Natus Medical Announces Third Quarter Financial Results

  • Reports record third quarter revenue of $130.6 million
  • Reports third quarter GAAP loss per share of $0.17 and non-GAAP earnings per share of $0.40
  • Updates annual revenue and earnings guidance for 2018

PLEASANTON, Calif., Oct. 24, 2018 (GLOBE NEWSWIRE) -- Natus Medical Incorporated (NASDAQ: BABY) today announced financial results for the three and nine months ended September 30, 2018.

For the third quarter ended September 30, 2018, the Company reported revenue of $130.6 million, an increase of 6.5% compared to $122.6 million reported for the third quarter 2017. GAAP gross profit margin was 59.0% vs. 60.5% in the third quarter 2017. GAAP net loss was $5.6 million, or $0.17 per share, compared with GAAP net loss of $8.5 million, or $0.26 per share in the third quarter 2017.

Non-GAAP earnings per diluted share was $0.40 for the third quarter 2018, compared to $0.40 in the third quarter 2017. Non-GAAP net income was $13.4 million for the third quarter 2018 compared to the prior year's third quarter non-GAAP net income of $13.1 million. Non-GAAP gross profit margin was 60.6% vs. 61.1% reported for the third quarter of 2017.

For the nine months ended September 30, 2018, the Company reported revenue of $389.9 million, an increase of 5.5% compared to $369.5 million reported for the same period in 2017. GAAP gross profit margin was 57.4% vs. 56.1% reported for the same period in 2017. GAAP net loss was $11.3 million, or $0.34 per share, compared with GAAP net loss of $13.2 million, or $0.41 per share in the same period in 2017.

Non-GAAP earnings per diluted share was $0.99 for the nine months ended September 30, 2018, compared to $1.03 in the same period in 2017. The Company reported non-GAAP net income of $33.0 million for the nine months ended September 30, 2018, compared to the prior year's non-GAAP net income of $34.2 million.

Cash flow from operations was $7.6 million and the Company repaid $5.0 million of outstanding debt during the third quarter of 2018.

“Our 2018 third quarter results are highlighted by 6.5% year over year revenue growth and 12.1% growth in non-GAAP operating income driven both by the acquisition of our Neuro Surgery business last year and modest organic growth in Neuro,” said Jonathan Kennedy, President and Chief Executive Officer of Natus. “We also continued to make progress on the regulatory front, successfully completing an FDA audit and our first MDSAP audit in our Seattle facility during the quarter.”

“In the third quarter, we made excellent progress with several new products.  We recognized our first revenue on Otoscan, selling over 50 units, introduced four new neurodiagnostic devices and Newborn Care made significant headway on new systems expected to be released in 2019,” Kennedy continued.

Financial Guidance

For the fourth quarter of 2018, the Company provided revenue guidance of $135.0 million to $140.0 million and non-GAAP earnings per share guidance of $0.48 to $0.51.

For the full year 2018, the Company updated its revenue guidance to $525.0 million to $530.0 million from $525.0 million to $535.0 million and updated its non-GAAP earnings per share guidance to $1.47 to $1.50 from $1.50 to $1.60.

The Company's non-GAAP earnings per share guidance excludes charges for amortization expense associated with intangible assets from prior acquisitions, certain other expenses, and related tax effects, which the Company expects to be approximately $7.5 million and $52.0 million for the fourth quarter 2018 and full year, respectively, and which the Company expects will reduce GAAP earnings per share by approximately $0.22 and $1.54 for the respective periods.

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: 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 and other non-recurring 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. Other non-recurring costs are associated with the transition of the executive management team. These costs can include stock compensation from accelerated vesting of stock, severance payouts and related payroll expenses.  3) Certain discrete items. These items represent significant infrequent charges or gains that management believes should be viewed outside of normal operating results, and each significant discrete transaction is evaluated to determine whether it should be excluded from non-GAAP reporting. 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, October 24, 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 6688356. 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 6688356. The conference call also will be available real-time via the Internet at https://edge.media-server.com/m6/p/nsr5n74b, 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 the anticipated revenue and GAAP and non-GAAP earnings per share for the fourth quarter and full year 2018 and the impact of amortization expense associated with acquisition-related intangible assets, certain other expenses, and related tax effects. 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 and achieve our profitability goals from recent acquisitions, 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 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, 2017, 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
Drew Davies
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)
               
