NATUS MEDICAL INCORPORATED
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") should be read in conjunction with the
Consolidated Financial Statements and the accompanying footnotes. MD&A includes
the following sections:
Business
We are 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.
Year 2021 Overview
Our consolidated revenue increased by
Net income was$13.2 million , or$0.39 per share in the year endedDecember 31, 2021 , compared with net loss of$16.6 million , or$0.49 per share in the prior year. This increase in income was primarily driven by higher revenue resulting from the recovery of the impact of the COVID-19 pandemic on global demand for our products, a more profitable mix of revenue and impairment of intangibles related to end of sale products in 2020, not repeating to the same level in 2021. This was partly offset by an increase in operating expenses as we returned closer to more normal operating levels of the business related to the impact of the COVID-19 global pandemic. We generated cash flow from operations of$64.0 million . COVID-19 Update Healthcare providers and patients continue to depend on our products and services every day. Our team members and partners are continuing to maintain our supply chain, manufacturing and delivery of our products and services. The health and welfare of our employees, our customers and our partners remain our top priority as we continue our business operations. We have implemented safeguards in our facilities to protect team members, including social distancing practices, work from home and other measures consistent with specific regulatory requirements and guidance from health authorities. As an essential supplier of healthcare products and services, all of our manufacturing, engineering, sales and customer support functions remain fully operational and will continue to support customers with vital supplies, service and equipment. Supply chain delays and constraints have impacted our ability to ship products in the last few quarters. We are working with our suppliers to reduce constraints by providing forecasts further into the future and closely monitoring and communicating changes in the forecast, however we remain uncertain of when the supply chain will stabilize.
Impact to our supply chain
Many of our materials are single source and require lengthy qualification periods. Disruptions in our supply chain could negatively impact our ability to produce and supply our finished products. We continue to experience some extended lead times and delays in receiving supplies and finished goods which impacted revenue this period. We are working closely with our suppliers to manage orders and proactively resolve delays in the materials we require to meet our demand. Liquidity In the first quarter of 2020 we drew$60.0 million on our credit line as a precaution to ensure we have the necessary capital to continue to reliably serve our customers during an extended period of uncertainty. During the third quarter of 2020 we amended our Credit Agreement which extended the maturity date of the original agreement fromSeptember 23, 2021 toSeptember 25, 2023 , reduced the aggregate revolving credit facility from$225.0 million to$150.0 million , and amended certain covenants. During 2021, we repaid the full outstanding debt balance under our Credit Agreement and continued to maintain a strong cash position ending the period with$75.6 million in cash. While we believe that we have sufficient liquidity to operate the Company for the foreseeable future, we are evaluating additional measures we could take to further enhance our liquidity position should negative economic conditions deteriorate for an extended period of time.
Impact to fair-value of intangible assets
We have reviewed the assets on our balance sheet, particularly goodwill and
significant intangible assets for indications of impairment related to COVID-19
and determined that there are no indicators of impairment at this time. The
values of these assets are particularly sensitive to our market cap and the long
term value of their cash flows. If these conditions change
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significantly, we may need to record an impairment to their value. However, any impairment charges would not require the use of cash and are excluded from the calculation of our debt covenants and therefore would not affect our ability to borrow under our existing credit line.
Government Grants
Various government programs have been established to provide financial relief for businesses affected by COVID-19 including theCanada Emergency Wage Subsidy ("CEWS") andCanada Emergency Rent Subsidy ("CERS") under the COVID-19 Economic Response Plan inCanada . We received$4.1 million for payroll subsidies under CEWS and CERS for the year endedDecember 31, 2021 . Our policy is to account for these subsidies in the same manner as an offset to the expense they relate to in the period in which we are reasonably assured to receive payment. For the year endedDecember 31, 2021 we recognized reductions of$0.5 million in cost of sales,$1.7 million in marketing and selling expense,$1.7 million in research and development expense, and$0.2 million in general and administrative expense in the condensed consolidated statement of operations for these subsidies.
