NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1 - Basis of Presentation
The accompanying interim condensed consolidated financial statements of Natus Medical Incorporated (“Natus,” “we,” “us,” “our,” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
.
Interim financial reports are prepared in accordance with the rules and regulations of the Securities and Exchange Commission; accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. The interim financial information is unaudited, and reflects all normal adjustments that are, in the opinion of management, necessary for the fair presentation of our financial position, results of operations, and cash flows for the interim periods presented. The consolidated balance sheet as of
December 31, 2015
was derived from audited financial statements, but does not include all disclosures required by GAAP. The accompanying financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
. We have made certain reclassifications to the prior period to conform to current period presentation.
Operating results for the
nine months ended September 30, 2016
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2016
. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (Topic 606)
. ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 sets forth a new revenue recognition model that requires identifying the contract, identifying the performance obligations, determining the transaction price, allocating the transaction price to performance obligations and recognizing the revenue upon satisfaction of performance obligations.
The original effective date for ASU 2014-09 would have required the Company to adopt beginning in its first quarter of 2017. In July 2015, the FASB voted to amend ASU 2014-09 by approving a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. Accordingly, the Company will adopt the standard in its first quarter of 2018. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the impact of adopting the new revenue standard on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. This standard requires a lessee to recognize the lease assets and lease liabilities arising from operating leases in the statement of financial position. Qualitative along with specific quantitative disclosures are required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. The Company is currently evaluating the impact that will result from adopting ASU 2016-02.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting
. The new standard contains several amendments that simplifies the accounting for employee share-based payment transactions, including the accounting for income
taxes, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The changes in the new standard eliminate the accounting for excess tax benefits to be recognized in additional paid-in capital and tax deficiencies recognized either in the income tax provision or in additional paid-in capital. The Company elected early adoption of ASU 2016-09 in the first quarter of 2016 which was applied using a modified retrospective approach. For the nine months ended September 30, 2016, we recognized all excess tax benefits and tax deficiencies as income tax expense or benefit as a discrete event. An income tax benefit of approximately
$1.9 million
was recognized in the period ended September 30, 2016 as a result of the adoption of ASU 2016-09. There was no change to retained earnings with respect to excess tax benefits, as this is not applicable to the Company. The treatment of forfeitures has not changed as we are electing to continue our current process of estimating the number of forfeitures. As such, this has no cumulative effect on retained earnings. With the early adoption of 2016-09, we have elected to present the cash flow statement on a prospective transition method and no prior periods have been adjusted.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
This standard provides guidance for eight cash flow classification issues in current GAAP. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company elected early adoption of ASU 2016-15 in the first quarter of 2016 relating to
Contingent Consideration Payments Made after a Business Combination
. For the nine months ended September 30, 2016, the Company recognized
$1.0 million
as a cash outflow for investing activities on the Statement of Cash Flows. This payment was made soon after the acquisition date of a business combination to settle the contingent consideration from the Monarch acquisition.
2 - Business Combinations
RetCam
On July 6, 2016, we acquired the portfolio of RetCam Imaging Systems ("RetCam") from Clarity Medical Systems, Inc. for
$10.6 million
in cash. RetCam is an imaging system used to diagnose and monitor a range of ophthalmic maladies in premature infants. The purchase agreement also included a holdback of
$2.0 million
which is contingent upon completion of certain modifications to RetCam 3 no later than March 31, 2017. Subsequent to the acquisition, an additional
$1.1 million
was paid by the Company to Clarity Medical Systems as a result of a working capital adjustment. Results of operations for RetCam will be included in our consolidated financial statements from the date of acquisition. The total purchase price was allocated
$7.7 million
to tangible assets,
$5.0 million
to intangible assets with an assigned weighted average life of
5
years being amortized on the straight line method, and
$1.0 million
to goodwill, offset by
$2.0 million
to net liabilities. Purchase price allocation is considered preliminary at this time although no material adjustments are anticipated. Pro forma financial information for the RetCam acquisition is not presented as it is not considered material.
