We have taken actions to reduce costs, including reducing
travel and discretionary expenses. We will continue to prioritize spending to
allow continued investment in products and services that are key elements of our
stated strategy for profitable growth in the years ahead.
Impact to our supply chain
Many of our materials are single source and require lengthy qualification
periods. Disruptions in our supply chain could negatively impact our ability to
produce and supply our finished products. We have made strategic investments in
inventory to help mitigate potential supply chain disruptions. These investments
include increased inventory and firm purchase orders beyond our typical
timeframe in order to secure capacity at our key suppliers. To date, we have not
incurred any significant supply disruptions and we believe our suppliers are
positioned well to provide us with the materials we need to meet our demand. The
health and safety of our suppliers is also a priority for us and we have
transitioned collaboration with our suppliers to online technology so that we
can continue our business operations.
Liquidity
In 2019, we completed a restructuring of the Company and strengthened our
balance sheet by generating over $60.0 million in cash from operations and
paying down $55.0 million in debt. At the end of the first quarter of 2020 we
drew an additional $60.0 million on our credit line as a precaution to ensure we
have the necessary capital to continue to reliably serve our customers during an
extended period of uncertainty. During the third quarter of 2020 we amended our
Credit Agreement
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which extended the maturity date of the original agreement from September 23,
2021 to September 25, 2023 , reduced the aggregate revolving credit facility from
$225.0 million to $150.0 million , and amended certain covenants. During the year
ended December 31, 2020 , we repaid $58.0 million in debt and continued to
maintain a strong cash position ending the period with $82.1 million in cash.
Some hospitals and clinics delayed payments for products and services and we
have worked with our customers to arrange mutually acceptable payment terms
during this uncertain time. Looking ahead, we expect revenues and margins to
improve, but remain below historical levels. We see our customers adapting to
the COVID environment with elective procedures resuming, which we believe will
result in increased capital spending, improving our business for the foreseeable
future.
While we believe that we have sufficient liquidity to operate the Company for
the foreseeable future, should negative economic conditions persist for an
extended period of time, we are evaluating additional measures we could take to
improve our liquidity position.
Impact to fair-value of intangible assets
We have reviewed the assets on our balance sheet, particularly goodwill and
significant intangible assets for indications of impairment related to COVID-19
and determined that there are no indicators of impairment at this time. The
values of these assets are particularly sensitive to our market cap and the long
term value of their cash flows. If these conditions change significantly, we may
need to record an impairment to their value. However, any impairment charges
would not require the use of cash and are excluded from the calculation of our
debt covenants and therefore would not affect our ability to borrow under our
existing credit line.
During the third quarter of 2020 we recorded an impairment charge of an acquired
tradename and technology that lead to the decision to discontinue the sale of
one of our products rather than continuing to invest in the product. See Note 6
to the Condensed Consolidated Financial Statements for additional discussion on
this impairment charge.
Impact to our financial systems and internal control
To date, the COVID-19 pandemic has not had a material impact to our ability to
operate our accounting and financial functions. We are staffed with
approximately 150 dedicated finance, accounting and IT professionals. Our
accounting and IT systems are maintained with third party support agreements and
we have documented disaster recovery plans in place. Our finance, accounting and
IT professionals are performing their normal functions while working from home
with little to no on-site physical presence and with no changes to our internal
controls. We are confident that we can operate in this manner for an extended
period of time without disruption and without significant impact to our internal
controls.
Travel restrictions and use of online technology
The global Natus team is geographically diverse with multiple small locations
and hundreds of employees that typically work from home in normal circumstances.
We use the latest collaboration technology and have been able to transition to a
company-wide work from home model without major interruption. Our manufacturing,
distribution and field service operations require physical presence of certain
employees as their work requires them to handle our products. In these cases, we
have made adjustments to shift size and schedule and limited access to these
groups by non-related employees. Our field service technicians are following our
customers' requirements for distancing practices but continue to provide service
where needed. Our sales representatives also continue to provide services to
customers, either remotely or in person, when practicable.
Travel restrictions have forced most customer and external partner collaboration
to online technology. Using this technology has enabled us to continue
operations without incident. However, in-person customer engagement as well as
physical presence in laboratory settings is required for the long term success
of our company and eventually, we will need to return to traditional forms of
interaction.
