Natus Medical Announces Third Quarter 2019 Financial Results

Pleasanton, California, UNITED STATES


  • Third quarter revenue of $123.5 million
  • Third quarter GAAP earnings per diluted share of $0.25
  • Third quarter non-GAAP earnings per diluted share of $0.36

PLEASANTON, Calif., Oct. 24, 2019 (GLOBE NEWSWIRE) -- Natus Medical Incorporated (NASDAQ:NTUS) (the “Company” or “Natus”), a leading provider of medical device solutions focused on the diagnosis and treatment of central nervous and sensory system disorders for patients of all ages, today announced financial results for the three and nine months ended September 30, 2019.

Key Results During the Quarter

  • Achieved organic revenue growth of 2% after divestitures
  • Reduced inventory by $1.6 million during the quarter
  • Reduced days sales outstanding by six days year-over-year
  • Generated $23.9 million in operating cash flow
  • Reduced debt by $10.0 million

For the third quarter ended September 30, 2019, the Company reported revenue of $123.5 million, a decrease of 5.4% compared to $130.6 million reported for the third quarter 2018. GAAP gross profit margin was 59.1% during the third quarter of 2019 compared to 59.0% in the third quarter 2018. GAAP net income was $8.5 million, or $0.25 per diluted share, compared with GAAP net loss of $5.6 million, or $0.17 per share in the third quarter 2018.

Non-GAAP earnings per diluted share was $0.36 for the third quarter 2019, compared to $0.40 in the third quarter 2018. Non-GAAP net income was $12.1 million for the third quarter 2019 compared to $13.4 million in the third quarter 2018. Non-GAAP gross profit margin was 61.3% in the third quarter 2019 compared to 60.6% reported for the third quarter of 2018.

For the nine months ended September 30, 2019, the Company reported revenue of $363.8 million, a decrease of 6.7% compared to $389.9 million reported for the same period in 2018. GAAP gross profit margin was 58.1% vs. 57.4% reported for the same period in 2018. GAAP net loss was $17.4 million, or $0.52 per share, compared with GAAP net loss of $11.3 million, or $0.34 per share in the same period in 2018.

Non-GAAP earnings per diluted share was $0.79 for the nine months in 2019, compared to $0.99 in the same period in 2018. The Company reported non-GAAP net income of $26.5 million for the nine months ended September 30, 2019, compared to the prior year's non-GAAP net income of $33.0 million.

“Our third quarter results represent continued improvement in our business. Our performance in the quarter drove significant cash flow from operations of $23.9 million. Revenue from our neuro end market grew 8% adjusted for divestitures for the second consecutive quarter. Our newborn care and hearing & balance markets were down year-over-year, but showed growth in phototherapy, vision screening and hearing fitting devices. Overall, we achieved revenue growth of 2%, adjusted for divestitures and discontinued products,” said Jonathan Kennedy, President and Chief Executive Officer of Natus. “During the quarter, we continued to execute our strategic plan of focusing our efforts in the central nervous systems and sensory markets and believe we have achieved significant improvements in our operational efficiency.”

Financial Guidance

For the fourth quarter of 2019, the Company's revenue guidance is expected to be between $128.0 million and $132.0 million and non-GAAP earnings per share guidance is expected to be between $0.44 and $0.50.

For the full year 2019, the Company updated its expected revenue guidance to be between $492.0 million and $496.0 million and non-GAAP expected earnings per share guidance to be between $1.23 and $1.29.

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 $6.7 million and $50.5 million for the fourth quarter 2019 and full year, respectively, and which the Company expects will reduce GAAP earnings per share by approximately $0.19 and $1.49 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 a conference call to discuss this announcement beginning at 4:30 p.m. Eastern Time (1:30 p.m. Pacific Time) today, October 24, 2019. 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 8582045. 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 8582045. 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 medical device solutions focused on the diagnosis and treatment of central nervous and sensory system disorders for patients of all ages.

