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BABY > SEC Filings for BABY > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for NATUS MEDICAL INC

Form 10-Q for NATUS MEDICAL INC


9-Nov-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Natus®, AABR®, ABaer ®, ALGO®, AOAE®, AuDX ®, Balance Manager®, Balance Master®, Biliband ®, Bio-logic®, Ceegraph®, CHAMP ®, Cochlea Scan®, Cool Cap®, Ear Couplers ®, Echo Screen®, Embla®, Embletta ®, Enterprise®, EquiTest®, Fischer-Zoth ®, Flexicoupler®, Gumdrop®, Keypoint ®, Keypoint AU®, Keypoint EU®, Keypoint JP ®, MASTER®, Medix®, MedixI.C.S.A ®, Navigator®, Neatnick®, neoBLUE ®, Neuromax®, NeuroWorks®, Nicolet ®, NicoletElite®, Oxydome®, REMbrandt ®, REMlogic®, Sandman®, Sleeprite ®, Sleepscan®, Smart Scale®, STETHODOP ®, TECA®, Tootsweet®, Traveler ®, Warmette® and VAC PAC®, VERSALAB ®, Xact Trace®, are registered trademarks of Natus Medical Incorporated and its subsidiaries. Accuscreen™, Bili Lite Pad™, Bili-Lite™, Biomark™, Circumstraint™, Coherence™, Deltamed™, inVision™, Medix MediLED™, MiniMuffs™, NATUS NatalCare™, Neometrics™ and Smartpack™ are non-registered trademarks of Natus and its subsidiaries. Solutions for Newborn CareSM is a non-registered service mark of Natus.

Overview

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") supplements the MD&A in the Annual Report on Form 10-K for the year ended December 31, 2011 of Natus Medical Incorporated ("Natus," "we," "us," or "our Company"), and presumes that readers have read or have access to the discussion and analysis in our Annual Report. Management's discussion and analysis should be read in conjunction with our condensed consolidated financial statements and accompanying footnotes, the discussion of certain risks and uncertainties contained in Part II, Item 1A of this report, and the cautionary information regarding forward-looking statements at the end of this section. MD&A includes the following sections:

• Our Business. A general description of our business;

• 2012 Third Quarter Overview. A summary of key information concerning the financial results for the three months ended September 30, 2012;

• Application of Critical Accounting Policies. A discussion of the accounting policies that are most important to the portrayal of our financial condition and results of operations and that require significant estimates, assumptions, and judgments;

• Results of Operations. An analysis of our results of operations for the periods presented in the financial statements;

• Liquidity and Capital Resources. An analysis of capital resources, sources and uses of cash, investing and financing activities, off-balance sheet arrangements, contractual obligations and interest rate hedging;

• Recent Accounting Pronouncements. See Note 1 to our Condensed Consolidated Financial Statements for a discussion of new accounting pronouncements that affect us; and

• Cautionary Information Regarding Forward-Looking Statements. Cautionary information about forward-looking statements.

Our Business

Natus is a leading provider of healthcare products used for the screening, detection, treatment, monitoring and tracking of common medical ailments in newborn care, hearing impairment, neurological dysfunction, epilepsy, sleep disorders, and balance and mobility disorders. 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, incubators to control the newborn's environment, and software systems for managing and tracking disorders and diseases for public health laboratories.

We have completed a number of acquisitions since 2003, consisting of either the purchase of a company, substantially all of the assets of a company, or individual products or product lines. The businesses we have acquired are Neometrics in 2003, Fischer-Zoth in 2004, Bio-logic, Deltamed, and Olympic Medical in 2006, Xltek in 2007, Sonamed, Schwarzer Neurology, and Neurocom in 2008, Hawaii Medical and Alpine Biomed in 2009, Medix in 2010, Embla in 2011, and Nicolet in 2012.

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Product Families

We categorize our products into the following product families, which are more fully described in our Annual Report on Form 10-K for the year ended December 31 2011:

• Neurology - Includes products for diagnostic electroencephalography (EEG), electromyography (EMG), intra-operative monitoring (IOM), diagnostic sleep analysis, or polysomnography (PSG), newborn brain monitoring, and assessment of balance and mobility disorders.

• Hearing - Includes products for newborn hearing screening and diagnostic hearing assessment.

• Newborn Care - Includes thermoregulation devices and products for the treatment of brain injury and jaundice in newborns.