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
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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 recognize
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.
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.
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.
Income Taxes
We account for income taxes under the assets and liability method, which
requires the recognition of deferred tax assets and liabilities for expected
future tax consequences of events that have been included in the financial
statements. Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial statements carrying
value of assets and liabilities and the tax basis of those assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income in the period that
includes the enactment date.
We record net deferred tax assets to the extent it is more likely than not that
the assets will be realized. The ultimate recovery of deferred tax assets is
dependent upon the amount and timing of future taxable income and other factors
such as the taxing jurisdiction in which the asset is to be recovered. A high
degree of judgment is required to determine if, and the extent to which,
valuation allowances should be recorded against deferred tax assets. In making
such determination, we consider all available positive and negative evidence,
including future reversals of existing taxable temporary differences, projected
future taxable income, tax planning strategies and recent financial operations.
Based on all available evidence, both positive and negative, and the weight of
that evidence to the extent such evidence can be objectively verified, we
determine whether it is more likely than not that all or a portion of the
deferred tax assets will be realized. The main factors we consider include:
•Cumulative earnings or losses in recent years, adjusted for certain
nonrecurring items;
•Expected earnings or losses in future years; and
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•The availability, or lack thereof, of taxable income in prior carryback periods
that would limit realization of the carryforward period associated with the
deferred tax assets and liabilities
To the extent that we have recorded a valuation allowance on certain deferred
tax assets that are determined to be realizable in the future, we adjust the
valuation allowance which reduces the provision for income taxes.
We recognize the tax benefits of uncertain tax positions in the financial
statements as defined in ASC Topic 740, Income Tax. In the ordinary course of
business, there is inherent uncertainty in quantifying our income tax positions.
We assess our income tax positions and record deferred income tax benefits for
all tax years subject to examination based upon management's evaluation of the
facts, circumstances and information available at the reporting date about the
ability to realize the benefit of the deferred tax assets or tax positions. When
the tax position is deemed more likely than not of being sustained, we recognize
the largest amount of tax benefit that is greater than 50 percent likely of
being ultimately realized upon settlement as defined in ASC 740-10-05. For those
income tax positions where it is not more likely than not that an income tax
benefit will be sustained in the future, we do not recognize a deferred tax
benefit in our financial statements. We record interest and penalties, net of
any applicable tax benefit, related to income taxes, if any, as a component of
the provision for income taxes when applicable.
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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.
Percent of Revenue
Years Ended December 31,
2020 2019 2018
Revenue 100.0 % 100.0 % 100.0 %
Cost of revenue 44.7 % 39.7 % 41.1 %
Intangibles amortization 3.2 % 1.4 % 1.7 %
Gross profit 52.1 % 58.9 % 57.3 %
Operating expenses:
Marketing and selling 25.8 % 26.1 % 25.7 %
Research and development 14.7 % 11.9 % 11.6 %
General and administrative 11.8 % 12.0 % 13.3 %
Intangibles amortization 3.7 % 3.1 % 4.3 %
Restructuring 0.9 % 9.0 % 7.0 %
Total operating expenses 56.9 % 62.1 % 61.9 %
Income (loss) from operations (4.9) % (3.2) % (4.6) %
Other expense, net (0.5) % (1.1) % (1.5) %
Income (loss) before provision (benefit) for income tax
(5.3) % (4.3) % (6.1) %
Provision (benefit) for income tax expense (1.3) % (1.1) % (1.8) %
Net loss (4.0) % (3.2) % (4.3) %
Comparison of 2020 and 2019
Revenue
Years ended December 31,
2020 2019 Change
Neuro
Devices and Systems $ 179,881 $ 220,306 (18) %
Supplies 56,275 66,059 (15) %
Services - 871 (100) %
Total Neuro Revenue 236,156 287,236 (18) %
Newborn Care
Devices and Systems 51,894 53,465 (3) %
Supplies 36,174 38,264 (5) %
Services 16,566 19,183 (14) %
Total Newborn Care Revenue 104,634 110,912 (6) %
Hearing & Balance
Devices and Systems $ 70,711 $ 92,050 (23) %
Supplies 4,183 4,977 (16) %
Services - - - %
Total Hearing & Balance Revenue 74,894 97,027 (23) %
Total Revenue $ 415,684 $ 495,175 (16) %
For the year ended December 31, 2020 , Neuro revenue decreased by 18% compared to
the prior year. Devices and Systems revenue decreased by 18% and Supplies
revenue decreased by 15% compared to the prior year due primarily to the impact
of the global COVID-19 pandemic. Services revenue decreased 100% compared to the
prior year due to our exit from the GND business in January 2019 .
