NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1 - Basis of Presentation
The accompanying interim condensed consolidated financial statements of Natus Medical Incorporated (“Natus,” 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, 2016
.
Interim financial reports are prepared in accordance with the rules and regulations of the Securities and Exchange Commission; accordingly, the reports 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, 2016
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, 2016
. The Company has made certain reclassifications to the prior period to conform to current period presentation.
Operating results for the
three months ended March 31, 2017
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2017
. 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 Standard Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance. The standard's core principle is that an entity should recognize revenue when it transfers promised 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. The standard creates a five-step model to achieve its core principle: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction's price to the separate performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In addition, entities must disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative disclosures are required about: (i) the entity's contracts with customers; (ii) the significant judgments, and changes in judgments, made in applying the guidance to those contracts; and (iii) any assets recognized from the costs to obtain or fulfill a contract with a customer. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 616) - Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to interim and annual periods beginning January 1, 2018. The standard allows entities to apply the standard retrospectively to each prior period presented (“full retrospective adoption”) or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application (“modified retrospective adoption”). The Company plans to adopt this guidance on January 1, 2018, and continues to evaluate the impact of adopting under the modified retrospective adoption versus the full retrospective method. The Company is currently in the process of determining the impact of the new revenue recognition guidance on its revenue transactions, including any impacts on associated processes, systems, and internal controls. The Company's preliminary assessment indicates implementation of this standard will not have a material impact on financial results. The Company's evaluation has included determining whether the unit of account (i.e., performance obligations) will change as compared to current GAAP, as well as determining the standalone selling price of each performance obligation. Standalone selling prices under the new guidance may not be substantially different from the Company's current methodologies of establishing fair value on multiple element arrangements. The Company
continues to evaluate the impact of this guidance and its subsequent amendments on the consolidated financial position, results of operations, and cash flows, and any preliminary assessments are subject to change.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330). This standard requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is estimated selling prices in the ordinary course of business, less reasonable predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted ASU 2015-11 in January 2017 and no impact was recorded by the Company.
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 January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805). This update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisition (or disposals) of assets or businesses. The definition of a business affected many areas of accounting including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods, and must be applied prospectively. The Company is currently evaluating the impact that will result from adopting ASU 2017-01.
Also in January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This update modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Because these amendments eliminate Step 2 from the goodwill impairment test, they should reduce the cost and complexity of evaluating goodwill for impairment. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact, if any, that will result from adopting ASU 2017-04.
2 - Business Combinations
Otometrics
On January 3, 2017, the Company acquired the Otometrics business from GN Store Nord A/S for a cash purchase price of
$149.2 million
, which includes a
$4.2 million
net working capital adjustment. Otometrics is a manufacturer of hearing diagnostics and balance assessment equipment, disposables and software. Otometrics provides computer-based audiological, otoneurologic and vestibular instrumentation and sound rooms to hearing and balance care professionals worldwide. Otometrics has a complete product and brand portfolio known for its sophisticated design technology in the hearing and balance assessment markets.
The Company has accounted for the acquisition under the acquisition method of accounting for business combinations. Under the acquisition method of accounting, the assets acquired and liabilities assumed from Otometrics are recorded in the condensed consolidated financial statements at their respective fair values as of the acquisition date. The excess of the purchase price over the fair value of the acquired net assets is recorded as goodwill. The results of Otometrics are included in the condensed consolidated financial statements since the date of the acquisition.
