Natus Medical Announces Fourth Quarter and Full Year 2017 Financial Results

  • Reports record fourth quarter revenue of $131.4 million and full year revenue of $501.0 million
  • Reports fourth quarter GAAP earnings (loss) per share of $(0.22) and non-GAAP of $0.42

PLEASANTON, Calif., Feb. 07, 2018 (GLOBE NEWSWIRE) -- Natus Medical Incorporated (NASDAQ:BABY) today announced financial results for the three months and full year ended December 31, 2017.

For the fourth quarter ended December 31, 2017, the Company reported revenue of $131.4 million, an increase of 22.0% compared to $107.7 million reported for the fourth quarter 2016. GAAP gross profit margin was 56.4% vs. 60.4% reported for the fourth quarter 2016. GAAP net loss was $7.1 million, or $(0.22) per share, compared with GAAP net income of $10.2 million, or $0.31 per diluted share in the fourth quarter 2016.

Non-GAAP earnings per diluted share was $0.42 for the fourth quarter 2017, compared to $0.51 in the fourth quarter 2016. Non-GAAP net income was $14.0 million for the fourth quarter 2017 compared to the prior year's fourth quarter non-GAAP net income of $16.8 million. Non-GAAP gross profit margin was 60.4% vs. 61.3% reported for the fourth quarter of 2016. 

For the year ended December 31, 2017, the Company reported revenue of $501.0 million, an increase of 31.2% compared to $381.9 million reported for the same period in 2016. GAAP gross profit margin was 56.1% vs. 61.5% reported for the same period in 2016. GAAP net loss was $20.3 million, or $(0.62) per share, compared with GAAP net income of $42.6 million, or $1.29 per diluted share in the same period in 2016.

Non-GAAP earnings per diluted share was $1.45 for the year ended December 31, 2017, compared to $1.62 in the same period in 2016. The Company reported non-GAAP net income of $48.1 million for the year ended December 31, 2017, compared to the prior year's non-GAAP net income of $53.5 million.

“As we previously released, revenue in the fourth quarter was lower than expected due to weakness in our U.S. neurodiagnostic business and lower than expected revenues from Otometrics.  Revenue from our recently acquired neurosurgery business was above our expectations.  Newborn care performed as expected during the quarter,” said Jim Hawkins, President and Chief Executive Officer of the Company. “Non-GAAP earnings per share correspondingly came in lower than expected as well.”

“We remain very excited about Otoscan, our digital ear scanning technology.  While we expect minimal revenues from Otoscan in 2018 as our initial customer network is established, we believe digital imaging of the ear will become the standard for custom hearing aid fitting in the years ahead,” Hawkins continued.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (“the Tax Reform Act”) was enacted. The most material impact to the Company from the Tax Reform Act is the tax on deemed repatriation of all foreign subsidiary earnings. The repatriation tax resulted an estimated one-time tax cost of $18.3 million. In addition, the Tax Reform Act requires that the Company re-measure its deferred tax assets and liabilities to account for the impact of lower corporate tax rates on the future reversal of temporary differences. Due to the Company's net U.S. deferred tax asset position, this re-measurement results in an additional estimated tax cost of $3.9 million in the quarter. During the quarter, the Company also released its historical valuation allowance on its U.S. deferred tax assets. This one-time benefit decreased our GAAP tax expense by $10.8 million.

Financial Guidance

For the first quarter of 2018, the Company provided revenue guidance of $125.0 million to $127.0 million and non-GAAP earnings per share guidance of $0.23 to $0.24.

For the full year 2018, the Company provided revenue guidance of $535.0 million to $540.0 million and non-GAAP earnings per share to $1.60 to $1.65.

The Company's non-GAAP earnings per share guidance excludes charges for amortization expense associated with intangible assets from prior acquisitions, which the Company expects to be approximately $6.8 million and $27.0 million for the first quarter 2018 and full year, respectively, and which the Company expects will reduce GAAP earnings per share by approximately $0.21 and $0.82 for the respective periods.  Non-GAAP earnings per share also excludes the inventory FMV step-up of $2.6 million related to the Integra acquisition that is required for purchase accounting.

Use of Non-GAAP Financial Measures

The Company presents in this release its non-GAAP net income, non-GAAP earnings per share, non-GAAP gross margin and non-GAAP operating margin results which exclude amortization expense associated with certain acquisition-related intangibles, restructuring charges, certain discrete items, direct costs of acquisitions, and the related tax effects. A reconciliation between non-GAAP and GAAP financial measures is included in this press release.

The Company believes that the presentation of results excluding these charges or gains provides meaningful supplemental information to both management and investors that is indicative of the Company's core operating results and better reflects the ongoing economics of the Company's operations. The Company believes these non-GAAP financial measures facilitate comparison of operating results across reporting periods.

