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BABY > SEC Filings for BABY > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for NATUS MEDICAL INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for NATUS MEDICAL INC


7-Nov-2013

Quarterly Report


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

Registered Trademarks and Tradenames

Natus®, AABR®, ABaer®, ALGO®, AOAE®, AuDX®Aura®, Balance Manager®, Balance Master®, Balance Shape®, Biliband®, Bio-logic®, Bo-JECT®, Brain Atlas®, Ceegraph®, CHAMP®, Clarity System®, Cochlea Scan®, Cool Cap®, CoolCare®, Comet®, Dantec®, Ear Couplers®, Ear Muffin®, EC2®, Echo Screen®, Embla US®, Embletta®, Enterprise®, EquiTest®, Fass®, Fischer-Zoth®, Flexicoupler®,Grass®,Grass Technologies®, Gumdrop®, Halo Ear Muffin®, Hawaii Medical®, Keypoint®, Keypoint AU®, Keypoint EU®, Keypoint JP®, MASTER®, Medelec®, Medix®, MedixI.C.S.A®, Navigator®, Neatnick®, neoBLUE®, Neurocom®, Neuromax®,Neurotrac®, NeuroWorks®, Nicolet®, NicoletElite®, Oxydome®, Panorama®, Pocket®, Polyview®, REMbrandt®, REMlogic®, Sandm an®, Scout®, Sleeprite®, Sleepscan®, Sleeptrek®, Smart Scale®, Sonamed®, Sonara®, Sonara TEK®, Stellate Notta®, STETHODOP®, SZAC®, TECA®, Tootsweet®, Traveler®, Treetip®,Twin®, VAC PAC®, VERSALAB®, Warmette®, Xact Trace®, Xltek® are registered trademarks of Natus Medical Incorporated and its subsidiaries. Accuscreen™, Bili Lite Pad™, Bili-Lite™, Biomark™, Circumstraint™, Coherence™, Deltamed™, inVision™, Medix MediLED™, MiniMuffs™, 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, 2012 of Natus Medical Incorporated. 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, our Annual Report filed on Form 10-K for the year ended December 31, 2012 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;

• 2013 Third Quarter Overview. A summary of key information concerning the financial results for the three months ended September 30, 2013;

• 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.

End Markets

Our products address two primary end markets:

• 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.


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• Newborn Care - Includes thermoregulation devices and products for the treatment of brain injury and jaundice in newborns and products for newborn hearing screening and diagnostic hearing assessment.

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.

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 14 - 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. The products that are attributable to these categories are described in our Annual Report on Form 10-K for the year ended December 31, 2012. Revenue from Devices and Systems, Supplies and Services, as a percent of total revenue for the three and nine months ended September 30, 2013 and 2012 is as follows:

                                  Three Months Ended           Nine Months Ended
                                     September 30,               September 30,
                                  2013            2012         2013           2012
          Devices and Systems         62 %           59 %          60 %          63 %
          Supplies                    30 %           33 %          31 %          31 %
          Services                     8 %            8 %           9 %           6 %

          Total                      100 %          100 %         100 %         100 %

During the three and nine months ended September 30, 2013 and 2012, no single customer or foreign country contributed to more than 10% of revenue.

2013 Third Quarter Overview

Our business and operating results are driven in part 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 $4.4 million in the third quarter ended September 30, 2013 to $85.4 million compared to $81.0 million in the third quarter of the previous year. Grass Technologies Product Group ("Grass") contributed $3.8 million of revenue in the third quarter of 2013. Excluding revenues from Grass we experienced revenue increases across business units in Canada and Denmark, and declines across other business units in Europe, South America and the United States.

Net income was $6.3 million or $0.20 per diluted share in the three months ended September 30, 2013, compared with a net loss of $1.7 million or $0.06 per share in the same period in 2012. An increase from 55 % to 60% in gross profit percentage for the third quarter of 2013 compared to same period in 2012 resulted primarily from improved margins associated with more favorable 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.


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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 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, 2012, 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 nine months ended September 30, 2013.

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,
                                                     2013         2012          2013         2012
Revenue                                                100 %        100 %         100 %        100 %
Cost of revenue                                       39.9         45.0          41.2         44.3

Gross profit                                          60.1         55.0          58.8         55.7

Operating expenses:
Marketing and selling                                 23.8         26.9          25.4         27.1
Research and development                               8.8         10.5           9.6         10.8
General and administrative                            16.8         23.2          15.8         19.5

Total operating expenses                              49.4         60.6          50.8         57.4
Income (loss) from operations                         10.7         (5.6 )         8.0         (1.7 )
Other income (expense), net                           (0.7 )       (0.3 )        (0.6 )        0.1

Income (loss) before provision for income tax
(benefit)                                             10.0         (5.9 )         7.4         (1.6 )

Provision for income tax (benefit) expense             2.6         (3.7 )         2.0         (1.0 )

Net income (loss)                                      7.4 %       (2.2 )%        5.4 %       (0.6 )%

As the operations of Grass and Nicolet neurodiagnostic business ("Nicolet") have been reflected in our consolidated results since their acquisition dates of February 2013 and July 2012, where significant, we have noted the impact of these acquisitions on our results of operations for the three and nine months ended September 30, 2013, as compared to the same periods in 2012.

