Natus Medical Announces 2010 Third Quarter Financial Results

- Updates Earnings Per Share Guidance

SAN CARLOS, Calif.-- Natus Medical Incorporated (Nasdaq:BABY) today announced financial results for the three and nine months ended September 30, 2010.

For the third quarter ended September 30, 2010, Natus reported revenue of $53.3 million, compared to $44.3 million reported in the comparable quarter of the previous year. Net income was $3.7 million, or $0.13 per diluted share, for the third quarter of both 2010 and 2009.

For the nine months ended September 30, 2010, the Company reported net income of $6.5 million, or $0.22 per diluted share, compared to net income of $6.8 million, or $0.24 per diluted share, for the comparable period in 2009.

On a non-GAAP basis the Company reported net income $4.9 million, or $0.17 per diluted share, for the third quarter of 2010, compared with net income of $4.1 million, or $0.14 per diluted share, for the third quarter of 2009. The non-GAAP results for the third quarter of 2010 exclude $1.2 million of amortization expense associated with acquisition-related intangible assets, a charge of $323,000 associated with the discontinuance of the Clarity newborn hearing screening product line, and $179,000 of direct costs incurred in the third quarter associated with the Company's acquisition of Medix on October 12, 2010.

"On October 13, 2010, we announced our expected revenue results for the quarter as several large orders we expected to ship during the last weeks of the quarter were delayed. As a result, our third quarter revenue was approximately $700,000 below our expectation and our non-GAAP earnings per share were off a penny from our guidance," said Jim Hawkins, President and Chief Executive Officer of the Company.

"Our hearing screening business continues to do well in all our markets, with third quarter revenue up 11% over last year," said Hawkins. "We also received a $2.9 million order from Saudi Arabia in the third quarter for our ALGO newborn hearing systems, Cool-Caps, and Olympic Cerebral Function Monitors. If the hearing screening program is fully implemented in Saudi Arabia, with approximately 700,000 births per year, we anticipate a significant disposable revenue stream in future years. Approximately half of this order was shipped in the third quarter and we expect the remainder to ship in the fourth quarter."

"In October 2010 we acquired Medix, a leader in the development, manufacturing, and sales of incubators, infant warmers, and LED-based phototherapy devices in Latin America. Expanding Natus into these new products and markets will enlarge our footprint into both the nursery and neonatal intensive care units of hospitals around the globe. We are very excited about the Medix acquisition and expect it to be accretive to our earnings in 2011, exclusive of any restructuring charges. Because Medix sells primarily through distributors in Latin America they will have a lower gross profit margin than our corporate average; however, we expect our operating margin will improve next year with the contribution of Medix," added Hawkins.

"During the third quarter we experienced cost issues, both internal and external, that affected our profitability. Our gross profit was 59% versus our expectation of 61.5%. This was due to three factors: growth in our lower gross margin international business, increased product costs, and product mix. Although we were able to partially offset these increased production costs through operating expense control, we have continued to invest in our organization and infrastructure to support our continuing growth, most recently by hiring a President of Natus Europe and adding key personnel to our finance and IT groups worldwide, including Argentina. We expect that our operating costs, exclusive of the costs of Medix, will increase in the fourth quarter, and thus we are reducing our fourth quarter earnings per share guidance accordingly," said Hawkins.

"We continue to be very optimistic about the future of Natus. With the acquisition of Medix, we now expect to substantially achieve two of our long standing goals: exiting 2010 with a revenue run rate of approximately $250 million and generating approximately 50% of our revenue from international markets," added Hawkins.

As of September 30, 2010 the Company had cash, cash equivalents, and short-term investments of $43.6 million, stockholders' equity of approximately $256 million, and working capital of approximately $91 million. These figures do not give effect to the Medix acquisition.

Financial Guidance on a GAAP and non-GAAP Basis

Natus reiterated its revenue guidance and updated its earnings guidance for the full year 2010.

On a GAAP basis for the full year 2010, the Company expects revenue to be approximately $217 million and earnings per share to range from $0.41 to $0.43. The Company had previously said it expected that earnings per share would range from $0.46 to $0.48. The Company's previous guidance did not take into account the third quarter charges of $500,000 for the discontinuance of the Clarity hearing screener and direct costs of the Medix acquisition.

Natus also reiterated its revenue guidance and updated its earnings guidance for the fourth quarter of 2010.