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For the year ended December 31, 2020 , Newborn Care revenue decreased by 6%
compared to the prior year. Devices and Systems revenue decreased by 3% and
Supplies revenue decreased 5% compared to the prior year due to the impact of
the COVID-19 pandemic. Services revenue decreased by 14% compared to the prior
year primarily due to our exit from the Peloton business as of December 31, 2019
and was partly offset by the ramp up in activity under our agreement with
Pediatrix over 2020.
For the year ended December 31, 2020 , Hearing & Balance revenue decreased 23%
compared to the prior year due to the impact of the COVID-19 pandemic.
Cost of Revenue and Gross Profit
Years ended December 31,
2020 2019
Revenue $ 415,684 $ 495,175
Cost of revenue 185,912 196,551
Intangibles amortization 13,241 6,916
Gross profit 216,531 291,708
Gross profit percentage 52.1 % 58.9 %
For the year ended
Years ended December 31,
2020 2019
Marketing and selling $ 107,282 $ 129,109
Percentage of revenue 25.8 % 26.1 %
Research and development
14.7 % 11.9 %
General and administrative $ 49,113 $ 59,649
Percentage of revenue 11.8 % 12.0 %
Intangibles amortization $ 15,224 $ 15,144
Percentage of revenue 3.7 % 3.1 %
Restructuring $ 3,809 $ 44,739
Percentage of revenue 0.9 % 9.0 %
Marketing and Selling
Marketing and selling expenses decreased during the year ended December 31, 2020
as compared to the prior year. The decrease in expenses is mainly attributable
to lower expenses due to COVID-19 which caused decreases in travel expense,
tradeshow and other events, payroll, commissions, and service expenses.
Research and Development
Research and development expenses increased during the year ended December 31,
2020 compared to the prior year. The increase relates to higher project spend
for Medical Device Regulation compliance, consulting and testing, and
remediation partly offset by lower travel due to COVID-19 restrictions.
General and Administrative
General and administrative expenses decreased during the year ended December 31,
2020 compared to the prior year. This decrease was due to a reduction in
consulting fees and outside services and utilities costs due to the global
COVID-19 pandemic.
Intangibles Amortization
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Intangibles amortization remained flat for the year ended December 31, 2020
compared to the prior year as there was no change in intangibles classified as
operating expenses.
Restructuring
Restructuring costs decreased during the year ended December 31, 2020 compared
to the prior year. This decrease was driven by costs in 2019 that did not repeat
in 2020. In 2019, we recorded an impairment related to the sale of Medix, 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 decrease was also driven by restructuring expenses incurred in
2019 related to exiting the GND and Peloton businesses.
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 $1.9 million in the year ended December 31,
2020 , compared to $5.6 million in the prior year. We reported $2.0 million of
foreign currency exchange gains in the year ended December 31, 2020 versus $0.8
million of foreign currency losses in the prior year. Interest expense was $3.7
million in the year ended December 31, 2020 compared to $4.9 million in the
prior year. The reduction in interest expense was driven by accelerated payments
on our outstanding debt. Interest income was $11.0 thousand in the year ended
December 31, 2020 , compared to $0.3 million in the prior year.
Provision for Income Tax
The effective tax rate ("ETR") for the year ended December 31, 2020 was 24.7% as
compared to 26.3% 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, and federal NOL carrybacks to prior years.
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 ended December 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 in January 2019 .
For the year ended December 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 of Medix, 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 of Medix
business and product line rationalization. Services revenue decreased by 6%
compared to the
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prior year primarily due to a lower collection per screen and decrease in
screening volume on our Peloton hearing screening service, which was exited as
of December 31, 2019 .