NeuroQuest
On March 2, 2016, we acquired NeuroQuest, LLC (“NeuroQuest”) through an asset purchase. NeuroQuest complements our Global Neuro-Diagnostics ("GND") and Monarch Medical Diagnostics, LLC ("Monarch") acquisitions which offer patients a convenient way to complete routine-electroencephalography ("EEG") and extended video electronencephalography ("VEEG") testing. The cash consideration for NeuroQuest was
$4.6 million
. The purchase agreement also included an asset consideration holdback of
$0.5 million
. The total purchase price was allocated to
$0.5 million
of tangible assets,
$1.3 million
of intangible assets with an assigned weighted average life of
5
years being amortized on the straight line method, and
$3.5 million
of goodwill, offset by
$0.1 million
of net liabilities. Purchase price allocation is considered preliminary at this time. Pro forma financial information for the NeuroQuest acquisition is not presented as it is not considered material.
Monarch
We acquired Monarch Medical Diagnostics, LLC ("Monarch") through an asset purchase on November 13, 2015. Monarch's service compliments our GND acquisition which offers patients a convenient way to complete routine and extended video EEG diagnostic testing. The service also provides comprehensive reporting and support to the physician. The cash consideration for Monarch was
$2.7 million
. The purchase agreement also included a contingent consideration holdback of
$1.0 million
which we paid on January 11, 2016. The total purchase price was allocated to
$1.2 million
of tangible assets,
$1.2 million
of intangible assets with an assigned weighted average life of
5
years being amortized on the straight line method, and
$2.4 million
of goodwill. Pro forma financial information for the Monarch acquisition is not presented as it is not considered material.
Global Neuro-Diagnostics
We acquired GND Operating LLC, and Braincare, LLC (collectively "GND") through an equity purchase on January 23, 2015. GND's service offers patients a convenient way to complete routine and extended video EEG diagnostic testing, which can be performed at the home, hospital or physician's office. The service also provides comprehensive reporting and support to the physician. The cash consideration for GND was
$11.4 million
, which consists primarily of
$1.5 million
of tangible assets,
$4.8 million
of intangible assets with an assigned weighted average life of
5
years being amortized on the straight line method, and
$8.9 million
of goodwill, offset by
$0.5 million
of net liabilities. The purchase agreement also included an earn-out provision contingent upon GND achieving certain revenue milestones from 2015 to 2017. At acquisition we estimated the earn-out to be
$3.2 million
. Each quarter we evaluate expected future revenue and adjust our estimate accordingly. We currently estimate this earn-out to be
$0.5 million
, which was a reduction of
$2.8 million
in the current quarter, as we expect lower revenues for 2016 and 2017 than anticipated. Pro forma financial information for the GND acquisition is not presented as it is not considered material.
NicView
On January 2, 2015, we purchased the assets of Health Observation Systems, LLC ("NicView") for cash consideration of
$1.1 million
, of which
$0.3 million
was allocated to tangible assets and
$2.7 million
to goodwill, offset by
$0.6 million
allocated to net liabilities. NicView provides streaming video for families with babies in the neonatal intensive care unit. The asset purchase agreement included an earn-out condition of
$1.3 million
that was contingent upon orders received and installed by February 28, 2016. The earn-out was paid on March 28, 2016. Pro forma financial information for the NicView acquisition is not presented as it is not considered material.