The following table summarizes the preliminary purchase price allocation of the fair value of the assets acquired and liabilities assumed at the date of acquisition, (in thousands):
|
|
|
|
|
Cash and cash equivalents
|
$
|
5,604
|
|
Accounts receivable
|
28,483
|
|
Inventories
|
22,462
|
|
Property and equipment
|
3,610
|
|
Intangible assets
|
57,500
|
|
Goodwill
|
72,671
|
|
Other assets
|
3,555
|
|
Accounts payable
|
(8,663
|
)
|
Accrued liabilities
|
(14,185
|
)
|
Deferred revenue
|
(767
|
)
|
Deferred income tax
|
(21,023
|
)
|
Total purchase price
|
$
|
149,247
|
|
The goodwill recorded represents the future economic benefits arising from the other assets acquired that could not be individually identified and separately recognized. The goodwill recorded as part of the acquisition of Otometrics is not amortized and includes the following:
|
|
•
|
The expected synergies and other benefits that we believe will results from combining the operations of Otometrics with the operations of Natus;
|
|
|
•
|
Any intangible assets that did not qualify for separate recognition, as well as future, yet unidentified projects and products; and
|
|
|
•
|
The value of the going-concern element of Otometrics's existing businesses (the higher rate of return on the assembled collection of net assets versus if Natus has acquired all of the net assets separately).
|
Management is working with an independent valuation firm to determine fair values of the identifiable intangible assets. The Company will use a combination of income approaches including relief from royalty and multi-period excess earnings methods. The valuation models will be based on estimates of future operating projections of the acquired business and rights to sell products as well as judgments on the discount rates used and other variables. The Company is determining the forecasts based on a number of factors, including their best estimate of near-term net sales expectations and long-term projections, which include review of internal and independent market analyses.
The fair value of assets acquired and liabilities assumed was based on preliminary valuations, and our estimates and assumptions are subject to change as the valuations are finalized, within the measurement period not to exceed 12 months from the acquisition date. The Company is currently in the process of verifying data and finalizing information related to the Otometrics valuation and recording of inventory, accounts receivable, other liabilities, income taxes and the corresponding effect on goodwill.
Otometrics's revenue of
$27.8 million
and loss from operations of
$1.1 million
are included in the condensed consolidated statement of income and comprehensive income for the period from January 3, 2017 (acquisition date) to March 31, 2017.
The unaudited pro forma financial results presented below for the quarters ended March 31, 2017 and 2016, include the effects of pro forma adjustments as if the acquisition occurred on January 1, 2016. The pro forma results were prepared using the acquisition method of accounting and combine the historical results of Natus and Otometrics for the quarters ended March 31, 2017 and 2016, including the effects of the business combination, primarily amortization expense related to the fair value of identifiable intangible assets acquired, interest expense associated with the financing obtained by Natus in connection with the acquisition, and the elimination of acquisition-related costs incurred.
The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the earliest period presented, nor is it intended to be a projection of future results.
Unaudited Pro forma Financial Information
(in thousands)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Revenue
|
$
|
124,660
|
|
|
$
|
114,854
|
|
Net income (loss)
|
$
|
2,348
|
|
|
$
|
(877
|
)
|
|
|
|
|
Earnings per share:
|
|
|
|
Basic
|
$
|
0.07
|
|
|
$
|
(0.03
|
)
|
Diluted
|
$
|
0.07
|
|
|
$
|
(0.03
|
)
|
Weighted average shares used in the calculation of earnings per share:
|
|
|
|
Basic
|
32,485
|
|
|
32,606
|
|
Diluted
|
33,040
|
|
|
33,222
|
|
The pro forma results for the quarter ended March 31, 2017 were adjusted to exclude
$2.0 million
of nonrecurring expense related to the fair value adjustment of acquisition-date inventory.
The pro forma results for the quarter ended March 31, 2016 were adjusted to include these charges, along with
$2.0 million
of amortization of intangible assets, and
$1.0 million
of interest expense.
RetCam
On July 6, 2016, the Company 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 was paid on February 16, 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 have been included in the Company's condensed consolidated financial statements from the date of acquisition. The total purchase price was allocated
$7.2 million
to tangible assets,
$4.9 million
to intangible assets with an assigned weighted average life of
5
years being amortized on the straight line method, and
$1.7 million
to goodwill, offset by
$2.0 million
to net liabilities. Pro forma financial information for the RetCam acquisition is not presented as it is not considered material.