For the fourth quarter of 2010, the Company expects revenue to be approximately $62 million and earnings per share to range from $0.18 to $0.20. The company had previously said revenue would be approximately $55 million, exclusive of Medix, and earnings per share would range from $0.20 to $0.21.

On a non-GAAP basis the Company expects earnings per share to range from $0.62 to $0.64 for the full year 2010 and $0.21 to $0.23 for the fourth quarter of 2010. The Company had earlier said that non-GAAP earnings per share for the full year would range from $0.65 to $0.67 and for the fourth quarter $0.23 to $0.24.

The full year non-GAAP earnings guidance excludes amortization expense associated with acquisition-related intangible assets, the charge associated with the discontinuance of the Clarity hearing screener and associated disposable supplies, a restructuring charge, and direct costs of the Medix acquisition. The Company has elected to provide its guidance on a non-GAAP basis that excludes the amortization of acquisition related intangibles as this presentation is common among companies that are active acquirors and whose results are, accordingly, affected by such charges. The Company also excludes these charges, charges related to the product discontinuance, restructuring charges, and acquisition related costs because this information is used by management to evaluate operating results and because it believes this information will assist investors in making period to period comparisons of the Company's operating results.

The Company's GAAP and non-GAAP guidance include the impact of expensing employee share based compensation. However, the Company's guidance does not include the impact of any future acquisition-related charges associated with the Medix acquisition, other acquisition or restructuring related charges that may be incurred, or the impact any future potential acquisitions might have on the Company's results of operations. All earnings per share amounts are on a diluted basis.

Use of Non-GAAP Financial Measures

In addition to disclosing financial results calculated in accordance with GAAP, this release contains non-GAAP financial measures that exclude amortization of acquisition related intangibles, other acquisition-related charges, charges related to product discontinuance, and restructuring charges. The Company believes that the presentation of results excluding amortization and these other charges provides meaningful supplemental information to both management and investors that is indicative of the Company's core operating results. Therefore, the Company believes these non-GAAP financial measures facilitate comparison of operating results across reporting periods. A reconciliation between the Company's results of operations on a GAAP and non-GAAP basis for the periods reported is included as part of the condensed consolidated statements of operations at the end of the Company's financial results release.

The Company believes that both management and investors benefit from referring to these non-GAAP financial measures in assessing the Company's performance and when planning, forecasting, and analyzing future periods. 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 today (8:00 a.m. Pacific Time). Individuals interested in listening to the conference call may do so by dialing 800-659-1942 for domestic callers, or 1-617-614-2710 for international callers, and entering reservation code 99278684. A telephone replay will be available for 48 hours following the conclusion of the call by dialing 888-286-8010 for domestic callers, or 1-617-801-6888 for international callers, and entering reservation code 58205263.

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 used for the screening, detection, treatment, monitoring and tracking of common medical ailments such as hearing impairment, neurological dysfunction, epilepsy, sleep disorders, and newborn care. Product offerings include computerized neurodiagnostic systems for audiology, neurology, polysomnography, and neonatology, as well as newborn care products such as hearing screening systems, phototherapy devices for the treatment of newborn jaundice, head-cooling products for the treatment of brain injury in newborns, and software systems for managing and tracking disorders and diseases for public health laboratories.

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

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, but are not limited to, statements regarding the achievement of historic profit levels in 2011, the fulfillment of the remainder of the Saudi Arabia order in the fourth quarter 2010, the benefit of the Medix acquisition and its impact on operating margins, and anticipated revenue and profitability for the fourth quarter and full year 2010. These statements relate to current estimates and assumptions of our management as of the date of this press release, and future events or Natus' future financial performance or results, 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, the demand for our products and services, the impact of adverse global economic conditions 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, and risks associated with bringing new products to market, 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, 2009, and its 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 AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

                              Three Months Ended       Nine Months Ended

                              September   September    September    September

                                2010        2009         2010         2009

Revenue                       $ 53,279    $ 44,251     $ 155,136    $ 114,871

Cost of revenue                 21,831      17,450       62,955       44,869

Gross profit                    31,448      26,801       92,181       70,002

Operating expenses:

Marketing and selling           12,693      11,767       40,046       32,005

Research and development        4,820       4,175        15,188       11,839

General and administrative      8,074       5,688        26,782       16,462

Total operating expenses        25,587      21,630       82,016       60,306

Income from operations          5,861       5,171        10,165       9,696

Other income/(expense):