3 - Earnings Per Share
The components of basic and diluted EPS are as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net income
|
$
|
13,313
|
|
|
$
|
10,932
|
|
|
$
|
32,361
|
|
|
$
|
29,380
|
|
Weighted average common shares
|
32,388
|
|
|
32,432
|
|
|
32,476
|
|
|
32,279
|
|
Dilutive effect of stock based awards
|
593
|
|
|
821
|
|
|
601
|
|
|
915
|
|
Diluted Shares
|
32,981
|
|
|
33,253
|
|
|
33,077
|
|
|
33,194
|
|
Basic earnings per share
|
$
|
0.41
|
|
|
$
|
0.34
|
|
|
$
|
1.00
|
|
|
$
|
0.91
|
|
Diluted earnings per share
|
$
|
0.40
|
|
|
$
|
0.33
|
|
|
$
|
0.98
|
|
|
$
|
0.89
|
|
Shares excluded from calculation of diluted EPS
|
—
|
|
|
—
|
|
|
138
|
|
|
—
|
|
4 - Cash, Cash Equivalents, and Short-Term Investments
The Company has invested its excess cash in highly liquid marketable securities such as corporate debt instruments, U.S. government agency securities and asset-backed securities. Investments with maturities greater
than one year are classified as current because management considers all investments to be available for current operations.
The Company's investments are designed to provide liquidity, preserve capital and maximize total return on invested assets with a focus on high credit-quality securities.
The Company's investments have been classified and accounted for as available-for-sale. Such investments are recorded at fair value and unrealized holding gains and losses are reported as a separate component of accumulated other comprehensive income (loss) in the stockholders' equity until realized. Realized gains and losses on sales of investments, if any, are determined on the specific identification method and are reclassified from accumulated other comprehensive income (loss) to results of operations as other income (expense).
The Company, to date, has not determined that any of the unrealized losses on its investments are considered to be other-than-temporary. The Company reviews its investment portfolio to determine if any security is other-than-temporarily impaired, which would require the Company to record an impairment charge in the period any such determination is made. In making this judgment, the Company evaluates, among other things: the duration and extent to which the fair value of a security is less than its cost; the financial condition of the issuer and any changes thereto; and the Company's intent and ability to hold its investment for a period of time sufficient to allow for any anticipated recovery in market value, or whether the Company will more likely than not be required to sell the security before recovery of its aggregated cost basis. The Company has evaluated its investments as of September 30, 2016 and has determined that no investments with unrealized losses are other-than-temporarily impaired. No investments have been in a continuous loss position greater than one year.
Cash, cash equivalents and short-term investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Cash and cash equivalents:
|
|
|
|
Cash
|
74,072
|
|
|
82,469
|
|
U.S. Treasury Bills
|
7,001
|
|
|
—
|
|
Total cash and cash equivalents
|
81,073
|
|
|
82,469
|
|
Short-term investments:
|
|
|
|
U.S. investment grade bonds
|
16,865
|
|
|
—
|
|
Developed investment grade bonds
|
8,564
|
|
|
—
|
|
Total short-term investments
|
25,429
|
|
|
—
|
|
Total cash, cash equivalents and short-term investments
|
106,502
|
|
|
82,469
|
|
Short-term Investments by investment type are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Aggregated Cost Basis
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Aggregated Fair Value
|
|
Aggregated Cost Basis
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Aggregated Fair Value
|
U.S. investment grade bonds
|
16,890
|
|
|
1
|
|
|
(26
|
)
|
|
16,865
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Developed investment grade bonds
|
8,579
|
|
|
—
|
|
|
(15
|
)
|
|
8,564
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total short-term investments
|
$
|
25,469
|
|
|
$
|
1
|
|
|
$
|
(41
|
)
|
|
$
|
25,429
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Short-term investments by contractual maturity are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Investments
|
|
Investments
|
Due in one year or less
|
$
|
7,342
|
|
|
$
|
—
|
|
Due after one year through five years
|
18,087
|
|
|
—
|
|
Total short-term investment
|
$
|
25,429
|
|
|
$
|
—
|
|
5 - Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Raw materials and subassemblies
|
$
|
26,944
|
|
|
$
|
19,041
|
|
Work in process
|
2,030
|
|
|
1,343
|
|
Finished goods
|
35,895
|
|
|
36,149
|
|
Total inventories
|
64,869
|
|
|
56,533
|
|
Less: Non-current inventories
|
(13,215
|
)
|
|
(7,961
|
)
|
Inventories, current
|
$
|
51,654
|
|
|
$
|
48,572
|
|
At
September 30, 2016
and
December 31, 2015
, we have classified
$13.2 million
and
$8.0 million
, respectively, of inventories as other assets. We expect that we will not use this inventory within the next twelve months. This inventory consists primarily of last time buy items from our suppliers, service components used to repair products pursuant to warranty obligations and extended service contracts, including service components for products we are not currently selling and inventory that we purchased in bulk quantities. Management believes that these inventories will be utilized for their intended purpose.