  Three Months Ended   Nine Months Ended
  September 30,
2018
  September 30,
2017
  September 30,
2018
  September 30,
2017
Revenue $ 130,638     $ 122,643     $ 389,900     $ 369,531  
Cost of revenue 51,583     47,112     159,849     158,615  
Intangibles amortization 1,930     1,290     6,235     3,789  
  Gross profit 77,125     74,241     223,816     207,127  
Gross profit margin 59.0 %   60.5 %   57.4 %   56.1 %
Operating expenses:              
  Marketing and selling 33,200     32,537     102,474     95,106  
  Research and development 15,127     11,632     46,186     38,098  
  General and administrative 15,799     17,329     56,967     57,501  
  Intangibles amortization 4,477     3,882     13,434     11,841  
  Restructuring 11,432     321     14,182     914  
  Total operating expenses 80,035     65,701     233,243     203,460  
Income (loss) from operations (2,910 )   8,540     (9,427 )   3,667  
Interest expense (1,644 )   (1,025 )   (5,240 )   (3,287 )
Other income 918     1,175     296     2,019  
Income (loss) before tax (3,636 )   8,690     (14,371 )   2,399  
Provision for income tax expense (benefit) 1,940     17,203     (3,069 )   15,597  
Net loss $ (5,576 )   $ (8,513 )   $ (11,302 )   $ (13,198 )
Loss per share:              
  Basic $ (0.17 )   $ (0.26 )   $ (0.34 )   $ (0.41 )
  Diluted $ (0.17 )   $ (0.26 )   $ (0.34 )   $ (0.41 )
Weighted-average shares:              
  Basic 33,321     32,593     32,982     32,536  
  Diluted 33,321     32,593     32,982     32,536  

NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands)
           
  September 30,   June 30,   December 31,
  2018   2018   2017
ASSETS          
           
Current assets:          
Cash and investments $ 54,440     $ 54,908     $ 88,950  
Accounts receivable 121,113     122,971     126,809  
Inventories 80,586     76,630     71,529  
Other current assets 30,843     32,224     18,340  
Total current assets 286,982     286,733     305,628  
           
Property and equipment 21,564     21,645     22,071  
Goodwill and intangible assets 318,618     326,109     345,580  
Deferred income tax 10,135     10,296     10,709  
Other assets 16,746     18,855     25,931  
Total assets $ 654,045     $ 663,638     $ 709,919  
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities:          
Accounts payable $ 20,595     $ 24,053     $ 25,242  
Accrued liabilities 52,015     54,874     51,738  
Deferred revenue 16,816     16,892     15,157  
Total current liabilities 89,426     95,819     92,137  
           
Long-term liabilities:          
Long-term debt 114,426     119,379     154,283  
Deferred income tax 18,896     18,936     19,407  
Other long-term liabilities 21,338     21,970     21,995  
Total liabilities 244,086     256,104     287,822  
Total stockholders’ equity 409,959     407,534     422,097  
Total liabilities and stockholders’ equity $ 654,045     $ 663,638     $ 709,919  

NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
   
  Three Months Ended
  September 30,
2018
  September 30,
2017
Operating activities:      
Net loss $ (5,576 )   $ (8,513 )
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
     
     Provision for losses on accounts receivable 1,782     1,632  
     Depreciation and amortization 8,958     7,040  
     Loss on disposal of property and equipment 250     20  
     Warranty reserve (902 )   (401 )
     Share-based compensation 9,814     2,248  
     Changes in operating assets and liabilities:      
         Accounts receivable 891     (4,762 )
         Inventories (2,700 )   699  
         Prepaid expenses and other assets 743     719  
         Accounts payable (3,435 )   (8,734 )
         Accrued liabilities (2,446 )   1,967  
         Deferred revenue 58     998  
         Deferred income tax 191     11,021  
               Net cash provided by operating activities 7,628     3,934  
Investing activities:      
Acquisition of businesses, net of cash acquired     4,844  
Purchases of property and equipment (1,740 )   (1,285 )
Purchase of intangible assets (339 )    
               Net cash provided by (used in) investing activities (2,079 )   3,559  
Financing activities:      
Proceeds from stock option exercises and Employee Stock
Purchase Program purchases
5,423     174  
Taxes paid related to net share settlement of equity awards (4,847 )   (549 )
Deferred debt issuance costs     (316 )
Contingent consideration earn-out     (446 )
Proceeds from borrowings     50,000  
Payments on borrowings (5,000 )   (5,000 )
               Net cash provided by (used in) financing activities (4,424 )   43,863  
Exchange rate changes effect on cash and cash equivalents (1,593 )   746  
Net Increase (decrease) in cash and cash equivalents (468 )   52,102  
Cash and cash equivalents, beginning of period 54,908     80,303  
Cash and cash equivalents, end of period $ 54,440     $ 132,405  

NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
RECONCILIATION OF NON-GAAP ADJUSTMENTS (unaudited)
(in thousands, except per share amounts)
               
  Three Months Ended
  Nine Months Ended
  September 30,
2018
  September 30,
2017
  September 30,
2018
  September 30,
2017
GAAP based results:                              
Income before provision for income tax $ (3,636 )   $ 8,690     $ (14,371 )   $ 2,399  
               
Non-GAAP adjustments:              
Intangibles amortization - (COGS) 1,930     1,290     6,235     3,789  
Recall accrual and remediation efforts (COGS) (1,198 )   (714 )   1,375     3,945  
Restructuring and other non-recurring costs (COGS) 846         873     1,684  
Direct costs of acquisitions (COGS) 402     76     3,882     4,446  
Intangibles amortization - (OPEX) 4,483     3,882     13,439     11,841  
Direct costs of acquisitions (M&S) 14     (302 )   423     (338 )
Recall accrual and remediation efforts (R&D) 1,288     1,469     4,875     6,571  
Direct costs of acquisitions (R&D) 50     24     235     24  
Restructuring and other non-recurring costs (OPEX) 12,904     321     18,108     5,401  
Direct costs of acquisitions (G&A) 502     1,457     3,682     2,370  
Restructuring and other non-recurring costs (OI)         366      
Direct costs of acquisitions (OI)             48  
Extraordinary annual meeting expenses 15         2,230      
Extraordinary patent litigation     306     996     1,642  
Non-GAAP income before provision for income tax 17,600     16,499     42,348     43,822  
               
Income tax expense, as adjusted $ 4,227     $ 3,380     $ 9,357     $ 9,672  
               
Non-GAAP net income $ 13,373     $ 13,119     $ 32,991     $ 34,150  
 Non-GAAP earnings per share:              
  Basic $ 0.40     $ 0.40     $ 1.00     $ 1.05  
  Diluted $ 0.40     $ 0.40     $ 0.99     $ 1.03  
               
 Weighted-average shares used to compute              
  Basic non-GAAP earnings per share 33,321     32,593     32,982     32,536  
  Diluted non-GAAP earnings per share 33,551     33,100     33,388     33,086  

NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
RECONCILIATION OF NON-GAAP ADJUSTMENTS (unaudited)
(in thousands, except per share amounts)
               
  Three Months Ended   Nine Months Ended
  September 30,
2018
  September 30,
2017
  September 30,
2018
  September 30,
2017
GAAP Gross Profit 77,125     74,241     223,816     207,127  
Amortization of intangibles 1,930     1,290     6,235     3,789  
Direct cost of acquisitions 402     76     3,882     4,446  
Recall accrual and remediation efforts (1,198 )   (714 )   1,375     3,945  
Restructuring and other non-recurring costs 846         873     1,684  
Non-GAAP Gross Profit 79,105     74,893     236,181     220,991  
Non-GAAP Gross Margin 60.6 %   61.1 %   60.6 %   59.8 %
               
GAAP Operating Profit (2,910 )   8,540     (9,427 )   3,667  
Amortization of intangibles 6,413     5,172     19,674     15,630  
Recall accrual and remediation efforts 90     755     6,250     10,516  
Extraordinary patent litigation     306     996     1,642  
Restructuring and other non-recurring costs 13,750     321     18,981     7,085  
Direct cost of acquisitions 968     1,255     8,222     6,502  
Extraordinary annual meeting expenses 15         2,230      
Non-GAAP Operating Profit 18,326     16,349     46,926     45,042  
Non-GAAP Operating Margin 14.0 %   13.3 %   12.0 %   12.2 %
               
GAAP Provision for income tax expense (benefit) 1,940     17,203     (3,069 )   15,597  
Effect of accumulated change of pretax income (15,493 )   (1,942 )   (4,701 )   5,099  
Effect of change in annual expected tax rate 15,704     (1,126 )   14,120     (473 )
Repatriation tax adjustment         101      
Stock-based compensation adjustment 791         1,621      
Valuation Allowance for GAAP purposes 1,285     (10,755 )   1,285     (10,755 )
Effect on acquisition cost             204  
Non-GAAP Income tax expense 4,227     3,380     9,357     9,672  
               
  Quarter Ended   Year Ended        
  December 31, 2018   December 31, 2018        
GAAP EPS Guidance $0.26 - $0.29   ($0.07) - ($0.04)        
Amortization of Intangibles 0.20   0.79        
Restructuring and other non-recurring costs 0.03   0.67        
Litigation   0.03        
Recall Accrual and Remediation Efforts 0.03   0.22        
Direct cost of acquisitions 0.02   0.26        
Tax effect (0.06)   (0.43)        
Non-GAAP EPS Guidance $0.48 - $0.51   $1.47 - $1.50        

NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
GROSS MARGIN BY BUSINESS UNIT (unaudited)
(in thousands)
       
  Three Months Ended   Nine Months Ended
  September 30,
2018
  September 30,
2017
  September 30,
2018
  September 30,
2017
Neuro:                              
Revenue $ 69,790     $ 59,368     $ 206,162     $ 174,955  
Cost of revenue 25,275     21,222     79,628     65,011  
Intangibles amortization 1,042     470     3,507     1,369  
  Gross profit 43,473     37,676     123,027     108,575  
Gross profit margin 62.3 %   63.5 %   59.7 %   62.1 %
               
Newborn care:              
Revenue $ 31,210     $ 33,666     $ 91,188     $ 108,408  
Cost of revenue 13,044     12,848     38,223     52,248  
Intangibles amortization 119     126     358     338  
  Gross profit 18,047     20,692     52,607     55,822  
Gross profit margin 57.8 %   61.5 %   57.7 %   51.5 %
               
Otometrics:              
Revenue $ 29,638     $ 29,609     $ 92,550     $ 86,168  
Cost of revenue 13,264     13,042     41,998     41,356  
Intangibles amortization 769     694     2,370     2,082  
  Gross profit 15,605     15,873     48,182     42,730  
Gross profit margin 52.7 %   53.6 %   52.1 %   49.6 %
               
Consolidated:              
Revenue $ 130,638     $ 122,643     $ 389,900     $ 369,531  
Cost of revenue 51,583     47,112     159,849     158,615  
Intangibles amortization 1,930     1,290     6,235     3,789  
  Gross profit 77,125     74,241     223,816     207,127  
Gross profit margin 59.0 %   60.5 %   57.4 %   56.1 %

NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
RECONCILIATION OF NON-GAAP GROSS MARGIN BY BUSINESS UNIT (unaudited)
(in thousands)
               
  Three Months Ended   Nine Months Ended
  September 30,
2018
  September 30,
2017
  September 30,
2018
  September 30,
2017
Neuro:              
GAAP Gross Profit 43,473     37,676     123,027     108,575  
Amortization of intangibles 1,042     469     3,507     1,364  
Acquisition charges 402         3,832      
Recall accrual and remediation efforts             1,781  
Non-GAAP Gross Profit 44,917     38,145     130,366     111,720  
Non-GAAP Gross Margin 64.4 %   64.3 %   63.2 %   63.9 %
               
Newborn care:              
GAAP Gross Profit 18,047     20,692     52,607     55,822  
Amortization of intangibles 119     128     358     345  
Recall accrual and remediation efforts (1,198 )   (714 )   1,375     2,164  
Restructuring and other non-recurring costs 846         848     1,684  
Non-GAAP Gross Profit 17,814     20,106     55,188     60,015  
Non-GAAP Gross Margin 57.1 %   59.7 %   60.5 %   55.4 %
               
Otometrics:              
GAAP Gross Profit 15,605     15,873     48,182     42,730  
Amortization of intangibles 769     693     2,370     2,080  
Acquisition charges     76     50     4,446  
Restructuring and other non-recurring costs         25      
Non-GAAP Gross Profit 16,374     16,642     50,627     49,256  
Non-GAAP Gross Margin 55.2 %   56.2 %   54.7 %   57.2 %
               
Consolidated:              
GAAP Gross Profit 77,125     74,241     223,816     207,127  
Amortization of intangibles 1,930     1,290     6,235     3,789  
Acquisition charges 402     76     3,882     4,446  
Recall accrual and remediation efforts (1,198 )   (714 )   1,375     3,945  
Restructuring and other non-recurring costs 846         873     1,684  
Non-GAAP Gross Profit 79,105     74,893     236,181     220,991  
Non-GAAP Gross Margin 60.6 %   61.1 %   60.6 %   59.8 %

NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
GEOGRAPHIC REVENUE (unaudited)
(in thousands)
               
  Three Months Ended   Nine Months Ended
  September 30,
2018
  September 30,
2017
  September 30,
2018
  September 30,
2017
Consolidated Revenue:              
United States 77,980     68,697     222,135     200,506  
International 52,658     53,946     167,765     169,025  
Totals 130,638     122,643     389,900     369,531  
               
United States 60 %   56 %   57 %   54 %
International 40 %   44 %   43 %   46 %
Totals 100 %   100 %   100 %   100 %
                       

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Source: Natus Medical Incorporated