Interest income                 34          40           30           218

Interest expense                (13    )    (18    )     (49     )    (131    )

Other income (expense), net     (196   )    49           30           497

Total other income/(expense)    (175   )    71           11           584

Income before provision for     5,686       5,242        10,176       10,280
income tax

Provision for income tax        1,943       1,573        3,631        3,488

Net income                    $ 3,743     $ 3,669      $ 6,545      $ 6,792

Earnings per share:

Basic                         $ 0.13      $ 0.13       $ 0.23       $ 0.25

Diluted                       $ 0.13      $ 0.13       $ 0.22       $ 0.24

Weighted-average shares used
to compute

Basic earnings per share        28,212      27,669       28,021       27,640

Diluted earnings per share      29,261      28,668       29,170       28,343




NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

RECONCILIATION OF NON-GAAP ADJUSTMENTS (UNAUDITED)

(in thousands, except per share amounts)

                             Three Months Ended      Nine Months Ended

                             September   September   September   September

                               2010        2009        2010        2009

GAAP based results:

Income before provision for  $ 5,686     $ 5,242     $ 10,176    $ 10,280
income tax

Non-GAAP adjustments:

Amortization expense
associated with certain                                                      (a)
acquired intangible assets
reported as a component of:

 Cost of revenue               510         410         1,530       1,229

 Marketing and selling         329         238         989         713

 Research and development      370         375         1,111       1,126

Restructuring charge
reported as a component of                             3,107                 (b)
general and administrative
expense

Direct costs of                179         460         179         460       (c)
acquisitions

Costs associated with the
discontinuance of the
Sonamed Clarity hearing                                                      (d)
screener reported as a
component of:

 Cost of revenue               323                     1,081

 Marketing and selling                                 300

Non-GAAP income before         7,397       6,725       18,473      13,808
provision for income tax

Provision for income tax,      2,527       2,603       6,589       5,247
as adjusted

Non-GAAP net income          $ 4,870     $ 4,122     $ 11,884    $ 8,561

Non-GAAP earnings per
share:

 Basic                       $ 0.17      $ 0.15      $ 0.42      $ 0.31

 Diluted                     $ 0.17      $ 0.14      $ 0.41      $ 0.30

Weighted-average shares
used to compute:

 Basic non-GAAP earnings       28,212      27,669      28,021      27,640
 per share

 Diluted non-GAAP earnings     29,261      28,668      29,170      28,343
 per share

Memo, Gross profit
percentage:

 GAAP basis                    59.0   %    60.6   %    59.4   %    60.9   %

 non-GAAP basis                60.6   %    61.5   %    61.1   %    62.0   %

Note:

The Company has elected to provide non-GAAP financial results that exclude the
items below as this presentation is common among companies that are active
acquirors and whose results are, accordingly, affected by such charges, because
this information is used by management to evaluate operating results and because
it believes this information will assist investors in making period to period
comparisons of the Company's operating results.

(a) Amortization expense associated with acquired intangible assets with
definite lives.

(b) Restructuring charge including accruals for severance benefits and exit and
disposal costs.

(c) Direct costs of acquisitions that are expensed pursuant to the requirement
of ASC 805.

(d) Charge associated with discontinuance of the Sonamed Clarity newborn hearing
screener. Costs include concessions given to customers purchasing a replacement
hearing screener, write-down of inventory, and write-off of tradenames.




NATUS MEDICAL INCORPORATED AND SUBSIDIARIES

GUIDANCE INCLUDING GAAP TO NON-GAAP EARNINGS PER SHARE RECONCILIATION

(unaudited)

                                      Three months ending  Fiscal year ending

                                      December 31, 2010    December 31, 2010

Revenue                               $62.0 Million        $217.0 Million

Earnings per share:

GAAP basis                            $0.18 to $0.20       $0.41 to $0.43

Non-GAAP adjustments

Restructuring charge                  - -                  $0.07

Discontinuance of Sonamed Clarity     - -                  $0.04
hearing screener

Amortization of acquisition- related  $0.03                $0.10
intangible assets

Non-GAAP earnings per share           $0.21 to $0.23       $0.62 to $0.64




    Source: Natus Medical Incorporated