6 – Intangible Assets
The following table summarizes the components of gross and net intangible asset balances (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Gross
Carrying
Amount
|
|
Accumulated
Impairment
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Gross
Carrying
Amount
|
|
Accumulated
Impairment
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
Intangible assets with definite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
$
|
63,264
|
|
|
$
|
—
|
|
|
$
|
(34,140
|
)
|
|
$
|
29,124
|
|
|
$
|
63,668
|
|
|
$
|
—
|
|
|
$
|
(31,600
|
)
|
|
$
|
32,068
|
|
Customer related
|
37,283
|
|
|
—
|
|
|
(16,863
|
)
|
|
20,420
|
|
|
35,529
|
|
|
—
|
|
|
(14,352
|
)
|
|
21,177
|
|
Trade names
|
34,478
|
|
|
(3,379
|
)
|
|
(6,232
|
)
|
|
24,867
|
|
|
31,837
|
|
|
(3,340
|
)
|
|
(3,052
|
)
|
|
25,445
|
|
Internally developed software
|
17,722
|
|
|
—
|
|
|
(9,769
|
)
|
|
7,953
|
|
|
15,513
|
|
|
—
|
|
|
(8,155
|
)
|
|
7,358
|
|
Patents
|
2,694
|
|
|
—
|
|
|
(2,283
|
)
|
|
411
|
|
|
2,663
|
|
|
—
|
|
|
(2,175
|
)
|
|
488
|
|
Definite-lived intangible assets
|
$
|
155,441
|
|
|
$
|
(3,379
|
)
|
|
$
|
(69,287
|
)
|
|
$
|
82,775
|
|
|
$
|
149,210
|
|
|
$
|
(3,340
|
)
|
|
$
|
(59,334
|
)
|
|
$
|
86,536
|
|
Finite-lived intangible assets are amortized over their useful lives, which are
5
to
20
years for technology,
4
to
16
years for customer related intangibles,
4
to
10
years for internally developed software,
5
to
7
years for trade names, and
10
to
15
years for patents.
Internally developed software consists of
$15.5 million
relating to costs incurred for development of internal use computer software and
$2.2 million
for development of software to be sold.