For the year ended December 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 ended December 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 ended December 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 ended December 31, 2019 compared
to the prior year. This increase was driven by the restructuring initiatives
announced in January 2019 . We recorded an impairment related to the sale of
Medix, 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 ended December 31,
2019 , compared to $7.7 million in the prior year. We reported $0.8 million of
foreign currency exchange losses in the year ended December 31, 2019 versus $0.8
million of foreign currency losses in the prior year. Interest expense was $4.9
million in the year ended December 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 ended
December 31, 2019 and the prior year.
Provision for Income Tax
The effective tax rate ("ETR") for the year ended December 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 and SAB 118 adjustments arising from the
2017 Tax Act that were recorded in 2018.
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 of December 31, 2020 , we had cash and cash equivalents outside the U.S. in
certain of our foreign operations of $30.9 million . We intend to permanently
reinvest this cash held by our foreign subsidiaries except for Excel-Tech and
Natus Ireland subsidiaries, which we intend to repatriate. If, however, a
portion of these permanently reinvested funds were needed and distributed to our
operations in the United States , we may be subject to additional U.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.
On September 23, 2016 , we entered into a Credit Agreement with JP Morgan Chase
Bank ("JP Morgan"), Citibank, NA ("Citibank") and Wells Fargo Bank, National
Association ("Wells Fargo"). The Credit Agreement provides for an aggregate
$150.0 million of secured revolving credit facility (the "Credit Facility"). On
September 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 . During the third quarter of 2020 we amended the
terms of the Credit Agreement to extend the maturity of the original agreement
and to reduce the aggregate value of revolving credit facility, and amend
certain covenants. The amended Credit Agreement provides for an aggregate $150.0
million of secured revolving credit facility.
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, 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. The Credit Agreement matures on September 25, 2023 , at which
time all principal amounts outstanding under the Credit Agreement will be due
and payable. We have no other significant credit facilities. During the first
quarter of 2020 we drew an additional $60.0 million on our credit line as a
precaution to ensure we
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have the necessary capital to continue to reliably serve our customers during an
extended period of uncertainty of which we have repaid $58.0 million during
2020. As of December 31, 2020 we had $57.0 million outstanding under the Credit
Facility.
December 31, December 31, December 31,
2020 2019 2018
Cash, cash equivalents, and investments $ 82,082 $ 63,297 $ 56,373
Debt 55,840 54,665 104,474
Working capital 125,950 126,928 152,329
Year Ended
December 31, December 31, December 31,
2020 2019 2018
Net cash provided by operating activities $ 34,426 $ 60,060 $ 33,020
Net cash used in investing activities (12,606) (5,339) (8,389)
Net cash provided by (used in) financing activities (10,877)
(48,532) (49,512)
Comparison of 2020, 2019, and 2018
During 2020 cash generated from operating activities of $34.4 million was the
result of $16.6 million of net loss, non-cash adjustments to net loss of $49.6
million , and net cash outflows of $1.4 million from changes in operating assets
and liabilities. The non-cash adjustments were $28.1 million of depreciation and
amortization expense, $9.6 million from share-based compensation, $6.7 million
of an impairment of intangible assets, $2.0 million of warranty reserves, $1.9
million of loss on commencement of sales-type leases, $1.4 million of non-cash
lease expense, and $1.2 million of accounts receivable reserves, offset by
deferred taxes of $1.6 million . Cash used in investing activities during the
period was $12.6 million and consisted of cash used of $8.6 million to acquire
other property and equipment, $2.0 million of an acquisition, and $2.0 million
of equity method investments. Cash used in financing activities during the year
ended December 31, 2020 was $10.9 million and consisted of repayments of $58.0
million of our outstanding debt under the Credit Facility, $10.5 million for
repurchases of common stock under our share repurchase program, $2.0 million for
taxes paid related to net share settlement of equity awards, $1.2 million of
deferred debt issuance costs, $0.5 million of principal payments of financing
lease liability, offset by proceeds from borrowing of $60.0 million and proceeds
from stock option exercises and Employee Stock Purchase Program ("ESPP")
purchases of $1.3 million .
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 $65.9
million , and net cash outflows of $9.9 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 of Medix, $8.4
million from share-based compensation, $4.3 million of accounts receivable
reserves, and $2.9 million of warranty 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 ended December 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 ended December 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 .