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

Forward-Looking Statements

This press release contains forward-looking statements, which are generally statements that are not historical facts. Forward-looking statements can be identified by the words “expects”, “anticipates”, “believes”, “intends”, “estimates”, “plans”, “will”, “outlook” and similar expressions. Forward-looking statements are based on management's current plans, estimates, assumptions and projections, and speak only as of the date they are made. These forward-looking statements include, without limitation, statements regarding the Company's ability to achieve improvements in operational efficiency and to execute its strategic plans. 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. The Company's future results could differ materially due to a number of factors, including the ability of the Company to realize the anticipated benefits from its new structure or from its consolidation strategy, effects of competition, the Company's ability to successfully integrate and achieve its profitability goals from recent acquisitions, the demand for Natus products and services, the impact of adverse global economic conditions and changing governmental regulations, including foreign exchange rate changes, on the Company's target markets, the Company's ability to expand its sales in international markets, the Company's ability to maintain current sales levels in a mature domestic market, the Company's ability to control costs, risks associated with bringing new products to market, and the Company's ability to fulfill product orders on a timely basis, as well as those factors identified under the heading Item 1A “Risk Factors” in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Natus disclaims any obligation to update information contained in any forward looking statement, except as required by law.

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,
2019
 September 30,
2018
 September 30,
2019
 September 30,
2018
Revenue$123,463  $130,638  $363,759  $389,900 
Cost of revenue48,706  51,583  147,240  159,849 
Intangibles amortization1,736  1,930  5,237  6,235 
  Gross profit73,021  77,125  211,282  223,816 
Gross profit margin59.1% 59.0% 58.1% 57.4%
Operating expenses:       
  Marketing and selling30,848  33,200  96,813  102,474 
  Research and development14,114  15,127  39,941  46,186 
  General and administrative15,113  15,799  44,108  56,966 
  Intangibles amortization3,751  4,477  11,300  13,434 
  Restructuring1,106  11,432  41,147  14,182 
  Total operating expenses64,932  80,035  233,309  233,242 
Income (loss) from operations8,089  (2,910) (22,027) (9,426)
Interest expense(1,165) (1,644) (4,059) (5,240)
Other income (expense)(444) 918  (862) 296 
Income (loss) before tax6,480  (3,636) (26,948) (14,370)
Provision for income tax expense (benefit)(1,981) 1,940  (9,596) (3,069)
Net income (loss)$8,461  $(5,576) $(17,352) $(11,301)
Earnings (loss) per share:       
  Basic$0.25  $(0.17) $(0.52) $(0.34)
  Diluted$0.25  $(0.17) $(0.52) $(0.34)
Weighted-average shares:       
  Basic33,655  33,321  33,666  32,982 
  Diluted33,738  33,321  33,666  32,982 


 
NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands)
      
 September 30, June 30, December 31,
 2019 2019 2018
ASSETS     
      
Current assets:     
Cash and investments$63,062  $52,009  $56,373 
Accounts receivable108,964  106,934  127,041 
Inventories75,107  78,275  79,736 
Other current assets27,735  28,022  22,625 
Total current assets274,868  265,240  285,775 
      
Property and equipment25,095  26,547  22,913 
Operating lease right-of-use assets16,059  17,217   
Goodwill and intangible assets265,152  274,725  287,097 
Deferred income tax21,955  19,187  22,639 
Other assets25,984  25,084  19,716 
Total assets$629,113  $628,000  $638,140 
      
LIABILITIES AND STOCKHOLDERS’ EQUITY     
      
Current liabilities:     
Accounts payable$30,096  $25,235  $28,805 
Current portion of long-term debt35,000  35,000  35,000 
Accrued liabilities56,657  51,605  52,568 
Deferred revenue19,242  19,861  17,073 
Current portion of operating lease liabilities5,901  5,960   
Liabilities and accrued impairment held for sale     
Total current liabilities146,896  137,661  133,446 
      