Amortization expense related to intangible assets with definite lives was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Technology
|
$
|
863
|
|
|
$
|
934
|
|
|
$
|
2,571
|
|
|
$
|
2,854
|
|
Customer related
|
848
|
|
|
689
|
|
|
2,495
|
|
|
2,092
|
|
Trade names
|
1,139
|
|
|
1,024
|
|
|
3,176
|
|
|
2,048
|
|
Internally developed software
|
602
|
|
|
434
|
|
|
1,618
|
|
|
1,142
|
|
Patents
|
28
|
|
|
28
|
|
|
84
|
|
|
84
|
|
Total amortization
|
$
|
3,480
|
|
|
$
|
3,109
|
|
|
$
|
9,944
|
|
|
$
|
8,220
|
|
Expected amortization expense related to amortizable intangible assets is as follows (in thousands):
|
|
|
|
|
Three months ending December 31, 2016
|
$
|
3,390
|
|
2017
|
13,557
|
|
2018
|
13,333
|
|
2019
|
12,173
|
|
2020
|
9,974
|
|
2021
|
8,522
|
|
Thereafter
|
21,826
|
|
Total expected amortization expense
|
$
|
82,775
|
|
7 – Goodwill
The carrying amount of goodwill and the changes in the balance are as follows (in thousands):
|
|
|
|
|
December 31, 2015
|
$
|
107,466
|
|
Acquisitions
|
4,485
|
|
Foreign currency translation
|
(33
|
)
|
September 30, 2016
|
$
|
111,918
|
|
8 - Property and Equipment, net
Property and equipment, net consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Land
|
$
|
2,865
|
|
|
$
|
2,918
|
|
Buildings
|
5,335
|
|
|
5,662
|
|
Leasehold improvements
|
2,400
|
|
|
2,345
|
|
Office furniture and equipment
|
14,513
|
|
|
13,866
|
|
Computer software and hardware
|
12,654
|
|
|
10,488
|
|
Demonstration and loaned equipment
|
11,838
|
|
|
11,216
|
|
|
49,605
|
|
|
46,495
|
|
Accumulated depreciation
|
(31,478
|
)
|
|
(29,528
|
)
|
Total
|
$
|
18,127
|
|
|
$
|
16,967
|
|
Depreciation expense of property and equipment was approximately
$0.9 million
and
$2.9 million
for the
three and nine
months ended
September 30, 2016
, respectively, and approximately
$1.0 million
and
$3.1 million
for the
three and nine
months ended
September 30, 2015
, respectively.
9 - Reserve for Product Warranties
We provide a warranty with our products that is generally
one year
in length, but in some cases regulations may require us to provide repair or remediation beyond our typical warranty period. If any of our products contain defects, we may be required to incur additional repair and remediation costs. Service for domestic customers is provided by Company-owned service centers that perform all service, repair, and calibration services. Service for international customers is provided by a combination of Company-owned facilities and vendors on a contract basis.
A warranty reserve is included in accrued liabilities for the expected future costs of servicing products. Additions to the reserve are based on management’s best estimate of probable liability. We consider a combination of factors including material and labor costs, regulatory requirements, and other judgments in determining the amount of the reserve. The reserve is reduced as costs are incurred to honor existing warranty and regulatory obligations.
As of September 30, 2016 we had accrued
$6.5 million
of estimated costs to bring certain NeoBLUE® phototherapy products into U.S. regulatory compliance. Our estimate of these costs is primarily based upon the number of units outstanding that may require repair and costs associated with shipping and repairing the product. We expect that costs associated with bringing the products back into compliance will not be incurred until the first quarter of 2017. Additional costs could be incurred in future periods to bring products into regulatory compliance, but such costs cannot currently be reasonably estimated.
The details of activity in the warranty reserve are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Balance, beginning of period
|
$
|
10,858
|
|
|
$
|
4,408
|
|
|
$
|
10,386
|
|
|
$
|
2,753
|
|
Additions charged to expense
|
960
|
|
|
1,617
|
|
|
3,273
|
|
|
4,770
|
|
Reductions
|
(819
|
)
|
|
(813
|
)
|
|
(2,660
|
)
|
|
(2,311
|
)
|
Balance, end of period
|
$
|
10,999
|
|
|
$
|
5,212
|
|
|
$
|
10,999
|
|
|
$
|
5,212
|
|
The estimates we use in projecting future product warranty costs may prove to be incorrect. Any future determination that our product warranty reserves are understated could result in increases to our cost of sales and reductions in our operating profits and results of operations.
10 - Share-Based Compensation
As of
September 30, 2016
, we have
two
active share-based compensation plans, the 2011 Stock Awards Plan and the 2011 Employee Stock Purchase Plan. The terms of awards granted during the
nine
months ended
September 30, 2016
and our methods for determining grant-date fair value of the awards are consistent with those described in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2015
.