NeuroQuest
On March 2, 2016, the Company 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 electroencephalography ("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. Pro forma financial information for the NeuroQuest 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
March 31,
|
|
2017
|
|
2016
|
Net income
|
$
|
348
|
|
|
$
|
8,538
|
|
Weighted average common shares
|
32,485
|
|
|
32,606
|
|
Dilutive effect of stock based awards
|
555
|
|
|
616
|
|
Diluted Shares
|
33,040
|
|
|
33,222
|
|
Basic earnings per share
|
$
|
0.01
|
|
|
$
|
0.26
|
|
Diluted earnings per share
|
$
|
0.01
|
|
|
$
|
0.26
|
|
Shares excluded from calculation of diluted EPS
|
—
|
|
|
179
|
|
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
March 31, 2017
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):
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Cash and cash equivalents:
|
|
|
|
Cash
|
$
|
103,778
|
|
|
$
|
213,551
|
|
Short-term investments:
|
|
|
|
U.S. investment grade bonds
|
3,601
|
|
|
24,477
|
|
Foreign investment grade bonds
|
5,483
|
|
|
9,542
|
|
Total short-term investments
|
9,084
|
|
|
34,019
|
|
Total cash, cash equivalents and short-term investments
|
$
|
112,862
|
|
|
$
|
247,570
|
|
Short-term investments by investment type are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
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
|
3,607
|
|
|
—
|
|
|
(6
|
)
|
|
3,601
|
|
|
24,531
|
|
|
—
|
|
|
(54
|
)
|
|
24,477
|
|
Foreign investment grade bonds
|
5,492
|
|
|
2
|
|
|
(11
|
)
|
|
5,483
|
|
|
9,567
|
|
|
—
|
|
|
(25
|
)
|
|
9,542
|
|
Total short-term investments
|
$
|
9,099
|
|
|
$
|
2
|
|
|
$
|
(17
|
)
|
|
$
|
9,084
|
|
|
$
|
34,098
|
|
|
$
|
—
|
|
|
$
|
(79
|
)
|
|
$
|
34,019
|
|
Short-term investments by contractual maturity are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Investments
|
|
Investments
|
Due in one year or less
|
$
|
5,459
|
|
|
$
|
21,655
|
|
Due after one year through five years
|
3,625
|
|
|
12,364
|
|
Total short-term investment
|
$
|
9,084
|
|
|
$
|
34,019
|
|
See Note 16 to these Condensed Consolidated Financial Statements for additional discussion regarding the fair value of the Company's short-term investments.
5 - Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Raw materials and subassemblies
|
$
|
37,100
|
|
|
$
|
28,245
|
|
Work in process
|
1,936
|
|
|
1,507
|
|
Finished goods
|
43,648
|
|
|
34,908
|
|
Total inventories
|
82,684
|
|
|
64,660
|
|
Less: Non-current inventories
|
(15,000
|
)
|
|
(15,073
|
)
|
Inventories, current
|
$
|
67,684
|
|
|
$
|
49,587
|
|
At
March 31, 2017
and
December 31, 2016
, the Company has classified
$15.0 million
and
$15.1 million
, respectively, of inventories as other assets. This inventory consists primarily of service components used to repair products held by customers pursuant to warranty obligations and extended service contracts, including service components for products that the Company no longer sells, inventory purchased for lifetime buys, and inventory that has been impacted by ship holds. The Company 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
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
|
$
|
85,942
|
|
|
$
|
—
|
|
|
$
|
(35,630
|
)
|
|
$
|
50,312
|
|
|
$
|
64,563
|
|
|
$
|
—
|
|
|
$
|
(34,683
|
)
|
|
$
|
29,880
|
|
Customer related
|
59,127
|
|
|
—
|
|
|
(18,816
|
)
|
|
40,311
|
|
|
38,087
|
|
|
—
|
|
|
(17,610
|
)
|
|
20,477
|
|
Trade names
|
46,495
|
|
|
(3,310
|
)
|
|
(8,165
|
)
|
|
35,020
|
|
|
32,106
|
|
|
(3,290
|
)
|
|
(7,135
|
)
|
|
21,681
|
|
Internally developed software
|
15,479
|
|
|
—
|
|
|
(10,677
|
)
|
|
4,802
|
|
|
14,978
|
|
|
—
|
|
|
(10,220
|
)
|
|
4,758
|
|
Patents
|
2,637
|
|
|
—
|
|
|
(2,292
|
)
|
|
345
|
|
|
2,620
|
|
|
—
|
|
|
(2,251
|
)
|
|
369
|
|
Definite-lived intangible assets
|
$
|
209,680
|
|
|
$
|
(3,310
|
)
|
|
$
|
(75,580
|
)
|
|
$
|
130,790
|
|
|
$
|
152,354
|
|
|
$
|
(3,290
|
)
|
|
$
|
(71,899
|
)
|
|
$
|
77,165
|
|
Finite-lived intangible assets are amortized over their weighted average lives, which are
15
years for technology,
9
years for customer related intangibles,
5
years for internally developed software,
7
years for trade names,
13
years for patents, and
11
years in total.
