Quarterly report pursuant to Section 13 or 15(d)

Business Combinations

v3.8.0.1
Business Combinations
9 Months Ended
Sep. 30, 2017
Business Combinations [Abstract]  
Business Combinations
Business Combinations
Otometrics
On January 3, 2017, the Company acquired the Otometrics business from GN Store Nord A/S for a cash purchase price of $149.2 million, which includes a $4.2 million net working capital adjustment. Otometrics is a manufacturer of hearing diagnostics and balance assessment equipment, disposables and software. Otometrics provides computer-based audiological, otoneurologic and vestibular instrumentation and sound rooms to hearing and balance care professionals worldwide. Otometrics has a complete product and brand portfolio known for its sophisticated design technology in the hearing and balance assessment markets.
The Company has accounted for the acquisition under the acquisition method of accounting for business combinations. Under the acquisition method of accounting, the assets acquired and liabilities assumed from Otometrics are recorded in the condensed consolidated financial statements at their respective fair values as of the acquisition date. The excess of the purchase price over the fair value of the acquired net assets is recorded as goodwill. The results of Otometrics are included in the condensed consolidated financial statements since the date of the acquisition.
The following table summarizes the preliminary purchase price allocation of the fair value of the assets acquired and liabilities assumed at the date of acquisition, (in thousands):
Cash and cash equivalents
$
6,758

Accounts receivable
30,052

Inventories
23,403

Property and equipment
2,770

Intangible assets
75,755

Goodwill
58,941

Other assets
1,987

Accounts payable
(8,663
)
Accrued liabilities
(14,907
)
Deferred revenue
(767
)
Deferred income tax
(26,082
)
Total purchase price
$
149,247


The goodwill recorded represents the future economic benefits arising from the other assets acquired that could not be individually identified and separately recognized. The goodwill recorded as part of the acquisition of Otometrics is not amortized and includes the following:
The expected synergies and other benefits that we believe will result from combining the operations of Otometrics with the operations of Natus;
Any intangible assets that did not qualify for separate recognition, as well as future, yet unidentified projects and products; and
The value of the going-concern element of Otometrics's existing businesses (the higher rate of return on the assembled collection of net assets versus if Natus has acquired all of the net assets separately).
Management is working with an independent valuation firm to determine fair values of the identifiable intangible assets. The Company will use a combination of income approaches including relief from royalty and multi-period excess earnings methods. The valuation models will be based on estimates of future operating projections of the acquired business and rights to sell products as well as judgments on the discount rates used and other variables. The Company is determining the forecasts based on a number of factors, including their best estimate of near-term net sales expectations and long-term projections, which include review of internal and independent market analyses.
The fair value of assets acquired and liabilities assumed was based on preliminary valuations, and our estimates and assumptions are subject to change as the valuations are finalized, within the measurement period not to exceed 12 months from the acquisition date. The Company is currently in the process of verifying data and finalizing information related to the Otometrics valuation and recording of inventory, accounts receivable, intangible assets, other liabilities, income taxes and the corresponding effect on goodwill. In the three months ended September 30, 2017, the Company made adjustments resulting from the continued purchase price allocation refinement.
Otometrics's revenue of $86.2 million and loss from operations of $4.6 million are included in the condensed consolidated statement of operations for the period from January 3, 2017 (acquisition date) to September 30, 2017.
The unaudited pro forma financial results presented below for the three and nine months ended September 30, 2017 and September 30, 2016, include the effects of pro forma adjustments as if the acquisition occurred on January 1, 2016. The pro forma results were prepared using the acquisition method of accounting and combine the historical results of Natus and Otometrics for the three and nine months ended September 30, 2017 and September 30, 2016, including the effects of the business combination, primarily amortization expense related to the fair value of identifiable intangible assets acquired, interest expense associated with the financing obtained by Natus in connection with the acquisition, and the elimination of acquisition-related costs incurred.
The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the earliest period presented, nor is it intended to be a projection of future results.
Unaudited Pro forma Financial Information
(in thousands)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$
122,643

 
$
118,431

 
$
369,531

 
$
356,769

Net income (loss)
$
(6,113
)
 
$
3,494

 
$
(6,398
)
 
$
3,311

 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.19
)
 
$
0.11

 
$
(0.20
)
 
$
0.10

Diluted
$
(0.19
)
 
$
0.11

 
$
(0.20
)
 
$
0.10

Weighted average shares used in the calculation of earnings per share:
 
 
 
 
 
 
 
Basic
32,593

 
32,388

 
32,536

 
32,476

Diluted
32,593

 
32,981

 
32,536

 
33,077


The pro forma results for the three and nine months ended September 30, 2017 were adjusted to exclude $2.4 million and $6.8 million, respectively of nonrecurring expense related to the fair value adjustment of acquisition-date inventory.
The pro forma results for the three and nine months ended September 30, 2016 were adjusted to exclude the aforementioned charges, along with $2.0 million and $6.0 million, respectively of amortization of intangible assets, and $1.0 million and $3.0 million, respectively of interest expense.
RetCam
On July 6, 2016, the Company acquired the portfolio of RetCam Imaging Systems ("RetCam") from Clarity Medical Systems, Inc. for $10.6 million in cash. RetCam is an imaging system used to diagnose and monitor a range of ophthalmic maladies in premature infants. The purchase agreement also included a holdback of $2.0 million which was paid on February 16, 2017. Subsequent to the acquisition, an additional $1.1 million was paid by the Company to Clarity Medical Systems as a result of a working capital adjustment. Results of operations for RetCam have been included in the Company's condensed consolidated financial statements from the date of acquisition. The total purchase price was allocated $7.2 million to tangible assets, $4.9 million to intangible assets with an assigned weighted average life of 5 years being amortized on the straight line method, and $1.7 million to goodwill, offset by $2.0 million to net liabilities. Pro forma financial information for the RetCam acquisition is not presented as it is not considered material.
NeuroQuest
On March 2, 2016, the Company acquired NeuroQuest, LLC (“NeuroQuest”) through an asset purchase. NeuroQuest complements our Global Neuro-Diagnostics (“GND”) and Monarch Medical Diagnostics, LLC (“Monarch”) acquisitions which offer patients a convenient way to complete routine-electroencephalography (“EEG”) and extended video electroencephalography (“VEEG”) testing. The cash consideration for NeuroQuest was $4.6 million. The purchase agreement also included an asset consideration holdback of $0.5 million which was paid on April 30, 2017. The total purchase price was allocated to $0.5 million of tangible assets, $1.3 million of intangible assets with an assigned weighted average life of 5 years being amortized on the straight line method, and $3.5 million of goodwill, offset by $0.1 million of net liabilities. Pro forma financial information for the NeuroQuest acquisition is not presented as it is not considered material.