NATUS MEDICAL INCORPORATED Overview
The following Management Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") supplements the MD&A in our Annual Report on Form
10-K for the year ended
Our Business
We are recognized by healthcare providers as a leading source for solutions to screen, diagnose, and treat disorders of the brain, neural pathways, and sensory nervous systems. Our service and education complement hardware, advanced software and algorithms, and consumables that provide stimulus, acquire and monitor physiological signals and capture how the body responds, enabling clinicians worldwide to improve patient outcomes and quality of life.
End Markets
We provide innovative healthcare solutions in four product portfolios: Brain, Neural Pathways, Sensory Nervous System and Other.
•Brain - This product portfolio includes solutions focused on diagnosing, monitoring and treating disorders specific to the brain, which include areas of neurodiagnostics and neurocritical care. Key neurodiagnostic product lines in this portfolio include electroencephalography (EEG) used in epilepsy monitoring and polysomnography (PSG) used to diagnose sleep disorders. Key neurocritical care product lines provide access through the cranium to the brain, monitor intracranial pressure and temperature, and provide therapeutic drainage of cerebrospinal fluid in cases of traumatic brain injury, hemorrhagic stroke, and hydrocephalus. This portfolio is comprised of well-known brands in the industry, including Nicolet®, Xltek®, Olympic®, Embla®, Grass®, Natus Quantum®, Trex™ and Camino®.
•Neural Pathways - Focused on nerve and muscle disorders, the Neural Pathways portfolio uses electromyography (EMG) and nerve conduction studies (NCS) testing. These product lines help diagnose neuromuscular diseases, such as myasthenia gravis, movement disorders, such as dystonia and Parkinson's disease, and peripheral neuropathies, carpal tunnel syndrome and pinched nerves. Our portfolio is comprised of well-known brands in the industry, including Nicolet®, Dantec®, UltraPro™ and Natus Elite™.
•Sensory Nervous System - This product portfolio focuses on hearing and balance disorders and pediatric eye imaging. Multiple clinical needs across hearing screening and diagnosis are addressed by this portfolio, including newborn hearing screening, hearing assessment and diagnostics and hearing aid fitting. A
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comprehensive list of balance tests helps in the diagnosis of vestibular disorders, such as dizziness and vertigo. Eye imaging is used to diagnose and monitor retinopathy of prematurity to help prevent blindness in premature babies. Natus products are sold under trusted brand names, including ALGO®, RetCam®, Aurical®, Bio-logic®, Madsen® and Otoscan®.
•Other - The products in this portfolio do not directly fit within the Brain, Neural Pathways or Sensory Nervous System portfolio. These solutions span eight product lines, including phototherapy for jaundice management, video streaming of newborns in the NICU, data management for newborn care and a full range of shunts and valves for neurosurgical applications, among others. This portfolio includes several well-known brands, such as neoBLUE®, NICVIEW®, Vac-Pac® and Neometrics®.
Segment and Geographic Information
We operate as one operating segment and one reportable segment, which provides healthcare products, and services focused on solutions to screen, diagnose, and treat disorders affecting the brain, neural pathways, and eight sensory nervous systems. Financial information is reviewed on a consolidated basis for purposes of making operating decisions and assessing financial performance. Consolidated financial information is accompanied by disaggregated information about revenues by end market and geographic region. We do not assess the performance of our end markets or geographic regions on measures of profit or loss, or asset-based metrics. We have disclosed the revenues for each of our end markets and geographic regions to provide the reader of the financial statements transparency into our operations.
Information regarding our revenues and long-lived assets in the
Revenue by Product Category
We generate our revenue 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
Three Months Ended
March 31,
2022 2021
Devices and Systems 63 % 65 %
Supplies 23 % 22 %
Services 14 % 13 %
Total 100 % 100 %
2022 First Quarter Overview
Our business and operating results are driven in part by worldwide economic
conditions. Our revenue is significantly dependent on both capital spending by
hospitals in
We experienced an increase in demand in
Our net income was
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income is due to lower gross margin and higher tax provision due to enactment of IRC Section 174, partly offset by increased revenue and lower operating expenses.
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 and customer support functions remain fully operational and will continue to support customers with vital supplies, service and equipment. Supply chain delays and constraints, as well as cost increases for semiconductors, 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.