Long-term liabilities:     
Long-term debt34,618  44,570  69,474 
Deferred income tax8,129  8,649  16,931 
Operating lease liabilities13,112  14,326   
Other long-term liabilities20,200  21,237  19,845 
Total liabilities222,955  226,443  239,696 
Total stockholders’ equity406,158  401,557  398,444 
Total liabilities and stockholders’ equity$629,113  $628,000  $638,140 


NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)
      
 Three Months Ended Nine Months Ended
 September
30, 2019
 September
30, 2018
 September
30, 2019
 September
30, 2018
Operating activities:       
Net income (loss)$8,461  $(5,576) $(17,352) $(11,301)
Adjustments to reconcile net loss to net cash provided by operating activities:       
Provision for losses on accounts receivable534  1,782  1,494  5,871 
Depreciation and amortization7,519  8,958  22,946  25,652 
(Gain) loss on disposal of property and equipment  250  482  410 
Warranty reserve911  (902) 2,588  73 
Share-based compensation1,915  9,814  6,377  15,446 
Impairment charge for held for sale assets    24,571   
Changes in operating assets and liabilities:       
Accounts receivable(1,880) 891  17,290  2,955 
Inventories401  (2,700) (2,074) (5,183)
Prepaid expenses and other assets417  743  (10,643) (14,398)
Accounts payable5,124  (3,435) 1,607  (3,799)
Accrued liabilities3,693  (2,446) 1,073  968 
Deferred revenue(368) 58  2,371  1,745 
Deferred income tax(2,861) 191  (2,817) 517 
Net cash provided by operating activities23,866  7,628  47,913  18,956 
Investing activities:       
Acquisition of businesses, net of cash acquired      151 
Purchases of property and equipment(953) (1,740) (3,872) (5,127)
Purchase of intangible assets  (339) (13) (637)
Net cash used in investing activities(953) (2,079) (3,885) (5,613)
Financing activities:       
Proceeds from stock option exercises and ESPP519  5,423  2,193  10,515 
Repurchase of common stock      (5,629)
Taxes paid related to settlement of equity awards(23) (4,847) (1,596) (5,173)
Principal payments of financing lease liability(139)   (404)  
Contingent consideration earn-out      (147)
Payments on borrowings(10,000) (5,000) (35,000) (40,000)
Net cash used in financing activities(9,643) (4,424) (34,807) (40,434)
Exchange rate changes effect on cash and cash equivalents(2,217) (1,593) (2,532) (7,419)
Net decrease in cash and cash equivalents11,053  (468) 6,689  (34,510)
Cash and cash equivalents, beginning of period52,009  54,908  56,373  88,950 
Cash and cash equivalents, end of period$63,062  $54,440  $63,062  $54,440 


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, 2019
 September
30, 2018
 September
30, 2019
 September
30, 2018
GAAP based results:       
Income (loss) before provision for income tax$6,480  $(3,636) $(26,948) $(14,370)
        
Non-GAAP adjustments:       
Intangibles amortization (COGS)1,736  1,930  5,237  6,235 
Recall accrual and remediation efforts (COGS)  (1,198) 67  1,375 
Restructuring and other non-recurring costs (COGS)  846  989  873 
Direct costs of acquisitions (COGS)917  402  1,040  3,882 
Intangibles amortization (OPEX)3,751  4,483  11,300  13,439 
Direct costs of acquisitions (M&S)7  14  40  423 
Recall accrual and remediation efforts (R&D)  1,288    4,875 
Direct costs of acquisitions (R&D)61  50  152  235 
Restructuring and other non-recurring costs (OPEX)1,855  12,904  42,112  18,108 
Direct costs of acquisitions (G&A)630  502  764  3,682 
Direct costs of acquisitions (OI&E)      366 
Extraordinary annual meeting expenses  15    2,230 
Litigation (OPEX)5    702  996 
Non-GAAP income before provision for income tax15,442  17,600  35,455  42,349 
        
Income tax expense, as adjusted$3,331  $4,227  $8,922  $9,357 
        
Non-GAAP net income$12,111  $13,373  $26,533  $32,992 
 Non-GAAP earnings per share:       
  Basic$0.36  $0.40  $0.79  $1.00 
  Diluted$0.36  $0.40  $0.79  $0.99 
        