The following discussion reflects the effects of the corrections disclosed in Note 16 to the condensed consolidated financial statements.

Three Months Ended September 30, 2013 and 2012

Revenues

Our consolidated revenue increased by $4.4 million or 5.4% to $85.4 million for the three months ended September 30, 2013, compared to $81.0 million in the comparable 2012 period. Grass contributed $3.8 million of revenue in the third quarter of 2013. Revenue from our products other than Grass increased by $0.6 million in 2013, compared to 2012.


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Revenue from our neurology products increased $4.9 million or 9.6% to $55.4 million in the third quarter of 2013, compared to $50.5 million in the same period in 2012. Revenue from our neurology products, other than Grass increased by $1.1 million for the three months ended September 30, 2013 compared to 2012. This increase was attributable to higher demand for neurodiagnostic products. Revenue from our newborn care products decreased by $0.5 million, or 1.5% to $30.0 million in the third quarter of 2013 compared to $30.5 million in the same period in 2012. This decrease was primarily attributed to a decrease in newborn care supplies offset by an increase in newborn care devices and systems.

Revenue from neurology devices and systems was $34.7 million for the three months ended September 30, 2013, representing an increase of 13.1% or $4.0 million, from $30.7 million reported in the third quarter of 2012. Grass contributed to $2.2 million of the increase in neurology devices and systems while revenue from our neurology products other than Grass increased by $1.8 million in the third quarter of 2013 compared to the third quarter of 2012, primarily attributable to an increase in EEG revenue. Revenue from newborn care and other devices and systems was $18.1 million for the three months ended September 30, 2013, representing an increase of 4.5% or $0.8 million, from $17.3 million reported in the third quarter of 2012. This increase in newborn care devices and systems revenue was due to higher sales of hearing products.

Revenue from devices and systems was 62% of consolidated revenue in the third quarter of 2013 compared to 59% of consolidated revenue in the third quarter of 2012.

Revenue from neurology supplies was $15.3 million for the three months ended September 30, 2013 representing an increase of 2.6% or $0.4 million, from $14.9 million reported in the third quarter of 2012. Grass contributed to $1.5 million of neurology supplies revenue. Neurology supplies revenue other than Grass decreased $1.1 million in the third quarter of 2013 compared to the third quarter of 2012. This decrease was primarily attributable to a decrease in both domestic and European sleep supplies. Revenue from newborn care supplies was $10.0 million for the three months ended September 30, 2013, representing a decrease of 15.3% or $1.8 million from $11.8 million reported in the third quarter of 2012. This decline is primarily due to a decrease in ALGO hearing supplies.

Revenue from supplies was 30% of consolidated revenue in the third quarter of 2013 compared to 33% in the same period in 2012.

Revenue from neurology services was $5.3 million for the three months ended September 30, 2013 representing an increase of 9.2% or $0.4 million, from $4.9 million reported in the third quarter of 2012. Grass contributed to $0.2 million of the increase in neurology services. Neurology services revenue other than Grass increased by $0.2 million in the third quarter of 2013 compared to the third quarter of 2012. Revenue from newborn care services was $1.9 million for the three months ended September 30, 2013, representing an increase of 35.7% or $0.5 from $1.4 million reported in the third quarter of 2012. This increase was comprised primarily of newborn care hearing screening data management services.

Revenue from services was 8% of consolidated revenue in the third quarter of 2013 and 2012.

No single customer accounted for more than 10% of our revenue in the third quarter of either 2013 or 2012. Revenue from domestic sales increased 7.1% to $51.4 million for the three months ended September 30, 2013 from $48 million in the third quarter of 2012. Revenue from international sales increased 2.9% to $34 million for the three months ended September 30, 2013 compared to $33 million in the third quarter of 2012. Revenue from domestic sales was 60.2% of total revenue for the three months ended September 30, 2013 and 59.2% for the three months ended September 30, 2012. Revenue from international sales was 39.8% of total revenue in the third quarter of 2013 and 40.8% of revenue in the third quarter of 2012.