Application of Critical Accounting Estimates
We prepare our financial statements in accordance with accounting principles
generally accepted in
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:
•Inventory valuation
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. These critical accounting estimates are described in more detail in our Annual Report on Form 10-
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K for the year ended
Recent Developments
On
Results of Operations
The following table sets forth selected consolidated statement of operations data as a percentage of total revenue for the periods indicated:
Three Months Ended
March 31,
2022 2021
Revenue 100.0 % 100.0 %
Cost of revenue 44.1 % 40.6 %
Intangibles amortization 1.3 % 1.5 %
Gross profit 54.6 % 57.9 %
Operating expenses:
Marketing and selling 24.7 % 25.2 %
Research and development 11.0 % 12.2 %
General and administrative 10.7 % 12.9 %
Intangibles amortization 3.0 % 3.4 %
Restructuring 1.7 % 0.2 %
Total operating expenses 51.1 % 53.9 %
Income from operations 3.5 % 4.0 %
Other expense, net (0.7) % (1.4) %
Income before provision for income tax 2.8 % 2.6 %
Provision for income taxes 1.2 % 0.4 %
Net income 1.6 % 2.2 %
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Revenues
The following table shows revenue by products during the three months ended
Three Months Ended
March 31,
2022 2021 Change
Brain Products:
Devices and Systems $ 37,807 $ 37,293 1 %
Supplies 6,291 5,486 15 %
Services 7,290 5,705 28 %
Total Brain Revenue 51,388 48,484 6 %
Neural Pathway Products:
Devices and Systems 9,657 8,832 9 %
Supplies 9,531 8,751 9 %
Services 204 257 (21) %
Total Neural Pathways Revenue 19,392 17,840 9 %
Sensory Nervous Systems Products:
Devices and Systems 23,342 21,292 10 %
Supplies 8,473 8,143 4 %
Services 5,858 6,097 (4) %
Total Sensory Nervous Systems Revenue 37,673 35,532 6 %
Other Products:
Devices and Systems 5,025 7,067 (29) %
Supplies 2,781 2,898 (4) %
Services 3,534 3,106 14 %
Total Other Revenue 11,340 13,071 (13) %
Total Revenue $ 119,793 $ 114,927 4 %
For the three months ended
For the three months ended
For the three months ended
For the three months ended
Revenue from domestic sales increased to
Revenue from international sales increased to
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Cost of Revenue and Gross Profit
Cost of revenue and gross profit consists of (in thousands):
Three Months Ended
March 31,
2022 2021
Revenue $ 119,793 $ 114,927
Cost of revenue 52,781 46,688
Intangibles amortization 1,600 1,751
Gross profit 65,412 66,488
Gross profit percentage 54.6 % 57.9 %
For the three months ended
Operating Costs
Operating costs consist of (in thousands):
Three Months Ended
March 31,
2022 2021
Marketing and selling $ 29,551 $ 28,971
Percentage of revenue 24.7 % 25.2 %
Research and development $ 13,224 $ 14,040
Percentage of revenue 11.0 % 12.2 %
General and administrative $ 12,807 $ 14,855
Percentage of revenue 10.7 % 12.9 %
Intangibles amortization $ 3,598 $ 3,897
Percentage of revenue 3.0 % 3.4 %
Restructuring $ 2,051 $ 205
Percentage of revenue 1.7 % 0.2 %
Marketing and Selling
Marketing and selling expenses increased for the three months ended
Research and Development
Research and development expenses decreased slightly during the three months
ended
General and Administrative
General and administrative expense during the three months ended
Intangibles Amortization
Intangibles amortization remained relatively flat during the three months ended
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Restructuring
Restructuring expenses increased during the three months ended
Other Expense, net
Other expense, net consists of investment income, interest expense, net currency
exchange gains and losses, and other miscellaneous income and expense. For the
three months ended
Provision for Income Tax
Our tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete events arising in each respective quarter. During each interim period, we update the estimated annual effective tax rate which is subject to significant volatility due to several factors, including our ability to accurately predict the income before provision for income taxes in multiple jurisdictions, the effects of acquisitions, the integration of those acquisitions, and changes in tax law. In circumstances where we are unable to predict income in multiple jurisdictions, the actual year to date effective tax rate may be the best estimate of the annual effective tax rate for purposes of determining the interim provision for income tax.
We recorded income tax expense of
Under the Tax Cut and Jobs Act (the "Act") enacted on
We recorded no change related to unrecognized tax benefits for the three months
ended
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Liquidity and Capital Resources
Liquidity and capital resources consist of (in thousands):
March 31, 2022 December 31, 2021
Cash and cash equivalents $ 84,285 $ 75,595
Working capital 173,913 162,690
Three Months Ended
March 31,
2022 2021
Net cash provided by operating activities $ 8,897 $ 24,703
Net cash used in investing activities (1,634) (731)
Net cash provided by (used in) financing activities 2,516 (21,275)
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 of
We have a Credit Agreement with JP Morgan, Citibank, and Wells Fargo. During the
third quarter of 2020 we amended the terms of the Credit Agreement to extend the
maturity of the original agreement, reduce the aggregate value of the revolving
credit facility, and amend certain covenants. The amended Credit Agreement
provides for an aggregate
During the three months ended
During the three months ended
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used in financing activities during the three months ended
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 of borrowings 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 of
As of
As of
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 12 of our Consolidated Financial Statements for further discussion on income taxes.
Recently Issued Accounting Pronouncements
None.
Cautionary Information Regarding Forward Looking Statements
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 about
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statements can be identified by the words "expects," "anticipates," "believes," "intends," "estimates," "plans," "will," "outlook" and other 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 within Item 2 include, without limitation, statements regarding our ability to consummate the proposed Merger, and the timing, costs and any benefits of such transaction, the impact of COVID-19 pandemic on our business, the sufficiency of our current cash, cash equivalents and short-term investment balances, any cash generated from operations to meet our ongoing operating and capital requirements for the foreseeable future, outcomes of new product development, improved operations performance and profitability as the result of restructuring activities, and our intent to acquire additional technologies, products or businesses.
Forward-looking statements are not guarantees of future performance and are subject to substantial risks and uncertainties that could cause the actual results predicted in the forward-looking statements as well as our future financial condition and results of operations to differ materially from our historical results or currently anticipated results. Investors should carefully review the information contained under the caption "Risk Factors" referred to in Part II, Item 1A of this report for a description of risks and uncertainties. All forward-looking statements are based on information available to us on the date hereof, and we assume no obligation to update forward-looking statements.
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