Travel restrictions and use of online technology
The global Natus team is geographically diverse with multiple small locations and hundreds of employees that typically work from home in normal circumstances. We use the latest collaboration technology and have been able to transition to a company-wide work from home model without major interruption. Our manufacturing, distribution and field service operations require physical presence of certain employees as their work requires them to handle our products. In these cases, we have made adjustments to shift size and schedule and limited access to these groups by non-related employees. Our field service technicians are following our customers' requirements for distancing practices but continue to provide service where needed. Travel restrictions have forced most customer and external partner collaboration to online technology. Using this technology has enabled us to continue operations without incident. However, in-person customer engagement as well as physical presence in laboratory settings is returning and becoming more frequent.
Critical Accounting Estimates
We prepare our financial statements in accordance with accounting principles generally accepted inthe 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. Our estimates are based on our historical experience and a variety of other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates, assumptions, and judgements on a regular basis. We believe that the following critical accounting estimates require the use of significant assumptions and judgments to have a full understanding of our financial statements. By their nature, these estimates and judgements are subject to an inherent degree of uncertainty. The use of different estimates, assumptions, and 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.
Inventory Valuation
Inventories are carried at the lower of cost or net realizable value, with cost
being determined using the first-in, first-out method. The carrying value of our
inventory is reduced for any difference between cost and estimated net
realizable value of the inventory. We determine net realizable value by
evaluating ending inventories for excess quantities, obsolescence, and other
factors that could impact our ability to consume inventory for its intended use.
The estimate for inventory valuation includes significant assumptions that have
a high degree of subjectivity. For example, our evaluation includes an analysis
of historical sales by product including judgements with respect to projections
of future demand by product and qualitative analysis of obsolescence by product
based on expectations from operations. Adjustments to the value of inventory
establish a new cost basis and are considered permanent even if circumstances
later suggest that increased carrying amounts are recoverable. If demand is
higher than expected, we may sell inventory that had previously been written
down.
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Results of Operations
The following table sets forth for the periods indicated selected consolidated
statement of income data as a percentage of total revenue. Our historical
operating results are not necessarily indicative of the results for any future
period.
Percent of Revenue
Years Ended December 31,
2021 2020 2019
Revenue 100.0 % 100.0 % 100.0 %
Cost of revenue 40.8 % 44.7 % 39.7 %
Intangibles amortization 1.4 % 3.2 % 1.4 %
Gross profit 57.8 % 52.1 % 58.9 %
Operating expenses:
Marketing and selling 24.5 % 25.8 % 26.1 %
Research and development 11.9 % 14.7 % 11.9 %
General and administrative 11.1 % 11.8 % 12.0 %
Intangibles amortization 3.6 % 3.7 % 3.1 %
Restructuring 1.6 % 0.9 % 9.0 %
Total operating expenses 52.8 % 56.9 % 62.1 %
Income (loss) from operations 5.0 % (4.9) % (3.2) %
Other expense, net (0.9) % (0.5) % (1.1) %
Income (loss) before provision (benefit) for income tax
4.1 % (5.3) % (4.3) %
Provision (benefit) for income tax expense 1.3 % (1.3) % (1.1) %
Net income (loss) 2.8 % (4.0) % (3.2) %
Comparison of 2021 and 2020
Revenue
Years ended December 31,
2021 2020 Change
Neuro
Devices and Systems $ 220,929 $ 179,464 23 %
Supplies 63,838 56,275 13 %
Total Neuro Revenue 284,767 235,739 21 %
Newborn Care
Devices and Systems 55,174 52,284 6 %
Supplies 33,710 36,174 (7) %
Services 16,139 16,566 (3) %
Total Newborn Care Revenue 105,023 105,024 - %
Hearing & Balance
Devices and Systems $ 78,652 $ 70,738 11 %
Supplies 4,996 4,183 19 %
Total Hearing & Balance Revenue 83,648 74,921 12 %
Total Revenue $ 473,438 $ 415,684 14 %
For the year ended
For the year ended
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lower Hearing Screening supplies shipments, mostly due to production and supply chain constraints. Services revenue decreased by 3% compared to the prior year due to lower revenue from our Newborn Care business. For the year endedDecember 31, 2021 , Hearing & Balance revenue increased 12% compared to the prior year. Devices and Systems revenue increased by 11% compared to the prior year, particularly in our Hearing Assessment and Fitting businesses. Supplies revenue increased by 19% compared to the prior year, particularly in our Fitting business. The increases are primarily due to the recovery from the impact of the global COVID-19 pandemic, as non-emergent procedures were halted in 2020.