Internally developed software consists of
$13.3 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
March 31,
|
|
2017
|
|
2016
|
Technology
|
$
|
1,326
|
|
|
$
|
853
|
|
Customer related
|
2,208
|
|
|
794
|
|
Trade names
|
1,587
|
|
|
1,029
|
|
Internally developed software
|
504
|
|
|
476
|
|
Patents
|
27
|
|
|
28
|
|
Total amortization
|
$
|
5,652
|
|
|
$
|
3,180
|
|
Expected amortization expense related to amortizable intangible assets is as follows (in thousands):
|
|
|
|
|
Nine months ending December 31, 2017
|
$
|
15,897
|
|
2018
|
20,973
|
|
2019
|
19,817
|
|
2020
|
17,621
|
|
2021
|
16,171
|
|
2022
|
12,431
|
|
Thereafter
|
27,880
|
|
Total expected amortization expense
|
$
|
130,790
|
|
7 – Goodwill
The carrying amount of goodwill and the changes in the balance are as follows (in thousands):
|
|
|
|
|
December 31, 2016
|
$
|
113,112
|
|
Acquisitions/Purchase accounting adjustments
|
70,645
|
|
Foreign currency translation
|
2,092
|
|
March 31, 2017
|
$
|
185,849
|
|
8 - Property and Equipment, net
Property and equipment, net consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Land
|
$
|
2,864
|
|
|
$
|
2,856
|
|
Buildings
|
5,279
|
|
|
5,219
|
|
Leasehold improvements
|
2,465
|
|
|
2,386
|
|
Equipment and furniture
|
23,218
|
|
|
18,398
|
|
Computer software and hardware
|
9,121
|
|
|
9,100
|
|
Demonstration and loaned equipment
|
11,463
|
|
|
11,393
|
|
|
54,410
|
|
|
49,352
|
|
Accumulated depreciation
|
(33,514
|
)
|
|
(32,019
|
)
|
Total
|
$
|
20,896
|
|
|
$
|
17,333
|
|
Depreciation expense of property and equipment was approximately
$1.1 million
for the
three
months ended
March 31, 2017
and approximately
$1.0 million
for the
three
months ended
March 31, 2016
.
9 - Reserve for Product Warranties
The Company provides a warranty for products that is generally
one year
in length, but in some cases regulations may require them to provide repair or remediation beyond the typical warranty period. If any of the products contain defects, the Company 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, vendors on a contract basis, and distributors.
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. The Company considers 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 March 31, 2017, the Company had accrued
$6.6 million
of estimated costs to bring certain NeoBLUE® phototherapy products into U.S. regulatory compliance. The Company's 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. The Company expects that costs associated with bringing the products back into compliance will begin to be incurred during the second quarter of 2017.
During the first quarter of 2017, the Company accrued
$1.0 million
for a product related recall. The Company expects that costs associated with the recall will be incurred starting in the second quarter of 2017.