 Weighted-average shares used to compute       
  Basic non-GAAP earnings per share33,655  33,321  33,666  32,982 
  Diluted non-GAAP earnings per share33,738  33,551  33,772  33,388 


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,
2019
 September 30,
2018
 September 30,
2019
 September 30,
2018
GAAP Gross Profit$73,021  $77,125  $211,282  $223,816 
Amortization of intangibles1,736  1,930  5,237  6,235 
Direct cost of acquisitions917  402  1,040  3,882 
Recall accrual and remediation efforts  (1,198) 67  1,375 
Restructuring and other non-recurring costs  846  989  873 
Non-GAAP Gross Profit$75,674  $79,105  $218,615  $236,181 
Non-GAAP Gross Margin61.3% 60.6% 60.1% 60.6%
        
GAAP Operating Income (Loss)$8,089  $(2,910) $(22,027) $(9,426)
Amortization of intangibles5,487  6,413  16,537  19,674 
Recall accrual and remediation efforts  90  67  6,250 
Litigation5    702  996 
Restructuring and other non-recurring costs1,855  13,750  43,101  18,981 
Direct cost of acquisitions1,615  968  1,996  8,222 
Extraordinary annual meeting expenses  15    2,230 
Non-GAAP Operating Profit$17,051  $18,326  $40,376  $46,927 
Non-GAAP Operating Margin13.8% 14.0% 11.1% 12.0%
        
GAAP Income Tax Benefit (Expense)$(1,981) $1,940  $(9,596) $(3,069)
Effect of accumulated change of pretax income3,141  (15,493) 8,847  (4,701)
Effect of change in annual expected tax rate(1,135) 15,704  (1,740) 14,120 
Repatriation tax adjustment    (177) 101 
Stock-based compensation adjustment  791    1,621 
Valuation allowance for GAAP purposes  1,285    1,285 
Restructuring and other expenses3,306    11,588   
Non-GAAP Income Tax Expense$3,331  $4,227  $8,922  $9,357 
        
 Three Months Ended Year Ended    
 December 31, 2019 December 31, 2019    
GAAP EPS Guidance$0.24 - $0.30 ($0.27) - ($0.21)    
Amortization of intangibles0.16 0.65     
Restructuring and other non-recurring costs 1.28     
Litigation 0.02     
Direct cost of acquisitions 0.06     
Tax effect0.03 (0.52)    
Non-GAAP EPS Guidance$0.44 - $0.50 $1.23 - $1.29    


 
NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
GROSS MARGIN BY END MARKETS (unaudited)
(in thousands)
    
 Three Months Ended Nine Months Ended
 September 30,
2019
 September 30,
2018
 September 30,
2019
 September 30,
2018
Neuro:       
Revenue$72,192  $69,762  $206,179  $206,124 
Cost of revenue25,571  25,251  75,785  79,511 
Intangibles amortization938  1,042  2,819  3,507 
  Gross profit$45,683  $43,469  $127,575  $123,106 
Gross profit margin63.3% 62.3% 61.9% 59.7%
        
Newborn care:       
Revenue$27,005  $34,220  $83,105  $98,697 
Cost of revenue11,058  13,912  35,238  40,050 
Intangibles amortization64  119  193  358 
  Gross profit$15,883  $20,189  $47,674  $58,289 
Gross profit margin58.8% 59.0% 57.4% 59.1%
        
Hearing & balance:       
Revenue$24,266  $26,656  $74,475  $85,079 
Cost of revenue12,077  12,420  36,217  40,288 
Intangibles amortization734  769  2,225  2,370 
  Gross profit$11,455  $13,467  $36,033  $42,421 
Gross profit margin47.2% 50.5% 48.4% 49.9%
        
Consolidated:       
Revenue$123,463  $130,638  $363,759  $389,900 
Cost of revenue48,706  51,583  147,240  159,849 
Intangibles amortization1,736  1,930  5,237  6,235 
  Gross profit$73,021  $77,125  $211,282  $223,816 
Gross profit margin59.1% 59.0% 58.1% 57.4%
        
Note: The revenue and gross margin for our AccuScreen® newborn hearing screening product has been reclassified from Hearing & Balance to Newborn Care for both the current and prior periods. Hearing & Balance was formerly name Audiology.


NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
RECONCILIATION OF NON-GAAP GROSS MARGIN BY END MARKETS (unaudited)
(in thousands)
        
 Three Months Ended Nine Months Ended
 September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018
Neuro:       
GAAP Gross Profit$45,683  $43,469  $127,575  $123,106 
Amortization of intangibles938  1,042  2,819  3,507 
Acquisition charges917  402  1,040  3,832 
Non-GAAP Gross Profit$47,538  $44,913  $131,434  $130,445 
Non-GAAP Gross Margin65.8% 64.4% 63.7% 63.3%
        
Newborn care:       
GAAP Gross Profit$15,883  $20,189  $47,674  $58,289 
Amortization of intangibles64  119  193  358 
Recall accrual and remediation efforts  (1,198) (571) 1,375 
Restructuring and other non-recurring costs  846  814  848 
Non-GAAP Gross Profit$15,947  $19,956  $48,110  $60,870 
Non-GAAP Gross Margin59.1% 58.3% 57.9% 61.7%
        
Hearing & balance:       
GAAP Gross Profit$11,455  $13,467  $36,033  $42,421 
Amortization of intangibles734  769  2,225  2,370 
Acquisition charges      50 
Recall accrual and remediation efforts    638   
Restructuring and other non-recurring costs    175  25 
Non-GAAP Gross Profit$12,189  $14,236  $39,071  $44,866 
Non-GAAP Gross Margin50.2% 53.4% 52.5% 52.7%
        
Consolidated:       
GAAP Gross Profit$73,021  $77,125  $211,282  $223,816 
Amortization of intangibles1,736  1,930  5,237  6,235 
Acquisition charges917  402  1,040  3,882 
Recall accrual and remediation efforts  (1,198) 67  1,375 
Restructuring and other non-recurring costs  846  989  873 
Non-GAAP Gross Profit$75,674  $79,105  $218,615  $236,181 
Non-GAAP Gross Margin61.3% 60.6% 60.1% 60.6%


NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
GEOGRAPHIC REVENUE (unaudited)
(in thousands)
        
 Three Months Ended Nine Months Ended
 September 30,
2019
 September 30,
2018
 September 30,
2019
 September 30,
2018
Consolidated Revenue:       
United States$73,553  $77,980  $213,055  $222,135 
International49,910  52,658  150,704  167,765 
Totals$123,463  $130,638  $363,759  $389,900 
        
United States60% 60% 59% 57%
International40% 40% 41% 43%
Totals100% 100% 100% 100%


NATUS MEDICAL INCORPORATED AND SUBSIDIARIES
REVENUE AFTER EXITED PRODUCTS (unaudited)
(in thousands)
            
 Three Months Ended Nine Months Ended Year Ended
 September 30,
2019
 September 30,
2018
 September 30, 2
019
 September 30,
2018
 December 31,
2018**
 December 31,
2017
Revenue$123.5  $130.6  $363.8  $389.9  $530.9  $501.0 
Newborn care*(0.4) (5.2) (4.1) (15.4) (20.6) (35.0)
Neuro*(0.2) (3.2) (1.2) (10.9) (14.3) (14.6)
Hearing & balance*  (1.5)   (9.8) (7.9) (6.9)
Revenue after exited products/ship holds$122.9  $120.7  $358.5  $353.8  $488.1  $444.5 
            
*Newborn care, Neuro, and Hearing & balance include exited businesses (GND, Neurocom, Medix) and other end of sales products.
**Year ended December 31, 2018 included $30.6M of Neurosurgery which did not exist before November 2017.

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