Segment and Geographic Information

We operate in one reportable segment in which we provide healthcare products used for the screening, detection, treatment, monitoring and tracking of common medical ailments in newborn care, hearing impairment, neurological dysfunction, epilepsy, sleep disorders and balance and mobility disorders.

Our end-user customer base includes hospitals, clinics, laboratories, physicians, nurses, audiologists, and governmental agencies. Most of our international sales are to distributors who resell our products to end-users or sub-distributors.

Information regarding our sales and long-lived assets in the U.S. and in countries outside the U.S. is contained in Note 15- Segment, Customer and Geographic Information of our condensed consolidated financial statements included in this report.

Revenue by Product Category

We generate our revenue either from sales of Devices and Systems, which are generally non-recurring, and from related Supplies and Services, which are generally recurring. Other revenue consists primarily of freight revenue. The products that are attributable to these categories are described in our Annual Report on Form 10-K for the year ended December 31, 2011. Revenue from Devices and Systems and Supplies and Services, as a percent of total revenue for the three and nine months ended September 30, 2012 and 2011 is as follows:

                                  Three Months Ended           Nine Months  Ended
                                     September 30,                September 30,
                                  2012            2011         2012            2011
        Devices and Systems           60 %           61 %          62 %           64 %
        Supplies and Services         38 %           37 %          36 %           34 %
        Other                          2 %            2 %           2 %            2 %

        Total                        100 %          100 %         100 %          100 %

During the three and nine months ended September 30, 2012 and 2011, no single customer or foreign country contributed to more than 10% of revenue, and revenue from services was less than 10% of revenue.

2012 Third Quarter Overview

Our business and operating results have been and continue to be affected by worldwide economic conditions. Our sales are significantly dependent on both capital spending by hospitals in the United States and healthcare spending by ministries of health within the European Union.

Our consolidated revenue increased $29.4 million in the third quarter ended September 30, 2012 to $80.7 million compared to $51.3 million in the third quarter of the previous year. Nicolet, acquired in July 2012, contributed to $24.1 million of incremental revenue and Embla, acquired in September 2011, contributed to $5.3 million of incremental revenue in the third quarter of 2012. We experienced revenue increases and declines across other business units in the United States, Europe, and South America that resulted in the same level of revenue in both quarters.

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We incurred a net loss of $1.9 million or $(0.07) per share in the three months ended September 30, 2012, compared with net income of $154,000 or $0.01 per diluted share in the same period in 2011. The net loss for the 2012 period included restructuring and related stock compensation costs of $7.7 million and direct costs associated with the Nicolet acquisition completed in July 2012 of $786,000. An increase in gross profit of 1.1 percentage points for the third quarter of 2012 compared to same period in 2011, resulted primarily from product mix.

Application of Critical Accounting Policies

We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In so doing, we must often make estimates and use assumptions that can be subjective, and, consequently, our actual results could differ from those estimates. For any given individual estimate or assumption we make, there may also be other estimates or assumptions that are reasonable.

We believe that the following critical accounting policies require the use of significant estimates, assumptions, and judgments. The use of different estimates, assumptions, or judgments could have a material effect on the reported amounts of assets, liabilities, revenue, expenses, and related disclosures as of the date of the financial statements and during the reporting period:

• Revenue recognition

• Inventory is carried at the lower of cost or market value

• Carrying value of intangible assets and goodwill

• Liability for product warranties

• Share-based compensation

These critical accounting policies are described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2011, under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. There have been no changes to these policies during the three and nine months ended September 30, 2012.

Results of Operations

The following table sets forth, for the periods indicated, selected consolidated
statements of operations data as a percentage of total revenue. Our historical
operating results are not necessarily indicative of the results for any future
period.



                                                       Three Months                Nine Months
                                                           Ended                      Ended
                                                       September 30,              September 30,
                                                    2012          2011          2012          2011
Revenue                                               100 %        100.0 %        100 %         100 %
Cost of revenue                                      45.2           46.3         44.4          43.4

Gross profit                                         54.8           53.7         55.6          56.6

Operating expenses:
Marketing and selling                                27.0           28.6         27.2          26.6
Research and development                             10.5           11.9         10.9          11.0
General and administrative                           23.3           15.2         19.5          14.7

Total operating expenses                             60.8           55.7         57.6          52.3

Income (loss) from operations                        (6.0 )         (2.0 )       (2.0 )         4.3
Other income (expense), net                          (0.3 )          0.4          0.1            -

Income (loss) before provision (benefit) for
income tax                                           (6.3 )         (1.6 )       (1.9 )         4.3
Provision for income tax (benefit) expense           (3.9 )         (2.0 )       (1.3 )         0.9

Net income (loss)                                    (2.4 )%         0.4 %       (0.6 )%        3.4 %

We acquired Nicolet in July 2012 and Embla in September 2011. Where significant, we have noted the impact of these acquisitions on our results of operations for the three and nine months ended September 30, 2012, as compared to the same periods in 2011.