The details of activity in the warranty reserve are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Balance, beginning of period
|
$
|
10,670
|
|
|
$
|
10,386
|
|
Assumed through acquisitions
|
1,176
|
|
|
—
|
|
Additions charged to expense
|
2,806
|
|
|
929
|
|
Reductions
|
(1,931
|
)
|
|
(738
|
)
|
Balance, end of period
|
$
|
12,721
|
|
|
$
|
10,577
|
|
The estimates the Company uses in projecting future product warranty costs may prove to be incorrect. Any future determination that product warranty reserves are understated could result in increases to cost of sales and reductions in operating profits and results of operations.
10 - Share-Based Compensation
As of
March 31, 2017
, the Company has
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
three
months ended
March 31, 2017
and the 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, 2016
.
Details of share-based compensation expense are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Cost of revenue
|
$
|
81
|
|
|
$
|
76
|
|
Marketing and selling
|
69
|
|
|
279
|
|
Research and development
|
467
|
|
|
513
|
|
General and administrative
|
2,139
|
|
|
2,033
|
|
Total
|
$
|
2,756
|
|
|
$
|
2,901
|
|
As of
March 31, 2017
, unrecognized compensation expense related to the unvested portion of stock options and other stock awards was approximately
$17.0 million
, which is expected to be recognized over a weighted average period of
2.3 years
.
11 - Other Income (Expense), net
Other income (expense), net consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Interest income
|
$
|
332
|
|
|
$
|
8
|
|
Interest expense
|
(980
|
)
|
|
(31
|
)
|
Foreign currency gain (loss)
|
(428
|
)
|
|
450
|
|
Other income
|
37
|
|
|
29
|
|
Total other income (expense), net
|
$
|
(1,039
|
)
|
|
$
|
456
|
|
12 - Income Taxes
The Company recorded provisions for income tax of
$16.0 thousand
and
$3.1 million
for the
three
months ended
March 31, 2017
and
March 31, 2016
, respectively. The effective tax rate was
4.4%
and
26.8%
for the
three
months ended
March 31, 2017
and
March 31, 2016
, respectively.
The Company's effective tax rate for the
three
months ended
March 31, 2017
differed from the federal statutory tax rate primarily because of the profits taxed in foreign jurisdictions with lower tax rates than the federal statutory rate. The decrease in the effective tax rate for the
three
months ended
March 31, 2017
compared with the
three
months ended
March 31, 2016
is primarily attributable to shifts in the geographical mix of income and discrete tax events, principally share based compensation deductible in the first quarter. The percentage impact to the quarterly tax rate related to the discrete events for the
three
months ended
March 31, 2017
was significantly greater than the impact to the tax rate related to discrete events for the
three
months ended
March 31, 2016
.
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
three
months ended
March 31, 2017
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Personnel Related
|
Facility Related
|
Total
|
Balance at December 31, 2016
|
$
|
343
|
|
$
|
152
|
|
$
|
495
|
|
Additions
|
142
|
|
—
|
|
142
|
|
Reversals
|
(2
|
)
|
—
|
|
(2
|
)
|
Payments
|
(143
|
)
|
(52
|
)
|
(195
|
)
|
Balance at March 31, 2017
|
$
|
340
|
|
$
|
100
|
|
$
|
440
|
|
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.
In addition to the customary restrictive covenants listed above, the Credit Agreement also contains financial covenants that require the Company to maintain a certain leverage ratio and fixed charge coverage ratio, each as defined in the Credit Agreement:
|
|
•
|
Leverage Ratio, as defined, to be no higher than
2.75
to
1.00
.
|
|
|
•
|
Interest Coverage Ratio, as defined, to be at least
1.75
to
1.00
at all times.
|
At
March 31, 2017
, the Company is in compliance with the Leverage Ratio at
2.07
to
1.00
and the Interest Coverage Ratio at
33.47
to
1.00
.
At
March 31, 2017
, the Company had
$150.0 million
outstanding under the Credit Agreement.
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, which ranges between
1.75
% to
2.75
%. The effective interest rate during the first quarter of 2017 was
2.75%
. The Credit Agreement matures on September 23, 2021, at which time all principal amounts outstanding under the Credit Agreement will be due and payable.