Cost of Revenue and Gross Profit

Our cost of revenue decreased $2.4 million or 6.6% to $34.1 million for the three months ended September 30, 2013 from $36.5 million in the third quarter of 2012. Grass contributed $2.1 million to our cost of revenue, which was coupled with cost of revenue declines across North America driven by Neurology material cost reduction initiatives. We plan to maintain this level of cost of revenue as a percentage of revenue. Gross profit increased $6.7 million, or 15.2%, to $51.3 million in the third quarter of 2013 from $44.6 million in the third quarter of 2012. Gross profit as a percentage of revenue was 60.1% for the three months ended September 30, 2013 and 55% for the three months ended September 30, 2012. The increase in gross profit as a percentage of revenue was the result of improved margins associated with product mix and material cost reduction initiatives in Neurology.


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Operating Costs

Total operating costs decreased $6.9 million or 14.1% to $42.2 million for the three months ended September 30, 2013, from $49.1 million in the third quarter of 2012. The operating costs of Grass contributed to $0.6 million in operating costs.

Our marketing and selling expenses decreased $1.5 million or 6.7% to $20.3 million in the third quarter of 2013, from $21.8 million in the third quarter of 2012. Marketing and selling expenses as a percent of total revenue was 23.8% for the three months ended September 30, 2013 and 26.9% for the same period in 2012. The decrease in marketing and selling expenses is due to cost cutting initiatives.

Our research and development expenses decreased $1.0 million or 11.5% to $7.5 million for the three months ended September 30, 2013 from $8.5 million for the three months ended September 30, 2012. Research and development expenses as a percent of total revenue decreased to 8.8% in the third quarter of 2013 from 10.5% in the third quarter of 2012. The decrease in research and development expenses is due to lower employee compensation costs resulting from restructuring activities initiated in 2012.

Our general and administrative expenses decreased $4.5 million or 23.9% to $14.3 million for the three months ended September 30, 2013 from $18.8 million for the three months ended September 30, 2012. General and administrative expenses as a percent of revenue decreased to 16.8% in the third quarter of 2013 from 23.2% in the third quarter of 2012. The newly enacted medical device tax in 2013 accounted for $0.9 million of general and administrative expenses for the three months ended September 30, 2013. The overall decrease in general and administrative expenses for the period is primarily attributable to a decrease in severance costs of $5.7 million partially offset by the medical device tax noted above.

Other Income (Expense), net

Other income (expense), net consists of investment income, interest expense, net currency exchange gains and losses, and other miscellaneous income and expense. We reported other expense of $580,000 for the three months ended September 30, 2013, compared to $218,000 for the three months ended September 30, 2012. We reported $165,000 of foreign currency exchange losses in the third quarter of 2013 versus $136,000 of foreign exchange gains in the third quarter of 2012. Interest expense was $138,000 for the three months ended September 30, 2013 compared to $215,000 for the three months ended September 30, 2012 due primarily to favorable interest rate fluctuation.

Provision for Income Tax

We recorded a provision (benefit) for income tax of $2.3 million and $(3.0) million for the three months ended September 30, 2013 and 2012, respectively. The increase in tax expense for the three months ended September 30, 2013 compared to the same period of 2012 is primarily attributable to the increase in income before provision for income tax. Our effective tax rate was 26.5% and 63.5% for the three months ended September 30, 2013 and 2012, respectively. For the three months ended September 30, 2013, our effective tax rate differed from statutory tax rates primarily because of profits taxed in foreign jurisdictions with lower tax rates. For the three months ended September 30, 2012, our effective tax rate differed from statutory tax rates primarily due to the settlement of foreign and U.S. state income tax audits and from 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, 2013 and 2012

Revenues

Our consolidated revenue increased by $52.0 million or 25.8% to $253.5 million for the nine months ended September 30, 2013, compared to $201.5 million in the comparable 2012 period. The increase was attributable to our recent acquisitions. Grass, acquired in February 2013 contributed $9.7 million of revenue in the nine month period of 2013. Nicolet, acquired in July 2012 contributed $44.8 million of incremental revenue in the nine month period of 2013 as compared to 2012. Revenue from our products other than Grass and Nicolet, decreased by $2.5 million in 2013 compared to 2012. This decrease was attributable to weak economic conditions in Europe partially offset by stronger domestic demand on our neurodiognostic products.

Revenue from our neurology products increased $54.9 million or 50.5% to $163.8 million in the nine month period of 2013, compared to $108.9 million in the same period in 2012. Revenue from our neurology products, other than Grass and Nicolet products, increased by $0.4 million for the nine months ended September 30, 2013 compared to 2012. This increase was attributable to higher demand on neurodiognostic products. Revenue from our newborn care products decreased by $3.1 million, or 3.3% to $89.6 million in the nine month period of 2013 compared to $92.7 million in the same period in 2012. This decline was primarily attributed to weak economic conditions in Europe.