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Three Months Ended September 30, 2012 and 2011

Our revenue increased $29.4 million, or 57%, to $80.7 million for the three months ended September 30, 2012, compared to $51.3 million in the comparable 2011 period. Nicolet contributed $24.1 million and Embla contributed $5.3 million of incremental revenue during the 2012 quarter.

Revenue from devices and systems increased $17 million, or 55%, to $48.1 million in the third quarter of 2012, compared to $31.1 million in the same period in 2011. Nicolet contributed $12.9 million and Embla contributed $3.3 million of incremental device and system revenue during the 2012 quarter. Devices and systems revenue from our neurology and other diagnostic products other than Nicolet and Embla increased $200,000 or 2% to $14.0 million and devices and systems revenue from newborn care and other device products increased $600,000. Revenue from devices and systems was 60% and 61% of total revenue for the three months ended September 30, 2012 and 2011, respectively.

Revenue from supplies and services increased $11.1 million, or 58%, to $30.3 million in the third quarter of 2012 compared to $19.2 million in the same period in 2011. Nicolet contributed $10.0 million and Embla contributed $2 million of incremental supplies and services revenue in the third quarter of 2012. Revenue from newborn care and hearing supplies increased by $100,000, revenue from neurology supplies other than Nicolet and Embla decreased by $500,000 and service fee revenue other than Nicolet and Embla decreased by $500,000. Revenue from supplies and services was 38% of total revenue in the three months ended September 30, 2012, compared to 37% of total revenue for the third quarter of 2011.

Revenue from sales outside the U.S. increased 62%, or $12.7 million to $33.3 million in the third quarter of 2012 compared to $20.6 million for the same period in 2011. Nicolet and Embla contributed $13.3 million of international revenue, while revenue from neurology and hearing products other than Nicolet and Embla increased by $200,000 and international revenue from newborn care and other products decreased by $800,000.

Gross profit as a percentage of revenue was 54.8% for the three months ended September 30, 2012 compared to 53.7% for the corresponding 2011 period, reflecting increased profit margins on Natus U.S. and Xltek products. Gross profit increased $16.7 million or 61% to $44.3 million in 2012 from $27.6 million in 2011.

Total operating expense increased by $20.5 million, or 72%, to $49.1 million in the three months ended September 30, 2012, compared to $28.6 million in the same period in 2011. The operating expense of Nicolet and the incremental expense of Embla was $13.0 million. In addition, restructuring costs and direct acquisition costs, respectively, were $6.3 million and $500,000 more in the 2012 period compared to the 2011 period. We wrote off $700,000 of Nicolet backlog in the 2012 period with no such expense in the 2011 period.

Marketing and selling expense increased $7.1 million, or 48%, to $21.8 million in the three months ended September 30, 2012, compared to $14.7 million in the same period in 2011. The marketing and selling expense of Nicolet, including the backlog write-off, and the incremental expense of Embla was $6.8 million. The remainder of the increase was primarily related to higher commission costs.

Research and development expense increased $2.4 million or 39%, to $8.5 million for the three months ended September 30, 2012, compared to $6.1 million in the same period of 2011. The research and development expense of Nicolet and the incremental expense of Embla was $3.1 million. A decrease in other expense was primarily attributable to lower employee compensation costs resulting from cost cutting activities initiated earlier in 2012.

General and administrative expense increased $11 million, or 141%, to $18.8 million in the three months ended September 30, 2012, compared to $7.8 million in the same period in 2011. The general and administrative expense of Nicolet and the incremental expense of Embla was $3.1 million. The cost of restructuring activities and direct costs of acquisitions increased by $6.2 million and $500,000, respectively, in the 2012 period compared to the same period in 2011.