Specifically, the Company excludes the following charges, gains, and their related tax effects in the calculation of non-GAAP net income, non-GAAP earnings per share and non-GAAP operating expense and excludes all but restructuring charges from the calculation of non-GAAP gross margin: 1) Non-cash amortization expense associated with certain acquisition-related intangibles. The charges reflect an estimate of the cost of acquired intangible assets over their estimated useful lives. 2) Restructuring charges. The Company has over time completed multiple acquisitions of other companies and businesses. Following an acquisition the Company will, as it determines appropriate, initiate restructuring events to eliminate redundant costs. Restructuring expenses, which are excluded in the non-GAAP items, are exclusively related to permanent reductions in our workforce and redundant facility closures. 3) Certain discrete items. These items represent significant infrequent charges or gains that management believes should be viewed outside of normal operating results. These items are specifically identified when they occur. 4) Direct costs of acquisitions.  These are direct acquisition-related costs that occur when the Company makes an acquisition, such as professional fees, due diligence costs, and earn-out adjustments.

The Company applies GAAP methodologies in computing its non-GAAP tax provision by determining the annual expected effective tax rate after taking into account items excluded for non-GAAP financial reporting purposes.  The Company’s non-GAAP tax expense and its non-GAAP effective tax rate are generally higher than its GAAP tax expense and GAAP effective tax rate because the income subject to taxes would be higher due to the effect of the expenses excluded from non-GAAP financial reporting. The nature of each quarterly discrete transaction will be evaluated to determine whether it should be excluded from non-GAAP reporting.

The Company's management uses these non-GAAP financial measures in assessing the Company's performance and when planning, forecasting, and analyzing future periods and the Company believes that investors also benefit from being able to refer to these non-GAAP financial measures along with the GAAP operating results. These non-GAAP financial measures also facilitate management's internal comparisons to the Company's historical performance. The non-GAAP financial measures disclosed by the Company should not be considered a substitute for or superior to financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and reconciliations to those financial statements should be carefully evaluated.

Conference Call

Natus has scheduled an investment-community conference call to discuss this announcement beginning at 11:00 a.m. Eastern Time (8:00 a.m. Pacific Time) today, February 7, 2018. Individuals interested in listening to the conference call may do so by dialing 1-844-634-1441 for domestic callers, or 1-508-637-5658 for international callers, and entering reservation code 6794299. A telephone replay will be available for 48 hours following the conclusion of the call by dialing 1-855-859-2056 for domestic callers, or 1-404-537-3406 for international callers, and entering reservation code 6794299. The conference call also will be available real-time via the Internet at http://investor.natus.com, and a recording of the call will be available on the Company’s Web site for 90 days following the completion of the call.

About Natus Medical Incorporated

Natus is a leading provider of healthcare products and services used for the screening, detection, treatment, monitoring and tracking of common medical ailments in newborn care, hearing impairment, neurological dysfunction, neurosurgery, epilepsy, sleep disorders, and balance and mobility disorders.

Additional information about Natus Medical can be found at www.natus.com.

Forward-Looking Statements

This press release contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, particularly statements regarding the expectations, beliefs, plans, intentions and strategies of Natus. These forward-looking statements include statements regarding Otometrics revenue growth rate, increasing the profitability of Otometrics, the anticipated revenue and GAAP and non-GAAP earnings per share for the first quarter and full year 2018 and the impact of amortization expense associated with acquisition-related intangible assets. These statements relate to current estimates and assumptions of our management as of the date of this press release and involve known and unknown risks, uncertainties and other factors that may cause actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by the forward-looking statements. Forward-looking statements are only predictions and the actual events or results may differ materially. Natus cannot provide any assurance that its future results or the results implied by the forward-looking statements will meet expectations. Our future results could differ materially due to a number of factors, including the effects of competition, our ability to successfully integrate the Otometrics acquisition and the integration of certain assets acquired from Integra, and achieve our profitability goals for Otometrics, the demand for our products and services, the impact of adverse global economic conditions and changing governmental regulations, including foreign exchange rate changes, on our target markets, our ability to expand our sales in international markets, our ability to maintain current sales levels in a mature domestic market, our ability to control costs, risks associated with bringing new products to market and integrating acquired businesses, and our ability to fulfill product orders on a timely basis. Natus disclaims any obligation to update information contained in any forward looking statement.

More information about potential risk factors that could affect the business and financial results of Natus is included in Natus' annual report on Form 10-K for the year ended December 31, 2016, and its subsequent quarterly reports on Form 10-Q and in other reports filed from time to time by Natus with the U.S. Securities and Exchange Commission.