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Future Liquidity
Our future liquidity and capital requirements will depend on numerous factors,
including the:
•Extent to which we make acquisitions;
•Amount and timing of revenue;
•Length and severity of business disruptions caused by COVID-19;
•Extent to which our existing and new products gain market acceptance;
•Cost and timing of product development efforts and the success of these
development efforts;
•Cost and timing of marketing and selling activities; and
•Availability to borrow 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, 2020 (in thousands):
Payments Due by Period
Less than More than
Total 1 Year 1-3 Years 4-5 Years 5 Years
Unconditional purchase obligations
$ 460 $ - $ - Bank debt 57,000 - 57,000 - - Interest payments 2,419 1,493 926 - - Repatriation tax 7,016 459 2,218 4,339 - Total$ 106,001 $ 41,058 $ 60,604 $ 4,339 $ - 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 2023. 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, 2020 we have classified$50.0 million out of the$57.0 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 18 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 43 -------------------------------------------------------------------------------- Table of Contents 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. We do not currently hold derivatives to hedge our exposure to foreign currency exchange rate fluctuations; however, we may choose to hedge our exposure in the future. 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. All of the potential changes noted above are based on sensitivity analyses performed on our financial position as ofDecember 31, 2020 . 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, 2020 , accumulated other comprehensive income (loss) related to the interest rate swap agreement included a net unrealized loss of approximately$212 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 2020, 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, 2020 . 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 the impact of the COVID-19 pandemic on our business, the sufficiency of our current cash, cash equivalents and short-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. 44 -------------------------------------------------------------------------------- Table of Contents Selected Quarterly Financial Data (Unaudited) The following table presents our operating results for each of the eight quarters in the period endingDecember 31, 2020 . 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. Quarters Ended December 31, September 30, December 31, September 30, 2020 2020June 30, 2020 March 31, 2020 2019 2019June 30, 2019 March 31, 2019 (in thousands, except per amounts) Revenue$ 118,718 $ 102,803 $ 84,780 $ 109,383 $ 131,416 $ 123,463 $ 125,539 $ 114,757 Cost of revenue 51,247 47,160 42,573 44,933 49,259 48,389 52,393 46,509 Intangibles amortization 1,801 8,117 1,654 1,668 1,679 1,736 1,746 1,756 Gross profit 65,670 47,526 40,553 62,782 80,478 73,338 71,400 66,492 Operating expenses: Marketing and selling 27,715 26,035 22,802 30,730 32,268 30,787 32,324 33,729 Research and development 14,722 14,670 14,336 17,569 17,567 14,447 13,324 13,394 General and administrative 12,359 12,384 11,187 13,182 15,261 15,394 12,691 16,306 Intangibles amortization 3,894 4,025 3,644 3,661 3,844 3,751 3,763 3,786 Restructuring 1,966 350 621 871 3,592 1,106 2,668 37,372 Total operating expenses 60,656 57,464 52,590 66,013 72,532 65,485 64,770 104,587 Income (loss) from operations 5,014 (9,938) (12,037) (3,231) 7,946 7,853 6,630 (38,095) Other income (expense), net 1,326 (947) (757) (1,494) (670) (1,609) (1,200) (2,112) Income (loss) before provision for (benefit from) income tax 6,340 (10,885) (12,794) (4,725) 7,276 6,244 5,430 (40,207) Provision for (benefit from) income tax 1,135 (1,569) (3,891) (1,128) 4,266 (1,987) 1,944 (9,809) Net income (loss)$ 5,205 $ (9,316) $ (8,903) $ (3,597) $ 3,010 $ 8,231 $ 3,486 $ (30,398) Earnings (loss) per share: Basic$ 0.15 $ (0.28) $ (0.26) $ (0.11)$ 0.09 $ 0.24 $ 0.10 $ (0.90) Diluted$ 0.15 $ (0.28) $ (0.26) $ (0.11)$ 0.09 $ 0.24 $ 0.10 $ (0.90) Weighted average shares used in the calculation of net earnings (loss) per share: Basic 33,861 33,828 33,827 33,800 33,691 33,655 33,639 33,590 Diluted 33,903 33,828 33,827 33,800 33,829 33,738 33,690 33,590 45
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