Long-term debt consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Revolving credit facility
|
$
|
150,000
|
|
|
$
|
140,000
|
|
Debt issuance costs
|
(111
|
)
|
|
—
|
|
Less: current portion of long-term debt
|
—
|
|
|
—
|
|
Total long-term debt
|
$
|
149,889
|
|
|
$
|
140,000
|
|
As of
March 31, 2017
, the carrying value of total debt approximated fair market value. The fair value of the Company's debt is considered a Level 2 measurement. See Note 16 to these Condensed Financial Statements for additional discussion regarding the fair value measurement of debt.
15 - Segment, Customer and Geographic Information
The Company operates in
one
reportable segment in which the Company provides healthcare products and services used for the screening, detection, treatment, monitoring and tracking of common medical ailments.
End-user customer base includes hospitals, clinics, laboratories, physicians, nurses, audiologists, and governmental agencies. Most of the Company's international sales are to distributors who resell products to end users or sub-distributors.
Revenue and long-lived asset information are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Consolidated Revenue:
|
|
|
|
United States
|
$
|
64,710
|
|
|
$
|
56,899
|
|
Foreign countries
|
59,950
|
|
|
30,430
|
|
Totals
|
$
|
124,660
|
|
|
$
|
87,329
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Revenue by End Market:
|
|
|
|
Neurology Products
|
|
|
|
Devices and Systems
|
$
|
38,190
|
|
|
$
|
39,197
|
|
Supplies
|
14,886
|
|
|
15,034
|
|
Services
|
3,193
|
|
|
2,441
|
|
Total Neurology Revenue
|
56,269
|
|
|
56,672
|
|
Newborn Care Products
|
|
|
|
Devices and Systems
|
24,137
|
|
|
13,541
|
|
Supplies
|
11,446
|
|
|
11,614
|
|
Services
|
5,050
|
|
|
5,502
|
|
Total Newborn Care Revenue
|
40,633
|
|
|
30,657
|
|
Otometrics Products
|
|
|
|
Devices and Systems
|
$
|
21,378
|
|
|
$
|
—
|
|
Supplies
|
6,380
|
|
|
—
|
|
Services
|
—
|
|
|
—
|
|
Total Otometrics Revenue
|
27,758
|
|
|
—
|
|
Total Revenue
|
$
|
124,660
|
|
|
$
|
87,329
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Property and equipment, net:
|
|
|
|
United States
|
$
|
8,202
|
|
|
$
|
7,024
|
|
Canada
|
5,296
|
|
|
4,941
|
|
Argentina
|
1,949
|
|
|
2,530
|
|
Ireland
|
3,217
|
|
|
2,121
|
|
Other foreign countries
|
2,232
|
|
|
717
|
|
Totals
|
$
|
20,896
|
|
|
$
|
17,333
|
|
During the
three
months ended
March 31, 2017
and
2016
, 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
March 31, 2017
and
December 31, 2016
, 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
. The Company expensed
$2.2 million
during the third quarter of 2014 for this impairment. As of
March 31, 2017
, the Company is 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 the 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, 2016
|
|
Additions
|
|
Payments
|
|
Adjustments
|
|
March 31, 2017
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
3,043
|
|
|
$
|
—
|
|
|
$
|
(2,000
|
)
|
|
$
|
19
|
|
|
$
|
1,062
|
|
Total
|
$
|
3,043
|
|
|
$
|
—
|
|
|
$
|
(2,000
|
)
|
|
$
|
19
|
|
|
$
|
1,062
|
|
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 changes in these unobservable inputs may result in a significant impact to the 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 financial instruments.
Short-term investments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Short term investments
|
|
|
|
|
|
|
|
U.S. investment grade bonds
|
—
|
|
|
3,601
|
|
|
—
|
|
|
3,601
|
|
Foreign investment grade bonds
|
—
|
|
|
5,483
|
|
|
—
|
|
|
5,483
|
|
Total short term investments
|
—
|
|
|
9,084
|
|
|
—
|
|
|
9,084
|
|