Cost of Revenue and Gross Profit
Years ended December 31,
2021 2020
Revenue $ 473,438 $ 415,684
Cost of revenue 193,015 185,912
Intangibles amortization 6,743 13,241
Gross profit 273,680 216,531
Gross profit percentage 57.8 % 52.1 %
For the year ended December 31, 2021 , our gross profit as a percentage of sales
increased by 5.7% compared to the prior year. This increase was primarily
attributable to higher revenue resulting from a partial recovery from the impact
of the COVID-19 pandemic, a more profitable mix of product shipments, lower
inventory scrap and lower amortization relating to an impairment of a product
line during 2020.
Operating Costs
Years ended December 31,
2021 2020
Marketing and selling $ 116,014 $ 107,282
Percentage of revenue 24.5 % 25.8 %
Research and development $ 56,306 $ 61,296
Percentage of revenue 11.9 % 14.7 %
General and administrative $ 52,753 $ 49,113
Percentage of revenue 11.1 % 11.8 %
Intangibles amortization $ 17,129 $ 15,224
Percentage of revenue 3.6 % 3.7 %
Restructuring $ 7,699 $ 3,809
Percentage of revenue 1.6 % 0.9 %
Marketing and Selling
Marketing and selling expenses increased during the year ended December 31, 2021
as compared to the prior year. The increase in expenses is mainly attributable
to higher expenses as we moved towards more normal operating levels of the
business, as compared to the impact of COVID-19, in the prior year which caused
increases in travel expense, tradeshow and other events, payroll, commissions,
and service expenses.
Research and Development
Research and development expenses decreased during the year ended December 31,
2021 compared to the prior year. The decrease relates to lower project spend for
Medical Device Regulation compliance, consulting and testing, and remediation
partly offset by increased spending on new product development.
General and Administrative
General and administrative expenses increased during the year endedDecember 31, 2021 compared to the prior year. This increase was due to more normal operating levels of the business as we recover from the impact of the global COVID-19 pandemic, resulting in increases in payroll expenses and outside services. 35
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Intangibles Amortization
Intangibles amortization increased for the year endedDecember 31, 2021 compared to the prior year due to an intangible impairment of$2.0 million relating to the Babybe acquisition. Restructuring Restructuring costs increased during the year endedDecember 31, 2021 compared to the prior year. This increase was driven by costs of approximately$6.9 million associated with the Company's executive management transition, which were primarily comprised of accelerated vesting of stock compensation, severance expense, and sign-on bonus. Other Income (Expense), net Other income (expense), net consists of interest income, interest expense, net currency exchange gains and losses, and other miscellaneous income and expense. We reported other expense, net of$4.4 million in the year endedDecember 31, 2021 , compared to$1.9 million in the prior year. We reported$2.0 million of foreign currency exchange losses in the year endedDecember 31, 2021 versus$2.0 million of foreign currency gains in the prior year. Interest expense was$1.9 million in the year endedDecember 31, 2021 compared to$3.7 million in the prior year. The reduction in interest expense was driven by accelerated payments on and full repayment of our outstanding third-party bank debt. Other miscellaneous income and expense consisted primarily of a loss on our equity method investment of$0.6 million in the yearDecember 31, 2021 .
Provision for Income Tax
The effective tax rate ("ETR") for the year ended December 31, 2021 was 31.9% as
compared to 24.7% for the prior year. Significant items that impact the
effective tax rate are the change in geographic mix of income and adjustments
and reversals of uncertain tax positions.