Details of share-based compensation expense are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Cost of revenue
|
$
|
50
|
|
|
$
|
29
|
|
|
$
|
169
|
|
|
$
|
116
|
|
Marketing and selling
|
169
|
|
|
287
|
|
|
622
|
|
|
972
|
|
Research and development
|
320
|
|
|
249
|
|
|
1,185
|
|
|
644
|
|
General and administrative
|
1,415
|
|
|
1,326
|
|
|
4,981
|
|
|
3,650
|
|
Total
|
$
|
1,954
|
|
|
$
|
1,891
|
|
|
$
|
6,957
|
|
|
$
|
5,382
|
|
As of
September 30, 2016
, unrecognized compensation expense related to the unvested portion of our stock options and other stock awards was approximately
$11.6 million
, which is expected to be recognized over a weighted average period of
1.8 years
.
11 - Other Income (Expense), net
Other income (expense), net consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Interest income
|
$
|
76
|
|
|
$
|
13
|
|
|
$
|
94
|
|
|
$
|
28
|
|
Interest expense
|
(223
|
)
|
|
—
|
|
|
(351
|
)
|
|
—
|
|
Foreign currency loss
|
(783
|
)
|
|
(80
|
)
|
|
(282
|
)
|
|
(1,571
|
)
|
Other
|
37
|
|
|
74
|
|
|
127
|
|
|
340
|
|
Total other income (expense), net
|
$
|
(893
|
)
|
|
$
|
7
|
|
|
$
|
(412
|
)
|
|
$
|
(1,203
|
)
|
12 - Income Taxes
Provision for Income Tax Expense
We recorded provisions for income tax of
$1.0 million
and
$7.6 million
for the
three and nine
months ended
September 30, 2016
, respectively. Our effective tax rate was
7.2%
and
19.0%
for the
three and nine
months ended
September 30, 2016
, respectively. We recorded provisions for income tax of
$5.2 million
and
$12.8 million
for the
three and nine
months ended
September 30, 2015
, respectively. Our effective tax rate was
32.0%
and
30.4%
for the
three and nine
months ended
September 30, 2015
, respectively.
Our effective tax rate for the
three and nine
months ended
September 30, 2016
differed from the federal statutory tax rate primarily because of profits in foreign jurisdictions with lower tax rates than the federal statutory rate. The decrease in the effective tax rate for the
three and nine
months ended
September 30, 2016
compared with the
three and nine
months ended
September 30, 2015
is primarily attributable to shifts in the geographical mix of income whereby the income subject to income taxes recorded in high tax jurisdictions significantly decreased, and the income subject to income taxes recorded in low tax jurisdictions significantly increased.
Our year-to-date results reflect the projected fiscal year 2016 effective tax rate as adjusted for the impact of any quarterly discrete events. The impact of the discrete items recorded during the three months ended
September 30, 2016
decreased the quarterly tax rate by
11.8%
. The tax impacts from material discrete items include the adoption of ASU 2016-09, Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting, tax true-up adjustments relating to the filing of 2015 tax returns and adjustment of certain earn-out liabilities. The impacts from adoption of ASU 2016-09 decreased our quarterly effective tax rate by
3.8%
; the tax true-up adjustments recorded in this quarter related to the filing of 2015 tax returns increased our quarterly tax rate by
1.5%
and the accounting income recognized in the adjustment of earn-out liabilities, which is not subject to income taxes, decreased our quarterly effective tax rate by
7.5%
. The impact of the discrete items
recorded during the three months ended
September 30, 2015
decreased the quarterly tax rate by
0.1%
. Excluding the impact of discrete items, the decrease in our quarterly effective tax rate for the three months ended
September 30, 2016
, compared with the three months ended
September 30, 2015
, is primarily attributable to forecasted shifts in the geographical mix of income.