Natus Medical Incorporated
Jonathan A. Kennedy
Executive Vice President and Chief Financial Officer
(925) 223-6700
InvestorRelations@Natus.com

 
NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited)
(in thousands, except per share amounts)
               
   Quarter Ended   Year Ended
  December 31,
2017
  December 31,
2016
  December 31,
2017
  December 31,
2016
Revenue $ 131,440     $ 107,699     $ 500,970     $ 381,892  
Cost of revenue 54,761     42,090     213,376     144,632  
Intangibles amortization 2,590     510     6,380     2,327  
Gross profit 74,089     65,099     281,214     234,933  
Gross profit margin 56.4 %   60.4 %   56.1 %   61.5 %
Operating expenses:              
Marketing and selling 31,060     23,255     126,166     84,834  
Research and development 13,724     10,847     51,822     33,443  
General and administrative 16,923     13,652     74,424     50,877  
Intangibles amortization 7,330     2,243     19,171     8,983  
Restructuring 1     221     914     1,536  
Total operating expenses 69,038     50,218     272,497     179,673  
Income from operations 5,051     14,881     8,717     55,260  
Interest expense (1,783 )   (114 )   (5,069 )   (419 )
Other income/(expense), net (516 )   168     1,502     62  
Income before tax 2,752     14,935     5,150     54,903  
Provision for income tax expense 9,846     4,704     25,443     12,309  
Net (loss) income $ (7,094 )   $ 10,231     $ (20,293 )   $ 42,594  
Earnings (loss) per share:              
Basic $ (0.22 )   $ 0.32     $ (0.62 )   $ 1.31  
Diluted $ (0.22 )   $ 0.31     $ (0.62 )   $ 1.29  
Weighted-average shares:              
Basic 32,648     32,405     32,564     32,460  
Diluted 32,648     33,009     32,564     33,056  
                       

 
NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands)
           
  December 31,   September 30,   December 31,
  2017   2017   2016
ASSETS          
           
Current assets:          
Cash and investments $ 88,950     $ 132,405     $ 247,570  
Accounts receivable, net 126,809     116,666     86,638  
Inventories 71,529     69,322     49,587  
Other current assets 18,340     22,605     22,004  
Total current assets 305,628     340,998     405,799  
           
Property and equipment, net 22,071     20,677     17,333  
Goodwill and intangible assets 345,580     321,454     190,277  
Deferred income tax 10,709     2,204     14,915  
Other assets 25,931     18,952     20,688  
Total assets $ 709,919     $ 704,285     $ 649,012  
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities:          
Accounts payable $ 25,242     $ 17,961     $ 18,700  
Accrued liabilities 51,738     48,281     37,895  
Deferred revenue 15,157     14,691     23,346  
Total current liabilities 92,137     80,933     79,941  
           
Long-term liabilities:          
Long-term debt, net 154,283     154,235     140,000  
Deferred income tax 19,407     34,835     3,684  
Other long-term liabilities 21,995     9,263     8,013  
Total liabilities 287,822     279,266     231,638  
Total stockholders’ equity 422,097     425,019     417,374  
Total liabilities and stockholders’ equity $ 709,919     $ 704,285     $ 649,012  
                       

 
NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
   
   Quarter Ended
  December 31,
2017
  December 31,
2016
Operating activities:      
Net income (loss) $ (7,094 )   $ 10,232  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:      
Provision for losses on accounts receivable 1,313     183  
Depreciation and amortization 9,239     4,059  
Impairment of intangible assets 1,674      
Loss on disposal of property and equipment (35 )   (8 )
Warranty reserve (3,036 )   (339 )
Share-based compensation 2,222     2,051  
Changes in operating assets and liabilities:      
Accounts receivable (16,813 )   424  
Inventories 915     (1,315 )
Prepaid expenses and other assets 4,096     1,874  
Accounts payable 8,145     1,097  
Accrued liabilities 17,057     (479 )
Deferred revenue 658     (11,115 )
Deferred income tax (12,738 )   (2,480 )
Net cash provided by operating activities 5,603     4,184  
Investing activities:      
Acquisition of businesses, net of cash acquired (48,421 )    
Purchases of property and equipment (1,317 )   (1,010 )
Purchase of intangible assets      
Sale of short-term investments     (8,590 )
Net cash used in investing activities (49,738 )   (9,600 )
Financing activities:      
Proceeds from stock option exercises and Employee Stock Purchase Program purchases 1,219     1,080  
Repurchase of common stock     (1,032 )
Taxes paid related to net share settlement of equity awards (3,367 )   (170 )
Contingent consideration earn-out (20 )    
Proceeds from borrowings     140,000  
Net cash provided by (used in) financing activities (2,168 )   139,878  
Exchange rate changes effect on cash and cash equivalents 2,848     (1,985 )
Net increase (decrease) in cash and cash equivalents (43,455 )   132,477  
Cash and cash equivalents, beginning of period 132,405     81,073  
Cash and cash equivalents, end of period $ 88,950     $ 213,550  
               