For discussion of the year ended December 31, 2020 compared to the year ended
December 31, 2019 , please refer to Part II, Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our Annual Report
on Form 10-K for the year ended December 31, 2020 .
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. 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. As ofDecember 31, 2021 , we had cash and cash equivalents outside theU.S. in certain of our foreign operations of$30.3 million . We intend to permanently reinvest this cash held by our foreign subsidiaries except for Excel-Tech andNatus Ireland subsidiaries, which we intend to repatriate. If, however, a portion of these permanently reinvested funds were needed and distributed to our operations inthe United States , we may be subject to additionalU.S. income taxes and foreign withholding taxes depending on facts and circumstances at the time of distribution. The amount of taxes due would depend on the amount and manner of repatriation, as well as the location from where the funds were repatriated. We have a Credit Agreement withJP Morgan Chase Bank ("JP Morgan"),Citibank, NA ("Citibank") andWells Fargo Bank, National Association ("Wells Fargo"). During the third quarter of 2020 we amended the terms of the Credit Agreement to extend the maturity of the original agreement and to reduce the aggregate value of revolving credit facility, and amend certain covenants. The amended Credit Agreement provides for an aggregate$150.0 million of secured revolving credit facility. The Credit Agreement contains covenants, including covenants relating to maintenance of books and records, financial reporting and notification, compliance with laws, maintenance of properties and insurance, and limitations on guaranties, investments, issuance of debt, lease obligations and capital expenditures. The Credit Agreement provides for events of default, including failure to pay any principal or interest when due, failure to perform or observe covenants, bankruptcy or insolvency events and the occurrence of a material adverse effect. The Credit Agreement matures onSeptember 25, 2023 , at which time all principal amounts outstanding under the Credit Agreement will be due and payable. We have no other significant credit 36
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facilities. As ofDecember 31, 2021 we had no outstanding balance under the Credit Facility. December 31, December 31, December 31, 2021 2020 2019 Cash, cash equivalents, and investments$ 75,595 $ 82,082 $ 63,297 Debt - 55,840 54,665 Working capital 162,690 125,950 126,928 Year Ended December 31, December 31, December 31, 2021 2020 2019 Net cash provided by operating activities$ 63,995 $ 34,426 $ 60,060 Net cash used in investing activities (1,946) (12,606) (5,339) Net cash used in financing activities (60,662) (10,877) (48,532)
Comparison of 2021, 2020, and 2019
During 2021 cash generated from operating activities of$64.0 million was the result of$13.2 million of net income, non-cash adjustments to net income of$43.5 million , and net cash outflows of$7.3 million from changes in operating assets and liabilities. The non-cash adjustments were$28.1 million of depreciation and amortization expense,$14.2 million from share-based compensation,$4.0 million of warranty reserves, and$0.2 million of accounts receivable reserves, offset by deferred taxes of$4.4 million . Cash used in investing activities during the period was$1.9 million and consisted of cash used of$3.6 million to acquire other property and equipment, and$1.0 million of equity method investments offset by$2.7 million of proceeds from disposal of assets held for sale. Cash used in financing activities during the year endedDecember 31, 2021 was$60.7 million and consisted of repayments of$57.0 million of our outstanding debt under the Credit Facility,$4.1 million for taxes paid related to net share settlement of equity awards,$0.4 million of principal payments of financing lease liability, offset by proceeds from stock option exercises and Employee Stock Purchase Program ("ESPP") purchases of$0.9 million . During 2020 cash generated from operating activities of$34.4 million was the result of$16.6 million of net loss, non-cash adjustments to net loss of$49.6 million , and net cash outflows of$1.4 million from changes in operating assets and liabilities. The non-cash adjustments were$28.1 million of depreciation and amortization expense,$9.6 million from share-based compensation,$6.7 million of an impairment of intangible assets,$2.0 million of warranty reserves,$1.9 million of loss on commencement of sales-type leases,$1.4 million of non-cash lease expense, and$1.2 million of accounts receivable reserves, offset by deferred taxes of$1.6 million . Cash used in investing activities during the period was$12.6 million and consisted of cash used of$8.6 million to acquire