Natus Medical Announces Third Quarter Financial Results

| Source: Natus Medical Incorporated Natus Medical Incorporated

  • 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 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 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  $369,531 
Cost of revenue51,583  47,112  159,849  158,615 
Intangibles amortization1,930  1,290  6,235  3,789 
  Gross profit77,125  74,241  223,816  207,127 
Gross profit margin59.0% 60.5% 57.4% 56.1%
Operating expenses:       
  Marketing and selling33,200  32,537  102,474  95,106 
  Research and development15,127  11,632  46,186  38,098 
  General and administrative15,799  17,329  56,967  57,501 
  Intangibles amortization4,477  3,882  13,434  11,841 
  Restructuring11,432  321  14,182  914 
  Total operating expenses80,035  65,701  233,243  203,460 
Income (loss) from operations(2,910) 8,540  (9,427) 3,667 
Interest expense(1,644) (1,025) (5,240) (3,287)
Other income918  1,175  296  2,019 
Income (loss) before tax(3,636) 8,690  (14,371) 2,399 
Provision for income tax expense (benefit)1,940  17,203  (3,069) 15,597 
Net loss$(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:       
  Basic33,321  32,593  32,982  32,536 
  Diluted33,321  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 receivable121,113  122,971  126,809 
Inventories80,586  76,630  71,529 
Other current assets30,843  32,224  18,340 
Total current assets286,982  286,733  305,628 
      
Property and equipment21,564  21,645  22,071 
Goodwill and intangible assets318,618  326,109  345,580 
Deferred income tax10,135  10,296  10,709 
Other assets16,746  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 liabilities52,015  54,874  51,738 
Deferred revenue16,816  16,892  15,157 
Total current liabilities89,426  95,819  92,137 
      
Long-term liabilities:     
Long-term debt114,426  119,379  154,283 
Deferred income tax18,896  18,936  19,407 
Other long-term liabilities21,338  21,970  21,995 
Total liabilities244,086  256,104  287,822 
Total stockholders’ equity409,959  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 receivable1,782  1,632 
     Depreciation and amortization8,958  7,040 
     Loss on disposal of property and equipment250  20 
     Warranty reserve(902) (401)
     Share-based compensation9,814  2,248 
     Changes in operating assets and liabilities:   
         Accounts receivable891  (4,762)
         Inventories(2,700) 699 
         Prepaid expenses and other assets743  719 
         Accounts payable(3,435) (8,734)
         Accrued liabilities(2,446) 1,967 
         Deferred revenue58  998 
         Deferred income tax191  11,021 
               Net cash provided by operating activities7,628  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 period54,908  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 expenses15  —  2,230  — 
Extraordinary patent litigation—  306  996  1,642 
Non-GAAP income before provision for income tax17,600  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 share33,321  32,593  32,982  32,536 
  Diluted non-GAAP earnings per share33,551  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 Profit77,125  74,241  223,816  207,127 
Amortization of intangibles1,930  1,290  6,235  3,789 
Direct cost of acquisitions402  76  3,882  4,446 
Recall accrual and remediation efforts(1,198) (714) 1,375  3,945 
Restructuring and other non-recurring costs846  —  873  1,684 
Non-GAAP Gross Profit79,105  74,893  236,181  220,991 
Non-GAAP Gross Margin60.6% 61.1% 60.6% 59.8%
        
GAAP Operating Profit(2,910) 8,540  (9,427) 3,667 
Amortization of intangibles6,413  5,172  19,674  15,630 
Recall accrual and remediation efforts90  755  6,250  10,516 
Extraordinary patent litigation—  306  996  1,642 
Restructuring and other non-recurring costs13,750  321  18,981  7,085 
Direct cost of acquisitions968  1,255  8,222  6,502 
Extraordinary annual meeting expenses15  —  2,230  — 
Non-GAAP Operating Profit18,326  16,349  46,926  45,042 
Non-GAAP Operating Margin14.0% 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 rate15,704  (1,126) 14,120  (473)
Repatriation tax adjustment—  —  101  — 
Stock-based compensation adjustment791  —  1,621  — 
Valuation Allowance for GAAP purposes1,285  (10,755) 1,285  (10,755)
Effect on acquisition cost—  —  —  204 
Non-GAAP Income tax expense4,227  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 Intangibles0.20 0.79    
Restructuring and other non-recurring costs0.03 0.67    
Litigation— 0.03    
Recall Accrual and Remediation Efforts0.03 0.22    
Direct cost of acquisitions0.02 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 revenue25,275  21,222  79,628  65,011 
Intangibles amortization1,042  470  3,507  1,369 
  Gross profit43,473  37,676  123,027  108,575 
Gross profit margin62.3% 63.5% 59.7% 62.1%
        
Newborn care:       
Revenue$31,210  $33,666  $91,188  $108,408 
Cost of revenue13,044  12,848  38,223  52,248 
Intangibles amortization119  126  358  338 
  Gross profit18,047  20,692  52,607  55,822 
Gross profit margin57.8% 61.5% 57.7% 51.5%
        
Otometrics:       
Revenue$29,638  $29,609  $92,550  $86,168 
Cost of revenue13,264  13,042  41,998  41,356 
Intangibles amortization769  694  2,370  2,082 
  Gross profit15,605  15,873  48,182  42,730 
Gross profit margin52.7% 53.6% 52.1% 49.6%
        
Consolidated:       
Revenue$130,638  $122,643  $389,900  $369,531 
Cost of revenue51,583  47,112  159,849  158,615 
Intangibles amortization1,930  1,290  6,235  3,789 
  Gross profit77,125  74,241  223,816  207,127 
Gross profit margin59.0% 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 Profit43,473  37,676  123,027  108,575 
Amortization of intangibles1,042  469  3,507  1,364 
Acquisition charges402  —  3,832  — 
Recall accrual and remediation efforts—  —  —  1,781 
Non-GAAP Gross Profit44,917  38,145  130,366  111,720 
Non-GAAP Gross Margin64.4% 64.3% 63.2% 63.9%
        
Newborn care:       
GAAP Gross Profit18,047  20,692  52,607  55,822 
Amortization of intangibles119  128  358  345 
Recall accrual and remediation efforts(1,198) (714) 1,375  2,164 
Restructuring and other non-recurring costs846    848  1,684 
Non-GAAP Gross Profit17,814  20,106  55,188  60,015 
Non-GAAP Gross Margin57.1% 59.7% 60.5% 55.4%
        
Otometrics:       
GAAP Gross Profit15,605  15,873  48,182  42,730 
Amortization of intangibles769  693  2,370  2,080 
Acquisition charges—  76  50  4,446 
Restructuring and other non-recurring costs—  —  25  — 
Non-GAAP Gross Profit16,374  16,642  50,627  49,256 
Non-GAAP Gross Margin55.2% 56.2% 54.7% 57.2%
        
Consolidated:       
GAAP Gross Profit77,125  74,241  223,816  207,127 
Amortization of intangibles1,930  1,290  6,235  3,789 
Acquisition charges402  76  3,882  4,446 
Recall accrual and remediation efforts(1,198) (714) 1,375  3,945 
Restructuring and other non-recurring costs846  —  873  1,684 
Non-GAAP Gross Profit79,105  74,893  236,181  220,991 
Non-GAAP Gross Margin60.6% 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 States77,980  68,697  222,135  200,506 
International52,658  53,946  167,765  169,025 
Totals130,638  122,643  389,900  369,531 
        
United States60% 56% 57% 54%
International40% 44% 43% 46%
Totals100% 100% 100% 100%
            

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