 
NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
RECONCILIATION OF NON-GAAP ADJUSTMENTS (unaudited)
(in thousands, except per share amounts)
               
   Quarter Ended    Year Ended
  December 31,
2017
  December 31,
2016
  December 31,
2017
  December 31,
2016
GAAP based results:              
Income before provision for income tax $ 2,752     $ 14,935     $ 5,150     $ 54,903  
               
Non-GAAP adjustments:              
Intangibles Amortization - Cost of revenue 2,590     510     6,380     2,327  
Intangibles Amortization - Operating expense 7,330     2,242     19,171     8,983  
Recall Accrual and Remediation Efforts (COGS) (437 )       3,507     267  
Recall Accrual and Remediation Efforts (R&D) 1,066     2,462     7,637     2,462  
Restructuring 1     221     914     1,536  
Litigation (G&A)         1,642      
Direct costs of acquisitions (COGS) 3,145     460     7,590     460  
Direct costs of acquisitions (M&S) 467     (19 )   129     (3,429 )
Direct costs of acquisitions (G&A) 1,813     1,523     4,183     1,902  
Direct costs of acquisitions (R&D) 100         125      
Direct costs of acquisitions (OI&E)     38     48     149  
Peloton Collection Reserve (G&A)         4,058      
Discontinued product line charges (COGS)         1,684      
Discontinued product line charges (G&A)         429      
Non-GAAP income before provision for income tax 18,827     22,372     62,647     69,560  
               
Income tax expense, as adjusted $ 4,866     $ 5,596     $ 14,537     $ 16,095  
               
Non-GAAP net income $ 13,961     $ 16,776     $ 48,110     $ 53,465  
Non-GAAP earnings per share:              
Basic $ 0.43     $ 0.52     $ 1.48     $ 1.65  
Diluted $ 0.42     $ 0.51     $ 1.45     $ 1.62  
               
Weighted-average shares used to compute              
Basic non-GAAP earnings per share 32,648     32,405     32,564     32,460  
Diluted non-GAAP earnings per share 33,225     33,009     33,129     33,056  
                       

 
NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
RECONCILIATION OF NON-GAAP ADJUSTMENTS (unaudited)
(in thousands, except per share amounts)
               
   Quarter Ended    Year Ended
  December 31,
2017
  December 31,
2016
  December 31,
2017
  December 31,
2016
GAAP Gross Profit 74,089     65,099     281,214     234,933  
Amortization of intangibles 2,590     510     6,380     2,327  
Acquisition charges 3,145     460     7,590     460  
Recall accrual and remediation efforts (437 )       3,507     267  
Discontinued product line charges         1,684      
Non-GAAP Gross Profit 79,387     66,069     300,375     237,987  
Non-GAAP Gross Margin 60.4 %   61.3 %   60.0 %   62.3 %
               
GAAP Operating Profit 5,051     14,881     8,717     55,260  
Amortization of intangibles 9,920     2,752     25,551     11,310  
Recall accrual and remediation efforts 629     2,462     11,144     2,729  
Litigation         1,642      
Restructuring and acquisition charges 5,526     2,185     12,941     469  
Peloton collection reserve         4,058      
Discontinued product line charges         2,113      
Non-GAAP Operating Profit 21,126     22,280     66,166     69,768  
Non-GAAP Operating Margin 16.1 %   20.7 %   13.2 %   18.3 %
               
GAAP Provision for income tax expense (benefit) 9,846     4,704     25,443     12,309  
Effect of accumulated change of pretax income 8,244     1,023     13,343     3,286  
Effect of change in annual expected tax rate (514 )   (1,231 )   (988 )   (50 )
Tax audit reserve (1,263 )   7     (1,263 )   (543 )
Release of historical tax asset valuation 10,755              
Repatriation tax and tax asset re-measurement (22,188 )       (22,188 )    
Effect on acquisition cost (14 )   1,093     190     1,093  
Non-GAAP Income tax expense, as adjusted 4,866     5,596     14,537     16,095  
               
   Quarter Ended   Year Ended        
  March 31,
2018
  December 31,
2018
       
GAAP EPS Guidance $0.02 - $0.03   $0.89 - $0.94        
Amortization of Intangibles 0.21   0.82        
Direct cost of acquisitions 0.05   0.08        
Tax effect (0.05)   (0.19)        
Non-GAAP EPS Guidance $0.23 - $0.24   $1.60 - $1.65        

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Source: Natus Medical Incorporated