Other income (expense), net, consists of investment income from our investment portfolio, interest expense, net currency exchange gains and losses, and other miscellaneous income and expenses. We reported net other expense of $228,000 in the three months ended September 30, 2012, compared to net other income of $186,000 in the same period in 2011. We incurred other expense of $160,000 during the three months ended September 30, 2012 compared with the same amount of other income during the three months ended September 30, 2011. In addition, interest expense was higher by $168,000 for the three months ended September 30, 2012 quarter compared to the same quarter in 2011 resulting from bank borrowings in connection with the Nicolet acquisition.

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We recorded a provision for income tax benefit of $3.1 million and $1.0 million in the three months ended September 30, 2012 and 2011, respectively. The increase of tax benefit for the three months ended September 30, 2012 compared to the same period in the prior year is attributable primarily to the reversal of tax reserves upon settlement of a state income tax audit and the expiration of the statute of limitations on uncertain tax positions that were recorded as a component of income tax expense in prior years.

Nine Months Ended September 30, 2012 and 2011

Our revenue increased $32.7 million, or 19%, to $201.2 million for the nine month period ended September 30, 2012 compared to $168.5 million in the comparable 2011 period. Nicolet contributed $24.1 million and Embla contributed $20.1 million of incremental revenue during 2012. Revenue from our newborn care products decreased $2.3 million, revenue from neurology products other than from Nicolet and Embla decreased $6.1 million and revenue from our hearing and other products decreased $3.1 million in the nine month period in 2012 compared to the nine months ended September 30, 2011.

Revenue from devices and systems increased $17.5 million, or 16% to $124.8 million in the nine month period of 2012 compared to $107.3 million in the same period in 2011. Nicolet contributed $13 million and Embla contributed $11.1 million of incremental device and system revenue during the 2012. Devices and systems revenue from our neurology and other diagnostic products other than Nicolet and Embla decreased $5.9 million, or 11%, to $47.0 million and devices and systems revenue from newborn hearing screening coupled with newborn care and other device products decreased $600,000, reflecting continued weakness in worldwide capital spending coupled with pricing pressures. Revenue from devices and systems was 62% of total revenue in the nine months ended September 30, 2012 compared to 64% of total revenue for 2011.

Revenue from supplies and services increased $14.2 million, or 24%, to $72.6 million in the nine month period of 2012 compared to $58.4 million in the same period in 2011. Nicolet contributed $10.0 million and Embla contributed $8.9 million of incremental supplies and services revenue in 2012. Revenue from newborn care and hearing supplies decreased by $1.1 million, revenue from neurology supplies other than Nicolet and Embla decreased by $1.3 million, and service fee revenue other than Nicolet and Embla decreased by $2.3 million, primarily related to newborn care. Revenue from supplies and services was 36% of total revenue in the nine months ended September 30, 2012 compared to 34% of total revenue for 2011.

Revenue from sales outside the U.S. increased $16.6 million, or 23%, to $89.3 million in the nine month period of 2012 compared to $72.7 million for the same period in 2011. Nicolet contributed $11.1 million and Embla contributed $9.7 million of international revenue, while revenue from neurology and hearing products other than Nicolet and Embla decreased by $200,000 and international revenue from newborn care and other products decreased by $4.0 million.

Gross profit as a percentage of revenue was 55.6% for the nine months ended September 30, 2012 compared to 56.6% for the corresponding 2011 period, with the reduction primarily the result of increases in materials costs. Gross profit increased $16.6 million to $112.0 million in 2012 from $95.4 million in 2011.

Total operating expenses increased by $27.7 million, or 31%, to $115.9 million in the nine months ended September 30, 2012, compared to $88.2 million in the same period in 2011. The operating expense of Nicolet and the incremental expense of Embla contributed to $18.4 million of the increase. In addition, restructuring costs and direct acquisition costs, respectively, were $6.8 million and $2.6 million more in the 2012 period than the 2011period.

Marketing and selling expense increased $9.9 million, or 22%, to $54.7 million in the nine months ended September 30, 2012, compared to $44.8 million in the same period in 2011. The marketing and selling expense of Nicolet and the incremental expense of Embla was $9.1 million. The remainder of the increase was primarily attributable to the amortization of $700,000 of backlog recognized through purchase accounting associated with the Nicolet acquisition.

Research and development expense increased $3.3 million, or 18%, to $21.9 million for the nine months ended September 30, 2012, compared to $18.6 million in the same period of 2011. The research and development expense of Nicolet and the incremental expense of Embla was $4.9 million, partially offset by lower employee compensation costs resulting from cost cutting activities initiated early in 2012.