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Revenue from neurology devices and systems was $100.6 million for the nine months ended September 30, 2013, representing an increase of 42.9% or $30.2 million, from $70.4 million reported in the nine month period of 2012. Grass and Nicolet contributed incremental revenue of $30.5 million to the increase in neurology devices and systems while revenue from our neurology products other than Grass and Nicolet decreased by $0.3 million in the nine month period of 2013 compared to the nine month period of 2012, primarily attributable to weak economic conditions in Europe partially offset by strong domestic demand on neurodiognostic products. Revenue from newborn care and other devices and systems was $51.5 million for the nine months ended September 30, 2013, representing a decrease of 7.5% or $4.1 million, from $55.6 million reported in the nine month period of 2012. This decline in newborn care devices and systems revenue was due to lower sales of newborn incubators, CFM and diagnostic hearing revenue.

Revenue from devices and systems was 60% of consolidated revenue in the nine month period of 2013 compared to 63% of consolidated revenue in the nine month period of 2012.

Revenue from neurology supplies was $45.9 million for the nine months ended September 30, 2013 representing an increase of 54.2% or $16.1 million, from $29.8 million reported in the nine month period of 2012. Grass and Nicolet contributed incremental revenue of $17.9 million to neurology supplies revenue. Neurology supplies revenue other than Grass and Nicolet, decreased by $1.7 million in the nine month period of 2013 compared to the nine month period of 2012. This decline was primarily attributable to a decrease in sleep supplies. Revenue from newborn care supplies was $33.0 million for the nine months ended September 30, 2013, representing a decrease of 1.7% or $0.6 million from $33.6 million reported in the nine month period of 2012. This decrease was comprised primarily of newborn care hearing supplies.

Revenue from supplies was 31% of consolidated revenue in both the nine month period of 2013 and the nine month period of 2012.

Revenue from neurology services was $17.3 million for the nine months ended September 30, 2013 representing an increase of 101% or $8.7 million, from $8.6 million reported in the nine month period of 2012. Incremental revenue from Grass and Nicolet contributed to $6.1 million of the increase in neurology services. Neurology services revenue other than Grass and Nicolet, increased by $2.6 million in the nine month period of 2013 compared to the nine month period of 2012. This increase was primarily attributable to an increase in demand for neurodiagnostic and sleep services. Revenue from newborn care services was $5.1 million for the nine months ended September 30, 2013, representing an increase of 50.2% or $1.7 million from $3.4 million reported in the nine month period of 2012. This increase was primarily attributable to hearing screening data management service revenue.

Revenue from services was 9% of consolidated revenue in the nine month period compared to 6% of consolidated revenue in the nine month period of 2012.

No single customer accounted for more than 10% of our revenue in the nine month period of either 2013 or 2012. Revenue from domestic sales increased 31.3% to $147.7 million for the nine months ended September 30, 2013 from $112.5 million in the nine month period of 2012. Revenue from international sales increased 19% to $105.8 million for the nine months ended September 30, 2013 compared to $88.9 million in the nine month period of 2012. Revenue from domestic sales was 58.3% of total revenue for the nine months ended September 30, 2013 compared to 55.9% of consolidated revenue in the nine month period of 2012, and revenue from international sales was 41.7% of total revenue in the nine month period of 2013 compared to 44.1% of consolidated revenue in the nine month period of 2012.

Cost of Revenue and Gross Profit

Our cost of revenue increased $15.3 million or 17.1% to $104.5 million for the nine months ended September 30, 2013 from $89.2 million in the nine month period of 2012. Grass and Nicolet contributed incremental cost of revenue of $20.2 million partially offset by declines in cost of revenue declines across North America. Gross profit increased $36.8 million, or 32.7%, to $149.0 million in the nine month period of 2013 from $112.2 million in the nine month period of 2012 as a result of our increased sales. Gross profit as a percentage of revenue was 58.8% for the nine months ended September 30, 2013 and 55.7% for the nine months ending September 30, 2012 as a result of product mix, primarily as a result of a higher percentage of sales of neurology products which generally carry higher margins than our other products.

Operating Costs

Total operating costs increased $13.1 million or 11.3% to $128.8 million for the nine months ended September 30, 2013, from $115.7 million in the nine month period of 2012.The incremental operating expense of Grass and Nicolet contributed to $16.7 million in operating costs. The newly enacted medical device tax in 2013 accounted for $3.4 million of the increase in operating costs offset by lower severance and acquisition related direct costs.


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Our marketing and selling expenses increased $9.6 million or 17.6% to $64.3 million in the nine month period of 2013, from $54.7 million in the nine month period of 2012. Marketing and selling expenses as a percent of total revenue decreased to 25.4% in the first nine months of 2013 from 27.1% in the first nine months of 2012. The incremental marketing and selling expenses of Grass and Nicolet was $9.8 million.

Our research and development expenses increased $2.5 million or 11.4% to $24.3 million for the nine months ended September 30, 2013 from $21.8 million for the . . .

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