other property and equipment,$2.0 million of an acquisition, and$2.0 million of equity method investments. Cash used in financing activities during the year endedDecember 31, 2020 was$10.9 million and consisted of repayments of$58.0 million of our outstanding debt under the Credit Facility,$10.5 million for repurchases of common stock under our share repurchase program,$2.0 million for taxes paid related to net share settlement of equity awards,$1.2 million of deferred debt issuance costs,$0.5 million of principal payments of financing lease liability, offset by proceeds from borrowing of$60.0 million and proceeds from stock option exercises and Employee Stock Purchase Program ("ESPP") purchases of$1.3 million . During 2019 cash generated from operating activities of$60.1 million was the result of$15.7 million of net loss, non-cash adjustments to net loss of$65.9 million , and net cash outflows of$9.9 million from changes in operating assets and liabilities. The non-cash adjustments were$30.7 million of depreciation and amortization expense,$24.6 million of impairment for the sale of Medix,$8.4 million from share-based compensation,$4.3 million of accounts receivable reserves, and$2.9 million of warranty reserves, offset by deferred taxes of$5.4 million . Cash used in investing activities during the period was$5.3 million and consisted of cash used to acquire other property and equipment. Cash used in financing activities during the year endedDecember 31, 2019 was$48.5 million and consisted of repayments of$50.0 million of our outstanding debt under the Credit Facility,$1.7 million for taxes paid related to net share settlement of equity awards,$0.5 million of principal payments of financing lease liability, offset by proceeds from stock option exercises and Employee Stock Purchase Program ("ESPP") purchases of$3.6 million . 37 -------------------------------------------------------------------------------- Table of Contents Future Liquidity
Our future liquidity and capital requirements will depend on numerous factors, including the:
•Extent to which we make acquisitions;
•Amount and timing of revenue;
•Extent to which our existing and new products gain market acceptance;
•Cost and timing of product development efforts and the success of these development efforts;
•Cost and timing of marketing and selling activities; and
•Availability to borrow under line of credit arrangements and the availability of other means of financing.
Contractual Obligations In the normal course of business, we enter into obligations and commitments that require future contractual payments. The commitments result primarily from purchase orders placed with contract vendors that manufacture some of the components used in our medical devices and related disposable supply products, purchase orders placed for employee benefits and outside services, as well as commitments for leased office space, leased equipment, and bank debt. As ofDecember 31, 2021 , we have unconditional purchase obligations of$136.5 million that payments are due within the next year and$41.9 million due within one to three years. Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding. Included in the purchase obligations are obligations related to purchase orders for inventory purchases under our standard terms and conditions and under negotiated agreements with vendors. We expect to receive consideration (products or services) for these purchase obligations. The purchase obligation amount does not represent all anticipated purchases in the future, but represent only those items for which we are contractually obligated. This does not include obligations under employment agreements for services rendered in the ordinary course of business. As ofDecember 31, 2021 , we have estimated interest payments of$1.2 million due less than one year and$1.0 million due within one to three years. These interest payments are an estimate of expected interest payments but could vary materially based on the timing of future loan draws and payments. See Note 11 of our Consolidated Financial Statements for further discussion on debt and credit arrangements. As ofDecember 31, 2021 , we have$5.60 million of tax obligation relating to repatriation tax. The repatriation tax is a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as ofDecember 31, 2017 due to the enactment inDecember 2017 of the Tax Act. We are not able to reasonably estimate the timing of any potential payments for uncertain tax positions under Accounting Standards Codification ("ASC") 740, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement 109, therefore contractual obligations exclude any potential tax payments related to our ASC 740 liability for uncertain positions. See Note 17 of our Consolidated Financial Statements for further discussion on income taxes.
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