We recorded
$0.3 million
net tax expense of unrecognized tax benefits for the
nine
months ended
September 30, 2016
. Within the next twelve months, it is possible our uncertain tax benefit may change within a range of approximately
zero
to
$1.0 million
. Our tax returns remain open to examinations as follows: U.S. Federal, 2013 through 2015; U.S. States, 2011 through 2015; and significant foreign jurisdictions, 2013 through 2015.
13 - Restructuring Reserves
Historically, the Company has 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 to maintain a competitive cost structure. Restructuring expenses are related to permanent reductions in workforce and redundant facility closures.
The balance of the restructuring reserve is included in accrued liabilities on the accompanying condensed consolidated balance sheets. Employee termination benefits are included as a part of restructuring expenses.
Activity in the restructuring reserves for the
nine
months ended
September 30, 2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Personnel Related
|
Facility Related
|
Total
|
Balance at December 31, 2015
|
$
|
1,676
|
|
$
|
—
|
|
$
|
1,676
|
|
Additions
|
617
|
|
1,205
|
|
1,822
|
|
Reversals
|
(425
|
)
|
—
|
|
(425
|
)
|
Payments
|
(1,853
|
)
|
(688
|
)
|
(2,541
|
)
|
Balance at September 30, 2016
|
$
|
15
|
|
$
|
517
|
|
$
|
532
|
|
14 - Debt and Credit Arrangements
The Company has a Credit Agreement with JP Morgan Chase Bank ("JP Morgan") and Citibank, NA (“Citibank”). The 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, and is secured by virtually all of the Company's assets. 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 Company has no other significant credit facilities. As of
September 30, 2016
no amounts were outstanding under the Credit Agreement. The Company expects to finance a portion of an acquisition announced in September 2016 with borrowings under the revolving credit facility, as well as existing cash.
Pursuant to the terms of the Credit Agreement, the outstanding principal balance will bear interest at either (a) a fluctuating rate per annum equal to the Applicable Rate, as defined in the Credit Agreement, depending on our leverage ratio plus the higher of (i) the federal funds rate plus one-half of one percent per annum; (ii) the prime rate in effect on such a day; and (iii) the LIBOR rate plus one percent, or (b) a fluctuating rate per annum of LIBOR Rate plus the Applicable Rate. The Credit Agreement matures on September 23, 2021, at which time all principal amounts outstanding under the Credit Agreement will be due and payable.
Due to the execution of the Credit Agreement mentioned above, the Company terminated a previously existing credit agreement between the Company and Citibank. Under this agreement, the Company borrowed and repaid a total of
$16.0 million
during the nine months ended
September 30, 2016
.
15 - Segment, Customer and Geographic Information
We operate in
one
reportable segment in which we provide healthcare products and services 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.
Revenue and long-lived asset information are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Consolidated Revenue:
|
|
|
|
|
|
|
|
United States
|
$
|
62,515
|
|
|
$
|
62,601
|
|
|
$
|
186,933
|
|
|
$
|
177,862
|
|
Foreign countries
|
28,391
|
|
|
31,982
|
|
|
87,260
|
|
|
98,053
|
|
Totals
|
$
|
90,906
|
|
|
$
|
94,583
|
|
|
$
|
274,193
|
|
|
$
|
275,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenue by End Market:
|
|
|
|
|
|
|
|
Neurology Products
|
|
|
|
|
|
|
|
Devices and Systems
|
$
|
39,240
|
|
|
$
|
42,040
|
|
|
$
|
121,461
|
|
|
$
|
123,135
|
|
Supplies
|
14,381
|
|
|
15,239
|
|
|
44,482
|
|
|
45,556
|
|
Services
|
3,131
|
|
|
2,125
|
|
|
8,794
|
|
|
5,614
|
|
Total Neurology Revenue
|
56,752
|
|
|
59,404
|
|
|
174,737
|
|
|
174,305
|
|
Newborn Care Products
|
|
|
|
|
|
|
|
Devices and Systems
|
16,263
|
|
|
17,598
|
|
|
46,455
|
|
|
53,706
|
|
Supplies
|
11,792
|
|
|
12,584
|
|
|
35,677
|
|
|
37,233
|
|
Services
|
6,099
|
|
|
4,997
|
|
|
17,324
|
|
|
10,671
|
|
Total Newborn Care Revenue
|
34,154
|
|
|
35,179
|
|
|
99,456
|
|
|
101,610
|
|
Total Revenue
|
$
|
90,906
|
|
|
$
|
94,583
|
|
|
$
|
274,193
|
|
|
$
|
275,915
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Property and equipment, net:
|
|
|
|
United States
|
$
|
7,663
|
|
|
$
|
6,664
|
|
Canada
|
4,956
|
|
|
5,165
|
|
Argentina
|
2,000
|
|
|
2,361
|
|
Ireland
|
2,176
|
|
|
1,651
|
|
Other foreign countries
|
1,332
|
|
|
1,126
|
|
Totals
|
$
|
18,127
|
|
|
$
|
16,967
|
|
During the
three and nine
months ended
September 30, 2016
and
2015
, no single customer or foreign country contributed to more than
10%
of revenue.