General and administrative expense increased $14.4 million, or 58%, to $39.2 million in the nine months ended September 30, 2012, compared to $24.8 million in the same period in 2011. The general and administrative expense of Nicolet and the incremental expense of Embla was $4.4 million. The cost of restructuring activities and direct costs of acquisitions increased by $6.8 million and $2.6 million, respectively, in the 2012 period compared to the same period in 2011.

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Other income (expense), net, consists of investment income from our investment portfolio, interest expense, net currency exchange gains and losses, and other miscellaneous income and expenses. We reported net other income of $226,000 in the nine months ended September 30, 2012, compared to net other expense of $28,000 in the same period in 2011. We recognized $470,000 of foreign exchange gains and $39,000 of net foreign currency exchange losses during the nine months ended September 30, 2012 and 2011, respectively.

We recorded a provision for income tax benefit of $2.5 million in the nine months ended September 30, 2012, compared to a provision for income tax expense of $1.5 million in the same period in 2011. The tax benefit for the nine months ended September 30, 2012 compared to tax expense for same period in the prior year is primarily the result in the 2012 period of the settlement of foreign and U.S. state income tax audits and the expiration of the statute of limitations on uncertain tax positions that were recorded as a component of income tax expense in prior years.

Liquidity and Capital Resources

Liquidity is our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments. In addition, liquidity includes the ability to obtain appropriate financing and to raise capital. Therefore, liquidity cannot be considered separately from capital resources that consist of our current funds and the potential to increase those funds in the future. We plan to use these resources in meeting our commitments and in achieving our business objectives.

As of September 30, 2012, we had cash and cash equivalents of $19.5 million, stockholders' equity of $259.9 million, and working capital of $62.6 million, compared with cash and cash equivalents of $32.8 million, stockholders' equity of $257.7 million, and working capital of $90.5 million as of December 31, 2011.

As of September 30, 2012, we had cash and cash equivalents outside the U.S. in certain of our foreign operations of approximately $13.2 million. We currently intend to permanently reinvest the cash held by our foreign subsidiaries. If, however, a portion of these funds were needed for and distributed to our operations in the United States, we would be subject to additional U.S. income taxes and foreign withholding taxes. The amount of taxes due would depend on the amount and manner of repatriation, as well as the location from where the funds are repatriated.

We have a $50 million revolving credit facility with Wells Fargo Bank, National Association ("Wells Fargo"). The revolving credit facility contains covenants, including covenants relating to liquidity and other financial measurements, and provides for events of default, including failure to pay any interest when due, failure to perform or observe covenants, bankruptcy or insolvency events and the occurrence of a material adverse effect, and restricts our ability to pay dividends. We have granted Wells Fargo a security interest in substantially all of our assets. We have no other significant credit facilities. We did not draw on the credit facility in 2011.

In July 2012, we acquired for a cash purchase price of $57.9 million all of the outstanding common shares of CareFusion subsidiaries comprising the Nicolet business in the United States, Ireland, and the United Kingdom, and certain assets and liabilities of Nicolet sales divisions principally in China, Brazil, Germany, Italy, the Netherlands, and Spain. We funded this acquisition with a combination of cash on hand and a $31.0 million borrowing under the Wells Fargo credit facility.

We believe that our current cash and cash equivalents and any cash generated from operations will be sufficient to meet our ongoing operating requirements for the foreseeable future. In addition to the Nicolet acquisition, we acquired Embla in 2011 and Medix in 2010, and completed two acquisitions in 2009, four acquisitions in 2008, one in 2007, and three in 2006. We intend to continue to acquire additional technologies, products, or businesses and these acquisitions could be significant. These actions would likely affect our future capital requirements and the adequacy of our available funds. In order to finance future acquisitions, we may be required to raise additional funds through public or private financings, strategic relationships or other arrangements. Any equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants and increase our cost of capital.

Cash provided by operations increased by $400,000 for the nine months ended September 30, 2012 to $17.0 million, compared to $16.6 million for the same period in 2011. The sum of our net income and certain non-cash expense items, such as reserves, depreciation and amortization, and share based compensation was approximately $14.1 million in the 2012 period, compared to $18.4 million in 2011. The overall impact of changes in certain operating assets and liabilities on total operating cash flows resulted in a cash inflow of $2.9 million in 2012 . . .

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