16 - Fair Value Measurements
ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value is defined under ASC 820 as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes the following three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
Level 1
- Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2
- Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
- Unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
The Company does not have any financial assets or liabilities measured at fair value on a recurring basis.
The following financial instruments are not measured at fair value on the Company’s consolidated balance sheet as of
September 30, 2016
and
December 31, 2015
, but require disclosure of their fair values: cash and cash equivalents, accounts receivable, and accounts payable. The carrying value of these financial instruments approximates fair values because of their relatively short maturity.
In the third quarter of 2014, the Company listed its facility in Mundelein, Illinois for sale. This asset was measured at fair value less cost to sell as of September 30, 2014 based on market price and is classified as a Level 2 asset. The book value of this asset on June 30, 2014 was
$3.6 million
. We expensed
$2.2 million
during the third quarter of 2014 for this impairment. As of
September 30, 2016
we are carrying the asset as held for sale in other current assets on the accompanying condensed consolidated balance sheet at a value of
$1.4 million
.
The Company also has contingent consideration associated with earn-outs from acquisitions. Contingent consideration liabilities are classified as Level 3 liabilities, as the Company uses unobservable inputs to value them, which is a probability-based income approach. Contingent considerations are classified as accrued liabilities on our condensed consolidated balance sheet. Subsequent changes in the fair value of contingent consideration liabilities are recorded within the Company's income statement as an operating expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Additions
|
|
Payments
|
|
Adjustments
|
|
September 30, 2016
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
6,209
|
|
|
$
|
2,500
|
|
|
$
|
(2,284
|
)
|
|
$
|
(3,401
|
)
|
|
$
|
3,024
|
|
The significant unobservable inputs used in the fair value measurement of contingent consideration related to the acquisitions are annualized revenue forecasts developed by the Company’s management and the probability of achievement of those revenue forecasts. Significant increases (decreases) in these unobservable inputs in isolation would result in a significantly lower (higher) fair value measurement.
The Company's Level 2 securities are valued using third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spread, benchmark securities, prepayment/default projections based on historical data and other observable inputs. The Company validates the prices provided by its third-party pricing services by understanding the models used, obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming those securities traded in active markets. See Note 4 to these Condensed Consolidated Financial Statements for further information regarding the Company's financials instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
U.S. Treasury Bills
|
—
|
|
|
7,001
|
|
|
—
|
|
|
7,001
|
|
Short term investments
|
|
|
|
|
|
|
|
U.S. investment grade bonds
|
—
|
|
|
16,865
|
|
|
—
|
|
|
16,865
|
|
Developed investment grade bonds
|
—
|
|
|
8,564
|
|
|
—
|
|
|
8,564
|
|
Total short term investments
|
—
|
|
|
25,429
|
|
|
—
|
|
|
25,429
|
|